The consensus among European coatings companies and their suppliers is that the sharp drop in demand for paint is levelling out. But because of short-term economic uncertainties they are still not confident about the future trends in sales in the coming months.

Instead companies are continuing with policies adopted early in the recession of cost cutting and other initiatives to ensure that at least they maintain their margins during a period of falling revenues.

“We think that the downturn seems to have bottomed out and that there seems to be stabilization at a low level,” said Kurt Bock, chief financial officer at BASF of Germany, a leading coatings producer and supplier of coatings raw materials. “But we see no signs of a sustained upturn,” he told a conference call on the company’s half-year results.

BASF Coatings’ sales dropped 18% in the second quarter and by 22% in the first half of the year. The company described the demand for automotive and industrial coatings as “dramatically lower” in the second quarter.

Yet its coatings business was able to achieve stable margins during the quarter as a result of lower fixed costs due to restructuring measures. A loss in the first quarter was turned into a profit in the second.

AkzoNobel was even more cautious, particularly since its sales levels were still well below those in 2008. “With the exception of some emerging markets, we see little significant recovery of growth,” said Hans Wijers, the company’s CEO. “Due to the continuing economic uncertainty, forward visibility still remains limited. Therefore management actions continue to focus on customers, costs and cash.”

The company’s interim results confirmed big falls in sales compared to a year ago but improvements on first quarter figures. Revenue from decorative paints was down by five percent in the quarter against 11% in the first quarter. A 13% margin for earnings before interest, tax, depreciations and amortization (EBITDA) in decorative sales compared well with a 14% margin in the same period last year.

In AkzoNobel’s performance coatings operation, the EBITDA margin actually went up in the second quarter from that of a year ago—from 13% to 15.8%. This was despite a 14% drop in sales in the second quarter, with a fall of 19% by volume being offset by price rises averaging five percent.

Other coatings companies also reported second quarter results which, although showing sharp declines over figures of a year ago, were better than the first quarter’s. Tikkurila, the coatings division of Kemira of Finland, recorded sales 46% higher than the first quarter’s and an operating profit which was more than five times higher.

These improvements reflected progress in the performance of some key parts of the European economy since the beginning of the year.

“The European economy as a whole seems to have turned the corner,” said Alan Eastwood, economic advisor at the UK’s Chemical Industries Association (CIA) and head of an economic forecasting group at the European Chemical Industry Council (Cefic). “Some of the figures on GDP growth within individual countries in the second quarter have turned out to be much more positive than expected.”

In the 27 member states of the European Union, GDP declined by 0.3% in the second quarter compared to the previous quarter but in the first quarter the quarter-by-quarter fall was 2.4%.

Significantly the economies of France and Germany, the two largest in Europe, each grew by 0.3% bringing to an end a yearlong recession in both countries.

In Germany, the heartland of Europe’s manufacturing sector, exports rose by seven percent in June, the biggest increase for nearly three years. The Bundesbank, the country’s central bank, said that “the improvement of foreign demand (was) an important precondition for a further gain in corporate confidence.”

However the UK and Italy, two of the EU’s other big economies, registered GDP decreases of 0.8% and 0.5% respectively in the second quarter although the declines were lower than in the first quarter.

“The UK economy is moving in the right direction but, as elsewhere in Europe, a lot of the recovery in manufacturing appears to be coming from restocking after a period of destocking,” said Eastwood. “It is still unclear whether this shows a revival of underlying demand which will boost sales of paints and other downstream products. The problems of tight credit and rising unemployment are still holding back demand.”

Across Europe—including in the UK—falls in output of cars have been eased by government schemes giving automobile owners financial incentives to scrap old vehicles to buy new ones.

The number of new car registrations in Europe went up by 2.4% in June, the first rise for 14 months, according to figures from the association of European automobile manufacturers (ACEA).

The construction industry—another key customer sector for coatings producers—appears to be picking up as well. In the UK where construction activity has been badly hit by the recession, confidence among purchasing managers in building companies reached its highest level this summer since the spring of 2007.

Analysts are predicting that over the next few quarters the European construction sector will start to benefit from economic stimulus measures by European governments.

The retail segment for decorative paints, serving the DIY market, has been more resilient in Europe in recent months than that for the professional trade, according to AkzoNobel. As a result there were double-digit declines in decorative sales in Eastern Europe where DIY is less prevalent. But elsewhere in the Europe—like in strong DIY markets like the UK—retail paint sales have been more stable

Nonetheless, despite brightening prospects in major coatings sectors in Europe, coatings companies are treading carefully.

BASF Coatings, for example, is planning to continue with short-time working for around 1,000 staff at its two main German plants in Muenster and Wuerzburg. “In July, we extended short-time working for another six months until the end of January 2010,” said a company spokesman. “At this time no decision has been taken as to whether or not we are going to discontinue our short-time working arrangement.”

Like other companies in the coatings sector, BASF is anxious about the unpredictability of the economies of Europe and elsewhere. “There is still the danger of another painful setback due to overcapacities, bankruptcies and growing unemployment,” said Bock.

Latin America

Colombian paint and coatings manufacturer Inversiones Mundial has strengthened its position in the Caribbean through the purchase of additional shares of Curacao-based Macomoca N.V. from De Colores N.V. for an estimated $1.7 million. The investment raises Inversiones Mundial’s equity in the company to 75%. Venezuela’s Corporation Grupo Quimico SACA has also held a 25% share in Macomoca.

Among the company’s subsidiaries is Compania Global de Pinturas, or Pintuco, which operates in the Netherlands Antilles as Compania Pintuco Aruba y Curazao C.A., using the Antilliaanse Verffabriek B.V., or AFV Paints brand.

Inversiones Mundial, a diversified company, which also made an investment in a Brazilian pipe company, recently has indicated that it has a diversification strategy and a potential investment budget of up to $100 million, but is moving cautiously during this economic period, according to statements by company president Javier Jaramillo Velasquez to Colombia’s Colprensa. Apart from Curacao, the company also has manufacturing facilities in Ecuador and Venezuela, as well as commercial offices in Honduras, Panama and Peru. Global de Pinturas also is a member of the Color Marketing Group.

Under the Pintuco brand, the company has launched a 50th anniversary color collection of its Viniltex architectural paints, and is marketing it through retail centers including mall installations in Medellin. Among other marketing efforts, the company has also set up a 35-page netbook oriented to retail Acriltex customers (see http://www.nxtbook.com/ml/TDE/vivaElColorEd9/index.php) with a wide selection of residential settings and color themes, encompassing both paint and wood coatings. The company offers Acriltex test quarts in bright green plastic containers.

While the Colombian economy has slowed this year, Inversiones Mundial’s sales are expected to rise by close to ten percent, which is a decline from the 14% expansion in the prior year, Jaramillo suggested to the press. The company holds a 60% share of the Colombian paint market, he indicated. All segments of the company, including paint and coatings, generate $1 billion in sales and employ 5,000, Colprensa reports.

Other press reports suggest that Jaramillo plans to retire in late September; Ernesto Fajardo Pinto, who has ties to Monsanto, has been tapped to replace him.

Curacao is the economic center of the Neth­erlands Antilles islands, where the primary industry is refining Venezuelan crude oil. While the Netherlands Antilles paint and coatings market is not large, there are a variety of manufacturers located there. On Curacao’s sister island of Aruba, an architectural-oriented manufacturer is Car­ibbean Paint Factory Aruba Inc.