The estimated $9.7 billion Latin American market for paints and coatings is rising in importance relative to other geographic markets as economic growth in the region climbs upwards and as large new investments by both customers and suppliers are planned. “We expect the regional market to grow a few percentage points ahead of GDP (the gross domestic product), but the region is very polarized, with some countries growing fast, some at a good pace, and some not expected to grow at all over the next two or three years,” said Adriana Macouzet, PPG’s general manager of Latin America North, in Mexico City.
Sherwin-Williams calculates that Latin America represents seven percent of the global demand for all paints and coatings, according to a company presentation to investors made at the end of first quarter 2014. The percentage was greater for the architectural segment, which represents nine percent of the global consumption, and was trailed by both the OEM and Special Purpose segments which both were pegged at four percent of the global total, in the S-W comparison. For Sherwin-Williams, Latin America represented 4.6 percent of the company’s total profit in 2013, the study indicated.
According to the United Nations Economic Commission for Latin America (Eclac), based in Santiago, the region expanded by 2.5 percent during 2013 and is predicted to grow by 2.7 percent this year, the agency reported in April. That would place the growth of Latin American paint and coatings in the neighborhood of 4.7 percent to 5.7 percent this year, since annual paint sales are typically a few percentage points ahead of GDP. A variety of international multi-client studies have pegged growth in the region at 6.0 percent per year over the near to mid-term.
Consumption Linked to GDP Per Capita
While corporate and government expenditures in the industrial paint and coatings segment are affected by GDP growth in general, consumer expenditures in architectural and automotive segments are more linked to GDP per capita. The most recent compilation by the Global Property Guide shows that Uruguay is leading the region with $14,700, followed by Chile with $14,000, then Brazil with $13,000, and Mexico with $10,800, and Argentina with $10,600. With the exception of Uruguay, which can be seen as a sub-market of Argentina, the other four countries might be said to be the most important markets in the region for paint and coatings.
While Chile may be a more promising consumer market for paints and coatings than Colombia, the latter is a more strategic location for manufacturing. Colombia has a long trade relationship with Venezuela, and also has been a financial and trade hub for the entire Andean region, minus Chile.
The World Bank reports that there are an estimated 580 million people in Latin America, with an average GDP per capita of $9,000, compared with nearly $50,000 in the U.S. If the average Latin American consumption of paint is seven liters per capita, as one market analyst suggests, then regional consumption would amount to nearly 4.1 billion liters. However, that seven liter paint consumption level should be examined carefully to confirm that other materials, like spackle or putty are not included in the count, one paint maker cautioned.
While a few years ago, one of the fastest growing architectural sub-segments was premium quality paint, the total disposable income available for such purchases now suggests that lower- and mid-level quality paints will grow faster. “We have the largest selling mid-level brand in the world in our Rende Muito product, which translates from the Brazilian Portuguese to “covers a lot,” said Jaap Kuiper, the managing director for Akzo Nobel in Latin America, based in Rio de Janeiro.
Shortly after the Sherwin-Williams offer to purchase Mexico’s Comex for $2.3 billion was rejected, a Wall Street banker called Coatings World to inquire which of the paint and coatings manufacturers in Brazil were the largest and best family-owned companies. He needed the information in less than a week. S-W made it clear after the Mexican anti-trust agency rejected the deal that the company was prepared to make other acquisitions if that one did not go through. With such a S-W war chest for Latin America, it is not surprising that other paint and coatings companies also are targeting the region.
In January PPG CEO Charles Bunch told investors that the company had $4 billion available for global acquisitions and for cash returns to investors. Since then several PPG acquisitions have been made in the region. “PPG is committed to continuing to invest in Latin America; we are under-represented there in comparison to our global share,” said Macouzet. “Our Latin America strategy in the past has not been very focused, and has been more conservative, so that’s why over the last two to three years we have increased our attention and resources, making fairly large investments,” she says. “We are looking for opportunities both to grow organically and through mergers and acquisitions,” she added.
Similarly, Kuiper said, “We are making continuous investments in expanding capacity, building new warehouses, rapid fulfillment lines, and other productivity projects,” although he said he could not make specific dollar amounts public information.
For some paint and coatings manufacturers, following their largest clients to Latin America was a wise move. “In the Latin American region, the segment we see growing fastest is automotive OEMs and auto parts, particularly in Mexico and Brazil,” said Macouzet. “There have been heavy investments from the global OEM players, mostly in Mexico, which has become a manufacturing hub for export to different regions in the Americas and around world,” she said.
IHS Automotive, of Englewood, Colorado, forecasts that “nearly 2.3 million additional vehicles will be sold in South America by 2025, equal to the output of 10 modern assembly plants. Most of the growth will occur in Brazil, followed by Argentina and Colombia.”
