European Coating Industry is Out of an Energy Crisis, but Problems Keep Brewing

Skyrocketing energy prices have hit the European coatings industry hard, triggering a production decline particularly noticeable in the fourth quarter of 2022. Fortunately, apocalyptic forecasts voiced at the end of last year were not destined to come true, but it would be too early to say that the storm has already passed.

Skyrocketing energy and natural gas prices could drive de-industrialization in Europe, according to a last year’s study by Strategy& consulting agency, a subsidiary of PwC. “In the future, many companies could decide to reorganize their production within Europe or to withdraw entirely from Europe,” commented Strategy& Europe boss Andreas Späne.

The biggest problems were predicted for the energy-consuming sector: automotive, metals, and chemical industries. Countries heavily dependent on Russian oil and gas, such as Poland, were said to be in a particular bad position. France and Spain, on the other hand, saw a comparatively moderate rise in production costs thanks to a higher share of nuclear power and renewable energies in the energy mix.

The coatings industry has been affected directly by soaring energy prices and indirectly through rising costs and supply disruptions of raw materials, commented Aleksandra Svidler, economies consultant at London-based think tank Euromonitor International.

The direct impact of the European energy crunch has been particularly pronounced in countries that are heavily reliant on energy imports, such as Germany and Italy. For example, in Germany, which boasts the largest coatings industry in Europe, producers of paint and varnishes witnessed a 143% spike in spending on gas and a 21% surge in electricity costs between 2020 and 2022, Svidler said.

“Weighed by the combination of skyrocketing costs and worsening economic situation, the production volume of paints and varnishes in Germany shrank by 8.0% over 2022,” Svidler added.

Moreover, she added, the coatings industry has been indirectly affected by rising costs and supply disruptions of input materials. This is especially true for energy-intensive chemical products, which account for roughly one-third of total costs among paint and varnish producers in major European markets, such as Germany, the UK and France.

According to the German chambers of Commerce and Industry (DIHK), more than one in four German chemical producers was forced to cut back production last year due to high energy prices, which added extra pressure on costs and the supply of intermediate materials for coatings producers.

Looming Risks

Although energy prices have retreated from last year’s highs, especially for natural gas in Europe, they still remain at historically elevated levels, Svidler pointed out. High energy and raw material prices have been considered among the top risks by more than 80% of German chemical manufacturers, as revealed by a survey conducted by DIHK in the early summer of 2023.

Thanks to mild weather, energy conservation efforts and strong LNG imports, Europe has come out with higher-than-expected natural gas storage rates, which helped to substantially reduce price pressures in the market. According to the Gas Infrastructure Europe association, EU gas storage was 55.7% full on April 1, 2023, when the bloc officially ended the 2022-2023 heating season, which is well above the five-year average of 34.8% during the same period. As a result, average prices of natural gas in Europe fell in March 2023 to the lowest level since July 2021.

Although the current gas supply balance in the EU is more favorable on solid storage volumes, demand reduction efforts need to be sustained through 2023 to help the EU replenish the storage before the next winter season, according to Svidler. The EU countries agreed to extend the voluntary deal to cut average gas demand by 15% for one more year until March 2024 in order to ease the European gas supply-demand balance, yet this target may become mandatory if the market conditions become too tight.

“Fuller-than-expected reserves, softer prices, and efforts to limit consumption are set to make it easier to meet the European Commission’s gas storage target of 90% by 1 November 2023. However, lack of Russian gas supplies in 2023 and potential tightness in global LNG supply are some key downside risks for European buyers, with the global LNG availability affected by rising competition from China,” Svilder said.

Cost-of-Living Crisis Unfolds

In 2023, the European coatings industry could see problems on the consumer side, according to analysts, as rampant inflation forces consumers to urgently revise their budgets. To some extent, this might be considered a consequence of the last year’s energy crisis, especially since the countries reporting the highest inflation figures are those from Eastern Europe, which used to have the heaviest dependence on the Russian hydrocarbons import.

For instance, the highest annual rates of inflation in the EU were recorded in Hungary (25.6%), Latvia (17.2%) and Czechia (16.5%), according to Eurostat. The figures are similar in Estonia (15.6%), Poland and Lithuania (both at 15.2%).

With consumer purchasing power continually squeezed by high price pressures, household spending in Europe is anticipated to remain subdued, eventually leading to weaker demand for coatings used in the manufacturing of a wide range of consumer goods, Svidler said.

In fact, 32% of Euromonitor’s Lifestyle Survey respondents in Europe plan to decrease their overall spending over 2023 compared to 23% last year.

“Alongside high inflation, rising interest rates also hurt consumer affordability and discourage them from undertaking home renovations or purchasing new properties, indirectly impacting the demand for coatings used in construction and home improvement projects. According to Euromonitor International forecasts, consumer expenditure on maintenance and repair of dwellings in Europe is projected to shrink by 0.9% year on year in 2023 in real terms,” Svidler stated.

One of the key problems of the cost-of-living crisis is that increased household price sensitivity will also make it more difficult for producers to pass on elevated costs to consumers, according to Svidler.

Recovery is Not Around the Corner

According to Euromonitor International forecasts, the production value of the paint and varnish industry in Europe is expected to shrink by -1.1% over 2023 in real terms as the global economic slowdown, elevated costs and persisting uncertainty in the energy markets will continue to subdue industry growth.

The latest findings of the monthly business survey conducted by the European Commission have also confirmed a weakening in both global and local demand for chemicals, as chemical producers in the EU have been facing challenges with declining orders over the past few months, both domestically and internationally, alongside a notable rise in the inventory levels of finished products.

“The situation is expected to gradually improve over the next few years, however, with the assumption that current price and supply pressures moderate and the ongoing macro-economic uncertainties abate,” Svidler said.

For example, over the next five years, the turnover of the European construction and automotive industries is forecast to grow by 5.6% and 7.0%, respectively, in real terms, thus supporting the demand for coatings. In addition, over the medium- to long-term, the expected push in investment towards the clean energy transition will also support demand for coating solutions for renewable energy equipment, energy-efficient machinery, transport and buildings, and the hydrogen infrastructure, to name a few,
Svidler added.

The energy crisis has led to higher production costs, impacting profitability, weighing on business confidence and hindering expansion plans. Moreover, rising interest rates have put extra pressure on companies’ ability to finance their capital investment projects, according to Svidler. For example, in 2022, expenditure on construction activities and machinery among German paint and varnish producers already declined by 3.5% and 1.6%, respectively, while in France, it dropped by 12.9% and 10.3%, respectively.

“As financial conditions continue to tighten in the region, high borrowing costs will further limit businesses’ capacity for capital expenditures,” Svilder said, adding that, on the other hand, despite the challenging economic environment and tighter financial conditions, companies are encouraged to invest in energy-efficient solutions and alternative energy sources, such as renewables, to mitigate the impact of the current crisis and improve resilience to future potential energy market shocks.

“However, the European coatings industry’s outlook remains clouded by several key challenges, including intensifying environmental and safety regulations, the burden of bureaucratic processes and potential fluctuations in raw material costs and supply,” Svidler added.