Scott Detiveaux03.06.09
The current global economic downturn has affected virtually every industry, including paints and coatings. Over the period 2002 to 2007 the global paint and coatings industry grew at an annual rate of nearly five percent in terms of volume and nearly seven percent in terms of revenue. The market slowed significantly in 2008 and is projected to be flat to declining for 2009. Orr & Boss estimates that total global 2008 revenues for the paint and coatings industry were approximately US$93 billion on a volume of more than 27 billion liters.
In early 2008, the International Paint and Printing Ink Council (IPPIC) retained Orr & Boss to prepare a comprehensive, in-depth market analysis entitled, Global Paint and Coatings Industry Market Analysis Report (2007 � 2012). Coatings market data presented in this article is based on the intensive market research conducted for the completion of this study of the global paint and coatings industry. For the purposes of the IPPIC report and for this article, the global paint and coatings industry has been segmented into, studied and presented according to the market sectors listed in Table 1.
Decorative coatings are the largest of the major segments representing approximately 51% of the global volume and 43% of the global coatings value. The balance of the market is distributed across the nine industrial market segments with general industrial being the largest, comprising roughly ten percent of the volume and 11% of the market value. Chart 1 details the market distribution by volume and value of the industrial segments.
Globally, the decorative coating segment has grown at an annual rate of more than five percent in volume and nearly eight percent in value over the past five years. Similarly, industrial coatings have grown more than six percent annually in volume and slightly more than seven percent in value. Within the industrial sector, powder coatings and industrial maintenance and protective coatings have posted the highest average annual growth rates both in terms of volume and value. Packaging coatings and automotive refinish have experienced the lowest average growth rates. It is important to note that there has been significant regional variation in growth rates within the various major market segments.
Representing more than 35% of the total global coatings volume, Asia-Pacific has become the largest geographic region. Europe is the next largest region at nearly 30% of the global volume. NAFTA trails Europe and makes up 21% of the volume. The balance of the market volume is split between Latin America and the rest of the world (ROW). Market distribution based on coatings value varies from the volume distribution. Europe is the largest region in terms of coatings value, representing approximately 35% of the market volume. Asia-Pacific trails Europe and comprises roughly 31% of the global value. As with volume, NAFTA is the third largest region making up approximately 24% of the market. Latin America and ROW split the balance.
There are a number of factors that affect coatings demand. Three major determinants are overall economic activity, construction levels and by the quantity of specific end-use products manufactured such as automobiles, furniture and containers. The period 2002 to 2007 saw significant growth in the global economy with global GDP expanding at a compound annual rate of more than seven percent. The growth rate fell to less than four percent for 2008. In their most recent projection, the International Monetary Fund forecasts a 2009 growth in GDP of only 0.5%. This is the lowest forecast annual global growth rate since World War II. Clearly the stagnation of the global economy is having a negative impact on overall coatings demand.
Construction activity directly impacts a number of end-use markets and is a major driver of coatings demand. In addition to the decorative coatings segment, industrial maintenance, coil coatings and wood finishes are tied to construction. These end-use segments make up approximately 70% of overall coatings demand. Following years of significant expansion, the global construction market has dropped off considerably. Specifically, construction markets in leading Western economies are forecast to decline in 2009. The North American construction market is projected to shrink by roughly nine percent. The construction market in Japan is forecast to decline by seven percent and Europe is projected to decline by nearly two percent. For the near term, the decorative, industrial maintenance, coil and wood finishes markets will be negatively impacted by this decline in the construction market.
Industrial coatings demand is, by and large, driven by the demand for, and production of, the end use products. For example, transportation coatings de�mand is dictated by the number of cars, trucks and planes that are built. Unfortunately, demand for these manufactured products is down significantly. In 2008, global vehicle production declined more than five percent versus 2007 and a further decline of nearly nine percent is forecast for 2009. Trans�portation is not the only market facing a downturn. The U.S. Energy Information Administration (EIA) is projecting that the Manufacturing Index for the U.S. will fall below 2002 levels during the course of 2009.
