Sean Milmo12.03.09
The European coatings sector and its raw materials suppliers have entered a period of restructuring characterized by extensive cost cutting measures including reductions in personnel and, in many cases, investment.
The result could be leaner businesses, which will be able to withstand the financial pressures stemming from short-term low growth in their home markets.
Already some of the multinational European coatings companies are showing that they could emerge even stronger after the recession to take full advantage of a revival in demand.
European companies with large coatings operations have even managed to maintain their profitability this year despite big falls in paint sales.
"Their profits are down but not by much, while a lot of them have retained their margins," said David Thomas, chemicals consultant at Oxford Economics, Oxford, England. "They have achieved this mainly through cutting costs and by restricting investment."
While overall investment levels in the coatings sectors, including suppliers of raw materials, have been going down, some coatings operations have taken the opportunity of the economic crisis to strengthen their position in markets by opening new production capacity, putting more resources into innovation, and making acquisitions.
"Acquiring new business, especially in Asian and Eastern European growth regions, puts us in an ideal position for the future," said Raimar Jahn, head of BASF Coatings AG.
In the nine months from January to September this year, BASF Coatings' sales fell by 18% to $1.6 billion ($2.3 billion), mainly because their strong dependence on automobile demand. But the decline has been leveling out. Sales dropped by 12% in the third quarter while earnings were higher than in the previous quarter.
"We did well in a market experiencing an overall downturn," said Jahn. "During the crisis, we didn't lose market share. On the contrary, in some areas, we managed to gain market share. While the bottom has been reached, recovery is slow and unsteady. For the most part, however, we are headed in the right direction, even if the situation is still difficult."
BASF Coatings has expanded production capacity this year at its German sites in Munster and Wuerzburg, and launched a new scratch-resistant clear coat for automobiles. It has reduced casual staff in Germany but has retained all permanent staff in the country, with the help of a government-funded scheme for short-time working without job cuts.
AkzoNobel has announced it is cutting costs and reorganizing its activities in order to be "in good shape to take advantage of the recovery when it comes."
In its decorative paints business, in which it is restructuring its supply chain in Europe, the margin on sales of its earnings before interest, tax, depreciation and amortization (EBITDA) actually rose slightly to 15.2% in the third quarter of this year despite a six percent drop in sales. In performance coatings, EBITDA went up by 12% during the quarter with the help of margin management and cost reductions.
In November the company was even able to buy from Dow Chemical the former powder coatings activity of Rohm and Haas. Leif Darner, AkzoNobel board member responsible for performance coatings, described it as "a strategic acquisition which will enable us to further penetrate key industrial coatings segments."
Tikkurila, the coatings operation of Kemira of Finland, has been continuing to make acquisitions in Eastern Europe in order to bolster its position in the emerging economies of the region.
Despite a sales decrease of 21% in the first nine months of the year, costs and investment cuts have enabled Tikkurila to maintain profit margins at levels similar to those of last year. It has reduced capital expenditure, excluding that on acquisitions, by 38%.
With investments being squeezed both by coatings companies and their suppliers, greater stress, however, could be placed in the short term on production capacity because of closures and curbs on expansions and the building of new plants. In particular supplies of coatings raw materials could become tighter, which will trigger more volatility in prices.
Supply chains will lengthen as raw materials have to be imported instead of being sourced from local producers who will have disappeared, slimmed down their product portfolio or decreased output.
"There is unlikely to be absolute shortages," said Thomas. "There will be greater reliance on imports which would push up costs for formulators like coatings manufacturers. Most chemicals are now traded internationally, except inorganics like chlorine and its derivatives. Coating companies may have to reorganize the sourcing of their materials."
Coatings companies will be hoping to see in Europe next year a revival in demand for automobiles and a recovery in construction, particularly in the sales of homes.
"Among the downstream sectors in Europe, coatings has taken one of the biggest hits this year because of its reliance on housing and the car markets which have both been hammered by the recession," said Alan Eastwood, economic advisor to the UK Chemical Industries Association (CIA) and head of an economic forecasting group at the European Chemical Industry Council (Cefic).
In the UK, for example, where both housing and car production was severely impacted by the economic downturn, output of paints is predicted by Oxford Economics to have fallen by 19% this year
The outlook for European car sales in 2010 is uncertain because of the likelihood that European governments will be withdrawing "clunker" schemes under which motorists are given financial incentives to trade in old for new vehicles. These schemes have been helping to curb the fall in car sales across Europe.
"They may well have merely brought forward car purchases which were going to be made in 2010," said Eastwood. "So there may be a corresponding decline in sales next year."
Cefic is predicting an average 4.7% rise in output of chemicals, including downstream products like paints, next year. But this will be after a 12% fall in production this year.
"It's going to take a relatively long time for the European economy to catch up after the recession," said Thomas. "Chemicals production may not return to its levels in 2008 until 2013.
Consequently, coatings producers and their raw material suppliers in Europe have been preparing themselves for two to three years when they will require less capacity and resources than was needed prior to the financial crisis. One of the best ways of doing this has been by cutting variable costs-especially staffing and investment. But fixed costs are also being decreased. For the more resilient companies this downsizing will put them in a position of strength rather than weakness.
