According to the statistics from the China Polyurethane (PU) Industry Association, the output of PU coatings was 750 thousand tons in the first half of 2015, it grew by 7.1 percent over the same period of 2014 and the output of polyurethane adhesives and sealants is around 300 thousand tons in the first six months of 2015, equal to the same period in 2014. The main downstream markets for polyurethane coatings, including furniture and floors, automotive and construction as well as transportation, all slowed their growth in 2015. The automotive market in 2015 only grew by 4.7 percent, compared with 7 percent in 2014. Although the market demand for houses and apartments was still growing, the total area for new constructed houses and apartments in 2015 decreased by over 14 percent, coinciding with the central government’s strategy of reducing inventory in the real estate market in the hope of reviving this important market, a major pillar to China’s economy.
On the contrary, all the upstream markets for polyurethane, including MDI, TDI, PO, AA and BDO, are facing some level of oversupply challenges. But the whole PU industry still sees new capacities coming. In August 2015, BASF started production of MDI at its wholly owned company in Chongqing, the largest municipality city in west China. BASF invested $1.25 billion to build the 400,000 tons/year MDI facility since 2011. BASF said the new MDI facility will support the key industries in the western parts of China.
According to the statistics of China Polyurethane Industry Association, total MDI capacity in China was over 3 million tons per year in August 2015. Wanhua Chemical, the largest MDI producer in China, generated a net profit of 1.4 billion RMB (about $220 million) in the first half of 2015, 27.5 percent lower than the same period of 2014. The prices of most raw materials for polyurethane production have been experiencing a downward spiral since the second half of 2015.
Niche markets offer precious growth opportunities
The soft downstream markets, along with stricter government regulations, pushes polyurethane coatings companies to advance their production technologies, develop and introduce waterborne polyurethane coatings and explore new potential markets to release their existing capacities.
For example, foreseeing the growing demand for high quality and safe materials for sportsground in China, especially when poisonous sports tracks raised public concerns to the health of school students, BASF quickly introduced into China their polyurethane solution. It is a polyurethane system which combines coatings, adhesives and rubber particles together. By targeting the market of outdoor sports tracks and indoor sports floors, BASF cooperates with local companies to standardize their installation services by controlling qualification certifications in order to make sure BASF’s products are delivered with a high quality to the end users.
Facing the same market pressure, domestic coatings producers also speed up their product upgrading process. And some of them use the capital market to help them achieve this objective. A major coatings and ink supplier for major toy producers including Mattel, Lego, etc., Yonghui Chemical listed their stock in the national share transfer system since March 12, 2015. Yonghui Chemical said the company will use the new raised capital to enter the children’s wood furniture and home decoration markets. Although the toy market in Guangdong province has been shrinking for several continuous years, Yonghui’s business has kept growing. In the first half of 2015 Yonghua’s sales was increased by 4.29 percent over the same the period of 2014. But they are also clear that the plastic and wood coatings produced by Yonghua are mainly solvent-based, so the new capital will help them add new production lines to get into new market segments and develop more environmental friendly products.
Waterborne varieties will take over more market share
Although developing waterborne coatings is the market trend in China and waterborne PU coatings is taking over their solvent counterparts in more and more applications, waterborne PU coatings are only popular on leather products and solvent-based nitro, PE and PU coatings still control wood furniture market at the moment. Similar to the trend in other downstream markets for polyurethane coatings, China’s wood furniture output was decreased by 1.86 percent from January to October in 2015. As the wood furniture market is getting saturated, the competitiveness of the wood coatings producers depends on the extent of a company’s ability to adapt to fast changing market environment.
In 2015 several international coatings companies including Nippon Paint and Dulux of AkzoNobel introduced new waterborne wood coatings into the Chinese market. Nippon Paint also announced the establishment of a new business unit to provide a one stop shop solution, including PU, PE and NC wood coatings as well as colorants, to wood furniture market in China. Valspar opened in 2015 a new major coatings manufacturing center in Tianjin, China. The new production facility features expanded capacity for waterborne coatings products with fully automated production and high-speed filling lines. This multi-purpose facility supports Valspar’s customers in three of Valspar’s business divisions, including consumer paint, wood coatings and industrial coatings.
Besides wood coatings, Axalta, PPG, AkzoNobel and BASF, also established new waterborne automotive coatings production facilities recently to meet new market demand in China.
Fast growing railway industry creates a new battlefield
Following continuous investments in the construction of high speed trains and subways, many companies trying to grab this business opportunity developed and launched their own products to target this new market segment. It is estimated that China will have a total railway length of 18 thousand kilometers which can support the operations of trains with a speed of equal to or over 200 kilometers per hour by 2020, about half of the total high speed railway length worldwide. PU coatings are widely used in the painting of high speed trains, so the total market for PU coatings from high speed train sector is huge. But the competition can only be won by qualified companies. Spray polyurea coatings used to be widely applied in the railway construction as a major waterproofing material. At a time, so many companies got into this category, driving the bidding price very low. Since quality issues were found in several finished railway and subway lines, polyurea waterproofing coatings has been prohibited from China Railway‘s official bidding process in high speed railway construction. This proves that high quality instead of low cost is the key to win market competition. Coatings companies, especially those who are new entrants, need to aim for long term growth instead of short term business interests.