Coatings World - July 2008

International Coatings Scene

EUROPE

BY SEAN MILMO

EUROPEAN CORRESPONDENT

MILMOCW@RODPUB.COM

Currency trends issues
A look at
how currency
trends are
affecting and
influencing
the chemical
and coatings
industries.

European coatings companies, like other paint manufacturers across the world, are coping with a flood of increases in prices of their raw materials.

But most European producers, particularly those based in Western Europe, do have the advantage of having domestic currencies, particularly the euro now covering 15 countries, which have over the past year considerably appreciated against the U.S. dollar.

Many chemicals used in coatings formulations are priced in dollars.

The strong euro, Swiss franc, the various Scandinavian kroner currencies and to a lesser extent the UK pound have given coatings companies greater flexibility with their margins than competing paint producers outside Europe have, especially those in North America. Over the past year the euro itself has risen on the foreign exchange markets by approximately 20% against the dollar.

The currency benefit is also enjoyed by other downstream sectors in Europe but it can be valuable to coatings producers because of large numbers and variety of chemicals they use in their formulations.

“Chemicals imported from outside Europe or made from basic chemicals from outside the region are cheaper to buy with the euro or other strong currencies than elsewhere in the world,” explained Henrik Meinche, senior economist at the German Chemical Industry Association (VCI), Frankfurt.

“This can be quite a significant advantage when these chemicals are used to make intermediates, specialty chemicals or formulations like coatings,” he continued. “It dampens the effect of then having to sell a coatings or other product outside Europe priced in a strong currency like the euro. Coatings producers, for example, have greater freedom to adjust their prices in the global market—even increase them. They can widen their margins because they have paid proportionately less for their

raw materials.”

In addition to currency differentials, coatings companies may also have the benefit of long-term contracts for some of their raw materials, especially for those which are not petrochemical derivatives, and of opportunities for hedging arrangements. Other competitive tools in the way companies procure their raw materials are needed to alleviate the steady decline in the gains to be made from the long-term appreciation of currencies like the euro.

But the ability to offset against lower raw material costs the higher exports prices stemming from a strong currency can only be maintained as long as customers outside of Europe are willing to accept higher selling prices.

The financial results of European coatings companies for the first months of this year are showing that they are achieving the robust growth in sales and profits of last year. Jotun of Norway, for example, whose domestic currency has appreciated against the dollar at the same rate as the euro, reported a ten percent rise in sales and 23% increase in operating profit in the first four months of 2008 compared to the previous period last year.

At the moment demand for coatings is strong enough in areas like Eastern Europe, the Middle East, Asia and Latin America for customers to accept higher prices, especially as they acknowledge the supply-chain effects of steep increases in energy costs.

“With a few notable exceptions, everyone at the moment seems to be able to put up their prices,” said David Thomas, chemicals analyst at Oxford Economics, Oxford, England. “Inflation is rising in many areas, which also provides extra scope for increasing prices.”

Inflation, however, may also be a warning sign. The introduction of energy surcharges by producers of titanium dioxide ( TiO₂), resins and other raw materials for coatings and other sectors could drive up price pressures even further.