Regional Outlook Positive in Latin America

By Charles W. Thurston | June 17, 2007

As new investments continue to be made by paint and coatings manufacturers in Latin America, growth in the region is influenced by several factors including the battle for market share and the broad diversity of economies there.

Growth in the Latin American market for paints and coatings continues to be moderately strong this year, with demand likely expanding by one or two percentage points above the regional average gross domestic product growth, now running at approximately four percent. Consumption of paints and coatings in the region is typically linked to GDP growth, although per capita GDP growth ultimately is a more important indicator, since the region consumes only a fraction of the volume as compared to the U.S. market. In such an economic climate, the sentiment of major paint and coatings players in the region is of guarded optimism. The key markets for the industry in the region are Brazil, Mexico, Argentina, Chile and Colombia.

Substantial new investments are being made in manufacturing capacity with better technology in major markets like Mexico, where Rohm & Haas is building a $19 million plant and Consorcio Comex plans to build two plants worth up to $50 million. Depending on demand in the region, Dupont also has plans to increase its production of titanium dioxide in Mexico, successfully competing with China for cost-effective production.

Marketing also is becoming a more important tool in the battle for market share, according to Carol Derov, manager of store services for the international division of Sherwin-Williams. "Differentiation is very important because you have to have something unique to offer your customer base that will assist you in gaining sales," said Derov. In May, the company rolled out an exhibition and introduction of its Color tint mixing system to the architect and designer community in Santiago, Chile. Sherwin-Williams also will be unveiling country-specific color palettes in Argentina and Chile this year to help differentiate the brand from products sold in other distribution outlets, which sometimes market the same colors and products in all countries, she noted.

How fast the paint and coatings market will grow in Latin America depends in part on the broad diversity of the economies there. UBS a Latin America economic team based in Stamford, CT and led by Javier Kulesz, forecasts that GDP expansion in the region will be only 3.9% this year. However, Alfredo Coutinho, the senior economist for Latin America at Moody's Economy.com, based in West Chester, PA, predicts the expansion will grow at a rate of 4.2%. Both analysts agree that growth will be slightly slower this year than in 2006, when the regional economy grew by 4.5%.

The average per capita GDP level, which affects discretionary spending, is rising steadily as well. From a regional average of $5,465 in 2006, per capita GDP in the region will rise to $5,806 this year and push into the $6,116 range in 2008, projects UBS. Although the regional economy is accelerating less rapidly this year, inflation is warming. UBS forecasts that inflation in the region will rise to 5.1% this year, from 4.9% in 2006; the forecast for 2008 is of 5.6% inflation. Rising costs of imported and domestic materials have placed pressure on product pricing and sizing, and business credit problems in the region typically rise with inflation.

Critical mass helps drive Brazilian growth

Brazil has the largest economy in Latin America, and has the largest paint and coatings industry, with annual sales estimated at more than $2.1 billion in 2006, up nine percent from 2005, according to Dilson Ferreira, the executive president of Associacao das Fabricantes de Tintas (Abrafati), the national paint association, based in Sao Paulo. Paint sales in the architectural segment were worth $1.2 billion, in the industrial segment were $501 million and in the automotive segment were $343 million, according to Abrafati. Within the automotive segment, OEM sales were only $152 million, while refinishing sales were $191 million.

With a GDP of $1.02 billion and a population of 189 million, Brazils architectural paint market amounts to some 750 million liters per year, or three-quarters of the one billion liter overall market for all segments. Among major shifts in positioning in the Brazilian market this year was PPG's acquisition of Renner Sayerlack, which was estimated to hold a 7.5% share of the architectural paint market.

The automotive industry in Brazil is also huge and growing larger. Over the past year, Hyundai joined most other global auto manufacturers by investing $72 million to open an assembly operation at Anapolis, in Goias state, including a new paint line.

While the Brazilian economy will expand by only three percent this year, that figure is up from the 2.7% growth rate recorded in 2006. UBS projects that GDP growth in 2008 also will hold at three percent. Inflation in Brazil has dropped from a double-digit level in 2002 to four percent this year; in 2008 that figure is expected to rebound slightly to 4.3%, according to UBS.

Per capita GDP in Brazil will amount to $5,411 this year and climb to $5,671 in 2008, UBS forecasts. The relatively strong domestic currency, the real, helps drive consumer demand for paint and coatings. This year the real is expected to average 2.14-to-1, and hold at 2.16-to-1 during 2008, UBS projects.

