Additives Market Report

By Tim Wright | January 17, 2007

Key issues facing additive suppliers include increasing raw material and energy prices, emerging markets and regulatory legislation.

These days there are several key issues facing additive suppliers to the paint and coatings industry. More than anything else, the rising cost of crude oil is negatively impacting all manufacturers of products that get their start in those high-priced barrels.

In addition to raw material and energy price increases, growing competition from emerging regions, and increasing regulatory restrictions are other key challenges suppliers of additives must overcome.

Industry leaders Coatings World spoke with talked about these issues and others. All agreed that, among other strategies, innovation in the development of new technologies is a vital component moving forward in the years ahead as the dynamics of the coatings industry continue to shift and take shape around these issues.

The estimated value of the global market for additives used in paint and coatings is $4.5 billion, which accounts for the sale of surfactants, biocides, thickeners and various "other" materials, according to The Chemark Consulting Group, a consulting firm focused on the coatings, adhesives and sealants industries based in Southern Pines, NC.

The North American market is worth $1.474 billion while the EU market is worth $1.668 billion. Asia/Pacific accounts for $869 million while the rest of the world (ROW) accounts for $489 million.

In 2006, the additives market was up 3.4% in the U.S. and 3.2% in the EU over 2005, according to Chemark. The firm forecasts the U.S. and EU will grow at 3% and 2.8% respectively in 2007.

"The U.S. and European markets are flooded with entries for coatings additives in terms of defoamers, surfactants, flow and leveling as well as additives for abrasion resistance and slip," said Alan Kalmikoff, president, Keim-Additec Surface USA, LLC. "This trend will continue in 2007."

"Beyond 2007, for the next four to five years, the U.S. market will grow at 2.8% and the EU at 2.5% due primarily to the Asia/Pacific region influencing business shifts away from these two industrialized regions as well as consolidation efficiencies in these regions," said Phil Phillips, managing partner, The Chemark Consulting Group.

Raw Material and Energy Price Increases

Increasing raw material costs was the single largest negative impact on the additives market in 2006. The effect was similar across all regions, according Jeff Gault, accounts manager, Witcobond polyurethane dispersions, Chemtura Corp. "Qualification of new alternative sources of high quality raw materials remains a high priority for 2007," he said.

The increased production costs have clearly affected the additives market as evidenced by continued price hikes on finished goods on all fronts. "Price increases announced have not just been in the U.S. and EU, but worldwide in cases where one region alone cannot take the excess demand where supply is low," said Carmen Rodriguez, marketing manager, Elementis Specialties.

"In the past, we have tried to absorb most, if not all, of the cost increase without increasing customer prices," said Oliver Kretschik, market manager, industrial preservation business line, Lanxess. "However, as margins have eroded due to continuing raw material and energy cost increases, we have had to pass on some of the costs to customers."

Climbing raw material and energy prices are a mixed blessing for the additive supplier, according to Robert Miller, product manager, Troy Performance Additives. "We have been faced with huge raw material increases over the past two years. We see a leveling in this trend, which has been global in scope," he said. "The good news is that our customers are looking to us to provide solutions for improving coating performance while at the same time maintaining a stable cost."

Because raw material costing has continued to rise, many customers are looking to reformulate their coatings to remain cost competitive. "This includes looking at alternative chemistries, or even evaluating current coatings without additives to see just how much the product will suffer with reduced additives or taking the additives out altogether," said Mike O'Brien, general sales manager, Halox.

As the rising costs of raw materials and energy intensify cost control pressure on both additive suppliers and customers, to maintain profitability, more purchasing efforts are being made to stabilize price fluctuations through improved forecasting and volume ordering, according to Andre Bendo, industry manager, industrial coatings, Ciba Specialty Chemicals. "Unfortunately, the trend of rising raw material and energy costs will continue, albeit at a lower rate."

