Coatings World - January 2015

low level or fall further, analysts are forecasting that in the longer term they could start bringing down raw materials costs in many sectors.

“Continued low prices will create a glut in oil and its derivatives following a flow of investment funds into the sector in recent years and an expectation of continued high growth in China,” explained Paul Hodges, chairman of International e-Chem, a London-based chemicals consultancy.

“Raw materials suppliers will have to cut their prices because otherwise they will not have any customers,” he added.

This will first require the removal of a number of obstacles in the supply chain which have curbed the availability of some coatings raw materials.

“Since the 2008 financial crisis in
Europe, producers of raw materials like
basic chemicals have tended to keep low
stocks,” said Amit Sharda, chemicals
analyst at Oxford Economics, Oxford,
England. “This has resulted in a lack
of sufficient flexibility in the system for
downstream users to stock up their own
raw materials in order to take advantage
of upstream price decreases.”
The result has been that even at times
of economic crisis or supply/demand im-
balances prices have gone up, sometimes
steeply.

“As coatings manufacturers, we would of course, expect to see a knock on effect from the falling price of oil onto raw materials in the wider market,” said Tom Bowtell, chief executive of the British Coatings Federation (BCF)

“(But) raw material prices for the
coatings and inks sector have been rising
almost continuously since 2002 and in-
creased by well into double figures in the
two peak years of 2008 and 2011 while
other years also showed steady increas-
es,” he continued. “ Many solvents were
typically 30 percent to 40 percent higher
in price (in 2012 compared with 2012).
It is only in the last 18 months that we
have seen any real softening of purchase
prices and even this means only a 3% fall
in overall raw material prices in the last
year - a drop in the ocean compared with
what has gone before.”
Raw material suppliers which are
currently attempting to push up their
own sales prices are blaming other fac-
tors outside the oil value chain.

Clariant, the Swiss-based coatings materials supplier, for example, said that increases in operating costs was the main reason behind the announcement in late 2014 of a 10 percent rise in prices of additives for coatings and other products made by its Plastics and Coatings segment.

“Most of our raw materials in Plastics
& Coatings are at least 3 – 4 steps down-
ward in the value chain (from oil),” said
Ernesto Dongiovanni, Clariant’s head of
marketing, polymer additives. “Therefore
the impact of a lower oil price is substan-
tially less pronounced as other factors-
-inflation in labor costs etc.-- outweigh
this effect.”
Prices in the coating raw materials
supply chain have also been deeply in-
fluenced in recent years by cutbacks in
capacity following the 2008 recession
and a lack of investment in new plants
or expansions.

This is reflected in variations in price
trends between segments. Figures from
the European Chemical Industry Council
(Cefic), Brussels, which include down-
stream sectors like coatings, show that in
the first three quarters of last year (2014)
chemical producer prices dropped 1.7 per-
cent, but petrochemical prices declined
by over double that level while those for
polymers dipped by only 0.3 percent.

Europe’s ageing chemical plants are vulnerable to supply interruptions which has prevented some prices decreasing by as much as would be normally expected after a drop in oil prices. “There have been a relatively high number of breakdowns, and outages in basic chemical plants over the last few months,” says one chemicals analyst.

Some commentators are predicting that due to the lower margins stemming from lower oil prices, there will now be more plant closures. The rating agency Moody’s reckons that as much as 6 percent of European capacity for ethylene, the building block for organic chemicals, could be closed down.

Cefic was predicting in December that total output of chemicals including downstream products like coatings will rise only 1 percent in 2015—around the same level as in the previous year (2014). “Monthly data point to continued anaemic growth, with energy-intensive petrochemicals output falling,” said Hubert Mandery, Cefic’s director general.

Nonetheless there has been some evidence of a sudden rise in business confidence. In October the EU chemical industry confidence indicator (CCI)

soared to its highest level since July 2011.
Stronger European demand for coat-
ings later this year will be offset by de-
pressed sales in countries like Russia.
Tikkurila, the Finnish coatings producers
which has a big presence in Russia, has is-
sued a profits warning because of reduced
demand in the country and a sharp depre-
ciation of the Russian rouble.
There could also be decreased coatings
exports to oil producing areas outside
Europe like the Middle East, where the
construction sector has been booming.

The tight supply/demand balance in chemicals in Europe is likely to trigger a rise in some raw material prices in the event of any surge in coatings sales in the region. This could happen before low oil prices start to have a major influence on raw material costs.

“Even if there would be an impact on raw materials prices from lower oil prices, its effects could be delayed by several quarters,” said Dongiovanni. CW