Ernst & Young estimates that total investments in Latin America’s automotive industry over the decade beginning in 2007 will amount to $17.7 billion. “The production of light vehicles are expected to grow at a CAGR of 6.88 percent over the next four years — from 7.3 million to 9.6 million units by 2017,” the consultant indicated in a study of the market last year.
As the OEMs and part makers increase investments, paint and coatings manufacturers may be forced to upgrade their local portfolios more rapidly than in the past.
Perhaps the leading reason for the bullish outlook for architectural paints is the rapid creation of a new lower-middle class as the economies of the countries improve. “In Brazil, for example, there is a new middle class of over 100 million people, albeit at a low monthly income level, so what is growing fastest is the mid-segment, and then the economy segment, more than premium,” said Kuiper.
“Because of the young population in the region, a lot of house building is taking place, and many companies and governments there are investing heavily or are planning to invest heavily,” said Macouzet. “But because of the volatility in the economies there, the performance of the housing market depends on the conditions in each country.”
The Inter-American Development Bank reported in 2012 that, “Currently, one in three families in Latin America and the Caribbean...live in dwellings that are either unsuitable for habitation or are built with poor materials and lack basic infrastructure services. As many as 2 million out of the 3 million households that spring up annually in Latin American cities are forced to settle in informal housing, such as slums, because of insufficient supply of adequate and affordable dwellings.”
Among industrial paint and coatings suppliers investing and earning more in Latin America is Shaw Pipeline Services, based in Houston. The company earned $55 million in 2013 from the Technip project deployment of two portable concrete weight coating plants in Trinidad. This year, the company expects continued growth from “offshore and large diameter gas transmission pipeline opportunities in Mexico, the launch of insulation coating production at the Socotherm Argentina operation, and an expected increase in revenue in Brazil, where production has commenced on the deepwater insulation coating for flow lines and risers for Petrobras’ Sapinhoa field in the Santos basin,” the company reported.
Since both Mexico and Brazil have national petroleum companies, spending for on-shore and off-shore oil and gas development is massive, so corrosion control is a major focus of industrial paint companies in the region.
At the same time, the white goods markets for appliances and other products continues to grow in Mexico, especially for U.S. consumption, and in Brazil. Powder coatings manufacturers are focusing closely on these two markets.
Environmental & Social Sustainability
Low-VOC and zero-VOC water-based paints continue to grow in Latin America, and one formulation developed in Brazil this year has now begun to be manufactured in Europe, says Kuiper. “Our Coralite Zero trim paint was formulated here so that you can paint a door, have it dry in one day, then close it without any blocking effect,” he says. “It has attracted substantial interest in Europe thus far,” he said.
Social programs also are a key focus of major paint brands. Akzo Nobel’s “Tudo de Cor para Voce,” or “Everything in Color for You” outreach program began as an experiment in 2008 with wall painting in a small ghetto that rose up a steep hill in Rio de Janeiro. Today the program has grown to encompass 5,000 painted houses, donations of 600,000 liters of paint, and the training of 2,800 youth who had no marketable job skills before, the company says. “The program has touched 30 million people so far,” said Kuiper. It has also spread from Rio to a host of other Brazilian cities, including: São Paulo; Salvador; Olinda; Porto Alegre; Ouro Preto; Porto Seguro; Florianópolis; Fortaleza; Paraty; João Pessoa; Recife and Mauá.
Argentina is predicted to grow only by one percent this year, according to Eclac, but its paint consumption will decline, one supplier says. “Last year the market in Argentina grew in volume by almost 10 percent, but this year it is shrinking about two percent,” said Kuiper. “This huge difference has been caused by adverse macro-economics and political circumstances, including a mega-devaluation and hyper-inflation,” he observes. “So last year, people who were afraid that inflation would erode their money bought a new car and a new computer, and then painted their houses, so there was an artificial boom,” he explained. “This year people are more cautious, and many of them have already painted.”
Among manufacturer moves, PPG consolidated its automotive and industrial manufacturing operations in Argentina at its Pilar location, in Buenos Aires province, over the past year.
With the largest economy in Latin America, Brazil is always in the cross-hairs for multinational paint and coating manufacturers. In the architectural segment, Brazil grew at a rate of seven percent last year, and “we grew faster than that,” said Kuiper. “Our Coral brand market share has risen from 23 percent to 28 percent over the last six years. Brazil’s per capital consumption of paint is one of the highest levels in Latin America at 5.5 liters.”
It is not unlikely that there could be more mergers and acquisitions in the Brazilian architectural market, because several multinational competitors have such small market shares, Kuiper said. Domestic production is one reason investments in Brazil could rise. “It is very critical for us in closed economies like Brazil to increase our domestic capabilities, to respond to market in an easier and a leaner way,” Macouzet said.
