Coatings World - August 2017

Yo Y Net Sales Increase Average Sales Increase Yo Y Paint Purchase Price Net Positive Outlook Northeast 54% 4% 1% 77%

West 72% 7% 3% 72%

South 47% 5% 1% 71%

Midwest 37% 4% 3% 81%

Results of Paint Contractor/U.S. Architectural Coatings Industry Research Report 2017 vs. 2016

Each quarter, Northcoast Research surveys a large sample of paint contractors to get a sense for current business trends while United Mineral & Chemical Corp. (UMC) provides insight into coatings raw material trends. For inquiries regarding the results of the survey please contact Kevin Hocevar: kevin.hocevar@north-coastresearch.com. For inquiries regarding raw materials please contact Dave Kotowski: dkotowski@umccorp.com.

The cumulative responses to the question of “How do your sales in April, May and thus far through June of 2017 compare to your sales during the same time last year,” show that the market appears to have grown solidly from the prior year. 67% of contractors experienced a higher level of sales Yo Y. 17% of contractors described their sales as “Flat,” while 16% experienced a Yo Y sales decline in the period. These metrics produce a net increase of 51%. Sales grew an average of 5%.

When describing paint purchase prices YoY, 67% of respondents noted pricing as being higher compared to the prior year while 7% noted prices being lower. The remaining 26% described pricing as flat from the prior year. The net number of contacts seeing higher pricing YoY first jumped in 4Q16 as the SHW price increase took effect December 2016, however this jumped even more in our 1Q17 results as the remaining manufacturers’ price increases took effect and has remained relatively constant sequentially in our 2Q17 survey. On average, contacts indicate pricing is up 3.0% Yo Y in 2Q17, consistent with our 1Q17 survey.

As we enter the third quarter, global
pricing for TiO2 continues to be on an
upward trend. Depending on many
variables, coatings industry players may
have endured $0.40 to $0.50/lbs in cu-
mulative increases during the last 6 to 7
quarters (30-40%). During this period,
the industry witnessed the merger of the
two largest Chinese TiO2 producers,
Henan Billions and Lomon. This and
other Chinese environmental / govern-
ment led initiatives has allowed prices
to increase more rapidly in China than
in the North American market. We
see the Chinese market settling down
as we proceed through the second half
of 2017. It was also announced that
Tronox will acquire Cristal. This merg-
er will form the first or second largest
global producer of TiO2. Consolidation
in the “chemical” industry continues to
impact pricing and the supply channels
to the coatings industry. There does not
seem to be anything to stop this M&A
trend. However, there is a little light at
the end of the TiO2 tunnel. This will
not come in the form of TiO2 price de-
creases, but we do see prices stabilizing
at their current levels (or just above) as
we enter 2018. 2017 will be a big tran-
sition year. Price levels will be affected
more by demand than by supply. We
believe smaller Chinese suppliers will
come back on line at the higher price
levels. They will have environmental
hurdles to overcome to do so. Part of
the price stabilization thought process
is based on this expected increase in
Chines ouput.

Early in Q4 2016, OPEC made a valiant effort to lower the output of crude oil to increase the price. This tactic worked for approximately 4 months. During this period, the price of crude oil remained stable in the $53-56 range. Even as this article is being written, crude has fallen to around

$42 a barrel. Over time this should be
good news for resin buyers. Propylene is
on a downward trend as a result of falling
crude prices. The short term supply short-
ages on Styrene Monomer and Methyl
Methacrylate have ended or are close to
subsiding. Acrylic Acid and Ethyl Acry-
late have fallen off their recent high price
levels. The near term outlook for solvent
and resin prices looks to be on lower side
of the recent curve. This piece to the raw
material cost model should help paint
margins in the coming quarters.

At 75%, most contractors believe that business trends are improving/ will improve over the coming months. Only 25% described their outlook as “Neutral” (business trends will stay about the same) while none responded in the negative territory. In asking this question, we attempt to gauge actual expectations for the coming months based on how business has been trend-ing as of late and based on leading indicators such as contractor backlogs, bidding activity, and any other relevant factors. Given no responses in the negative, a net 75% of contacts are feeling good about the upcoming months. In our prior survey, no contacts responded in the negative territory as well. Our contacts described increased levels of bidding activity and backlogs as the primary drivers behind their positive outlook for the coming months. In terms of what’s driving the increased bidding activity/backlogs, many contacts cited renewed consumer/business confidence which is having a positive impact on spending, exterior paint business booking out further than usual, and general strength in the economy. Limiting the upside however is a lack of competent painters which has been a headwind for some time.