The outlook for coatings producers in Europe has suddenly brightened after prospects for higher sales and profits appeared to be gloomy earlier in the year.
The financial results of some leading players among coatings producers and raw materials suppliers for the second quarter and first half of this year have revealed the first signs of a possible pick-up in demand in some customer sectors and in some parts of Europe. These have been reinforced by figures showing an economic upturn in some of Europe’s major economies.
A recent period of restructuring and reorganizations by companies to reduce their costs and raise operating efficiency seems to be bearing fruits with improvements in margins.
Furthermore profitability—especially in the second quarter—has been boosted by the stabilizing and even decline of raw materials prices. With some coatings suppliers lower operating costs and cheaper raw materials helped offset the impact of a decline in sales. The hope now is that both these advantages will persist in the second half of the year and into 2014 when demand in Europe is forecast to gradually strengthen.
Tikkurila of Finland, whose main markets are Scandinavia, the Baltic states, Poland and Russia, reported, for example, a 3.1 percent decline in sales in the first half of the year to €347 million ($465 million). But operating profit went up 11.8 percent to €47 million, equivalent to a margin of 12.6 percent against 10.9 percent in the same period last year.
“Despite favorable weather conditions, our sales volumes continued to decline as construction decreased and the weak economic situation kept consumers cautious,” explained Erkki Jaervinen, Tikkurila’s president and chief executive. “Streamlining of our operations and the slightly lower level of raw material prices supported our profitability.”
The company’s Scandinavia business unit, which mainly comprises its activities in Sweden but excludes those in its domestic market in Finland, seemed to benefit the most from reductions in operating costs. Its operating profit increased by 14 percent in the first half. In Tikkurila’s East business unit, mostly consisting of Russia where there have been big wage increases and disruptions to raw material supplies, the operating result dropped by 22.5 percent.
AkzoNobel has also been busy reducing operating costs in Europe, particularly in its hard pressed decorative paints operation, which is the market leader in Europe. But these have not necessarily yet been fully reflected in higher margins and have even decreased profits because they have generated restructuring charges. This year the company is expecting restructuring charges of €325 million, close to 60 percent higher than initially expected and which is does not envisage being mirrored in improved earnings until 2015.
“With (the) pressure on our top line, we are stepping up our restructuring activities to secure the delivery of our 2015 targets which drive cash generation and quality of earnings,” said Ton Buechner, AkzoNobel’s chief executive.
In the company’s decorative paints business, operating income dropped by 9 percent in the second quarter mainly because of restructuring costs in Europe. In the first half operating income in decorative paints , however, rose by 6 percent after a sales decrease of 3 percent.
In Germany, which is one of AkzoNobel’s major decorative paints markets most affected by weak demand, the company has divested its paints stores to independent wholesalers to streamline its distribution channels in the country.
Its biggest restructuring initiative in its decorative paints activity in Europe has been an agreement to sell its building adhesives business, part of its decorative paints operation, to Sika AG of Switzerland. Last year the business which primarily serves the professional market in northwest Europe had sales of €185 million. Buechner said AkzoNobel wanted to focus its decorative paints business on “strong strategic paint positions.”
Both AkzoNobel’s decorative paints and performance coatings operations, as well as its speciality chemicals activities, have been benefitting from lower raw material costs which the company expects for the whole of the year will be marginally lower than those in 2012.
The decrease in a large proportion of raw material costs in the European coatings sector has stemmed from softer prices for petrochemical derivatives which in turn has resulted from lower crude oil prices since last year. BASF, both a coatings and raw materials producer, is now predicting that the average oil price for 2013 will be $105 per barrel against a previous forecast by the company of $110.
There has also been a drop in other raw material costs, particularly for inorganic pigments such as titanium dioxide and effect pigments whose producers were impacted by both feeble demand and lower selling prices. Altana Group reported a 5-percent drop in sales at its Eckart effect pigments business.
The biggest prices declines have been for TiO2, whose price has plunged by approximately 20 percent since the first half of last year due to weakening demand in Europe and elsewhere in the world.
Rockwood Holdings, Princeton, NJ, reported a 26-percent increase in sales to $549 million at its Europe-based TiO2 business in the first half of the year, mainly due to an acquisition in 2012.
But as a result of lower TiO2 prices, earnings before interest, tax, depreciation and amortisation (EBITDA) plummeted by 117 percent from $130 million a year ago to a negative $9.5 million. The profit decrease was “primarily from lower selling prices and continued lower fixed cost absorption related to lower production levels to reduce inventory,” according to the company.
Nonetheless if there is a significant upswing in demand for coatings, there is a danger that raw material prices will rally as well so that coatings producers have to rely more on their own ability to raise their selling prices to maintain or bolster margins.
After 18 months in recession, the 17-nation eurozone is considered by politicians and economists to be on the road to recovery after second-quarter GDP figures showed a 0.3 percent increase equivalent to a 1.1 percent annual rise. In Germany, the engine of the European economy, GDP went up 0.7 percent in the quarter and in France 0.5 percent. In the UK, the biggest European Union economy outside the eurozone, second-quarter GDP increased by 0.7 percent, triggering claims that the country’s frail economy was now starting a revival.
Already in anticipation of improved demand, raw material suppliers are moving to raise their prices to take advantage of low inventories among customers. TiO2 producers have been trying to push through price increases in the third quarter. Rockwood is expecting that during the second half of the year its TiO2 business “will achieve a turn-around with adjusted EBITDA margins trending in excess of 10 percent.”
Coatings producers will be hoping that, admidst the possible economic resurgence in Europe, there is not a repeat of what happened 2-3 years ago when a rapid rise in demand led to shortages and steep increases in raw material prices.