Regional growth in coatings demand has mirrored regional economic development. Over the past five years, those regions that have seen the greatest economic growth have experienced the greatest increase in coatings demand. This is most evident in the Asia-Pacific region where both GDP and coatings volume have been growing in excess of ten percent per year. It is important to note, however, that while growth follows the overall economy, there is wide disparity in per capita coatings demand.
North America has the largest per capita demand followed closely by Europe. Other regions of the world lag by a significant margin. Chart 2 depicts coatings demand per capita for each region.
Clearly the current global economic slowdown is having, and will continue to have, an impact on the coatings industry. The recovery of the coatings market is inherently tied to recovery in the end use segments, and thus overall economic activity, construction and manufacturing. The short-term forecast may indeed be negative, however, the medium- to long-term prospects for the industry are much more positive. While the International Monetary Fund has downgraded its 2009 global GDP forecast to 0.5% annual growth, it is projecting an annual growth of approximately three percent for 2010. This is consistent with an economic recovery occurring sometime between midyear 2009 and early 2010. Beyond 2010 the forecast is for a return to historical economic expansion levels.
This forecast is one of a number of potential scenarios and is based on the assumption that the current recession, despite being very severe, is none-the-less "typical." That is, a cyclical corrective response within the economy to such disruptive factors as over capacity, excess inventories, inflation, deflation, disruptive technological developments and regional growth among other factors. However, there are other scenarios that suggest that as regional economies are undergoing fundamental structural changes, the economic patterns of the past two to three decades were basically debt-driven and that growth is now unsustainable. This would mean that the coatings industry will have to identify those fundamental changes that are occurring and adjust regional, product and manufacturing strategies accordingly. Example, how valid is the stampede by coatings companies to open production facilities in China?
Following a difficult 2009, the construction sector is forecast to recover as this will be the basis for most stimulus plans. Construction growth, however, is unlikely to return to the high levels experienced during recent years, particularly in North America and in Western Europe. Decorative coatings and wood finishes are forecast to grow as the construction market rebounds. Industrial maintenance and protective coatings will grow in response to infrastructure spending and the recovery in non-residential construction spending. This will be particularly evident in the leading Western economies. As was previously discussed, industrial coatings will generally follow overall end use builds. Recovery in the manufacturing sector is much more difficult to forecast. In general, manufacturing growth is likely to be concentrated in the developing world.
The global economic downturn is affecting companies across the entire coating industry value chain.Raw material suppliers, formulators, distributors and applicators are all struggling to manage declining demand. Companies must take action to address the current market conditions. In order to effectively maneuver through this downturn, Orr & Boss recommends that companies focus on three key strategies: reducing operating costs, reducing working capital and managing top line sales.
To reduce operating costs companies must take a hard look at business processes, work flows and organizational structures to identify means of eliminating non-value added activities while preserving the ability to meet customer requirements. These efforts must cross all areas of the business. In addition, companies need to identify ways to reduce material and energy waste. Raw materials are by far a company's largest component of cost, so minor savings can have a major impact. Furthermore, savings related to material and energy management will immediately impact the bottom line.
Working capital requirements for specialty chemicals manufacturers and formulated products companies can be as high as 40% of sales. These requirements tie up significant resources and affect the borrowing ability of the business. Two key areas that companies can target are inventories and receivables. The challenge with optimizing these areas is maintaining service levels while reducing working capital. Lowering working capital at the expense of losing key customers is not a sustainable strategy.
The effects of the global downturn are felt across the value chain, including your customers. Their needs and expectations have likely changed as they attempt to manage these difficult market conditions. Suppliers must be able to adapt to these changes. Pricing strategies, credit terms, product mix and service offerings may need to be altered to meet these shifting needs. In addition, the present economic climate may present new market opportunities. Businesses that are able to respond will gain a competitive advantage by being well positioned when the inevitable recovery occurs.
