June 24 (Bloomberg) -- Dow Chemical Co. will raise prices as much as 25 percent in July, the largest increase in company history and the second in two months, to recoup surging energy and raw-material costs.

The biggest U.S. chemical maker also will add shipping surcharges in North America and close European and U.S. plants that make Styrofoam, paint ingredients and plastics because of rising expenses and weak demand, Midland, Michigan-based Dow said today in a statement.

Chief Executive Officer Andrew Liveris last month raised prices for June as much as 20 percent because of surging costs. The additional increases were needed because of a ``relentless'' rise in the cost of oil-derived naphtha and ethane, a component of natural gas, Dow said.

``This is what they need to be doing,'' Steve Hoedt, who helps manage $34 billion, including Dow Chemical shares, at National City Corp. in Cleveland, said in a phone interview. ``All the companies that have petroleum as a major input cost have needed for quite a while to pass along the higher raw- material costs to their customers.''

Dow fell $1.04, or 2.8 percent, to $36.58 at 4:15 p.m. in New York Stock Exchange composite trading, the lowest closing price in three months. The shares have declined 7.2 percent this year.

David Begleiter, a New York-based analyst at Deutsche Bank AG, reduced his second-quarter and full-year earnings estimates for Dow because of rising costs and ``signs of demand destruction in the U.S.''

Earnings `Pressured'

``We expect earnings to remain pressured as pricing struggles to catch up with escalating ethane prices,'' Begleiter said. He rates the shares ``hold.''

Costs for energy and oil and natural-gas derivatives have surged fourfold in five years to an estimated $32 billion this year, Dow said. That would be a 30 percent increase from 2007, when sales totaled $53.5 billion.

``The staggering increase in our costs over the past few months have forced us to take these further measures in order to restore our margins,'' CEO Liveris said in the statement.

Dow said its freight surcharge will add $300 per truck shipment and $600 per rail shipment as of Aug. 1.

The company's cumulative price increases since May approach 50 percent, Kevin McCarthy, an analyst at Banc of America Securities, said in a report. Dow's 3,200 products are used in thousands of consumer products, including diapers, sneaker soles, carpets and plastic bottles.

Inflation Watch

``The higher bill at the end of the day winds up in the lap of the consumer,'' Ben Johnson, a Chicago-based analyst at Morningstar Inc., said in a Bloomberg Radio interview. ``It's going to eventually filter through to those core inflation numbers.''

Federal Reserve Chairman Ben S. Bernanke has voiced concerns about inflation and the slumping dollar. Still, all 101 economists in a Bloomberg News survey said the Federal Open Market Committee will keep the benchmark lending rate unchanged at 2 percent at the conclusion of a two-day meeting tomorrow. Raising rates may exacerbate the U.S. economic slowdown.

Consumers anticipate annual inflation of 3.4 percent in the coming five years, a 13-year high, a Reuters/University of Michigan survey showed this month. A Commerce Department measure of prices tied to U.S. consumer spending has averaged annual gains of 3.3 percent this year, up from 2.5 percent in 2007.

Rising oil and natural-gas costs will help Dow convince customers that more price increases are necessary, Hoedt said.

Price Increases

``All this stuff is open for negotiation and it remains to be seen how effective the price increases will be,'' Hoedt said. ``As long as hydrocarbon prices stay high, they'll have pricing power.''

Crude-oil prices have almost doubled in the past year and reached a record $139.89 a barrel on June 16. Natural gas has surged 74 percent this year.

Dow's energy, transportation and raw-material costs may rise by $900 million in the second quarter from the first quarter, McCarthy said. Shutting plants should help tighten supply-demand balances so price increases can be achieved, McCarthy, who rates the shares ``neutral,'' said in a report.

Dow said it is reducing production at plants around the world because of slowing U.S. and European economies. The company will temporarily reduce by 40 percent European output of styrene, an ingredient in polystyrene products such as Styrofoam insulation and plastic flatware, and European polystyrene production will be cut by 15 percent.

`Idling Capacity'

``We're idling capacity for supply and demand fundamentals,'' Liveris said on CNBC. ``When you can't run the plant and make positive cash costs, you've got to bring it down.''

Dow Chemical plans to idle 20 percent of capacity for making Styrofoam insulation in Europe and to shut three factories that make emulsion polymers, used in paints, adhesives and carpets. The emulsion plants represent 25 percent of Dow capacity in North America and 10 percent in Europe.

Three factories in the Dow Automotive unit will be permanently shut because of declining North American sales, the company said. Details on specific plant closures, job cuts and related charges haven't been determined, said Chris Huntley, a company spokesman.

``They have to shutter anything that is only marginally economic,'' Hoedt said. ``This is just the beginning of what we are going to see.''

Dow also is temporarily shutting 30 percent of its North American capacity to make acrylic acid, used in water-based paints, and 25 percent of global production of ethylene oxide, used in antifreeze, plastic water bottles and carpet fiber.

Dow may restart the idled plants if demand improves or costs drop, Huntley said. The company has eliminated 1,200 jobs since announcing a round of permanent plant closings in November, he said.

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

Last Updated: June 24, 2008 16:45 EDT