2011 State of the Industry Review

July 13, 2011

Executives reflect on the past year in coatings and look ahead to what the future might bring.

Charles Bunch, chairman and CEO, PPG Industries

The strategic actions that PPG has undertaken over the past decade have served to transform our company from a diversified, North American-centric manufacturer to a global coatings leader. As a result, sales from our combined coatings businesses in 2010 accounted for 74 percent of the company. In addition, we significantly expanded our presence in emerging regions last year by 20 percent. These regions now account for about 27 percent of PPG, and the U.S. and Canada now represent less than 50 percent of our sales versus 75 percent ten years ago.

As we begin 2011, we expect the economic recovery to strengthen and broaden in most end-use markets and regions. However, construction in the developed regions and in Eastern Europe was depressed throughout 2010 and remains challenging. We also experienced higher coatings raw material costs in 2010, particularly in the second half of the year. As a result, we raised our selling prices over the course of 2010 in all of our businesses, and we are in the process of implementing further pricing initiatives to offset this persistent inflation. So, our challenges are not behind us. Yet, based on the way we’ve managed through adversity in the recent past, I believe we’ll be able to overcome these obstacles.

Raimar Jahn, president, BASF Group’s Coatings Division

We can be very satisfied with the course of the business year. We were able to improve significantly compared to the previous year with respect to our sales and our results, despite the increased cost of raw materials. We’re picking up our results from where we left off in 2007 – in other words, pre-crisis. Overall, all business units and all regions contributed to the positive results.

On the one hand, the markets have developed positively for us. Not only the improved market environment of the global automotive industry, but all work areas contribute to increase in sales.
On the other hand, the ongoing improvement of our product portfolio and the regional presence are paying off. For instance, we are expanding our commitment with motorcycle paints in Thailand and Vietnam as well as with coatings for wind turbines in North America, Brazil and China. In addition, we are further expanding our automotive refinish business in Australia. We are also specifically investing in research and development. The iGloss scratch-resistant clearcoat is one of our most recent innovations.

Europe and North America, where we are particularly successful in automotive OEM coatings and automotive refinish coatings, are among our main markets. In Europe, we are also participating in a strong demand for coil coatings form the Eastern European steel industry. But we are also growing strongly in architectural coatings in Brazil.

We will further expand our activities in Asia in particular, primarily in China, India, Japan and Korea. One example is the Technical Center that we set up in Korea in 2010. The importance of Asian manufacturers will increase worldwide. Therefore, we will not only continue to work closely with Western carmakers in Asia but also with global Asian carmakers as well as carmakers who are active locally.

We want to strengthen our leading position as coatings manufacturers in automotive OEM coatings and aim to remain the preferred supplier of basecoats and process solutions. In addition, we are focusing on solutions that are both environmentally friendly and economically efficient, as well as on first-class service. We will expand our presence in Asia, since the importance of Asia for automotive production is growing.

We will continue to rely on our strong brands in the premium segment in the automotive refinish area, which represent high-quality products and serve as well as excellent color competence. Furthermore, we will further strengthen our business through partnerships with carmakers or fleet operators. We also plan to intensify our business for commercial and transport vehicles, as well as construction and agricultural machines.

With respect to industrial coatings, we have a focus on pre-coatings, which we will further expand through innovative and sustainable solutions. In the post-coatings segment, we are now in a good position throughout the world with special coatings for wind turbine rotor blades, which will allow us to expand our business in all regions. New applications for ship and airplane construction are currently being established with a great deal of momentum.

We will likewise further expand on our position in the architectural coatings area. While BASF established a strong position in South America early on with Suvinil, we recently introduced a new brand in China with NORBIN. In Europe, we continue to focus on professional painters and paint supply dealers and will supply them with our innovations, such as Cool Colours, in 2011.

Morten Fon, president and CEO, Jotun

2009 was a very difficult year for the coatings industry and most coatings companies experienced reduced activity and lower profitability. Depending on the geographical footprint of the company a few companies continued to grow. 2010 became the year when most companies recovered, overall the profitability was restored in most companies, and finally the industry is again preparing for growth outside the mature markets.

Mature markets are expected to be fairly stable, while emerging markets will continue to grow. The trend is that coatings consumption normally grows the faster the GDP.

The global financial crisis has brought increased volatility to the industry. Raw materials markets are tighter and raw material prices continue to increase. This is a short-term challenge for the industry. Currency markets and commodity markets are also more volatile than before, which again creates challenges in the industry.

The regulation of the industry continues on the chemical side driven by the U.S and the EU. This will change the industry and all companies are now using large resources to develop new products, and to comply with new regulations. This process will continue.

The focus on sustainability will remain high in the industry, and innovation will be directed towards sustainable solutions that either will reduce the use of harmful substances or deliver new products that contribute to improving the environment.

Focus will be given to presenting the benefits of the products and services the industry provides. Protection of assets against corrosion, reduction of vessels fuel consumption or heat reflecting paints for houses are all examples of products that have positive environmental effects. At the same time the industry has to work hard to reduce the negative impacts of products and raw materials.

Financial and environmental sustainability will go hand in hand into the future.

Pierre-Yves Jullien, president and CEO, Hempel

I share a core belief with everyone at Hempel. Our industry has a bright future. However, the world is changing fast. Post financial crunch, the coatings industry faces soaring raw materials prices, an urgent need for investment and serious environmental concerns. It’s crucial our industry responds quickly to these changes with new technology, better processes and higher levels of professionalism. It’s equally important however, that the coatings industry doesn’t underestimate the value it creates.

