Coatings World - April 2009

International Coatings Scene

EUROPE

BY SEAN MILMO

EUROPEAN CORRESPONDENT

MILMOCW@RODPUB.COM

Where are raw material costs headed?

A look at how

the issue of

raw material

costs is affect-

ing the paint

and coatings

supply chain.

Coatings companies and many of their raw material suppliers in Europe are struggling to deal with the dual challenge of a huge slump in demand and the need to claw back last year’s massive rises in raw material costs.

Usually there is a time lag of several months or more between the impact of higher raw material prices on producers and their ability to compensate for them through higher selling prices.

This recovery of input costs is, however, extremely difficult at a time of poor demand. Furthermore economists are now warning that as soon as demand does start to pick up, perhaps later this year, there could be a steep rise in prices of commodities and basic chemicals because closure of upstream processing plants will have caused shortages.

The economic downturn is currently making it hard for companies along the coatings supply chain to achieve even minimal price rises, particularly those serving the deeply depressed construction and automobile sectors. In many cases they have to accept decreases in their prices in order to maintain market share.

Producers are using inventories of raw materials, which were purchased at a high price before the financial meltdown of last autumn.

“Margins are falling among coatings companies because they are unable to recoup higher raw materials costs,” said David Thomas, senior industrial economist in chemicals at Oxford Economics, Oxford, England. “Raw material prices have been coming down since late last year but with demand so low paint producers have been unable to exploit this decrease through their own price increases.”

Coatings producers in the UK have been badly affected by a combination of a slump

in sales and shrinking margins. Because of a weakening construction sector, paint demand has already been decreasing for the last two years—by 2.1% in 2007 and 5.9% in 2008, according to Oxford Economics.

“Paints in the UK were first hit by a decline in construction and are now badly affected by the collapse of the car industry,” said Thomas. “We are forecasting a 6.7% drop in output of paints in the country this year. Production will then slowly recover to a 1.8% rise next year and 2.6% in 2011 before slip-ping slightly to growth of 2.4% in 2012.”

The financial pressure on UK-based coatings companies and ingredient suppliers has been aggravated by a fall in the value of the country’s currency, the pound, which has slumped against the U.S. dollar, euro and other major currencies by 20-30% over the past year.

As a result producers in the country have had to pay more for their imported raw materials while end-user prices have stagnated. The UK retail price index (RPI) fell to zero in March for the first time in 49 years.

Across Europe the priority for coatings producers and their chemical suppliers is effective margin management so that the problems of decreasing sales and the necessity to make up for earlier rises in raw material costs do not cause drastic falls in profitability. With many companies margins are being maintained through cost savings.

Last year AkzoNobel, the market leader in European coatings, was able to push through price increases before the recession began to bite. In the whole of 2008 prices for decorative paints and performance coatings went up by four percent compared with the previous year to offset higher raw materials prices, decreases in volume sales and adverse changes in exchange rates.