The relentless rise in raw materials costs, which has been hitting European coatings producers over the last 2-3 years, has at last been easing. But the relief from the constant pressure of rising input prices may be short lived.
The first signs of a flattening-out of price increases across a broad spectrum of organic and inorganic chemicals used in coatings formulations came last summer. Then in the fourth quarter of last year prices of some key materials began to go down.
Associations representing chemical and related sectors are predicting that in 2013 prices will stabilize to stay at much the same level at the end of last year.
A slowdown in the economy of Western Europe, which is causing falls in sales of coatings, particularly in the decorative paints sector, has been the main reason for softening of chemical prices in response to decreases in the consumption of chemicals by coatings manufacturers and other key customers of the chemicals industry.
AkzoNobel’s sales from decorative paints in Europe, its main market for decorative coatings, declined by one percent in the third quarter. Decorative sales declined across all parts of the region, reflecting “severe weakness” of demand, according to the company. In the company’s performance coatings operation, demand for wood finishes and adhesives and powder coatings also went down in Europe.
The company reported that during the quarter raw material costs were only slightly above those of the previous year and compared to rises in the second quarter had leveled out.
Even in Eastern Europe, where coatings demand has been much stronger during the economic downturn since 2008, sales have been faltering. Tikkurila of Finland, whose main markets are in Eastern Europe, particularly Russia, recorded flat sales in the third quarter while in the first nine months of 2012 they went up by 4.8 percent.
“European demand for coatings is poor so as a result prices of some chemical raw materials have been weakening, ” explained Alan Eastwood, senior economist at the UK’s Chemical Industries Association (CIA) and chair of the economic forecasting panel of the European Chemical Industry Council (Cefic), representing chemical producers.
“Major buyers of coatings like automobile makers are having a bad time, except in a few countries like the UK, he added. “The construction industry is in the doldrums across much of Europe.”
The economic outlook for the 17-nation eurozone has worsened in recent months. The Washington-based International Monetary Fund is now predicting that the zone’s average GDP will decline by 0.2 percent in 2013 after the IMF forecast a slight rise of 0.1 percent in October.
Chemical suppliers are expecting the squeeze on chemical sales to continue to well into this year with a possible pickup in the second half of 2013. After a two percent fall in output in 2012, mainly due to slide in sales since the summer, chemicals production is expected by Cefic to go up in 2013 by 0.5 percent mainly because of a recovery later in the year.
However there are forces at work that are still preventing sharp falls in many chemical prices, indicating that they could quickly rise again with a revival in demand in sectors like coatings.
The latest figures from Cefic confirm that by the beginning of fourth quarter, the impetus behind the long period of chemical price increases was distinctly fading after an average year-on-year 3.4 percent rise in the first half of 2012. By October the average increase had dropped to below three percent with those for inorganic and consumer chemicals going up by only 1.3 percent.
Nonetheless prices for petrochemical-based chemicals, which make up the majority of those used in most coatings formulations, have been demonstrating resilience. They went up year on year by 5.1 percent in October.
“Chemical producers are putting a lot of effort into maintaining their prices because due to continuing high oil prices the costs of their own feedstocks are still high,” explained Henrik Meincke, head of the economics department of the German Chemical Industry Association (VCI).
Nonetheless the VCI is forecasting that in Germany overall chemical prices in Europe’s largest coatings market will go up by only 0.5 percent this year, compared with an average of just under 3 percent in 2012.
In the fourth quarter of 2012 and at the beginning of this year, there have even been signs of softening of prices for petrochemical derivatives. Spot prices for some coatings solvents have been going down because of surplus output.
Some chemical companies in Europe have even been reducing their own output to prevent excess supplies pulling down prices. The scarcity of production capacity for some chemicals is enabling producers to reduce utilization of their plants while staying profitable.
However in a crucial raw materials sector like titanium dioxide a tight balance between supply and demand is disappearing – at least for the moment.
After the 2008 financial crisis TiO2 prices in Europe almost doubled after a spate of closures of high-cost, low efficiency plants in the region.
“The current supply cycle in TiO2 with demand outstripping production capacity seems to be coming to an end,” said Eastwood. “The post-2008 rationalization in the sector sent prices sky high because there was no new capacity to deal with a recovery in demand. Now demand has fallen so sharply that the sector is showing the usual ups and downs of a commodity market.”
Major players in the European TiO2 market, such as Huntsman Corp, DuPont and Rockwood Holdings, owners of Sachtleben of Germany, announced falls in sales or profitability in the third quarter of last year.
Producers of the pigment have been cutting prices by 5-10 percent in recent months in Europe to reverse a trend of persistently rising prices since 2009. For some the demand has been so low that they had to seek buyers of their output in Asia and Latin America.
Nevertheless the likely excess in capacity in TiO2 and other important coatings raw materials this year will not be big enough to withstand a predicted upsurge in coatings demand in 2014 without prices going up again.
“Even if you cannot produce more when you want to, there will inevitably be a strong rise in chemical prices,” said Meincke.
Some analysts believe, however, that in the longer term the best hope for coatings producers and other downstream users of petrochemical and other organic chemicals is a decline in the oil price.
“We’ve had persistent high oil prices for at least two years in succession at a time of a weakening global economy, which is historically unprecedented,” said Paul Hodges, chairman of the London-based consultancy International eChem. “Oil prices need to come down substantially if they are to reflect the reality of current economic conditions.”
That big decrease in oil prices may happen. But unfortunately for coatings producers it could only occur a long time in the future.