The coatings industry in Europe has been bracing itself for an extremely difficult 2012 in which much of the region will be suffering from the effects of a severe economic downturn mainly due to the impact of the troubles with the euro on consumer and business confidence.
Many coatings companies have stepped up cost-cutting programs and taken restructuring measures, including job cuts.
One major concern is that a double-dip recession in 2012 will be the start of a long period of slow economic growth that will force coatings producers to reorganize themselves even more radically.
In fact the 17 countries of the euro zone have already been experiencing a decline in GDP in the fourth quarter of 2011. If, as is being predicted by economic forecasters, this is followed by a drop in output in the first quarter of 2012 the area will officially be in recession.
Most Western European countries are expected to go through decreases in GDP growth of 60-90 percent next year compared to 2011 which itself was a year of slow growth. In the majority GDP rises will shrink to well below one percent with large economies like Italy, Spain, France and the UK being in or close to a recession.
On the whole Eastern European states will fare better but even many of them will by hit by considerable decreases in growth rates. Poland’s GDP will fall from 4.2 percent to 2.5 percent while Russia’s will actually go up from four percent to 4.1 percent but Hungary will slip into recession, according to figures from the Paris-based Organisation for Economic Cooperation and Development (OECD).
“At the beginning of the 2011 there was a lot of optimism about an acceleration in the recovery from the 2008 financial crisis,” said Alan Eastwood, chairman of the economic forecasting panel of the European Chemical Industry Council (CEFIC) and economic advisor to the UK Chemical Industries Association (CIA).
“Now we’ve ended the year amidst a lot of gloom and doom,” Eastwood said. “With European governments cutting back public expenditure and the banks reluctant to lend money, it is difficult to see where any significant growth will come from.”
Cefic was predicting in early December that chemicals output, which is usually an indicator of trends in paints production, would go up by 1.5 percent next year compared with two percent in 2011. But already that rise is looking optimistic.
“The outlook for GDP growth in the EU has changed within a few weeks,” said Eastwood. “It could now be as low as 0.5 percent or even negative which will mean chemicals output will be lower than we initially thought.
“Amongst downstream sectors, construction in particular will remain even more depressed, which will put demand for decorative paints under pressure,” he said. “With a scarcity of money for mortgages fewer people will be moving into new homes.”
Due to the impending tighter squeeze on the construction sector, coatings companies with large decorative paints portfolios have tended to be the most active in refocusing their strategies and taking restructuring initiatives in Europe.
AkzoNobel, which has by far the biggest decorative paints business in Europe accounting for over half its global decorative sales, has revealed it is introducing further cost reduction and streamlining measures in Europe.
Over the last three years in its Europe, Middle East and Africa (EMEA) decorative business, in which Europe has accounted for the vast majority of annual sales of over €2.5 billion ($3.3 billion), the company has closed 11 production plants, 19 warehouses and discontinued 19 brands.
The product portfolio and distribution will now continue to be simplified, Richard Stuckes, EMEA managing director for decorative paints, told a recent meeting of investors and analysts in Amsterdam. The managerial structure of the EMEA business will be streamlined with countries focusing on selling and marketing while the business unit’s (BU) organization will concentrate on further integration of supply chains and supporting local activities.
“This further transformation will support our growth ambitions by releasing funds to invest in production, distribution and brand strength,” Stuckes said.
A priority for AkzoNobel in Europe will be to increase its presence at the decorative retail level, particularly by raising the number of stores within its own distribution network.
“With independent distribution channels under pressure, manufacturers’ owned/controlled stores become an increasingly important route to market,” said Stuckes. “Stores are an excellent way to introduce and manage new product, marketing and sales initiatives.”
AkzoNobel has indicated that it also believes that the economic downturn could provide openings for acquisitions in Europe, where the top six players in the decorative market still account for only 40 percent of sales. “Tough trading conditions will generate opportunities to drive consolidation in the market,” said Stuckes.
Finland’s Tikkurila, one of Europe’s top six competitors in decorative coatings with operations in Scandinavia and Eastern Europe, has announced a change in strategy aimed at boosting its brands by strengthening its distribution, particularly at the retail level.
“Volatility seems to be increasing in all markets, including mature ones,” said Erkki Jarvinen, Tikkurila’s president and chief executive. “This demands more flexible cost structures, so that we can better adapt to rapidly changing volume fluctuations and consumption patterns. We will also try to prioritize more clearly in the future both markets, businesses and customers so that we can improve the customer experience and invest enough in growth markets.”
Tikkurila will be focusing especially on Russia, which is forecast to maintain an annual average GDP growth of four percent for at least a few years, and its neighbouring markets. But in the Czech Republic, Slovakia and Hungary, where it does not have a strong position, it is spinning off its businesses to a Czech-based company run by former Tikkurila managers.
“We strongly believe in entrepreneurship and trust so that together with our well-known partners we can better grow the business and find an efficient set-up and structure,” said Jarvinen.
In Finland Tikkurila has started reorganizing its activities with the expected loss of up to 100 jobs in a workforce in the country of 750, equivalent to a cut of 13 percent. The company has a total of 3,500 employees in and outside Finland. “A leaner structure will force us to concentrate more on the customer interface and eliminate internal inefficiency,” said Jarvinen.
The European coatings and chemicals sector is expecting that sales will start to improve in the second half of this year and will continue to pick up into 2013 as GDP growth rates revive across much of Europe.
However growth may be sluggish with GDP rises averaging around or a little above one percent. “We expect growth in chemicals output in Western Europe will remain pretty flat for a few years with a return to the trend growth of 2.5 percent before the 2008 financial crisis taking place only between 2016 and 2020,” said Amit Sharda, chemicals analyst at Oxford Economics, Oxford, England.
With relatively rapid growth still likely to continue in the world’s emerging economies, particularly in Asia, Europe’s place in the world’s decorative paints sales will diminish further. AkzoNobel is expecting that by the middle of the decade Europe’s share of its decorative sales will go down from over half to around 40 percent.