Europe’s coatings companies, especially the multinational ones, are reasonably confident they can continue to increase their sales in the short- to medium-term, unless the world is plunged into a second recession.
But they are much less optimistic about raising or even maintaining their profit levels because of the likelihood that they will be unable to push up their prices to compensate for persistently high raw material costs.
They are hoping that they can keep on hiking their prices in the fast growing markets of the emerging economies in Asia, Latin America and parts of Eastern Europe. But it will be more difficult to put up prices in the mature domestic markets of Western Europe and some neighbouring areas of Eastern Europe.
As a result coatings companies will have to step up their efforts to find alternative ways to offsetting the impact of relentlessly high raw material prices.
Like other developed regions, Europe is facing the prospect of a period of slow economic growth as it struggles to grapple with the effects of the 2008 financial crisis, in particular the austerity measures needed to reduce government debts.
“Downstream sectors in Europe like coatings are finding themselves in a position they’ve never been in before,” said Alan Eastwood, economics advisor to the UK Chemical Industries Association (CIA). “They are in the midst of a prolonged downturn with high commodity prices.
“Previously when there have been downturns, commodity prices have gone down,” he said. “But now with the strength of the emerging economies, particularly China, there are high commodity prices because of continued strong demand. There’s been no significant decline in raw materials prices, which has speeded up the recovery of coatings and other manufacturers in Europe in previous recessions.”
Europe’s leading coatings companies reported in their interim results for the first half of this year relatively healthy increases in revenue.
AkzoNobel’s sales of its two coatings operations in decorative and performance coatings, which together account for around two thirds of total group revenue, went up by eight percent and 10 percent respectively in the first half of 2011.
By far the biggest rises, especially in the decorative business, were in Asia. Decorative sales soared by 20 percent in the first half against five percent in Europe.
Tikkurila of Finland, predominantly a decorative paints business active in Scandinavia and Eastern Europe, recorded a 10 percent rise in total sales in the first six months, with a 15 percent increase by its East unit covering mainly Russia.
BASF Coatings increased sales by nine percent in the first half, while Jotun of Norway raised revenue during the first four months of the year by 13 percent.
However with most European coatings companies, the rise in revenues has contrasted with declining profits, stemming mainly from an inability to match higher raw material costs with higher prices for their own products.
Coatings raw materials prices are estimated to have gone up by 20 percent in a year and by 60 percent in two years. European prices of titanium dioxide (TiO2) have risen by around 40 percent in 18 months.
In AkzoNobel’s decorative paints unit, EBITDA (earnings before tax, interest, depreciation and amortization) dropped by seven percent in the second quarter and by two percent in the first half.
With performance coatings, EBITDA fell by six percent in the first half and by 11 percent in the second quarter.
Tikkurila’s operating profit declined by seven percent in the first half, resulting in a virtual two point decrease in profit margin to 10.2 percent.
“Our profitability in the second quarter was weakened by the continued challenging developments in prices and availability of key raw materials,” said Erkki Jaervinen, Tikkurila’s president and chief executive.
Interim figures from BASF, the world’s largest chemicals company, which is backward integrated into intermediates and petrochemicals, demonstrated how the flexibility in pricing in base chemicals gradually diminishes further down the supply chain.
In its base chemicals division, mostly comprising petrochemicals, sales rose by 20 percent in the first half with operating profit up by 25 percent. Only two percent of the additional revenue was due to volume increases with 20 percent coming from price rises, partially offset by currency effects.
Its dispersions and pigments business expanded sales by 13 percent after it was “largely able to offset high raw material costs with price increases”, according to the company.
However it admits that with its coatings operation, for which it does not reveal profit figures, margins have been squeezed by an inability to “fully pass on high raw material costs.”
Uncertainties about trends in the global economy in the next few months will make coatings customers even more reluctant to accept higher prices. “If the global economy stays turbulent it will be even more difficult to push through price increases for our products,” said Morten Fon, Jotun’s chief executive.
Nonetheless there will be more room for movement in some markets than in others. “The mechanism for price discussions is different in mature and emerging markets,” said Jaervinen. “In mature markets, like Finland and Scandinavia, the price window is open only a few times a year. In emerging markets the system is more flexible.”
Even if coatings companies achieve price rises, there are doubts about how much customers will tolerate them.
“What is the extent of price elasticity?” asked Jaervinen. “Will constantly rising prices lead to ‘downtrading’—i.e. consumers preferring cheaper, somewhat lower quality products.”
Most coatings companies are looking at alternative options for reducing the impact of high raw material costs like changing formulations. They are endeavoring to tackle their concerns about availability of raw materials by building closer ties with suppliers.
“We are trying to market ourselves to suppliers as a growth opportunity for them because we have been able to increase our sales every year—even during the financial crisis,” said Fon. “When there is a lack of availability, we want to ensure we are given priority.”
AkzoNobel recently took the surprising step of expanding upstream into TiO2 when it formed a partnership with Guangxi CAVA Titanium Industry Co. Ltd. to build a 100,000 ton-a-year TiO2 plant in China.
One-third of the output will be allocated to AkzoNobel. The company says it will not only ease access to TiO2 supplies but ensure it gains competitive prices for the pigment.
However the aim behind the CAVA deal is to provide TiO2 supplies for AkzoNobel’s expanding Asian operations. Such an initiative would be far more difficult for a coatings company to organize in Europe, which is heavily reliant on raw materials produced outside the region. Europe may require other types of solutions to its raw material problems.