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Weathering the economic storm



As the coatings industry prepares for a sharp economic downturn, how will the market cope?



By Sean Milmo



Published October 30, 2008
Coatings companies and their raw material suppliers in Europe are hunkering down in preparation for a sharp economic downturn with some already announcing cost cutting measures, including job reductions.

At the same time companies are looking at ways of taking advantage of what could be at least a one-year recession in the leading economies of Europe by continuing to invest in expansions into new markets and in new technologies.

"The world economy has now clearly entered a phase of lower growth, particularly in the mature markets," said Hans Wijers, Akzo Nobel's CEO. "In these challenging markets, only lean companies succeed. We have therefore started a rigorous drive to further reduce our cost base."

The company is now aiming for a reduction in jobs of at least 3,600 following last year's takeover of ICI, as well as additional cost savings of €100 million ($127 million).

For more than a year the economies of the UK, Spain and Ireland have been declining because of the bursting of the boom in their housing markets.

In the wake of the financial crisis, the economic difficulties have spread to much of Western Europe and Central and Eastern Europe as well. The International Monetary Fund (IMF) has predicted that all of Western Europe's major economies will slip into recession over the next few months. In the euro zone of 15 countries growth next year will be only 0.2% versus 1.3% in 2008, according to IMF.

The construction and automobile sectors-both major outlets for coatings-have already been hit hard by the economic slump. In the UK granting of new mortgages is a third of the level it was a year ago.

A severe blow to companies in the coating sector in Western Europe is that the slowdown is also affecting large parts of Eastern Europe. Over the last few years Eastern Europe has been the big growth area in the whole of Europe. Strong demand there has helped Western European players offset sluggish growth in their domestic markets.

"People have been expecting the emerging economies to escape the worse of the downturn," said Louis McCulloch, a coatings consultant at James Consulting, Dorking, England. "But it looks likely now that this might not happen in areas like Eastern Europe. The problem for Eastern European countries is that a lot of them rely on exports to Western Europe."

One hope is that the larger Eastern European economies, particularly Russia and Poland, will withstand the worse of the recession. Oil and gas production should continue to be a driving force behind the Russian economy.

"Russia seems to have been holding up until now, and so has Poland," said Cheryl Martin, Rohm and Haas' general manager for paint and coatings materials in Europe. "But there is a credit squeeze in Russia which has affected the automobile market and could spread to construction as well. A lot will depend on how the banks and government there react."

With growth in Eastern Europe shrinking, coatings companies in Western Europe are looking to the fast growing economies of China, India and elsewhere in Asia for opportunities for increasing sales and for long-term expansion.

"Asia looks likely to remain a major attraction for Western coatings companies," said McCulloch. "Even if there is a decline in the growth rates of countries like India and China, they will still be consuming coatings at a rate well above their GDP growth rate. In China coatings volumes have been going up 20-30% a year-double to triple GDP growth-and in India the increase in volumes has been 12-14% which has also been well above GDP increases."

The response of Jotun Group of Norway to reduced growth in the global economy is to step up its investment in growth markets outside Europe.

"It is important for us to be able to position ourselves in the countries and sectors where there is reason to believe that growth will remain relatively strong over time," said Morten Fon, Jotun's CEO. His company is planning to open a new plant in South Korea next year and is building a new factory in Libya.

Also both coatings producers and suppliers of their raw materials and intermediates appear at the moment reluctant to cut back on R&D expenditure because of the importance of innovation in exploiting rising demand in a revived economy.

"Everyone is thinking about innovation during a downturn," said Martin. "Innovation helps companies become more efficient, save money and certainly enables them to become more competitive."

"At Rohm and Haas, we are using this crisis as an opportunity to expand our reach in the market," she continues. "It is the right time to do it. We are helping customers create new and better formulations so that they can get the right product to the right marketplace in preparation for the economic recovery. You cannot let up in a downturn. Otherwise, you'll lose out when the upturn comes."

With some coatings companies, however, the priority will be to avoid being in financial difficulties in a recession at whatever cost. For others it will be a matter of survival.

Both raw material suppliers and coatings manufacturers are now paying much closer attention to the financial health of customers when providing credit to them.

"We are seeing more credit problems with some of our customers," said Steven Welch, chief operating officer, international businesses, at BP which is a leading producer in Europe of acetic acid, a major raw material for coatings production.

"We haven't been significantly reducing the amount of credit we give to customers," he added. "But we are watching things very carefully. In a commodity business with low margins you cannot afford any write-offs."

Even large companies are being attentive to their debt financing. With €1.8 billion of its net debt due to mature in the next seven months, Akzo Nobel has decided to defer the remaining €1.6 billion of a share buy-back program.

Analysts are expecting a certain amount of restructuring along the coatings supply chain over the next year, mainly through takeovers.

"There will definitely be more consolidation," said McCulloch. "Times like these when companies will be getting into difficulties are an opportunity for expansion through acquisition for cash-rich players."


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