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Last Updated Thursday, December 18 2014
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Recovery in Europe Could Be Stalled by Ukrainian Crisis



Optimism is being undermined by worries about the economic impact of the Ukranian crisis, particularly on coatings demand in Russia and other Eastern European countries.



By Sean Milmo, European Correspondent



Published April 15, 2014
European coatings companies have been hoping that this year would bring a revival in their domestic markets as the European Union economies, particularly those in the eurozone, started to show signs of recovery around mid-2013.

But the optimism is being undermined by worries about the economic impact of the Ukrainian crisis, particularly on coatings demand in Russia and other Eastern European countries  where coatings have been growing strongly over the last few years.

Many Western European coatings producers have been relying on exports to these emerging markets on their door st EPS to offset static or even declining domestic sales.
They have also been slightly concerned about the short-term prospects in China and elsewhere in Asia which have become another expanding destination for European coatings exports.

However, in Western Europe itself the outlook has brightened considerably—at least before the recent events in Ukraine.  After two years of decline, the GDP of the 18-national eurozone was expected by the European Commission, the EU’s Brussels-based executive, to grow by 1.2 percent this year. 

Within the whole Union of 28 countries GDP was being forecast to expand by 1.5 percent  which in 2015 would rise to 2 percent with some countries then possibly showing growth rates of over 3 percent.

Chemicals output, including that of coatings, will go up by an average 1.5 percent this year after being flat in 2013, according to the European Chemical Industry Council (Cefic), representing chemicals producers.  Speciality chemicals production, which also comprises coatings and its raw materials, went up by 0.7 percent last year after slumping by almost 4 percent in 2012.

“Europe is (now) expected to return to the growth zone,” said Matthias Wolfgruber, chief executive of Altana AG, a German-based vertically integrated coatings, sealants, pigments and additives company.

With approxmately 42 percent of last year’s sales of €1.8 billion ($ 2.45 billion) in Europe, the company is hoping to double its revenue by 2020 while maintaining earnings before interest, tax, depreciation and amortisation (EBITDA) at a sales ratio of 18-20 percent.

After suffering sometimes sharp declines in European sales and profits following the post-2008 economic downturn, most European coatings companies have been restructuring their domestic businesses to raise efficiencies and reduce costs.

They are now hoping that they can use their leaner European operations as a platform for achieving steadily rising and much more profitable sales in Europe, especially in the economically more dynamic Western European countries.

Tikkurila of Finland, a decorative and industrial coatings producer supplying the markets in Scandinavia,  Central  and Eastern Europe and Russia and its neighbours on the eastern European  periphery,  recorded a revenue decrease of  2.6 percent last year.  Yet its operating profit went up 7.7 percent to €71.5 million with a margin on sales of  close to 11 percent.

In its home market of Finland sales dropped by 3.6 percent to € 108 million but its operating profit jumped by 38 percent with a margin of 14 percent.  In its Central and Eastern European business operating profit soared by 93 percent on flat sales of  €125 million.

“We have been modifying and simplifying our structures in recent years,” said Erkki Jaervinen, Tikkurila’s president and chief executive.  “These measures have supported good profitability in our operations in the challenging economic situation.”

BASF Coatings, which has approximately 40 percent of its sales in Europe, recorded a “considerable earnings increase” last year despite flat sales.  This was partly helped by restructuring in Europe where it completed the divestment of its European decorative paints operation.

“Our coatings business has been developing very nicely last year, especially in emerging markets,” Kurt Bock, BASF’s chairman told the company’s recent annual results press conference in Ludwigshafen, Germany.

AkzoNobel’s European sales of decorative paints, in which it is market leader in the region, fell 5 percent in 2013 to €2.5 billion, still around 60 percent of its global decorative sales. Yet its operating income in European decorative paints was higher than in 2012 due to a lower cost base created by efficiency improvements, according to the company which does not give a breakdown of profits figures by region or segment.

Among the restructuring initiatives in its European decorative business was the divestment of its European building  adhesives activity to  Sika AG of Switzerland.  It also sold a network of  stores for professional painters in Germany, while it has also been improving the effectiveness of its stores network in France. 
“We are taking decisive  action to streamline our product range, reduce complexity and become more competitive,” said Roud Joosten, member of AkzoNobel’s executive committee responsible for decorative paints.

The company is implementing a new business model for European decorative products which exploits the benefits of a simplified management structure with a greater emphasis on sustainability and eco-premium paints with a high environmental profile.

Next year it is due to commission a £100 million green-field decorative paints plant in northeast England  with an annual capacity of 100 million litres, which will replace two other UK plants and supply both the UK and continental European markets.  It will use r harvested rain water and consume 60 percent less energy per litre of  paint output.
The company’s  ‘Fix Europe’ agenda which embraces both its decorative and  performance coatings businesses not only covers manufacturing and distribution but also marketing, sales and administration.  The objective is to have a slimmer and more cost competitive structure to take full advantage of  the expected renewed growth in Europe.
However the reorganisations being undertaken by AkzoNobel and many other European coating companies may first have to cope with the economic reverberations of the confrontation between the West and Russia over Ukraine.

The Russian economy was already showing signs of softening  before the Ukrainian uprising.  “In Russia consumer confidence weakened during the last months of the year,” said Jaervinen.

Companies like Tikkurila and other Western European coatings producers which have been investing heavily in production capacity, distribution networks and services support in Russia are hoping that the crisis will blow over before the time of peak demand for coatings in the country in the summer.

Otherwise not only themselves but most other European coating companies will have to be much more cautious about the prospects for sales and profits not only this year but probably in 2015 as well.


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