Most of the world needs a constant supply of new civic structures, housing and vessels. And, with sustainability near the top of the agenda, it’s more important than ever that coatings keep these heavy investments protected and beautiful. Like all of us, our customers want to limit the environmental impact of their operations. We help them reach their environmental goals with new, high-performance coatings that use fewer solvents and biocides to protect man-made structures from the corrosive effects of nature. And, the latest advances in marine coatings technology are helping our customers in the shipping industry save fuel and reduce the carbon footprint of their ocean-going vessels.

I feel that our industry underestimates the positive impact it has on the everyday lives of people all over the world. From R&D to coatings applications, not only can we help our customers protect the long-term value of their assets; we can also help them operate efficiently and safely, and support their commitment to the environment. Think of the world’s great suspension bridges, civic architecture and offshore wind turbines to name a few. The coatings industry helps keep things safe and beautiful for longer. That’s real value for coatings customers—and ordinary people—all over the world.

Erkki Järvinen, president and CEO, Tikkurila Oyj

The global economy has been improving, although there are still some uncertainties related to the situation in Southern Europe and its effects on the financial markets. The crucial factors in terms of paint demand such as GDP, residential construction activity and consumer confidence are developing positively. Tikkurila’s sales volumes grew on all of our market areas in 2010, and growth in the economies of our operating areas continued in the first quarter of 2011.

In 2010, the main challenges of Tikkurila and the whole industry were related to the price and availability of raw materials. This trend has continued—raw material prices increased sharply also during the first months of 2011. In spite of this, Tikkurila has been mostly able to cover the rise in the raw material prices by raising sales prices. It would seem that these challenges are continuing and will possibly increase in the next few months. At Tikkurila, we are now focusing on securing sufficient raw material deliveries by expanding our delivery network where possible and adapting our raw material base where applicable.

The long prepared listing of Tikkurila on Nasdaq OMX Helsinki, completed in March 2010, was a major event for Tikkurila last year. It resulted in nearly 30,000 new shareholders for Tikkurila.
The importance of companies’ social responsibility becomes emphasized, which is for instance visible as increasing environmental awareness and increased interest towards the way companies operate. In terms of corporate responsibility we will also seek more uniform operating methods in order to ensure good practices in different operating environments. There is still work ahead in eco efficiency and operational development.

Tikkurila’s responsible operations are concretized in our wish to offer our customers environmentally sustainable solutions. The share of waterborne paints in Tikkurila’s total production is over 70 percent and the share is much higher in commercial and construction paints. In Sweden, as much as 98 percent of the decorative paints we sold in 2010 were waterborne.

We believe that the growth prospects for the paints and coatings industry are solid. We expect the GDP growth to continue in our key market areas in 2011. We also predict further raw material cost increases. In this situation, the suppliers for the paint industry will probably not be able to fully match the increasing demand, due to some of the capacity shutdowns carried out during the recession. In addition, we believe, that the consolidation development seen in the whole value chain of the industry will continue or even accelerate, resulting in fewer and stronger players.

Karl Altergott, president, Dunn-Edwards Corporation

Our view of the future includes a color forecast that is predominantly “green.” Dunn-Edwards remains committed to the pursuit of eco-efficiency in all our operations. For us, that means making the best performing paint with the least harmful ingredients, so that our paint can fulfill its environmentally beneficial purpose while avoiding adverse side effects.

We see this as a necessity, partly because one of our major markets is in California’s South Coast Air Quality Management District, where paint is more stringently regulated than anywhere else in the world. Right now, the District is engaged in a rule amendment process that may impose lower VOC limits on several coating categories, eliminate the “averaging” compliance option, and regulate—for the first time—the VOC content of colorants added to tint bases at the point of sale, possibly by 2014. Whatever the new requirements, we intend to be fully prepared to meet them well in advance of the date they will take effect.

Dunn-Edwards is also developing new, high performance ultra-low VOC coatings using raw materials based on renewable resources, particularly waterborne alkyd resins derived from vegetable oils. All of this is in keeping with the historical leadership role that Dunn-Edwards has played in advancing the concept of eco-efficiency. And, despite the lingering impacts of recession on our industry, we see many opportunities for growth ahead.

Clemens Steiner, CEO, Tiger Coatings

After getting off to a bad start in the wake of the crisis year of 2009, 2010 turned into a good year during which we managed to gain ground in all markets once again. Thanks to the solid partnerships we have with our customers, and to our tangible competitive advantages, we were able to “score” on a broad front. However, the basically very satisfactory course of business during the last financial year was clouded by the massive increases in the prices and sometimes shortages of ever-scarcer raw materials.

The crisis is not yet behind us in 2011 either. Nevertheless, thanks to our customers, our clear-cut positioning in each of our markets, our sound and innovative product solutions and above all our fellow Tigers, we have so far been able to come through the crisis making good use of its opportunities while absorbing the impact of its risks. Our success rests upon the fact that we keep on steadily pursuing our long-term goals – crisis or no crisis. All these various factors are summed up by Team, Innovation, Green products, Efficiency and Responsibility.

In turbulent times like these, the top short-term priority must be reliability. In the medium-term, there will once more be a demand for innovations that enable customers to produce more quickly and cost-effectively, with lower reject rates. In the not-so-distant future, attention will switch back to making the coatings process more eco-friendly and improving its energy balance. Following this, the issue of curing times and temperatures (i.e. of low-temperature powder coatings) is set to become more topical again. The second critical area will be the addition of extra functionalities to the organic coating films that are applied onto products.

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