These strategies are further described in the following six outcomes:
� Take decisive actions. A "do nothing" response to market upheaval and dramatic downturns can be devastating. To believe that you can "ride it out" with the typical cost cutting responses will leave you unprepared for the consequences of expected structural changes that are occurring in the global economy. Developing and implementing a well thought out and sustainable strategy is essential to getting past the bad times;
� Reduce working capital requirements. Significant cash must be freed up by reducing inventory and receivable levels. These untapped cash reserves can be accessed over the near-term with usually little to no capital investment required by undertaking initiatives involving optimizing the planning tools of management information systems typically in place but under-utilized or poorly understood;
� Reduce operational costs. Stream�lining your organization and improving business process efficiencies will free up cash requirements. Once again, this usually results in immediate cash flow improvements;
� Adapt to meet shifting customer needs. Needs of customers change during difficult market conditions. Your pricing strategies, credit terms, product mix and service offerings may need to change with them. Being prepared to show customers that you can be flexible in these areas and that you will help them during the difficult times can gain you much sought after customer loyalty.
� Improve credit worthiness. Use the above strategies to improve credit worthiness by reducing debt and strengthening your balance sheet. Bankers are looking much harder at these factors in today's economic environment. Good credit worthiness and a strong balance sheet translate into a decisive competitive advantage in the marketplace, especially during these difficult economic times.
� Seize upon game-changing opportunities. Be ready (and able) to identify and move on the "right opportunities" such as geographic expansion, new industry sectors, new products and acquisitions among others. These actions will address near-term revenue shortfalls and help position your business to capitalize upon the upturn in the economy when it arrives.
The global coatings market is a large and important part of the global economy and has enjoyed significant growth over the past five years. At present, however, the coatings market faces challenges as a result of the current economic conditions. Decline in overall economic activity, construction spending and manufacturing output have all had a negative impact on coatings demand. This downturn is likely to continue to at least mid- to late-2009. Western economies, and thus coatings demand in those regions, have been particularly hard hit as these economies have fallen into full-blown recession. Once booming areas like China and India will still show positive growth, but at a much lower rate than has been experienced of late.
Over the mid- to long-term, the forecast for the coatings industry is positive. The coatings market will rebound as does the global economy. If the recovery occurs as is currently predicted, the coatings market will approach $120 million by 2012. Growth, however, will vary significantly from region to region and across the end-use segments. In order to enjoy this predicted prosperity, companies must be able to survive the short-term crisis by limiting exposure to the market downturn and by positioning themselves to take advantage of the inevitable upturn.
In early 2008, the International Paint and Printing Ink Council (IPPIC) retained Orr & Boss to prepare a comprehensive, in-depth market analysis entitled, Global Paint and Coatings Industry Market Analysis Report (2007 � 2012). Coatings market data presented in this article is based on the intensive market research conducted for the completion of this study of the global paint and coatings industry. For the purposes of the IPPIC report and for this article, the global paint and coatings industry has been segmented into, studied and presented according to the market sectors listed in Table 1.
Market overview
Decorative coatings are the largest of the major segments representing approximately 51% of the global volume and 43% of the global coatings value. The balance of the market is distributed across the nine industrial market segments with general industrial being the largest, comprising roughly ten percent of the volume and 11% of the market value. Chart 1 details the market distribution by volume and value of the industrial segments.
Representing more than 35% of the total global coatings volume, Asia-Pacific has become the largest geographic region. Europe is the next largest region at nearly 30% of the global volume. NAFTA trails Europe and makes up 21% of the volume. The balance of the market volume is split between Latin America and the rest of the world (ROW). Market distribution based on coatings value varies from the volume distribution. Europe is the largest region in terms of coatings value, representing approximately 35% of the market volume. Asia-Pacific trails Europe and comprises roughly 31% of the global value. As with volume, NAFTA is the third largest region making up approximately 24% of the market. Latin America and ROW split the balance.
