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Sales growth expected to slow in 2008



Paint companies anticipate a decrease in sales growth for 2008 due to the slowdown in the global economy.



By Sean Milmo



Published April 4, 2008
Related Searches: Decorative Coatings Industrial Coatings
European coatings companies and raw material suppliers reported good sales and profits figures in their annual results for last year. But they are admitting that in what they figure will be a challenging year are unlikely to repeat the same performance in 2008.

Nonetheless few companies in the European coatings sector are pessimistic about this year, despite the slowdown in the global economy triggered by the financial crisis in the U.S. whose effects have spread to Europe.

The optimism stems from the belief that the Western European economy will perform relatively well and should avoid the sort of recession threatening the US. In addition companies expect to benefit considerably from continued robust growth in the economies of Eastern Europe, particularly Russia, while for those with global activities sales will be bolstered by strong demand in Asia.

Economists are expecting GDP growth in the 15-state eurozone at the core of the Western European economy to slow to 1.5-2.0% this year. This would still be in line with the long term trend rate in the area.

In its latest economic assessment, the Paris-based Organisation for Economic Co-operation and Development (OECD), representing the world's leading industrialized countries, estimated that quarter-on-quarter growth in the first half of this year in the eurozone would only be slightly lower than the second half of 2007.

One reason for the comparative vibrancy of Western Europe's economy has been the strength of its exports, despite the steep rise of the euro and other European currencies against the U.S. dollar. The exports increase has helped underpin demand for industrial coatings.

"Eurozone exports so far seem to be holding up well in the face of euro appreciation," said Juergen Elmeskov, the OECD's acting head of economics. In January eurozone exports increased by more than seven percent, their fastest monthly growth rate since May 2000.

A lot of the foreign demand for Western European exports has been coming from the buoyant economies of Eastern Europe. The Polish government is expecting first quarter GDP growth of six percent in the first quarter of 2008, a similar level to the total increase in Poland's output last year. Industrial production in Russia dropped to approximately five percent in January due to the winter but is expected to climb back to the eight to ten percent growth levels of last summer.

A large proportion of the leading European coatings companies reported sales increases of five to 10% or more in 2007, helped to some extent by the vitality of Eastern Europe and Asia, particularly China. Rises in profits were in many cases even higher.

The coatings division of Kemira of Finland recorded 11% growth in sales in 2007 to 652 million ($965 million), mainly due to its expansion in Russia and other countries of the former Soviet Union. Operating profit rose 15% 66 million after excluding non-recurring item to give a return on capital employed of 24%, almost three times higher than three years ago.

Teknos Group, another Finnish coatings company mainly producing industrial coatings, also pointed to brisk growth in exports sales in Russia and elsewhere in Eastern Europe as a key driver behind an eight percent revenue rise last year with a doubling in operating profit.

Akzo Nobel, Europe's largest paint producer, reported "significant" growth in sales of industrial coatings in Russia and the rest of Eastern Europe in 2007, as well as in Asia. Growth in its decorative coatings sales mainly came from Eastern Europe and Asia as well. The company's coatings sales went up by five percent last year to $6.5 billion while earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 12% to 737 million.

Paint sales at ICI, whose takeover by Akzo Nobel was completed in early January, increased by only three percent last year mainly because of a fall in demand for decorative coatings in the U.S. in the second half. But this drop was partly offset by rising demand in emerging markets. ICI's decorative sales in China during the year increased by 21% and by 13% in Latin America.

Coatings companies heavily involved in marine and protective coatings recorded relatively big rises in sales and profits last year due to vigorous demand both in Europe and Asia. Those supplying oil and gas producers were able to take advantage of steep rises in capital investment in the energy sector due to soaring crude oil prices.

In preliminary figures for last year, Jotun of Norway, whose main outlet is shipbuilding and oil and gas projects, reported a 25% rise in operating profit in 2007. "Last year was an absolute high point for Jotun with the best sales and profits in Jotun's history," said Morten Fon, the company's president and chief executive.


In the Middle East and Southeast Asia Jotun's revenue went up by 18%, while it has been making inroads into the Chinese market. In January it signed a contract for coatings supplies for 80 vessels to be built at Dayang Shipyard on China's Yangste River.

Hempel of Denmark, which is also mainly active in marine and protective coatings, pushed up its operating profit by 57% to 96 million on a 19% sales increase to 927 million. Over half of the company's sales were generated in U.S. dollar-based markets which reduced sales growth by six percentage points.

For the second successive year it recorded growth in sales of protective coatings of approximately 30% derived from rising demand both in Europe and Asia.

"In 2007 we improved efficiency and professionalism across the company and we managed this despite the weakening U.S. dollar and raw material prices that remained high," said Pierre-Yves Jullien, Hempel's chief executive.

With currency fluctuations and macroeconomic trends, particularly in North America, raw materials costs are at present the major concerns among European coatings companies. Akzo Nobel said they will contribute to a "testing environment" during 2008.

Nevertheless raw material prices are expected to be less volatile. Prices of methanol, a key base chemicals for resins, have been dropping from their peak in 2007. Excess supplies in Europe have been putting downward pressure on titanium dioxide pric

2008 will be a difficult year for many European coatings producers. But few believe that it will divert them from fulfilling their objective of consistent increases in sales and profits, although the rises this year are likely to moderate compared to those of 2007.


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