The Raw Material Storm

November 10, 2011

The big three—AkzoNobel, PPG and Sherwin-Williams—reported mixed third quarter results giving no clear indication if the weakened economy will improve any time soon. However, if raw material price trends continue to grow at current rates, the situation looks to worsen.

Prices of raw materials started climbing in the fourth quarter of last year and continued into the second quarter of 2011. Prices for titanium dioxide alone are poised to climb another 15 percent to 20 percent before the year is out.

“We are in a perfect storm, with unprecedented raw material price increases and sluggish demand,” AkzoNobel’s chief executive Hans Wijers said at a press conference.   

The world’s biggest paint maker said net profit fell 37 percent to €149 million despite a 4.8 percent rise in revenue to €4.05 billion due to higher prices for raw materials. To plug the leak Akzo said it plans to save €500 million in cuts by 2014.

Akzo said revenue growth was up helped by price increases passed on to end-users, but weak consumer demand combined with slow construction and housing markets in North America and Europe kept overall volumes nearly flat. Continuing but slowing growth in emerging markets made up for weak demand in mature markets said the company.

“Although our top-line revenue growth throughout the quarter was relatively strong, we have seen the macroeconomic situation worsen, which has impacted our third quarter results,” Wijers said. “We have also not yet fully offset the unprecedented raw material cost increases.”

PPG Industries Inc. said that its third-quarter net income rose 19 percent as demand for its protective and decorative coatings climbed in Asia and Latin America. The company also said demand in North America increased modestly, while demand in Europe declined.

North America’s largest paint maker reported earnings of $311 million in the quarter compared with $262 million during the same period the year before. Revenue increased 11 percent to $3.85 billion.

PPG said that it increased prices to offset higher raw material costs, and will raise prices further in several of its businesses. Sales increased 20 percent for PPG’s commodity chemicals business, 12 percent for industrial coatings, 12 percent for architectural coatings and 9.5 percent for performance coatings.

Sherwin-Williams Co.’s third-quarter earnings rose a slight 2.6 percent as higher sales buoyed by price increases helped to offset rising materials costs. Sales at the company have been increasing steadily since the start of 2010, but like its competitors the company’s profitability has suffered under pressure from climbing costs for raw materials.

“Operating segments continue to control costs and implement price increases in an effort to keep pace with the cost climb,” said chairman and chief executive Christopher Connor.

In the latest period, Sherwin-Williams posted a profit of $179.9 million, up from $175.3 million a year earlier. Revenue increased 14 percent to $2.48 billion. Sales in the company’s paint-stores group rose 10 percent due to higher selling prices and improving domestic architectural paint sales volume across most segments. Its global-finishes group saw revenue jump 31 percent largely because of acquisitions, selling price increases and higher paint sales volume.

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