Economic influences
There are a number of factors that affect coatings demand. Three major determinants are overall economic activity, construction levels and by the quantity of specific end-use products manufactured such as automobiles, furniture and containers. The period 2002 to 2007 saw significant growth in the global economy with global GDP expanding at a compound annual rate of more than seven percent. The growth rate fell to less than four percent for 2008. In their most recent projection, the International Monetary Fund forecasts a 2009 growth in GDP of only 0.5%. This is the lowest forecast annual global growth rate since World War II. Clearly the stagnation of the global economy is having a negative impact on overall coatings demand.
Construction activity directly impacts a number of end-use markets and is a major driver of coatings demand. In addition to the decorative coatings segment, industrial maintenance, coil coatings and wood finishes are tied to construction. These end-use segments make up approximately 70% of overall coatings demand. Following years of significant expansion, the global construction market has dropped off considerably. Specifically, construction markets in leading Western economies are forecast to decline in 2009. The North American construction market is projected to shrink by roughly nine percent. The construction market in Japan is forecast to decline by seven percent and Europe is projected to decline by nearly two percent. For the near term, the decorative, industrial maintenance, coil and wood finishes markets will be negatively impacted by this decline in the construction market.
Industrial coatings demand is, by and large, driven by the demand for, and production of, the end use products. For example, transportation coatings de�mand is dictated by the number of cars, trucks and planes that are built. Unfortunately, demand for these manufactured products is down significantly. In 2008, global vehicle production declined more than five percent versus 2007 and a further decline of nearly nine percent is forecast for 2009. Trans�portation is not the only market facing a downturn. The U.S. Energy Information Administration (EIA) is projecting that the Manufacturing Index for the U.S. will fall below 2002 levels during the course of 2009.
Regional growth in coatings demand has mirrored regional economic development. Over the past five years, those regions that have seen the greatest economic growth have experienced the greatest increase in coatings demand. This is most evident in the Asia-Pacific region where both GDP and coatings volume have been growing in excess of ten percent per year. It is important to note, however, that while growth follows the overall economy, there is wide disparity in per capita coatings demand.
Growth forecast
Clearly the current global economic slowdown is having, and will continue to have, an impact on the coatings industry. The recovery of the coatings market is inherently tied to recovery in the end use segments, and thus overall economic activity, construction and manufacturing. The short-term forecast may indeed be negative, however, the medium- to long-term prospects for the industry are much more positive. While the International Monetary Fund has downgraded its 2009 global GDP forecast to 0.5% annual growth, it is projecting an annual growth of approximately three percent for 2010. This is consistent with an economic recovery occurring sometime between midyear 2009 and early 2010. Beyond 2010 the forecast is for a return to historical economic expansion levels.
This forecast is one of a number of potential scenarios and is based on the assumption that the current recession, despite being very severe, is none-the-less "typical." That is, a cyclical corrective response within the economy to such disruptive factors as over capacity, excess inventories, inflation, deflation, disruptive technological developments and regional growth among other factors. However, there are other scenarios that suggest that as regional economies are undergoing fundamental structural changes, the economic patterns of the past two to three decades were basically debt-driven and that growth is now unsustainable. This would mean that the coatings industry will have to identify those fundamental changes that are occurring and adjust regional, product and manufacturing strategies accordingly. Example, how valid is the stampede by coatings companies to open production facilities in China?
Following a difficult 2009, the construction sector is forecast to recover as this will be the basis for most stimulus plans. Construction growth, however, is unlikely to return to the high levels experienced during recent years, particularly in North America and in Western Europe. Decorative coatings and wood finishes are forecast to grow as the construction market rebounds. Industrial maintenance and protective coatings will grow in response to infrastructure spending and the recovery in non-residential construction spending. This will be particularly evident in the leading Western economies. As was previously discussed, industrial coatings will generally follow overall end use builds. Recovery in the manufacturing sector is much more difficult to forecast. In general, manufacturing growth is likely to be concentrated in the developing world.