In Brazil, auto production in 2013 was up 9.9 percent to 3.74 million units, compared with 3.4 million the year before, according to the Associação Nacional dos Fabricantes de Veículos Automotores (Anfavea), the national auto manufacturers association, in Sao Paulo. This production level created a demand of $280 million for OEM automotive paints and coatings and $365 million for the automotive repair market out of a total of $4.28 billion in sales for all segments last year, reckons the Associacao das Fabricantes de Tintas (Abrafati), the national paint and coatings manufacturers association, also in Sao Paulo.
Chile’s market for paint and coatings is cited as one of the strongest this year, despite the expected domestic growth rate of only 3.5 percent. The per capital consumption of paint in Chile is about three liters, Kuiper suggests. Apart from strong architectural demand from construction, the country’s ports include extensive ship-building and services capacity, boosting industrial demand.
One significant Chilean architectural line customer investment made this year was that by the owners of the Sodimac DIY chain, based in Santiago. Parent Grupo Falabella made a $45 million purchase of property in Sao Paulo for a new store. The group logged $11.8 billion in diversified sales last year, and is present in five Latin American countries already.
In the past, Pinturas Ceresita and Sherwin-Williams have been singled out as leaders in the Chilean DIY market. Among Brazilian coatings manufacturers active in Chile is Renner Coatings Chile, which has been providing maritime coatings provisions through its licensee relationship with Chugoku.
In Colombia’s architectural segment, a new paint manufacturing facility in Bogota, is being completed by Orlando-based Lanco Paints and Coatings with local construction materials partner Sumicol. The new venture, called Corlanc, will continue to supply the Sodimac home improvement centers in Colombia.
Within Colombia’s automotive industry, over 30 percent of the estimated 300,000 units sold every year are manufactured in the country, which has eight vehicle and nine motorcycle assembly plants, according to a 2013 study by Spanish bank BBVA.
Among automotive segment investments made over the recent past by paint and coatings companies was a strategic market entry by PPG. “Two and a half years ago we bought a paint company in Colombia, Colpisa. We will continue to look for opportunities to expand our operations there,” said Macouzet. Colombiana de Pinturas, which was a privately-held company, is based in Itagüί, near Medellin, and manufactures and distributes coatings for automotive OEM and refinish, industrial and architectural coatings customers in Colombia and Ecuador. The acquisition, which was not priced, provided PPG with its first manufacturing base in the country.
Mexico has garnered much of the international attention paid to paint and coatings in the region with the saga of Sherwin-Williams attempts to purchase Comex. The latest report on the twice-rejected effort was that Comex would sue S-W for breach of contract. Mexico’s anti-monopoly agency, Comisión Federal de Competencia Económica (CFCE), argued that the deal would leave S-W with a majority control -- about 60 percent -- of the Mexican paint and coatings industry, and that it would be six to 10 times larger than its closest competition. Apart from its broad manufacturing base in Mexico as the largest domestic paint company, Comex also detains a distribution network that includes 3,200 points of sale, operated by some 875 concessionaires.
Prior to the failure of the Mexico acquisition, S-W did manage in September to acquire the U.S. and Canadian Professional Paint businesses of Comex for $90 million in cash and the assumption of debt valued at $75 million.
Among recent investments concluded in Mexico, PPG announced in March a $27 million investment in its manufacturing center at San Juan del Rio, in Queretaro state. The new lines, expected to be operational in 2015, will serve the automotive OEM, protective and marine, packaging and industrial customers in the country, the company indicates.
Mexico automotive production hit a new record of close to three million units in 2013, and expectations are that the country will be the fourth largest producer in the world within five years, after Brazil. With some 18 percent of the automobiles made in Mexico are exported, there is elasticity in demand when domestic consumption cools, as it has recently.
New OEM automotive investments are valued in the tens of billions of dollars, with new players from China and South Korea helping to stir competition for paint and coatings suppliers.
Rest of the Region
In the heart of the Andean region, Peru is a standout in terms of economic growth and paint and coatings demand, says Kuiper. Eclac estimates that Peru’s GDP will expand at 5.5 percent this year, with the construction industry expected to grow even faster at close to 9.0 percent.
“The Andean region could be a hot market over the next few years, and Peru will lead growth for the region,” said Mauro Trevisani, the chief operating officer for Andes Chemical, based in Miami, earlier this year. “That is why last year we opened a subsidiary including a warehouse in Lima; a lot is going on there in terms of infrastructure,” he noted.
In Central America, PPG in March made an acquisition of Canal Supplies in Panama that will serve as a distribution hub for the company not only in the sub-region -- including Costa Rica, notably -- but also the rest of Latin America, Macouzet says. The company had specialized in marine and industrial coatings prior to the acquisition.