Economic conditions in Europe seem to be working in favor of coatings companies.  But they are having a mixed success in taking advantage of an economic recovery to boost sales and profits.

The economies of the European Union’s 28 member states are now growing at the average annual rate of close to 2.5 percent, the fastest since the 2008 financial crisis.  “The economic expansion accelerated more than expected in the first half of 2017 (and) continues to be solid and broad-based across countries and sector,” Mario Draghi, president of the European Central Bank, told a press conference in September.

Industrial production in the EU is increasing at an even stronger annual rate in excess of three percent – its highest level since the post-2008 recession.

Among the coatings sector’s major customer markets, construction has been going through a major revival in some countries.  Germany’s construction output has been rising at its quickest rate since 2010 with robust growth in all three key segments of residential, commercial and civil engineering, according to figures from the financial service company IHS Markit.

However, levels of construction activity in Europe have been varying considerably.  In some countries production has been soaring at a double-digit percentage rate while in others it has been close to zero or even decreasing.

In the automobile sector, new automobile registrations in the EU increased by an average of 4.5 percent   between January and August this year with registrations in France going up by 9 percent and in Spain 7 percent.  But they were static in Finland and dropped by 2.4 percent in the UK, according to figures from the Brussels-based European Automobile Manufacturers Association (ACEA).

Although confidence among manufacturers in Europe is at its highest for some years, consumers’ confidence with continued high unemployment has been weak.  In the face of fluctuating demand for coatings, sales have often had to be driven by reduced prices.

At the same time the profits of coatings producers are once again being squeezed by rising raw material prices and even shortages.  Klaus Meffert, president of German coatings producer Meffert AG, commented in a recent staff newsletter that the company would be satisfied with its economic performance in the first half of the year but a matter of “concern was increasing raw material prices.”

Hikes in prices of titanium dioxide, some as high as 35 percent between mid-2016 and the summer of this year, have had the biggest impact on European coatings producers.  There were cuts in supplies of the pigment earlier this year  when a  fire shut a titanium dioxide  plant of Huntsman Corp. at Pori, Finland, and the Chinese started reducing exports of the pigment into Europe.

Coatings companies also complained that titanium dioxide suppliers were increasing or at least maintaining their inventories during a time of scarcity.

Prices of butadiene, epoxy and other resins and some solvents have also been going up, as well as those for certain additives. 

The increases seem to follow a similar pattern to those occurring during previous periods of economic upturn when rising demand has caused cuts in availability of materials, particularly of petrochemical derivatives.

Some coatings companies have announced they are taking steps to counter the effects of more expensive raw materials, although without giving much detail about what they are.

AkzoNobel revealed in a report for analysts on its first half results that it was taking “appropriate measures” to deal with higher raw material prices.  These had already been applied effectively in its speciality chemicals divisions, it said. But for its two coatings divisions in decorative paints and performance coatings it could take “several quarters before the necessary mitigating impact is fully realized.”

In the second quarter its   decorative paints business in Europe, Middle East and Africa (EMEA) suffered a seven percent drop in revenue while operating profits decreased by eight percent fall due to “higher than anticipated” raw material costs.

Tikkurila, the Finnish decorative and industrial coatings producer whose main markets are in Scandinavia and Eastern Europe, including Russia, increased sales by 3.4 percent in the first half but was hit by a 38 percent dive in operating profit.  In its business covering Russia sales went up by 19 percent in the first half but operating profit dropped by 22 percent.

The company blamed the profits fall on high raw material costs and problems with the introduction of enterprise resource planning software throughout Tikkurila’s businesses.  The ERP glitches compounded the raw materials problem because procurement of supplies was conducted through the new system.  There were times when the company could not meet demand because of lack of raw materials.

“We have initiated an extensive programme to boost profitability,” said Erkki Jaervinen, Turkkurila’s president and chief executive. It would aim to save €30 million ($36 million).

Currently of the countries outside the eurozone,  the UK is  the most vulnerable to the raw material price  rises  because of the fall in the value of  its pound  following a referendum last year in which the UK electorate  voted to leave  the EU.

A combination of a highly price competitive domestic market and higher raw material costs had had “a significant impact on profitability,” said the British Coatings Federation (BCF), representing coatings and ink producers,   in a recent analysis of  the UK market.

As the UK government negotiates Brexit – the country’s withdrawal from the EU, due to take place in March, 2019 – uncertainties about the future is undermining the confidence not only of coatings producers and other manufacturers but also consumers.

“(We are) therefore calling on government to provide clarity as we get closer to leaving the EU, and address in particular, the future of trading arrangements for our members’ products and alignment of chemical regulations,” said Tom Bowtell, BCF’s chief executive.

The impact of Brexit on consumer demand has been demonstrated by declines in decorative paints purchases.  In the first six months of 2017 volume decorative paints sales fell by eight percent, according to the BCF.

The cause of the drop is seen to be worries about the future of the housing market with mortgage approvals currently at a nine-month low and house sales at their lowest level for eight months.

The industry is concerned that the Brexit-triggered strains on the UK market could have a ripple effect on the European coatings sector.  The UK, for example, is a major decorative paints market for AkzoNobel with this year’s slump in retail paints demand in the country probably contributing to the drop in revenues and profit in its decorative business during the first half.

Brexit could be yet another factor holding the sector back from enjoying the full benefits of economic growth in the region.