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The State of the Global Coatings Industry



The global recession of 2008 and 2009 has had a tremendous impact on the coatings industry with all segments affected. However, the good news is that the market now appears to be in recovery.



By Scott Detiveaux



Published March 16, 2010
The State of the Global Coatings Industry
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The economic downturn that began in late 2008 has had a significant impact on the global paint and coatings industry. From 2002 to 2007 the global paint and coatings industry grew at an annual rate of nearly five percent in terms of volume and nearly seven percent in terms of revenue. From 2007 to 2008 the market was essentially flat as the dramatic decline in the fourth quarter erased gains that had been realized earlier in the year. The full impact of the market decline, however, was felt in 2009 as the market experienced real decline of approximately two to three percent in both volume and value.

Orr & Boss estimates that total global 2009 revenues for the paint and coatings industry were approximately US$90 billion on a volume of over 26 billion liters. In late 2010, the International Paint and Printing Ink Council (IPPIC) will publish a new edition of its "Global Paint and Coatings Industry Market Analysis Report." As with the earlier version, IPPIC has retained Orr & Boss to prepare this comprehensive, in-depth market analysis. The coatings market data presented in this article follows the basic market segmentation structure that is used in these industry reports.



Market Overview



Decorative coatings make up the largest of the major coatings segments representing approximately 51% of the global volume and 44% of the global coatings value. The importance of decorative coatings as a component of the overall market has actually grown as a result of the global recession. The percentage of the coatings market made up of decorative coatings has increased over the past two years as industrial coatings production has fallen. Global decorative coatings, while declining in sales, have done so at a lower rate when compared to industrial coatings. The industrial coatings market is comprised of nine sub-segments. General industrial is the largest of these sub-segments, comprising roughly ten percent of the volume and 11% of the market value. Powder, wood, transportation, and industrial maintanence and protective coatings are the other large industrial sub-segments. Chart 1 below details the market distribution of the industrial sub-segments by volume and value.


Chart 1
The decorative coating segment has declined at an annual rate of roughly one percent in volume and value over the past two years. Industrial coatings have declined at more than double the rate of decorative coatings. Within the industrial sector, transportation, powder, wood and coil coatings have posted significant declines since 2007. It is important to note that while the market as a whole has experienced decline, there has been significant regional variation in terms of growth within the various major market segments. Coatings markets in Western economies have borne an inordinate share of the market decline. The coatings markets in the U.S. and Western Europe have been especially hard hit. For example, the U.S. Census Bureau in its recently released "Paint, Varnish, and Lacquer - Third Quarter 2009" reports that total U.S. coatings sales through the first three quarters of 2009 were down nearly 20% in terms of volume when compared to a similar period in 2008.

In contrast to what has been seen in North America, Asia-Pacific is the only region that has shown growth over the past year. While far less than the double digit growth that has been seen in years past, this region has continued to show modest growth. Representing more than 40% of the global total, Asia-Pacific has become the largest geographic region in terms of coatings volume. Europe is the next largest region representing more than one-quarter of the world's coatings volume. NAFTA trails Europe and comprises less than 20% of the volume.The balance of the market volume is split between Latin America and the rest of the world (ROW).



Economic Influences



Coatings demand is affected by a number of factors. The three most prominent determinants are overall economic activity, construction levels and the quantity of specific end-use products manufactured such as automobiles, furniture and containers. The best measure of overall economic activity is GDP. As a rule of thumb, coatings sales tend to follow overall GDP. The most recent International Monetary Fund data illustrates the significant declines seen in Europe and North America as well as the slight growth in Asia-Pacific. GDP declines, accompanied most likely by coatings consumption declines, were experienced in Latin America and the ROW markets. These, however, were smaller in nature than those experienced in Europe and North America. This data is presented in Chart 2 below.


Chart 2
Construction activity directly impacts a number of end-use markets and is a major driver of coatings demand. In addition to decorative coatings, industrial maintenance, coil coatings and wood finishes are tied to construction. These end-use segments make up approximately 70% of overall coatings demand. After contracting in 2008, the global construction market shrank a further five percent in 2009. In particular, total construction in both North America and Western Europe declined by more than ten percent. These significant losses were countered somewhat by growth in Asia-Pacific. While overall growth was seen in Asia-Pacific, there has been a decline in the Japanese construction market. Steep declines in North American and European residential construction in 2008 were offset somewhat by commercial construction. Despite stimulus spending, 2009 saw a decline in residential and commercial construction in both these regions.

As you would expect, industrial coatings demand is largely driven by the demand for, and production of, the end use products. For example, transportation coatings demand is dictated by the number of cars, trucks and planes that are built. Demand for industrial coatings has been severely impacted by the decline in industrial output experienced during this recession. The transportation sector has been particularly hard hit. Following a decline in global production of nearly four percent in 2008, global automobile production fell an additional 18% in 2009. This downturn in the global transportation coatings market has been felt in all regions. The only significant producer of vehicles to experience growth is China. China has now supplanted the United States as the world's largest automobile market and accounted for nearly 20% of global vehicle production in 2009. While the decline in other manufacturing sectors has not been as severe as the automotive market, this market does serve as a microcosm for manufacturing activity as a whole.

Growth Forecast



The good news for the coatings industry is that most economists believe that the worst of the economic decline is behind us. Recovery, however, remains fragile and will vary significantly by region. Overall, the International Monetary Fund forecasts that the global GDP will grow by 5.7% in 2010 followed by an additional 4.8% in 2011. This will basically put the global economy in 2011 on par with economic activity of 2008. Latin America and ROW markets are predicted to post the strongest percentage growth, albeit from a small base. Again, Asia-Pacific is forecast to show the greatest amount of growth in dollar terms. North America and Europe will lag Asia-Pacific in both GDP percentage and dollar growth with North America slightly outpacing Europe.

