Total sales for home furniture and home appliances both enjoyed double digit growth in the first six months of 2017. Both export and domestic markets showed positive fast growth in these two industrial categories. However, fast growth in downstream markets did not bring profit increase to coatings producers. As the total coatings output keeps breaking historic records, the profitability of the whole industry is actually decreasing at the same time.
Tailor made and environment friendly home furniture is the new market trend. The Chinese government has set up four pilot areas which bans new investments on constructing new solvent-based coatings capacities which are less than 10 thousand tons per year. The four areas are Tianjin, Shanghai, Fujian and Guangzhou.
For coatings producer, new investments are needed for waste management or VOC control so that they can meet the requirements of new environment regulations and standards. And for downstream customers, this means their coaters need to be renovated so that they can adapt to the use of waterborne coatings or solvent-free coatings. This cost increase is difficult to be transferred fully to end-users because of fierce competition in the market.
Not only Chinese coatings producers, but also the whole coatings industry worldwide is under pressure from continuous price increase on raw materials. Asia Cuanon’s Q3 financial report shows that the company’s total sales increased by 30.53 percent over the same period of last year. The prices for emulsion, titanium dioxide and PS materials increased by 20.68 percent, 53.17 percent and 34.36 percent respectively in this period. On the contrary, the prices of their PS decoration panel and architecture coatings were either stable or even lower than before. So their profit for the first three quarters only grew by 4.46 percent over the same period of 2016. Asia Cuanon, which has its stock listed in the market in September, 2017, is a major producer and insulation panels and architecture coatings. The company also recently put their 250 thousand tons per year water borne coatings capacity into production in Chuzhou, Anhui province.
According to report released by China National Coatings Industry Association, the whole coatings industry’s profit decreased by 15.1 percent in China in the first half of this year, and 303 coatings companies did not earn any profit, and the number of unprofitable companies increased by 29.5 percent over the first half year of 2016. Reshuffling in the coatings industry will continue and will not stop until most unprofitable coatings companies retreat from the market or merge into other larger companies. But from another angle, the market is witnessing a fast growing period for some large coatings companies because of their easy access to financing and successful market strategies.
3Trees(SKSHU) achieved 40.68 percent sales increase, and 72.19 percent profit increase in the first night months of 2017. Both their engineering coatings and home decoration coatings segments grew quickly. But sales growth did not bring profitability increase for 3Tress, and their gross margin decreased by 5.4 percent to 40 percent in the first 9 months of 2017 comparing with the same period of 2016. The company signed strategic partnership agreement with Evergrande, with the latter promised to purchase no less than 1 billion yuan architecture coatings in three years. Evergrande is one of the largest real estate developers in China. 3Trees also has inked agreements for constructing new coatings plants in Anhui and Hebei, which, when completed, will create the largest domestic architecture coatings company in China.
The waste release fee will be changed to environment protection tax from next year. And the total tax charged for waste release in China is estimated to be 50 billion yuan per year. Each local government will decide their own tax ratio. This change will take the waste control out of administration system and put it into legal jurisdiction, and some provinces such as Guangdong and Guizhou are planning to raise the ratios charged on waste release. Generally speaking, the environmental pressure will be even challenging in the future for coatings companies. This, in another way, encourages merger and acquisitions between coatings companies and develops economy of scale, and pushes those technologies which are lagging behind the market trend to retreat from the market.
The resolves for the government to tackle environment problems is clear because the public will keep a close eye on the PM2.5 index and the pressure felt by the government is enormous. And it provides both challenges and opportunities for businesses. For example, the electric car industry is booming in China, and in less than half a year hundreds of electric car companies have been established in China, so the market is not short of money, and investors just need good projects, sometime even just a good concept. So although the automotive industry as a whole is growing slower than before, but growth in certain segments like electric car and SUV is leaping forward. In the coatings industry, fast development can be seen in powder coatings and UV cure coatings, both enjoying double digit growth in 2016.