08.02.17
Each quarter, Northcoast Research surveys a large sample of paint contractors to get a sense for current business trends while United Mineral & Chemical Corp. (UMC) provides insight into coatings raw material trends. Please note that of the three primary architectural paint channels (paint stores, home centers, and independent distributors), the contractor survey results are largely a proxy for the paint store channel. For inquiries regarding the results of the survey please contact Kevin Hocevar at 216-468-6924 or kevin.hocevar@northcoastresearch.com. For inquiries regarding raw materials please contact Dave Kotowski at 216-577-1982 or dkotowski@umccorp.com.
Contractor Sales — MSD Sales Growth in 2Q17
The cumulative responses to the question of “How do your sales in April, May and thus far through June of 2017 compare to your sales during the same time last year”, show that the market appears to have grown solidly from the prior year. 67% of contractors experienced a higher level of sales YoY. 17% of contractors described their sales as “Flat”, while 16% experienced a YoY sales decline in the period. These metrics produce a net increase (percent of contacts who experienced higher sales in the period minus the percent of contact who experienced lower) of 51%. Sales grew an average of 5%.
Price of Paint from Suppliers — 2017 Price Increases Have Not Slid Sequentially from 1Q17
When describing paint purchase prices YoY, 67% of respondents noted pricing as being higher compared to the prior year while 7% noted prices being lower. The remaining 26% described pricing as flat from the prior year. The net number of contacts seeing higher pricing YoY first jumped in 4Q16 as the SHW price increase took effect December 2016, however this jumped even more in our 1Q17 results as the remaining manufacturers’ price increases took effect and has remained relatively constant sequentially in our 2Q17 survey. On average, contacts indicate pricing is up 3.0% YoY in 2Q17, consistent with our 1Q17 survey.
Raw Materials Pricing and Supply Update
As we enter the third quarter, global pricing for TiO2 continues to be on an upward trend. Depending on many variables, coatings industry players may have endured $0.40 to $0.50/lbs in cumulative increases during the last 6 to 7 quarters (30-40%). During this period, the industry witnessed the merger of the two largest Chinese TiO2 producers, Henan Billions and Lomon. This and other Chinese environmental / government led initiatives has allowed prices to increase more rapidly in China than in the North American market. We see the Chinese market settling down as we proceed through the second half of 2017. It was also announced that Tronox will acquire Cristal. This merger will form the first or second largest global producer of TiO2. Consolidation in the "chemical" industry continues to impact pricing and the supply channels to the coatings industry. There does not seem to be anything to stop this M&A trend. However, there is a little light at the end of the TiO2 tunnel. This will not come in the form of TiO2 price decreases, but we do see prices stabilizing at their current levels (or just above) as we enter 2018. 2017 will be a big transition year. Price levels will be affected more by demand than by supply. We believe smaller Chinese suppliers will come back on line at the higher price levels. They will have environmental hurdles to overcome to do so. Part of the price stabilization thought process is based on this expected increase in Chines ouput.
Early in Q4 2016, OPEC made a valiant effort to lower the output of crude oil to increase the price. This tactic worked for approximately 4 months. During this period, the price of crude oil remained stable in the $53-56 range. Even as this article is being written, crude has fallen to around $42 a barrel. Over time this should be good news for resin buyers. Propylene is on a downward trend as a result of falling crude prices. The short term supply shortages on Styrene Monomer and Methyl Methacrylate have ended or are close to subsiding. Acrylic Acid and Ethyl Acrylate have fallen off their recent high price levels. The near term outlook for solvent and resin prices looks to be on lower side of the recent curve. This piece to the raw material cost model should help paint margins in the coming quarters.
3-Month Outlook — Strong Enthusiasm Carries Over into 2Q17
At 75%, most contractors believe that business trends are improving/will improve over the coming months. Only 25% described their outlook as “Neutral” (business trends will stay about the same) while none responded in the negative territory. In asking this question, we attempt to gauge actual expectations for the coming months based on how business has been trending as of late and based on leading indicators such as contractor backlogs, bidding activity, and any other relevant factors. Given no responses in the negative, a net 75% of contacts are feeling good about the upcoming months. In our prior survey, no contacts responded in the negative territory as well. Our contacts described increased levels of bidding activity and backlogs as the primary drivers behind their positive outlook for the coming months. In terms of what’s driving the increased bidding activity/backlogs, many contacts cited renewed consumer/business confidence which is having a positive impact on spending, exterior paint business booking out further than usual, and general strength in the economy. Limiting the upside however is a lack of competent painters which has been a headwind for some time.