Maneuvering through the downturn
The global economic downturn is affecting companies across the entire coating industry value chain.Raw material suppliers, formulators, distributors and applicators are all struggling to manage declining demand. Companies must take action to address the current market conditions. In order to effectively maneuver through this downturn, Orr & Boss recommends that companies focus on three key strategies: reducing operating costs, reducing working capital and managing top line sales.
To reduce operating costs companies must take a hard look at business processes, work flows and organizational structures to identify means of eliminating non-value added activities while preserving the ability to meet customer requirements. These efforts must cross all areas of the business. In addition, companies need to identify ways to reduce material and energy waste. Raw materials are by far a company's largest component of cost, so minor savings can have a major impact. Furthermore, savings related to material and energy management will immediately impact the bottom line.
Working capital requirements for specialty chemicals manufacturers and formulated products companies can be as high as 40% of sales. These requirements tie up significant resources and affect the borrowing ability of the business. Two key areas that companies can target are inventories and receivables. The challenge with optimizing these areas is maintaining service levels while reducing working capital. Lowering working capital at the expense of losing key customers is not a sustainable strategy.
The effects of the global downturn are felt across the value chain, including your customers. Their needs and expectations have likely changed as they attempt to manage these difficult market conditions. Suppliers must be able to adapt to these changes. Pricing strategies, credit terms, product mix and service offerings may need to be altered to meet these shifting needs. In addition, the present economic climate may present new market opportunities. Businesses that are able to respond will gain a competitive advantage by being well positioned when the inevitable recovery occurs.
These strategies are further described in the following six outcomes:
� Take decisive actions. A "do nothing" response to market upheaval and dramatic downturns can be devastating. To believe that you can "ride it out" with the typical cost cutting responses will leave you unprepared for the consequences of expected structural changes that are occurring in the global economy. Developing and implementing a well thought out and sustainable strategy is essential to getting past the bad times;
� Reduce working capital requirements. Significant cash must be freed up by reducing inventory and receivable levels. These untapped cash reserves can be accessed over the near-term with usually little to no capital investment required by undertaking initiatives involving optimizing the planning tools of management information systems typically in place but under-utilized or poorly understood;
� Reduce operational costs. Stream�lining your organization and improving business process efficiencies will free up cash requirements. Once again, this usually results in immediate cash flow improvements;
� Adapt to meet shifting customer needs. Needs of customers change during difficult market conditions. Your pricing strategies, credit terms, product mix and service offerings may need to change with them. Being prepared to show customers that you can be flexible in these areas and that you will help them during the difficult times can gain you much sought after customer loyalty.
� Improve credit worthiness. Use the above strategies to improve credit worthiness by reducing debt and strengthening your balance sheet. Bankers are looking much harder at these factors in today's economic environment. Good credit worthiness and a strong balance sheet translate into a decisive competitive advantage in the marketplace, especially during these difficult economic times.
� Seize upon game-changing opportunities. Be ready (and able) to identify and move on the "right opportunities" such as geographic expansion, new industry sectors, new products and acquisitions among others. These actions will address near-term revenue shortfalls and help position your business to capitalize upon the upturn in the economy when it arrives.
Summary
The global coatings market is a large and important part of the global economy and has enjoyed significant growth over the past five years. At present, however, the coatings market faces challenges as a result of the current economic conditions. Decline in overall economic activity, construction spending and manufacturing output have all had a negative impact on coatings demand. This downturn is likely to continue to at least mid- to late-2009. Western economies, and thus coatings demand in those regions, have been particularly hard hit as these economies have fallen into full-blown recession. Once booming areas like China and India will still show positive growth, but at a much lower rate than has been experienced of late.
Over the mid- to long-term, the forecast for the coatings industry is positive. The coatings market will rebound as does the global economy. If the recovery occurs as is currently predicted, the coatings market will approach $120 million by 2012. Growth, however, will vary significantly from region to region and across the end-use segments. In order to enjoy this predicted prosperity, companies must be able to survive the short-term crisis by limiting exposure to the market downturn and by positioning themselves to take advantage of the inevitable upturn.