The result could be leaner businesses, which will be able to withstand the financial pressures stemming from short-term low growth in their home markets.
Already some of the multinational European coatings companies are showing that they could emerge even stronger after the recession to take full advantage of a revival in demand.
European companies with large coatings operations have even managed to maintain their profitability this year despite big falls in paint sales.
"Their profits are down but not by much, while a lot of them have retained their margins," said David Thomas, chemicals consultant at Oxford Economics, Oxford, England. "They have achieved this mainly through cutting costs and by restricting investment."
While overall investment levels in the coatings sectors, including suppliers of raw materials, have been going down, some coatings operations have taken the opportunity of the economic crisis to strengthen their position in markets by opening new production capacity, putting more resources into innovation, and making acquisitions.
"Acquiring new business, especially in Asian and Eastern European growth regions, puts us in an ideal position for the future," said Raimar Jahn, head of BASF Coatings AG.
In the nine months from January to September this year, BASF Coatings' sales fell by 18% to $1.6 billion ($2.3 billion), mainly because their strong dependence on automobile demand. But the decline has been leveling out. Sales dropped by 12% in the third quarter while earnings were higher than in the previous quarter.
"We did well in a market experiencing an overall downturn," said Jahn. "During the crisis, we didn't lose market share. On the contrary, in some areas, we managed to gain market share. While the bottom has been reached, recovery is slow and unsteady. For the most part, however, we are headed in the right direction, even if the situation is still difficult."
BASF Coatings has expanded production capacity this year at its German sites in Munster and Wuerzburg, and launched a new scratch-resistant clear coat for automobiles. It has reduced casual staff in Germany but has retained all permanent staff in the country, with the help of a government-funded scheme for short-time working without job cuts.
AkzoNobel has announced it is cutting costs and reorganizing its activities in order to be "in good shape to take advantage of the recovery when it comes."
In its decorative paints business, in which it is restructuring its supply chain in Europe, the margin on sales of its earnings before interest, tax, depreciation and amortization (EBITDA) actually rose slightly to 15.2% in the third quarter of this year despite a six percent drop in sales. In performance coatings, EBITDA went up by 12% during the quarter with the help of margin management and cost reductions.
In November the company was even able to buy from Dow Chemical the former powder coatings activity of Rohm and Haas. Leif Darner, AkzoNobel board member responsible for performance coatings, described it as "a strategic acquisition which will enable us to further penetrate key industrial coatings segments."
Tikkurila, the coatings operation of Kemira of Finland, has been continuing to make acquisitions in Eastern Europe in order to bolster its position in the emerging economies of the region.
Despite a sales decrease of 21% in the first nine months of the year, costs and investment cuts have enabled Tikkurila to maintain profit margins at levels similar to those of last year. It has reduced capital expenditure, excluding that on acquisitions, by 38%.
With investments being squeezed both by coatings companies and their suppliers, greater stress, however, could be placed in the short term on production capacity because of closures and curbs on expansions and the building of new plants. In particular supplies of coatings raw materials could become tighter, which will trigger more volatility in prices.
Supply chains will lengthen as raw materials have to be imported instead of being sourced from local producers who will have disappeared, slimmed down their product portfolio or decreased output.
"There is unlikely to be absolute shortages," said Thomas. "There will be greater reliance on imports which would push up costs for formulators like coatings manufacturers. Most chemicals are now traded internationally, except inorganics like chlorine and its derivatives. Coating companies may have to reorganize the sourcing of their materials."
Coatings companies will be hoping to see in Europe next year a revival in demand for automobiles and a recovery in construction, particularly in the sales of homes.
"Among the downstream sectors in Europe, coatings has taken one of the biggest hits this year because of its reliance on housing and the car markets which have both been hammered by the recession," said Alan Eastwood, economic advisor to the UK Chemical Industries Association (CIA) and head of an economic forecasting group at the European Chemical Industry Council (Cefic).
In the UK, for example, where both housing and car production was severely impacted by the economic downturn, output of paints is predicted by Oxford Economics to have fallen by 19% this year
The outlook for European car sales in 2010 is uncertain because of the likelihood that European governments will be withdrawing "clunker" schemes under which motorists are given financial incentives to trade in old for new vehicles. These schemes have been helping to curb the fall in car sales across Europe.
"They may well have merely brought forward car purchases which were going to be made in 2010," said Eastwood. "So there may be a corresponding decline in sales next year."
Cefic is predicting an average 4.7% rise in output of chemicals, including downstream products like paints, next year. But this will be after a 12% fall in production this year.
"It's going to take a relatively long time for the European economy to catch up after the recession," said Thomas. "Chemicals production may not return to its levels in 2008 until 2013.
Consequently, coatings producers and their raw material suppliers in Europe have been preparing themselves for two to three years when they will require less capacity and resources than was needed prior to the financial crisis. One of the best ways of doing this has been by cutting variable costs-especially staffing and investment. But fixed costs are also being decreased. For the more resilient companies this downsizing will put them in a position of strength rather than weakness.