Exterior Architectural Decorative Coatings

By Tim Wright | October 3, 2008

The overall slowdown in economic activity combined with rising raw material costs, greater VOC restrictions and market consolidation are the key issues facing the exterior deco market today.

The economic slowdown has taken its toll on paint makers serving the exterior decorative coatings market. With fewer new homes and buildings under construction, the number of gallons of paint sold in key mature markets has fallen. To make matters more difficult paint makers are also plagued with high raw material costs. While they have stabilized a bit of late, the increases have far outpaced manufacturers ability to pass them along to customers. Increasing energy prices and ever more stringent environmental regulations are also challenges.

The market is also faced with continued customer and channel consolidation as well as manufacturer consolidation, which have a particular impact on smaller suppliers as they struggle to compete against global giants among fewer customers. The 20 largest paint makers, including PPG, DuPont and AkzoNobel, control more than 80% of the paint market.

According to consultancy Orr & Boss, architectural coatings accounted for an estimated 51% of the total global coatings volume in 2007. Exterior coatings represent approximately 35% of all architectural coatings, while interior coatings account for the remaining 65%. The market in North America and Europe was flat to declining in 2007 compared to 2006. Further declines are expected for these markets in 2008. At the same time China, India and other emerging markets continue to thrive and show positive growth in exterior decorative coatings.

In terms of volume, the Americas make up 33% of the exterior market, Western Europe 22%, Asia-Pacific 23%, ROW ten percent, Eastern Europe nine percent and India three percent. As for value, the Americas makes up 33% of the exterior market, Western Europe 30%, Asia-Pacific 22%, ROW six percent, Eastern Europe seven percent and India two percent.

Ray Foscante, a senior consultant with Orr & Boss, differentiated between the interior and exterior paint markets. "The interior market is primarily a discretionary one driven by either decorating preferences or by changes in ownership or occupation as with commercial property. As such this segment will see more frequent repaint opportunities," he said. "The exterior market is driven by performance and by new construction or rehabilitation. It's the difference between DIY and residential contracting versus major capital intensive new construction. This trend is especially true in the more developed economies of North America and Europe but holds true globally."

The loss of paintable surface is contributing to declines in the exterior deco market. Twenty years ago more than 40% of all new homes built in the U.S. had exterior wood siding. Today less than ten percent of new homes in the U.S. are built with wood siding.
Coatings companies closely watch housing data as it is a key indicator of the coatings market, according to Scott Detiveaux, a senior consultant at Orr & Boss. "However, the housing market has a much greater impact on the interior coatings market," he said. "For example, over since 1982 less than 25% of the houses built in the U.S. were constructed with wood siding. Over the past ten years only, less than ten percent of all houses built had wood siding."

The most critical short-term challenge facing exterior deco manufacturers is the decline in residential new construction in the U.S. and in Europe. A trend that will persist for at least another 18-24 months, Foscante said. "Any recovery will be gradual and will not return the market segment to the exceptional growth levels that occurred in the 2004-2006 period," he said. "Exterior deco manufacturers will have to adjust their cost basis in their supply and distribution chain to accommodate this new reality."

To keep afloat, technologically exterior deco suppliers will have to shift focus. "More product development attention will have to be placed on issues of sustainability and performance enhancements such as greater dirt pick-up resistance and weatherability," said Foscante. "Deco paint suppliers will also have to adjust to the shift away from traditional materials of construction such as wood toward composites and plastics. This will necessitate modifying approaches to application, surface preparation and adhesion. In addition, exterior deco manufacturers will have to consider entering new application areas, such as heat management, to adjust to changes in market share."

One reason for flat or declining growth rates is due to the growth of non-paintable surfaces/substrates. For example, there has been a move away from wood in exterior accessories such as window frames, doors, soffits, trim and shutters among others. There is also an overall trend away from wood exterior construction. Twenty years ago more than 40% of all new homes built in the U.S. had exterior wood siding. Today less than ten percent of new homes in the U.S. are built with wood siding. Vinyl is now by far the leading material of construction in the region.

Another factor that continues to shape the market is the price of raw materials as well as energy and transportation. "It is clear that raw materials prices have increased and will keep increasing," one coatings executive told Coatings World. "There is no secret in this respect. In order to remain competitive these increases need to be passed on to our customers."

Large retailers such as Home Depot and Wal-Mart have a major influence on the prices consumer pay for architectural paint.
Companies appear to be making more advances in their effort to curb skyrocketing costs by raising selling prices and zeroing in on any fat that can be removed from their processes. The goal: minimize the total cost of transforming a product from raw materials to finished goods in their customer's hands.

Other key trends shaping the market include tightening VOC regulations in many markets and increasing globalization of competition both on the level of large construction projects as well as in the retail sector with big box chains going international, which may offer growth opportunities for global paint suppliers to the exterior deco market.

Large retailers such as Home Depot and Wal-Mart have a major influence on the prices consumer pay for architectural paint.

Having a fortified stable of products that meets customer and regulatory demands is essential if a coatings company is to thrive in the exterior paint market. Firms are getting there via acquisition and in-house formulation efforts.

To create more robust products for exterior applications, there must be a strong focus on R&D and a willingness to experiment and utilize top-notch materials, say industry leaders in the U.S. and overseas.

New study projects growth for U.S. paint demand

According to a study from The Freedonia Group, U.S. demand for paint and coatings is expected to expand 3.1% annually to $23 billion in 2012. Volume gains are projected to accelerate from the sluggishness of 2002-07, when an economic slowdown-combined with high raw material costs and stringent environmental regulations-took a toll on the U.S. paint and coatings industry.

The market share held by traditional solvent-based coatings will continue to erode as these products are replaced by water-based, high solids, powders and other non-solvent coatings. Going forward, however, growth will be aided by an improving outlook for both construction and manufacturing activity, the study projected.

Architectural paint represents the largest segment of the overall paint and coatings market, accounting for approximately half of demand in both volume and value terms. The residential market will continue to account for the vast majority of architectural paint demand and will benefit from rebounding growth in residential construction, as well as a significant turnaround in new housing starts through 2012.

Demand for interior paint will outpace that for its exterior counterpart, as demand for the latter will be restrained by the ongoing popularity of siding materials. However, rapid growth in the use of fiber cement-a paintable siding material-will bode well for exterior paint demand.

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