European coatings manufacturers are bracing themselves for a prolonged period of shortages in key raw materials.
The industry is currently being hit by double–digit rises in prices for resins, pigments, additives, solvents and packaging materials as demand for paints begins to pick up in Europe while there is continued strong growth in coatings demand in China, India and other emerging economies.
“Our members are being told by their suppliers they cannot have the raw materials they want,” said Tony Mash, chief executive of the British Coatings Federation, Leatherhead, England. “What has happened is that raw materials have been shipped to the Far East because of the increase in coatings sales in countries like China while at the same time there has been an upturn in demand in Europe, particularly the UK. The suppliers have been cutting back their stock levels since the recession. For a number of raw materials, there have been production outages and plant shut downs, which have made matters worse. Now many suppliers are saying they are sold out for the present and are having to delay some shipments.”
In addition to the combined effects of persistent fast growth in Asia and a sudden surge in the need for coatings chemicals in Europe—as well as in North America—it has become clear that there is now an underlying imbalance in production capacity in Europe for certain raw materials.
The coatings supply chain is readjusting to cope with plant closures and cutbacks in capacity of individual production units in Europe during the recession and with a big increase in capacity for petrochemicals and other base chemicals in the Middle East and Asia.
As a result coatings producers are expecting that the current shortages will not be short-lived so that coatings companies are being forced to rethink their procurement strategies.
“The feedback we are getting from our members is that they anticipate that the shortages will continue for several more quarters because of the rapid economic growth in the Far East and the low stock levels in Europe,” said Mash.
Some analysts are warning that there will be regular uncertainties about raw material supplies for the next few years until the European economies have fully recovered from the recession.
“Europe will not be completely back on track until 2012 or 2013,” said Paul Hodges, chairman of International e-Chem, a London-based consultancy. “Undoubtedly in that time there will be great volatility in the level of supplies of raw materials to the coatings and other downstream industries which will result in a lot of price fluctuations. Relatively small shifts in supply/demand balances will make raw material purchasers very vulnerable.”
Some raw material scarcities can be traced to the recent opening of new crackers in the Middle East for making ethylene, a building block for a wide range of petrochemical derivatives. The expansion has resulted in the Middle East having around 25 percent of global ethylene capacity, which has caused European ethylene producers to run their crackers at lower utiliszation rates. This has cut domestic production of ethylene and its by-products propylene and butadiene, which are also important organic base chemicals.
In addition the economic downturn has caused overcapacity among Europe’s oil refineries. They have been reducing output of products like benzene, a base feedstock for aromatic chemicals.
Forecasts made a year ago that the closure of titanium dioxide plants in Europe would precipitate shortages when demand improved have appeared to be accurate as TiO2 producers pressed for price rises of four to five percent in the wake of tighter supplies in the first quarter of 2010. Some coatings have been warned that they may have to wait up to two months for deliveries.
In anticipation of a persistent problem with shortages, BCF has introduced a brokerage service for helping its members to transfer excess supplies of raw materials in their own warehouses to other coatings companies.
“An SME may, for example, want 100 kilos of an additive but can only order it in amounts of 500 kilos,” said Mash. “Instead of having a quantity of 400 kilos sitting in storage without being used for a lengthy period, our brokerage service will enable the company to find a buyer who has an immediate need for it.”
Under the scheme sellers have been advertising approximately 150 different items on the BCF’s website. These range from resins, plasticizers, solvents, pigments and additives to various types of packaging materials.
“The service is solely a means for bringing sellers and buyers of excess raw materials together,” said Mash. “We are only charging the seller a fee to cover our costs.”
The BCF is telling coatings companies to focus more on the strengthening of ties with their suppliers on the grounds that raw materials producers and distributors are likely to give preference to customers they know well.
“Our advice to our members is to maintain a good relationship with their suppliers in order to be certain of getting the materials they require for their coatings production,” said Mash. “They also need to plan their production carefully by taking into account the possibility that with some materials there may be long lead times in their supply.”
Logistics companies and distributors are tending to move products through the supply chain much more quickly than before in order to improve their cash flow by earning more revenue out of their existing assets. As a result they are not storing extra stock to cater for unexpected demand especially from buyers who are not regular customers.
“We have been experiencing some shortages mainly because supply chains have been lengthening with more raw materials being imported from outside Europe to make up for reductions in domestic capacity,” said an operations manager at one European distributor serving the coatings sector. “We maintain close relationships with our own suppliers to ensure that we are always able to meet the demands of our existing customers.”
Among most coatings companies in Europe, particularly, SMEs, procurement of raw materials will now have to be given greater priority within individual businesses and in some cases more human resources being devoted to task of securing supplies.