Rising Raw Material Prices Could Spark Increased Consolidation for European Coatings Companies

Coatings producers in Europe have been protesting vociferously about steep rises in raw material costs over the last few months as the region is threatened with a spate of inflation in the wake of oil price rises and currency fluctuations.

The increasing costs could squeeze margins in the coatings sector strengthening the trend toward more consolidation in an effort to improve profitability.

The specter of a period of inflation putting pressure on earnings could have been a factor behind the bid by PPG Industries of the U.S. to take over Dutch-based  AkzoNobel, the European market  leader in decorative paints with a strong position also in industrial coatings.

In February AkzoNobel reported falling sales and profits in its fourth quarter and full year results. Its performance coatings sales dropped by 5 percent in the full year 2016 to €5.7 billion ( $ 6.2 billion) while its operating income fell 4 percent to €759 million.  Decorative coatings revenue decreased by 4 percent to €3.8 billion but its operating income went up 3 percent to €357 million with the help of costs controls.

PPG’s €21 billion ($23 billion) unsolicited bid in early March was rejected by AkzoNobel’s management, which responded with an announcement that it would create value itself by spinning off its speciality chemicals business which accounts for around a  third of total turnover.

Previous to PPG’s acquisition move AkzoNobel revealed that it was planning a set of comprehensive measures to   deal with higher raw material and other input costs.

“We are likely to see higher year-over-year input costs in 2017 due to the inflationary environment,” Ton Büchner, AkzoNobel’s chief executive, told an annual results investors’ meeting. “We are taking appropriate measures to deal with higher raw material prices in an inflationary environment.”

Coatings producers in Europe face the problem of how to put up prices to offset higher costs when demand in the region only matches, at best, a GDP growth rate of 1-2 percent. 

Also, such is the structure of the supply chains for coatings raw materials in Europe that even a small rise in demand puts pressure on the availability of certain key chemicals causing quick movements in prices.  But customers will not consider the demand increase strong enough to warrant prices rises for coatings.

AkzoNobel reported that in the fourth quarter of last year revenues from the price/mix for performance coatings  fell by 3 percent and for decorative paints by 2 percent.

The surge in raw material costs is a test of the resilience of  coatings producers  because the rapidity of the price  rises has made it even more difficult to pass them on to customers.

Throughout much of last year chemical prices, at least in Europe, were declining, particularly those for bulk petrochemicals which provide the building blocks for many of the chemicals used in coatings formulations.

The Brussels-based European Chemical Industry Council (Cefic) issued figures in March (2016) showing that average prices of chemicals declined by 3 percent in January-November last year.

However, since late 2016 a number of factors  have combined to trigger an  increase in raw material prices of unusual  rapidity.

“Such price dynamics over such a short period have rarely been seen ( before), ” said Martin Engelmann, director-general of German Paint and Printing Ink Association (VdL), who estimates that the price rises will add  around € 200 million to the German coatings  industry’s costs.

BASF, the German-based leading chemicals producer which is both a raw materials supplier and a coatings producer, estimated in February that basic chemicals prices were already 40 percent higher than a year ago while during 2016 they had dropped by 11 percent.  “The price rises will continue in the first and second quarters of this year,” Hans-Ulrich Engel, the company’s chief financial officer, told BASF’s annual press conference at Ludwigshafen, Germany.

The big driver behind the increase has been the hike in oil prices which soared to a new high of over $50 per barrel in three months. This compared with $32  in early 2016  – an increase of 60 percent.

Higher oil prices have precipitated increases in prices of intermediates and other petrochemical derivatives which have been aggravated by currency changes particularly a stronger U.S. dollar.

In addition, in Europe and in China, which is a major supplier of organic pigments, there have been plant shutdowns caused by accidents and, in the case of China, a tightening of environmental regulations.

Exchange rate changes have been particularly severe in countries like the UK where  a referendum vote in favor of leaving the European Union in mid-2016 led to a 15-20 percent drop in the value of   the  pound  against  the dollar  and around 12 percent against  the euro.

UK raw material prices generally increased by 21 percent in January this year to register the biggest rise in five years, according to the country’s Office for National Statistics (ONS).

“These latest findings indicate a dramatic change, with the current rate of increase being five times greater than the 4.2 percent rise seen just 6 months ago back in July last year,” said Tom Bowtell, chief executive of British Coatings Federation (BCF).

In the UK some of the biggest price increases have in solvents. The BCF’s most recent raw material prices survey for January 2017 show the three-monthly average prices for acetone going up 61 percent,  n-butyl acetate up 40 percent  and methyl isobutyl ketone (MIBK) 20 percent.

In the eurozone which covers most of the EU’s 28 member states, the price rises have been less steep.  The VdL records a 6-percent rise since mid-2016 in Germany for  binders based on acrylic, epoxy or alkyd resins, a 12 percent increase for solvents and 20 percent for zinc dust.

Similar price  rises have been reported in the neighbouring eurozone-member  Austria. “The chemical industry has to expect even more price increases on raw materials (with) further uncertainties and fluctuations,” said the Austrian Chemical Industry Association (FCIO), which represents coatings producers.

Among the biggest prices rises have been those for titanium dioxide which accounts for a large proportion of most coatings companies raw material costs.  Since late last year in the eurozone countries TiO2 prices have gone up by over 15 percent while in the UK they have risen by 22 percent.

Part of this increase was due to a fire in January stopping production at a TiO2  plant at  Pori, Finland, owned by Huntsman Corporation of  the U.S.  The incident could have a big impact on TiO2  prices in Europe throughout 2017.

But TiO2 producers,  like suppliers of other important chemicals in coatings formulations, are also suffering from rises in their own raw material costs and are also determined to compensate for a period of low prices for their products. 

The coatings industry could be facing a time when finding ways of combatting  rising raw material cost will be a big priority.