The sales and profits of many coatings companies, particularly those involved in decorative paints, appear to be withstanding the effects of a drop in GDP and industrial output growth across much of Western Europe.
However, looming on the horizon is the danger that the Ukraine crisis will trigger a long-term decline in demand for foreign-produced coatings in Russia and the rest of the former Soviet Union.
It could also have a knock-on effect on neighboring Eastern European countries now members of the European Union, which have been achieving higher growth rates in recent years than those in Western Europe.
Robust demand in parts of Eastern Europe in the first half of this year has helped to boost the overall financial performance in Europe as a whole among coatings companies.
This is at a time when the economies of the 18-member eurozone have started faltering after displaying signs of a pick-up in the second half of last year. After recording a meager rise of 0.2 percent in the first quarter, GDP growth in the eurozone slipped to zero in the second quarter compared to the first.
The German economy, the EU’s manufacturing powerhouse, contracted by 0.2 percent in the second quarter against the first, while Italy went into recession with a similar decrease of 0.2 percent and France had zero growth.
Outside the eurozone the bright spot in Western Europe was the UK which achieved an average 0.8 percent growth in the first two quarters compared to the second half of 2013 – similar to that in the Eastern European countries of Poland, Hungary and Latvia.
Nonetheless, on a year-on-year basis the European figures looked brighter. GDP growth in the eurozone was 0.8 percent in the first half of this year while in the whole of the EU it was 1.3 percent. The UK’s economy expanded by just over 3 percent in the first six month with growth in Poland and Hungary rising by close to 3.5 percent.
In the European chemicals sector, which includes coatings, first-quarter output surged by 3.1 percent year-on-year, its biggest quarterly increase for two years and the fourth consecutive quarterly increase. “The recovery is volatile,” warned Kurt Bock, president of CEFIC, Europe’s chemicals trade association, and chairman of BASF, which owns one of the region’s largest coatings businesses.
A major reason for the revival in production in chemicals and its major value chains like coatings has been a mild winter, which contrasted with unusually cold conditions a year ago. The weather has benefitted the construction sector and, as a result, decorative paints.
“2013 was a poor year for most German coatings companies because the hard and long winter caused an overall fall in output of close to 5 percent,” explained Michael Bross, director and spokesperson for the German Paint and Printing Ink Association (VdL). “But with spring coming in February, this year will be much better.”
Output of exterior decorative paint slumped by around 30 percent in the first quarter of 2013. This year German production of decorative paints is forecast by VdF to rise by 3.1 percent – to 893,000 tons equivalent to 62 percent of total coatings output – with that of exterior coatings going up by 8 percent.
“If nothing dramatic happens, we can assume that in 2014 almost all coatings segments (will experience) a significant improvement in sales,” Klaus Meffert, VdF president, told the association’s recent annual meeting.
In the industrial coatings sector, whose output VdF is expecting to increase by 2.5 percent, it is now predicting rises of 3 percent or more in coatings for machinery, electrical and electronic equipment and automobiles and other vehicles.
The UK coatings industry is also enjoying increased demand from a construction sector which has recorded over 12 months of consecutives rises in output and from an OEM segment where output has risen by around 3.5 percent in the first half of the year.
Construction is also buoyant in parts of Eastern Europe. Building activity is at its higher in Poland since the 2008 crash. The Hungarian market has been forecast to grow by 10 percent this year.
Tikkurila, the Finnish decorative and industrial coatings producer whose main markets are Scandinavia, Eastern Europe and Russia, reported increased brand share in Poland and the Baltic countries in the first half of this year which helped push up the operating profit margin of its West business unit from 15.5 percent in the same period in 2013 to 17.1 percent.
A strong presence by PPG Industries in Eastern Europe has helped the company steadily increase the sales margin of the earnings before interest, tax, depreciation and amortisation (EBITDA) in its European architectural coatings business from 11.7 percent in 2010 to 14.1 percent last year.
However, the big worry for coatings companies active in Eastern Europe is Russia, which has been one of the biggest growth areas in the European coatings market. The country’s Economic Ministry conceded in late August that its economy is close to recession with rising inflation due to sanctions related to the Russian-Ukrainian conflict.
Tikkurila reported that in its East business region, consisting primarily of Russia, revenue dropped by 13.5 percent in the second quarter and by 8.5 percent in the first half of 2014.
“The volume growth in the Russian decorative paints market will be very low this year,” said Erkki Jaervinen, the company’s president and chief executive. Russian consumers are either postponing paint purchases or switching to cheaper and lower quality grades.
Hempel of Denmark has been among a few Western European coatings companies to press ahead with investment in Russia by breaking ground earlier this year for a plant at Ulyanovsk, 900 kilometres east of Moscow.
However others are now turning their backs on the country. “We had been considering investing in production facilities in Russia,” said a senior executive in one European international coatings company. “But now with the Ukrainian crisis and other factors an investment in Russia is no longer a possibility.”
With a population of 143 million and an economy which in GDP terms is the ninth largest in the world, the country has a coatings market which is difficult to ignore, particularly when it is close to your doorstep. Furthermore when the underlying medium-term trend across much of Europe is one of weak demand coatings companies in the region need large neighboring markets like Russia with potentially strong growth.