Europe Reports

Slow growth to recovery

By Sean Milmo | September 15, 2010

European paint makers have seen sales rise in the first half of the year, but raw material price increases continue to put pressure on profit margins.

The European coatings market is showing clear signs of a recovery from the recession, according to the financial results of the region’s coatings companies for the first half of 2010.
Nonetheless there are considerable doubts in the sector about whether the momentum behind the recovery will last, particularly since the extent of the revival in demand is by no means uniform across Europe.
“There is only a slow recovery in the market while the outlook is still rather uncertain,” said Erkki Jaervinen, president and chief executive of Tikkurila, the Finnish-based coatings producer.
The most buoyant market has been Germany where the country’s GDP grew by 2.2 percent in the three months to June, the fastest quarterly growth in 20 years. This has been mainly because the lower euro, particularly against the US dollar, has boosted its exports.
The association of the German paint and printing inks industry (VdL) had forecast in May that output of the country’s coatings companies would rise by 1.4 percent this year while turnover would go up by 3.6 percent.
“Because of the growth in the German economy we’ve now revised those figures to a 2.7 percent rise in output—slightly higher than the official forecast of a 2.5 percent increase in GDP—and to a 5.1 percent rise in turnover,” said Michael Bross, VdL’s head of public relations.
However even German coatings companies are worried about the possibility of a slow-down in exports because of a dip in the global economy and the threat of more financial turmoil among the southern member states of the European Union after a debt crisis in Greece earlier this year.
In many parts of Europe coatings sales took off in the first quarter of this year and continued to surge ahead for much of the second quarter. But by the middle of the year there were indications that demand was flattening out.
“There was a lot of restocking which accelerated after a pick-up in demand stretching back to the middle of last year,” said David Thomas, chemicals analyst at Oxford Economics, Oxford, England, which estimated that the Western European paints sector expanded by 10 percent in the first quarter compared with the same period in 2009.
Now the rise in sales has begun to wane in the wake of European governments ending their economic stimulus programs introduced after the financial crisis of 2008 to soften the impact of the recession. Furthermore in an effort to reduce their debts, they have also begun to make sharp expenditure cuts across large parts of the public sector.
“Cars sales, for example, have begun to weaken because governments have withdrawn financial incentives for drivers to trade in old cars for new ones,” said Thomas. 
In Sweden a project giving tax benefits to people renovating their homes has bolstered demand for decorative coatings and other materials in the country.
“The Swedish scheme has been a huge success and is one of the reasons why we are expecting an eight percent growth in revenue this year,” said Soeren Olesen, managing director of Fluegger, a Danish-based producer and retailer of decorative paints, which is active in the Swedish market. “In Denmark, which doesn’t have such a scheme decorative paint sales have been growing around one to two percent against three to five percent in Sweden. Around 20 percent of professional painters in the Danish capital Copenhagen are out of work.”
In Russia rising consumer confidence in the first half of the year—before the country was hit by drought as well as forest and peat fires which enveloped Moscow in smog—helped stimulate the decorative paints market as Russians spent more on home improvements.
“Demand for decorative paints rose by seven percent by volume in the first half of the year after a big drop in 2009,” said Jaervinen of Tikkurila for which Russia is a large market. “Furthermore Russian consumers have been moving from cheaper to premium paints which has helped to increase our sales.”
AkzoNobel, the European market leader in decorative paints, reported that besides strong demand in Turkey and Russia and “moderate growth” in the UK, its other decorative markets in the region were “stable to declining.”
The UK housing markets started to falter in the second quarter after an 8.9 percent rise in house prices in the first quarter. In Spain house prices fell by 4.7 percent in the first quarter amidst a slump in demand for paints and other building products.
Sales of OEM auto paints soared earlier in the year as output of passenger cars went up by 34 percent in the first three months compared with a year ago. But production was still 13 percent lower than in the first quarter of 2008, according to figures from European Automobile Manufacturers’ Association (ACEA).
BASF Coatings—most of whole sales are in the OEM sector—recorded a 23 percent rise in sales in the first half of the years, which was also underpinned by a “good order volume” in the auto refinish segment.
However European demand for cars has begun to decrease again with a 7.4 percent drop in sales in April and a 9.3 percent fall in new registrations in May as government support schemes were discontinued.
In addition to a big surge in demand for OEM paints prompted mainly by higher car exports, the German coatings sector has also benefited from the increase in exports from electrical equipment and machinery.
“These three markets—OEM, electrical and machinery—have been the main drivers behind increasing coatings sales,” said Bross. “After machinery output in Germany declined by around 40 percent last year it has increased sharply.”
AkzoNobel reported strong demand for powder coatings, especially in Eastern Europe, and also a quick rebound in the Turkish market for wood finishes and coatings. In specialty plastics coatings there were increased sales in Europe in contrast to declining volume and revenue sales in Asia.
While enjoying rises in sales, most coatings companies in Europe have been complaining about increasing raw material costs. VdL said that raw material prices went up by an average 10 percent in the first four months of the year with the costs of some additives jumping by as much as 25 percent.
“Raw material producers have been closing capacity and reducing their stocks,” said Olesen. “As soon as demand picked up there were shortages.”
Even if the sales of European coatings companies continue to improve for the rest of the year they face the prospect of narrower margins because of bigger raw material bills.

Related Market & Technology:

Related Raw Materials: