Brazil has beaten global odds with its strong economic expansion over the last several years, expanding its middle class rapidly. With it, an unprecedented wave of consumer demand is bolstering architectural, automotive and industrial coatings segments. Following a 7.5 percent increase in gross domestic production in 2010, Brazil's economy grew only 2.7 percent in 2011. Predictions for GDP expansion are 3.3 percent this year and 4.15 percent next year, according to a Central Bank survey.
Such growth needs to be measured against inflation, which amounted to 5.25 percent in 2011, demonstrating the need for continued fiscal policy changes. But as Brazil readies to host the World Soccer Cup in 2014, followed by the Olympics in 2016, President Dilma Rousseff has reduced taxes on consumer goods and is pressuring domestic banks to cut consumer lending and savings rates, which are substantially higher than in the United States.
Architectural Demand Buoyed by Demographics
The emergent middle class in Brazil is consuming at an attractive rate for paint and coatings manufacturers. Household consumption is predicted to reach 4.5 percent this year, according to data from Brazil's national economic data agency, IBGE. At the same time construction overall is expected to be up this year by 1.5 percent, led in part by a housing boom and still-rising home prices.
This growth is led by the upper middle class in Brazil—or those families earning more than $4,000 per month—which is expected to reach 29 million by 2014, roughly equivalent to the size of the upper middle class in Canada, according to the European Union's Institute for Security Studies.
Housing demand in Brazil is projected to rise to 1.8 million units by 2014, which has inspired the government to make plans to add up to eight million units over the next few years. Still, house prices are expected to rise by two to three times GDP growth, as preparations for the World Cup in soccer continue.
Although per capita consumption of paint is still in the five liters range, or one-third of that in the U.S. market, demand for better quality paint is rising along with total per capita consumption. The $2.1 billion architectural paint segment is already about two-thirds of the total volume of paint and coatings consumed in Brazil, including all segments.
Total architectural production of paints and coatings in Brazil are projected to rise four percent by volume this year to 1.138 million liters, according to an August 2011 projection by Antonio Carlos de Oliveira, the president of Abrafati, the Brazilian paint manufacturer's association.
Automotive Production Outstripping Demand
Brazil's government has made great investments in new roads and simultaneously has fostered easy consumer credit for purchasing new cars. Since the federal tax on new cars can be 50 of the new sales price, the revenue has been crucial to supporting government infrastructure programs.
With most of the world's major OEMs present in Brazil now, the production and demand for new cars is robust. Brazil's auto production was the 11th highest in the world in 2011, up seven percent from 2010 figures. Now, China's Anhui Jianghuai Automobile Group and Germany’s BMW are expected to invest an estimated $15 billion in Brazil over the mid-term.
According to Anfavea, the national auto manufacturer's association, production over the first quarter of this year dipped to almost one million units from 1.1 million in first quarter 2011. At the same time, new registrations only slipped to 1.08 million over first quarter 2012 compared with 1.11 million during the same quarter last year.
Last year, Brazil also was the world's fifth largest market for new car sales, with growth of over three percent. According to projections from Roland Berger Strategy Consultants, "Car sales in Brazil could double between 2010 and 2020 to 6.6 million vehicles; and production may rise by 3.6 million cars in 2010 to 5.5 million in 2020."
The total production of Brazilian OEM automotive paint and coatings manufacturers is expected to increase to 55 million liters, up five percent from 2011, according to the August 2011 projection by Abrafati. After market paint volume projections are nearly identical.
Industrial Coatings Expand with National Programs
Petrobras, Brazil's state oil company, is a behemoth among national oil companies, with 2011 revenue of $134.8 billion, making it one of the ten largest corporations in the world. Its capital investment program over the 2011-2015 period will be worth $225 billion. The company expects to drill 1,000 offshore wells during the period, to construct its own fleet of drilling platforms, and to build four new refineries to keep pace with the oil production rise from some two million barrels of oil per day today.
While the cost of a protective coating for an oil rig may be only one percent of the total value of the project, the cumulative value of those coatings are significant when the investment program is in the multi-billion-dollar range, said Fernando Macedo, the general manager for AkzoNobel's marine, protective and yacht coatings, in Sao Goncalo, Rio de Janeiro state.
Total volume production of industrial paints and coatings in Brazil is projected to be up four percent this year to 185 million liters, according to the Abrafati projection.
AkzoNobel Targets Brazilian Demand
Dutch powerhouse AkzoNobel is one multinational paint and coatings manufacturer that sees its future growth closely linked to Brazil. "Today we have great aspirations for Brazil, which is our fourth largest country market—after Germany, the United States and China—and one in which we know can grow,” said new CEO Ton Büchner, who took over the company in April. Last year the company's sales rose six percent globally, while sales in Latin America, led by Brazil, were up 11 percent.
The rise in figures is no accident of economics. "In 2010, we initiated country-specific sales goals for Brazil, India and China; Russia is still something of a missing link among the BRICs for us in terms of sales,” said Oskar Bosson, AkzoNobel's manager of communications for the Performance Coatings and Specialty Chemicals businesses, in Amsterdam. “At that time, we decided to double our Brazilian sales of about €750 million to €1.5 billion by 2015; as of last year we were up to about €950 million already.”
Among segments, architectural paints are key to AkzoNobel. "Decorative paint is our largest segment in Brazil in terms of sales, followed by the pulp and paper segment," said Tim van der Zanden, the director of external affairs for the company, also in Amsterdam.
"In Brazil there is a growing middle class, especially in Northern states like Pernambuco, so we are expanding our decorative paint plants and combining some footprints. We are working very hard on the Coral brand and we are focused largely on the mid-to-premium levels of the market," said Büchner. The company estimates that the "C" level of decorative paint encompassing the Brazilian middle class has expanded from 50,000 customers to 100,000 customers over the past seven years.
One inventive marketing tack AkzoNobel is pursuing for decorative paints is the donation of materials to the small red brick shacks of the Santa Marta slum, which rises up a long, steep hillside in Rio de Janeiro. There, the company began painting houses in 2010, and has since opened up a neighborhood office to coordinate with residents for the eventual painting of all 1,500 houses there. The return on the undisclosed amount of time and materials the company has invested in the humanitarian project thus far has been a factor of four or five times greater, over a matter of a few month's time, according to Jaap de Jong, AkzoNobel's country director for Brazil and regional director for Latin America, in Sao Paulo. Since the slum has been partially repainted, it has even become a tourist attraction of sorts.
One decorative segment product launch that has been very successful for the company is its Coral Rende Mais, a paint concentrate that can be thinned for extended coverage. The product has led sales in the overall Coral line, as middle class consumers simultaneously seek better quality paint and better value, according to Jaap Kuiper, the company's managing director for decorative paint within Latin America, in Sao Paulo.
In automotive paints, AkzoNobel is a major supplier of after-market paints, providing the national supplies for OEMs like General Motors, as well as the auto repair industry at large, said Almir Gozzi, the company's director general for Latin American automotive and aerospace coatings, in Sao Bernardo de Campo, in Sao Paulo state. Automotive and aerospace coatings represent 15 percent of the company's total performance coatings business unit. Latin America accounts for about eight percent of global performance coatings sales.
Industrial coatings, including marine and protective industrial products, are also a major segment for AkzoNobel sales in Brazil. A research and development joint venture with state oil company Petrobras helps AkzoNobel pinpoint products needed for the oil giant's new investment program, which is valued at $225 billion over the next few years, according to Fernando Macedo, the general manager for the company's marine, protective and yacht coatings, in Sao Goncalo, Rio de Janeiro state. Marine and protective coatings represent 27 percent of global sales for the company, according to its 2011 annual report.
AkzoNobel in May won a deal to provide coatings for the roof of Brazil's Maracanã Stadium, in Rio de Janeiro, which will host a major soccer final in 2014. The company also will supply paint for the mezzanine of the Grêmio Arena, located in Porto Alegre.