Following the market declines in 2008 and 2009, the global construction market is forecast to be essentially flat in 2010. The declines in the U.S. and European markets will slow and will be accompanied by a robust rebound in Asia. Growth is expected to be particularly strong in China and India, as well as in Russia and Brazil. The net result is that for at least the next year, the decorative, industrial maintenance, coil and wood finishes markets in North America and Europe will continue to be negatively impacted by a declining construction market, but should start to see recovery in 2011.

Growth in industrial sectors will similarly vary widely. In the transportations sector, the global automotive market is projected to grow by nearly ten percent in 2010 with North America showing significant recovery. It is important to note, however, that part of the reason for the strong forecast percentage growth in North America is that the market has fallen so significantly over the past three years. Production in this region is not forecast to reach 2007 levels until approximately 2015. Europe is projected to be flat in 2010 and show modest gains over the following few years. These forecasts are obviously highly dependent on the recovery of the regional economies.

In terms of general manufacturing activity, and overall demand for industrial coatings, the expectation is that 2010 will see a gradual improvement. According to the JPMorgan Purchasing Managers Index (PMI), global manufacturing production increased for the eighth successive month in January of 2010. Strong growth was seen in the U.S. manufacturing sector, as well as in China, India, Taiwan and South Korea. Western Europe and Japan have shown signs of growth, but lag the overall global market. Western Europe in particular is being held down by continuing deep recessions in Spain, Italy and Greece.

While the current consensus is that global economy is on the rebound and that this recession will follow a pattern of slow growth recovery, there remains concern that recovery could stagnate leading to a double dip recession. High levels of debt, continuing high unemployment and general economic uncertainly in major economies could precipitate this sort of further economic downturn. Should this type of economic reversal occur, market recovery would be delayed another 12 to 24 months and would have serious negative repercussions for the coatings industry.



Preparing for Recovery



Coatings companies across the globe have felt the serious impact of this most recent economic crisis. Emphasis for most of the past 18 to 24 months has been on survival. Either as a proactive means of preserving profitability or as necessary action to stay afloat, companies have tended to focus internally on means of reducing costs. Through layoffs, salary cuts, inventory reductions, facility closures, or all of the above, coatings companies have been forced to lower operating costs and working capital requirements. Now that the worst is apparently over, many are starting to look ahead to growth. The challenge, however, is how to grow in this changed marketplace.

One consequence of the recession has been consolidation, from both a supply and demand standpoint. There are fewer coatings manufacturers and fewer potential customers than there were just two years ago. Furthermore, coatings suppliers are facing this hyper-competitive environment with less resources and an increased urgency to grow. Balancing these contradictory forces creates a significant management problem. Orr & Boss recommends that a structured, methodical approach to market development be employed.

There are three key steps to this type of strategic market development:
- Market Assessment;
- Opportunity Analysis; and
- Strategy Development.

Successfully using this type of process will not only greatly increase the probability of success, but will prevent precious resources from being wasted. These steps are depicted below in Figure 1.


Figure 1
Many coatings companies have been able to successfully operate within their strict market boundaries. They have grown by selling their existing products and services to their current customers. There has been no need to go outside their comfort zone. The new reality is that they may need to expand in new market areas. To do this effectively requires Market Assessment. A company must understand the market structure and dynamics to have a chance at success. They must also fully understand market needs, the technology requirements and the competitive landscape. Armed with this information, coatings suppliers can identify those segments of the market that are most attractive to them and where they have an opportunity to be successful.

Once potentially attractive segments are identified, an Opportunity Analysis needs to be conducted. This type of analysis is used to more fully define the requirements of a given segment, what makes competitors successful in the market and to identify gaps in a company's offering. It is here that a potential supplier must fully define their potential value proposition to prospective new customers.An additional component of a well executed Opportunity Analysis is a quantification of the market opportunity.

With well defined market opportunities in hand, and a thorough understanding of the market potential, value proposition and success criteria, a coatings supplier will be positioned for effective Strategy Development. In this phase of market development, suppliers will define their entry strategy, establish their resource requirements and identify any potential acquisition candidates or partners that might be necessary for success. Failure to follow this type of structured and methodical process can result in missed opportunities at a time when they are sorely needed. In addition, taking a traditional shot-gun approach can result in wasting the limited resources available for growth as well.

Summary



The global recession of 2008 and 2009 has had a tremendous impact on the coatings market and has resulted in a decline in market volume and value. This impact has been particularly hard in Western economies. Virtually all segments-decorative and industrial-have been negatively impacted. The good news is that the market now appears to be in recovery. However, this recovery will be uneven in terms of both geography and market segment. Furthermore, the recovery will be nowhere near as dramatic as the decline. It will take the market several more years to return to previous levels. This slow and uneven growth makes it essential that coatings suppliers make the most out of the limited opportunities that exist in the marketplace. Companies that are able to execute a well planned market development strategy will be the winners coming out of the decline and will be in the best position for long term prosperity. CW

About the Author: Scott Detiveaux is a senior consultant with Orr & Boss, Inc., a U.S. based, international management consulting firm that specializes in the global specialty chemicals and coatings industries. Mr. Detiveaux is the project manager for the recently published IPPIC global coatings market study report referenced in this article.



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