Mexico a growing NAFTA automotive center

Mexico's economic growth is largely influenced by U.S. growth, and not surprisingly is slowing to 3.6% this year from a 4.8% level in 2006. The drop should reverse in 2008, however, with growth accelerating to 3.8%, UBS predicts. Inflation also is slowing this year to 3.5% from 4.1% last year, and will continue to slow to 3.3% in 2008, predictions suggest. While current total volume for the paint and coatings market is difficult to predict, extrapolation suggests it should be headed toward the 450 million liter mark, based on recent GDP expansion.

Mexico's GDP is the second largest in Latin America, at $882 billion, and with a population of 109 million, is a major target for U.S.-produced architectural paint and coatings. A recent analysis of the construction market by the U.S. Commerce Department suggests that paint consumption will grow by eight percent per year for the next three years. Per capita GDP in Mexico is also the second highest in the region, and will have risen to $8,106 this year and hit $8,360 in 2008, UBS predicts.

Most global auto manufacturers are present in Mexico, and new investments in the sector continue, thanks to the duty-free arrangements of the North American Free Trade Agreement. Toyota is investing $35 million this year to boost production at its Baja, CA plant. Similarly, domestically owned Grupo DESC is building a $52 million production facility at Derramadero, in Coahuila state, for painting and other car parts operations to serve DaimlerChrysler. Mexican auto exports to the U.S. have slowed during 2007, however, suggesting sales in this segment will decline short term.

Argentine recovery growth robust

Argentina has one of the most tested economies of the region, having weathered both fiscal socialism and dollarization in the past decade. GDP expansion in the country is a robust 5.9% this year, a more sustainable level than the 8.6% rate experienced in 2006. Current growth is impressive, given that the economy contracted by nearly 11% in 2002, when the government finally ended the monetary policy that set parity for the U.S. dollar and the peso. The exchange rate this year is approximately 3.19 to 1, and will slip slightly next year to 3.31 to 1, UBS projects.

Construction in Argentina is particularly strong, growing at a rate of over 15% during 2006, and driving demand for architectural paints and coatings. One leading national manufacturer of architectural paints, Sinteplast, is planning to build a new production plant to double or triple its 30 million liter production volume over the next few years. The investment follows the companys sales increase of 20% in 2006 to about $50 million; some 70% of sales were in the architectural segment, the company reported.

Competition in the architectural segment is rife. Big-box home improvement chain Easy Home plans to double the number of its stores to over 50 by 2010; the chain estimates that 60% of DIY sales in Argentina are being furnished by paint and small hardware stores.

The automotive sector in Argentina also is warming once again, after years of close competition with Brazil. Toyota plans to invest another $41 million in its Argentine facilities, which include a recently opened paint facility at its Zarate center.

The volume of the Argentine paint market suffered during dollarization, but has been recovering over the past several years. The 300 million liter volume reported in 2004 should have grown to approximately 375 million liters this year, based on GDP expansion since then. Per capita income will have risen to $6,282 this year and continue rising to $7,167 next year, UBS suggests.

Chilean economy expands

The Chilean economy is one of the bright spots in Latin American growth this year, with a GDP expansion of 5.3% this year, up from 4.3% in 2006. UBS forecasts that the expansion will accelerate to a 5.5% rate in 2008.

Chile's national production of paint was recently estimated at 19 million gallons worth some $240 million, according to Penta Research. Architectural paints account for 58% of sales to professionals in Chile, while industrial paints represent 42% of sales to professionals, the company indicated.

With a GDP of $140 billion and a population of 16.6 million, Chile is an important market for paint and coatings. Per capita income is high for the region, estimated at $8,419 for this year and growing to $8,851 in 2008, according to UBS calculations. Sherwin-Williams, which has about 30 company-owned stores in Chile, apart from other distributor/vendors, plans to open more stores in the country this year.

Colombia an Andean hub

Colombia's strong economy is slowing to a more manageable five percent GDP expansion this year from a 6.4% pace in 2006. The forecast for 2008 growth is 4.6%, compared to a flat inflation rate of four percent, UBS predicts.

With a GDP of $149 million and a population of 48 million, Colombia is a leading location for manufacturing in the region, and long has been a supply hub for the Andean nations of Ecuador and Bolivia.

In the architectural segment, Colombian producer Pintuco is opening a $4 million powdered paint research and development center. Pintuco, which exports paint to Ecuador and Venezuela, is a unit of Grupo de Inversiones Mundial. Consumption in the segment is still hampered by low per capita GDP, which should amount to $3,122 this year and rise to $3,157 in 2008, according to UBS.

Within the automotive segment, General Motors announced plans to invest $21 million to double production at its Colmotores facility, including a new paint line. GM is targeting exports to other Andean countries with its Colombian work.