Northcoast Research 2Q17 Paint Contractor Survey Data by region:
Contractor Sales — MSD Sales Growth in 2Q17
The cumulative responses to the question of “How do your sales in April, May and thus far through June of 2017 compare to your sales during the same time last year”, show that the market appears to have grown solidly from the prior year. 67% of contractors experienced a higher level of sales YoY. 17% of contractors described their sales as “Flat”, while 16% experienced a YoY sales decline in the period. These metrics produce a net increase (percent of contacts who experienced higher sales in the period minus the percent of contact who experienced lower) of 51%. Sales grew an average of 5%.
Price of Paint from Suppliers — 2017 Price Increases Have Not Slid Sequentially from 1Q17
When describing paint purchase prices YoY, 67% of respondents noted pricing as being higher compared to the prior year while 7% noted prices being lower. The remaining 26% described pricing as flat from the prior year. The net number of contacts seeing higher pricing YoY first jumped in 4Q16 as the SHW price increase took effect December 2016, however this jumped even more in our 1Q17 results as the remaining manufacturers’ price increases took effect and has remained relatively constant sequentially in our 2Q17 survey. On average, contacts indicate pricing is up 3.0% YoY in 2Q17, consistent with our 1Q17 survey.
Raw Materials Pricing and Supply Update
As we enter the third quarter, global pricing for TiO2 continues to be on an upward trend. Depending on many variables, coatings industry players may have endured $0.40 to $0.50/lbs in cumulative increases during the last 6 to 7 quarters (30-40%). During this period, the industry witnessed the merger of the two largest Chinese TiO2 producers, Henan Billions and Lomon. This and other Chinese environmental / government led initiatives has allowed prices to increase more rapidly in China than in the North American market. We see the Chinese market settling down as we proceed through the second half of 2017. It was also announced that Tronox will acquire Cristal. This merger will form the first or second largest global producer of TiO2. Consolidation in the "chemical" industry continues to impact pricing and the supply channels to the coatings industry. There does not seem to be anything to stop this M&A trend. However, there is a little light at the end of the TiO2 tunnel. This will not come in the form of TiO2 price decreases, but we do see prices stabilizing at their current levels (or just above) as we enter 2018. 2017 will be a big transition year. Price levels will be affected more by demand than by supply. We believe smaller Chinese suppliers will come back on line at the higher price levels. They will have environmental hurdles to overcome to do so. Part of the price stabilization thought process is based on this expected increase in Chines ouput.
Early in Q4 2016, OPEC made a valiant effort to lower the output of crude oil to increase the price. This tactic worked for approximately 4 months. During this period, the price of crude oil remained stable in the $53-56 range. Even as this article is being written, crude has fallen to around $42 a barrel. Over time this should be good news for resin buyers. Propylene is on a downward trend as a result of falling crude prices. The short term supply shortages on Styrene Monomer and Methyl Methacrylate have ended or are close to subsiding. Acrylic Acid and Ethyl Acrylate have fallen off their recent high price levels. The near term outlook for solvent and resin prices looks to be on lower side of the recent curve. This piece to the raw material cost model should help paint margins in the coming quarters.
3-Month Outlook — Strong Enthusiasm Carries Over into 2Q17
At 75%, most contractors believe that business trends are improving/will improve over the coming months. Only 25% described their outlook as “Neutral” (business trends will stay about the same) while none responded in the negative territory. In asking this question, we attempt to gauge actual expectations for the coming months based on how business has been trending as of late and based on leading indicators such as contractor backlogs, bidding activity, and any other relevant factors. Given no responses in the negative, a net 75% of contacts are feeling good about the upcoming months. In our prior survey, no contacts responded in the negative territory as well. Our contacts described increased levels of bidding activity and backlogs as the primary drivers behind their positive outlook for the coming months. In terms of what’s driving the increased bidding activity/backlogs, many contacts cited renewed consumer/business confidence which is having a positive impact on spending, exterior paint business booking out further than usual, and general strength in the economy. Limiting the upside however is a lack of competent painters which has been a headwind for some time.
Northcoast Research 2Q17 Paint Contractor Survey Data by region:
