Dow Chemical ( DOW) posted third-quarter earnings and sales gains but warned that rising commodities prices are creating a continuing challenge.

For its third quarter, the Midland, Mich., chemicals giant made $801 million, or 82 cents a share, up from the year-ago $617 million, or 65 cents a share. Revenue rose 12% from a year ago to $11.26 billion. Analysts surveyed by Thomson First Call had forecast a 75-cent profit on sales of $11.35 billion.

Price improved 12% year-over-year, with increases in all geographic areas and across virtually every business, while volume held steady compared with a very strong third quarter in 2004, despite the impact of the two hurricanes that hit the Gulf Coast.

Although Dow's feedstock and energy costs were almost $850 million higher than a year ago, the company recorded its 11th consecutive quarter of year-over-year margin recovery and was able to further reduce debt by $500 million. At the end of the quarter, Dow's net debt to capital ratio was 32%, 14 points lower than at the end of the same quarter in 2004. The company's gross debt to total capital ratio was 41%.

"This was a tough quarter for Dow; feedstock and energy costs soared to new highs and our U.S. Gulf Coast operations were disrupted by two severe hurricanes," said CFO Geoffery E. Merszei. "Looking ahead, global economic growth is set to continue, spurring higher demand for chemicals and plastics in the face of tightening supply/demand balances. Although feedstock and energy costs are expected to remain high and volatile, our continued focus on financial discipline and margin management should reap another year-over-year earnings improvement in the fourth quarter -- and 2006 should exceed our performance in 2005."

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