The interior architectural and decorative coatings market is estimated to be valued at approximately $26 billion globally for 2006, according to consultant firm Orr and Boss. Asia is the largest market representing approximately 32% of the total or slightly more than $8 billion. NAFTA is the second largest region at 26% of the total market equaling nearly $7 billion. Europe represents 22% of the global total at nearly $6 billion in sales. The rest of the world (ROW) comprises approximately 20% of the total interior architectural and decorative coatings market with slightly more than $5 billion in 2006 revenues.
While growth in interior decorative and architectural coatings markets depends on various factors including GDP growth, changes in consumer habits and housing loans/grants, the market perhaps relies most of all on new home and business construction and housing sales.
ICIS Chemical Business Americas reported that privately owned housing starts in August were at a seasonally adjusted annual rate of 1,665,000, 6% below the revised July estimate of 1,772,000 and 19.85% below the August 2005 rate of 2,075,000, according U.S. Census Bureau statistics.
Although new housing starts and sales of existing homes have slowed down in the U.S. and Western Europe, the interior architectural and decorative coatings markets in these regions have not fallen off entirely, continuing to produce positive growth figures even as raw material costs continue to creep up.
"The U.S. and EU interior architectural and decorative coatings markets were up slightly for 2006 compared to 2005 as demand softened over the second half of the year," said Scott Detiveaux, a senior consultant at Orr and Boss. "In the U.S. market, the decline in sales for residential applications has been partially offset by commercial application sales. Interior architectural and decorative coatings sales in the U.S. and EU are expected to increase 1-2% for 2007. Sales are forecast to grow 2-3% annually to 2010."
Coupled with the slow down in home construction and sales, architectural and decorative coatings makers in developed markets are facing price pressures on two fronts. On one side, the escalation of oil and natural gas costs has increased raw material prices to unprecedented levels over the past several years. On the other side, increased competition from emerging markets is also impacting markets in developed regions. However, despite these challenges architectural and decorative coatings markets have not been affected as negatively as other segments of the coatings industry.
"Unlike the OEM markets, where substrate manufacture and thus paint demand is moving to emerging countries, decorative paint demand remains strong in North America and Europe," said Detiveaux. "The question is how effective will manufacturers be in passing raw material costs on to the customers.
"At the same time," Detiveaux continued, "one of the major impacts of growth in developing markets is the increased competition for raw materials and the subsequent increase in material costs. The result is increased price pressure for North American and EU manufacturers."
Construction Booms in Emerging Markets
Decorative coatings growth around the world is being driven today by new construction, particularly in emerging markets where housing ownership and commercial developments are showing strong growth.
The growing economies of these developing regions-Asia, Eastern Europe, the Middle East and parts of Latin America-are changing the face of the coatings industry. While architectural and decorative paint makers in North America and Western Europe struggle to make money under current market conditions, these expanding markets offer bright opportunities.
According to Akzo Nobel's "Global Coatings Report 2006," China is undergoing the world's largest construction boom. The 2008 Beijing Olympics, plus the 2010 World Expo, both to be held in Shanghai, and the 2010 Asia Games to be held in Guangzhou, have led to massive investment in urban infrastructure. In addition, the report said home ownership has seen explosive growth since the closure of the government backed welfare housing scheme in 1998, and the real estate market is officially estimated to maintain its current rate of 10% over the next five years.
Another expanding market is the Middle East. In his article, "Eyeing the Middle East," (Coatings World, Aug. 2006) Sean Milmo reported that although the Middle East accounts for only four percent of the world's coatings market by value, its paint consumption is one of the fastest growing worldwide.
"In some of the Middle East countries bordering the Mediterranean Sea imports of coatings have more than doubled over the last five years," Milmo reported. "The strongest rise in demand, however, has been in the oil and gas producing countries of the Gulf area, where the steep rise in oil prices has triggered an unprecedented construction boom.
"This year," Milmo continued, "the total value of ongoing construction schemes in the six Arab countries in the Gulf Co-operation Council (GCC)-Saudi Arabia, United Arab Emirates (UAE), Kuwait, Qatar, Bahrain and Oman-is expected to exceed over one trillion U.S. dollars, an increase of approximately 70% within 12 months."
Eastern Europe is another hotbed of construction activity, led by the emergence of the Russian economy while other countries including Poland and the Czech Republic are all developing quickly.
In Russia, construction is one of the most rapidly growing economic sectors, according to Gennady Gordeev, public relations director, Empils, the largest player in the decorative coatings market in Russia and its neighboring countries. "From January-September 2006 292,000,000 apartments with a total area of 26 million square meters were commissioned, which amounted to a 112% increase over the same period in 2005," he said. "This growth in the construction sector has created good prospects for finishing materials manufacturers, including paint and varnish coatings."
Consolidation and Expansion
Historically, consolidation in the decorative coatings market has largely been confined within the macro-regions of the global market, according to Detiveaux. "Akzo Nobel's acquisition of both Sico and Flood as well as Materis Paints' purchase of Colorín may be indicative of further globalization of the decorative coatings market. Consolidation will continue to occur as companies seek additional avenues for growth. Whether or not globalization will continue and mirror trends in the OEM and special purpose markets remains to be seen."
However, in the meantime the major global paint and coatings manufacturers have tapped the world's emerging economies and continue to invest their dollars in them, either building new infrastructure or expanding existing facilities, broadening distributorships and customer bases, and acquiring competition.
Tikkurila Oy was very active this year in Eastern Europe. It first established a joint venture in Russia with the German company Sto AG called Sto-Tikkurila in Moscow to manufacture coating systems for facades. According to the companies, the markets for facade systems are developing rapidly due to the strong growth in construction.
The company also took over complete ownership of the Ukrainian company, Kolorit Paints, now called TOB Tikkurila. In addition to manufacturing waterborne paints in Kiev for mainly professional users under the brand name Kolorit, TOB Tikkurila will also market Finnish-made decorative paints under the Tikkurila brand.
Lastly, Tikkurila took over a 100% share of the company Finncolor s.r.o. based in Prague, the Czech Republic. Now called Tikkurila s.r.o., the old company had served as one of Tikkurila's importers for decorative paints in the Czech Republic.
Akzo Nobel was also active with several transactions in Eastern Europe during 2006. First it become one of the leading suppliers to the Ukrainian decorative paint market after signing an agreement to acquire a 51% controlling share in the coatings activities of Khimrezerv.
Later in the year the company continued to build its position in Central Europe signing an agreement to aquire Balakom a.s., one of the leading paint companies in the Czech Republic.
Looking to expand its presence in the Chinese architectural coatings market, PPG acquired Shanghai Sunpool Building Material Co., Ltd.
Valspar also increased its presence in China, after it acquired Huarun Paints, one of China's largest independent coatings companies and a rapidly growing supplier of architectural coatings.