Europe Reports

Resins are supplying the pressure

By Sean Milmo | February 6, 2007

Paint and coatings makers face a tough year ahead as resin suppliers continue to push for further price hikes.

Manufacturers of coatings resins in Europe are continuing to push for price increases in the wake of big rises in raw material costs.

The price hikes are ominous for coatings manufacturers because resin suppliers are not being optimistic about prospects for an easing of price pressures this year, even if there is a significant drop in oil prices.

The grim outlook for resin prices stems from a tightness in the suppy/demand balance among upstream players. In some commodity chemical sectors an outage at a single plant can immediately trigger a scarcity.

There seems to be little likelihood base chemical producers will invest in capacity expansions, particularly for the sake of maintaining or increasing supplies to a market like coatings resins where companies have less opportunity to absorb higher prices because of narrowing profit margins.

Epoxy bulk liquid producers, for example, have been preferring to supply the more remunerative polycarbonate market than the coatings resins sector.

As a result some companies in the coatings sector have been talking about the possibility of a greater degree of backward integration into raw materials.

DSM, one of Europe's leading producers of coatings resins, has warned that the persistent squeeze from raw material costs was an issue for the whole coatings sector.

"It's not just a DSM problem," said Dimitri de Vreeze, business unit director, DSM Coatings Resins, in a recent review of the raw material prices. "It is a problem of the whole coatings value chain and of adjoining value chains."

"Price increases are partly driven by high oil and feedstock prices but also by tight demand and supply in various markets," he added. "This is a result of growth in end markets, especially in China, and lack of sufficient investments in new capacities for raw materials."

DSM has emphasized the need to improve profitability through higher prices for its products so that it is able to invest in the development of resins to meet new environmental standards in Europe.

The latest price rises announced by DSM was for five to eight percent increases for solvent-borne resins, except amino resins, due to come into effect on January 1. Patrik Lundstrom, business director for decorative, protective and industrial resins, said the rises were necessary in order to "create a sustainable financial situation and to continue to invest in new products."

In the summer when DSM revealed similar price rises for long-oil alkyds and related products, Lundstrom admitted "we simply do not make money on these products anymore."

When it pushed up its prices for polyester powder and liquid polyester resins in June, DSM complained about the "turbulence" in the coatings resins market at a time of shortage for materials like neopentylglycol (NPG), isophthalic acid (PIA), adipic acid and certain solvents.

Nuplex, the New Zealand-based company which acquired Akzo Nobel's coatings resins operation two years ago, announced late last year its second hike in resins prices within 12 months.

John Hirst, the company's managing director, had predicted in early 2006 a softening in raw materials costs during the year as the supply/demand balance in petrochemicals swung back in favor of buyers. He also believed that the company would benefit from the bargaining power attained from a global purchasing operation for raw materials.

However in the early summer Nuplex Resins, Bergen op Zoom, The Netherlands, announced three to nine percent increases in its resin prices in Europe. Another five percent rise in prices for solvent-borne and waterborne acrylic, solvent-borne aminos and certain alkyds and polyesters came into effect in November after what the company called "dramatic" increases in costs of key resins feedstocks such as methanol and butanol.

In many cases of shortages of resin raw materials the causes can be traced back to problems with supplies of petrochemical feedstocks and base chemicals. Benzene prices have soared over the last few years because output has been diverted into making gasoline rather than chemicals. There have been constraints on supplies of propylene because of an absence of investment in Europe in additional ethylene steam cracker capacity.

Analysts expect that there will continue to be medium-term shortages of oxo-alcohol chemicals such as butanol and 2-ethyl hexanol because of scarce capacity in Europe and elsewhere in the world. In the last 18 months BASF has closed a 200,000 metric ton-a-year 2-ethyl hexanol plant at Ludwigshafen, Germany, while European Oxo has shut down a 250,000 ton-a-year butanol facility at Marl, also in Germany.

New investments in oxo alcohol expansion have been looking doubtful. In December Celanese sold its oxo products and derivatives businesses to the private equity company Advent International which at the same time also purchased European Oxo, a joint venture between Celanese and Degussa.

Over the next year production capacity and demand in oxo alcohols are expected to be so closely matched that an outage of even a single plant could lead to acute shortages and big price hikes. Conditions in the butanol market may be slightly less difficult in 2008 when a new plant in Taiwan is scheduled to come on stream.

A major drawback for the European coatings resins sector is that at a time of insufficient capacity in raw materials it is having to compete for supplies against players in much larger markets. With polyester feedstocks and derivatives, it is having to confront the buying power of operators in resins for polyester fibers and polyethylene terephthalate (PET) for plastic bottles.

"The fiber and PET markets are not only much bigger but they are much more lucrative for raw material suppliers," said Hans Courtier, a consultant at Irfab Chemical Consultants, Hoeilaart, Belgium.

"Neopentylglycol, of which there have been shortages, is used to produce saturated polyester resins and in the vast majority of powder coatings, but there are much larger markets for its raw materials," he continued. "The markets for polyester fiber and PET also have strong growth rates which gives them more potential for raw materials producers."

Most coatings markets in Europe are not expanding fast enough to be able to pass on big price increases to customers. Growth in the powder coatings market in Western Europe, for example, has slowed to approximately three to four percent, according to a recent study by Irfab. In Central and Eastern Europe growth in demand for powder coatings is higher but like in Western Europe scope for price rises is limited by excess capacity.

Hence coatings manufacturers in Europe are having to deal with strains on their profitability not only from producers in the raw material chain but also from their inability to boost their own prices in their end-user markets.

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