Emerging Markets

The emerging markets of China/Asia are making an increasingly significant impact on the additives market. The additive growth rate in these areas is considerably higher than the rest of the world, according to Bendo. "One of the challenges and opportunities companies are faced with is to establish local production and local expertise to take advantage of this growth," he said. "In addition, Asian suppliers are also making their presence felt with an ever increasing range of low-priced additives in global markets."

However, there are benefits and disadvantages to the emergence of the China/Asia market into the paint and coatings industry. "A huge benefit has been that many of our customers are now manufacturing in these Asian countries, and we have seen an increase in our market share there as well as the need for distribution channels for those regions," said O'Brien.

"The main disadvantage we see with the rise of the Asian marketplace has been in commoditizing the specialty additives market," he continued. "If a customer in the U.S. can buy an equivalent product from China, and the cost is half of what the customer is used to paying, at the very least the domestic supplier will have to sacrifice margin to maintain their business, and in some cases may have to walk away from business when they know they cannot compete."

On the same note, Miller said that while the expansion of paint and coatings companies in this region provides a large opportunity for increased additive business, on the flip side, he sees an expansion of low cost manufacturers of additive products competing in the market. "The additive companies that can provide additive products that promote value to the paint and coatings customer will be the most successful," he said.

Because additives tend to be specialized, intellectual property protection is always in the forefront of any discussion of emerging markets, according to Charles Mateer, marketing manager, Sartomer. "Control of the distribution channel is also critical, which entails speaking to the end customer, not a network of brokers, traders and distributors."

On many fronts, China is expected to grow in the double digits through 2010. With increased attention to infrastructure, chemical production and manufacturing for both domestic and international consumption, China presents a bright spot for coating suppliers, according to Rodriguez. "There are challenges, however since this growth presents increased competition in the region as well as the increased competition that China offers the rest of the world," she said. "The decreased costs in production, labor, energy and raw materials that China enjoys is changing the dynamics of the coatings market in the world."

Regulatory Developments

International and domestic regulatory developments are continuing to have a major impact on the paint and coatings industry.

The stricter regulations on VOCs are causing paint formulators to place higher value on lower VOC products, according to Bendo. "The REACH initiatives in the EU are requiring companies to allocate time and resources preparing for upcoming implementation. To address increasing regulations, additive producers must review their current product portfolio to determine whether there will be a market for each in the future.

"The challenges encountered deal with modifying existing products for new legislation," he continued. "Since solvents serve a purpose in each formulation, removing them isn't always a simple task, especially if final performance characteristics of the final paint must be maintained. There is a constant push to find low VOC or VOC-free paints that equal the performance characteristics of solvent-based systems. Another challenge faced by global suppliers is that what is acceptable to legislation in one country might not be acceptable in another."

"Introduction of VOC legislation often forces the reformulation of coatings, a good example being what we are seeing happening now in the architectural coatings sector," said Nicholas Wood, manager, technical service, Degussa Tego Coating Additives & Specialty Resins. "This forces innovation, not only from the paint manufacturers but also from the raw material suppliers."

The increasingly strict environmental regulations in North America and Europe will decrease the number of available active ingredients, said Kretschik. "As it will become more difficult to register new actives, there will be an increase in combination products offered by suppliers," he explained. "In addition, stricter environmental regulations have led to the reinvestigation of neglected molecules."

"VOC legislation in the EU should not be a major problem as technology developed in the U.S. can be transferred," said Miller. "A more critical issue will be the introduction of REACH, which could result in huge costs to additive suppliers."

For some of the small additive companies dealing with REACH will be a major challenge, concurred O'Brien. "If they want to continue selling their products into Europe, their will be substantial costs incurred to make sure their products will be included on the approved list," he said. "For products that may only be sold in small amounts in Europe, it may not be economically smart to go forward with this process and instead only concentrate on the higher volume product mix."

In addition to continuing down the path to "green chemistry," additive manufacturers need to build on their relationships with the core resin producers, according to O'Brien. "These companies drive the new technology to the coatings manufacturer, and by being a part of the resin producers development of new products, an additive company will thrive."

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