Feb. 3 (Bloomberg) -- Dow Chemical Co., the largest U.S. chemical maker, posted its first loss in six years and trailed analysts’ estimates as the economic recession slashed demand for plastics and industrial products.

The fourth-quarter loss of $1.55 billion, or $1.68 a share, compares with net income of $472 million, or 49 cents a share, a year earlier, Midland, Michigan-based Dow Chemical said today in a statement. Excluding certain items, the company had a loss of 62 cents a share. The average estimate of 11 analysts surveyed by Bloomberg was for profit of 8 cents.

Chief Executive Officer Andrew Liveris is closing factories and cutting jobs to cope with a global recession that he said may last all year. Sales volumes and prices plunged for basic plastics and chemicals, prompting Dow to reduce factory operating rates to the lowest in more than 25 years. Sales dropped 23 percent to $10.9 billion.

“It’s a very nasty set of results,” said Hassan Ahmed, a New York-based analyst at HSBC Securities. “Everyone says January has been tracking December, so you can make a valid case that the first quarter could be far worse than the fourth quarter.” He cut his rating on the shares to “neutral” from “overweight.”

Dow Chemical fell 11 cents, or 1 percent, to $10.94 as of 9:39 a.m. in New York Stock Exchange composite trading. The shares have declined 28 percent this year.

Fourth-quarter net income included $1.06 a share in charges for items including restructuring, goodwill impairment and expenses related to the company’s $15.4 billion takeover of Rohm & Haas Co. and a canceled plastics venture with Kuwait. Completion of the merger is now the subject of a court case in Delaware.

Sales Volumes

The revenue decline included a 17 percent drop in sales volumes and a 6 percent drop in prices, Dow said. Demand declined in all segments and in all regions.

“With a global economic crisis unfolding during the quarter, we responded with speed and urgency to get ahead of the demand destruction that continued to accelerate as we approached the end of the year,” Liveris said in the statement. “We are assuming that the late 2008 demand levels will continue for several quarters and possibly beyond.”

Dow ran its plants at 44 percent of capacity in December, the lowest ever, and at 64 percent for the full quarter.

Dow in December said it is eliminating about 5,000 jobs, or 11 percent of the global workforce, permanently closing 20 facilities and idling 180 plants. Dow’s contractor workforce is being cut by 6,000 globally.

U.S. Economy

The U.S. economy, the world’s largest, may contract at a 5.5 percent annual pace this quarter after declining at a 3.8 percent rate in the last three months of 2008, according to economists at Morgan Stanley in New York. The U.S., Japan and Europe are simultaneously in a recession for the first time since World War II. The International Monetary Fund last week projected global growth this year at 0.5 percent.

Full-year net income plunged 80 percent to $579 million, or 62 cents a share, Dow Chemical said. Sales rose 7.5 percent to $57.5 billion.

Dow Chemical’s earnings probably will deteriorate in 2009, which would require borrowing to pay the annual dividend of $1.68 a share, HSBC’s Ahmed said. When profit sank in 2002, the last time Dow posted a quarterly loss, the company borrowed to pay its dividend. Borrowing isn’t an option this year because of the Rohm & Haas acquisition and tight credit markets, he said.

“I am convinced they will not be able to pay their dividend,” Ahmed said. “A dividend cut becomes a very valid concern.”

Default Swaps Gain

The cost to protect against a default by Dow Chemical jumped to a record. Credit-default swaps protecting Dow bonds for five years jumped 75 basis points to 627 basis points, according to CMA DataVision in London. Contracts on Rohm & Haas climbed 27 basis points to 235 basis points, also a record, CMA data show. The contracts are used to hedge against losses or to speculate on the companies’ creditworthiness.

Costs for petroleum-derived raw materials and energy fell 23 percent from the year-earlier quarter, the company said. Dow uses oil and natural gas to power factories and as raw materials.

Dow, founded in 1897, makes 3,200 products, including plastics, Styrofoam insulation, pesticides and chlorine, at more than 150 production sites in 37 countries.

Agriculture Profit

The agriculture unit, which makes seeds and pesticides, reported profit of $34 million compared with a $38 million loss a year earlier. Profit rose 40 percent in the performance- chemicals units amid price gains and increased demand for some products, such as water-treatment membranes.

The basic-plastics segment had a $315 million loss because of tumbling demand and prices for products such as polyethylene plastic, used in bags and packaging. Basic chemicals had a $237 million loss, largely because of a 33 percent drop in demand.

The performance-plastics segment lost $479 million because of weak demand for resins used in industrial coatings and car parts and polyurethane foams used in cushions and bedding.

Rohm & Haas sued Dow last week in Delaware Chancery Court to force the completion of the transaction, which was supposed to close on Jan. 27. Judge William B. Chandler III set the first day of trial for March 9 in Georgetown, Delaware.

Court Filing

Dow said today in court documents that the rapid acceleration of the economic and financial downturn raised questions about the combined company’s viability and justified the decision not to complete the deal.

Dow, still committed to the merger, is seeking new terms from Citigroup Inc. and other lenders that have committed $13 billion in bridge financing for the acquisition. Liveris had planned to finance the deal with the loan and $4 billion in equity investments by Warren Buffett’s Berkshire Hathaway Inc. and the Kuwait Investment Authority.

Kuwait’s Petrochemical Industries Co. was to pay $7.5 billion for a 50 percent stake in Dow’s basic-plastics unit, the world’s largest producer of polyethylene. The resulting joint venture, known as K-Dow Petrochemicals, would have paid each partner $1.5 billion, boosting Dow’s proceeds to $9 billion.

To contact the reporter on this story: Jack Kaskey in New York at jkaskey@bloomberg.net.

Last Updated: February 3, 2009 09:44 EST