Coatings companies forge ahead despite negative environment

Coatings companies regard challenges as opportunities

23 May 2008 11:11  [Source: ICB]

Paint and coatings companies could almost be said to have assumed a Zen attitude these days, as they take challenges not as obstacles but as opportunities

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Ivan Lerner/New York

HIGH FEEDSTOCK costs, an increasingly environmentally conscious customer base, more regulatory action, large-scale consolidation and an unfavorable economy are putting pressure on earnings throughout the coatings value chain.

In this environment, say insiders, coatings suppliers and producers must constantly innovate their offerings to succeed. Trying not to lose your cool is a good idea, as well.

Both US-based Dow Coating Solutions and Rohm and Haas say the current climate can offer opportunities - when regarded from the right perspective.

Dow is looking at ongoing legislation in Southern California concerning lowering volatile organic compounds (VOCs) to 50 grams/liter, and believes these regulations will be adopted soon in other markets in North America.

"Dow Coating Solutions has been helping paint formulators meet those regulations for months now, making sure they can stay ahead of these and other major changes in the industry," says George Hamilton, president of the $2.5bn (€1.625bn) Dow Coating Solutions,which was created in March.

Coatings suppliers with a broad technology base and strong application know-how will be best positioned to provide solutions to coatings producers as part of their continuing effort to maintain compliant formulations, says Hamilton.

"There will be a continued strong focus on cost-effective and environmentally benign raw materials and coatings formulations," he says.

Meanwhile, Rohm and Haas considers the ongoing consolidation in the coatings business a chance to strengthen its relationships with industry players.

The company estimates that the top nine players in the world now control nearly 45% of the global coatings industry, compared with about 38% in 2000.

In the next 10 years, it is projected that 98-99% of the global architectural business will be supplied by 12 companies - and probably 94% of that volume will be supplied by seven companies.

Phil Phillips, managing director of Chemark Consulting Group of Southern Pines, North Carolina, US, predicts that Akzo Nobel of the Netherlands, PPG Industries, Sherwin-Williams and Valspar, all US, will be among these formulators. In 1975, there were 2,000 paint companies in the US. Now, there are fewer than 900.

US HOUSING MARKET WOES

US coatings giant Sherwin-Williams does not expect the near-term recovery of the housing market, Christopher Conner, the company's CEO, said in a recent press conference. Nor is the company "counting on oil prices to drop back to mid-2007 levels," he said.

Meanwhile, Dmitri Silversteyn of Longbow Securities says the weak domestic housing market has impacted growth for Valspar's paint segment, causing it to decline 4% year-over-year.

Dow Coating Solutions and Rohm and Haas are two of the companies that supply the formulators, who then take the polymers and mix them into paint. Formulators have three types of customers: architectural paints, including house paints product original equipment manufacturers (OEMs) and specialty material products.

In an effort to increase value, several large raw material suppliers are in the process of starting a strategic effort to circumvent the formulators. "This tactic is not designed to supplant the formulator, but instead, to find out directly what the end-user needs," says Phillips.

Meanwhile, the formulators have not been able to effectively pass through cost increases because of their inability to sell value. This is compounded by the hold the "big box" megastores, such as Home Depot, Lowe's or Wal-Mart, have on the do-it-yourself and house paints segments of architectural paints.

Using "a very sophisticated methodology," the big boxes "know how much money the formulator can make to the penny," says Phillips. They only allow the formulator to have enough return on investment to reinvest in capital, to keep the business and research alive.

"Pushing any price increases on the big boxes is monumentally difficult because of the latter's volume leverage," he adds.

And the retailers are also struggling. Weak US housing demand compelled supplies retailer Home Depot to close 15 outlets in the US in May.

PAINTED INTO A CORNER

However, raw material suppliers such as Dow and Rohm and Haas have had to put through price increases.

Customers understand the need for price increases, says Hamilton. "The increases are necessary to sustain margins and drive new innovations, such as the development of sustainable chemistries that reduce industry reliance on petrochemical feedstocks."

The "unexpected, unpredictable and exponential" rises in costs have come faster than anyone could have predicted, says Luis Fernandez, vice president and business group director for paint and coatings materials at Rohm and Haas. This business unit represents 24% of the company's sales, or about $2.12bn.

While traditional product price increases worked well for the company in the past, "in today's environment, we found ourselves continually going back for multiple rounds of increases, negotiated by customer by product," a process that was ineffective in restoring profitability, says Fernandez.

"We can't ask for, and implement, selling prices fast enough to recover these kinds of costs, and we can't afford to continue to serve as a buffer between our suppliers and our customers, and lose significant profitability in the process," he adds. "This is an untenable position."

According to Bank of America analyst Kevin McCarthy, Rohm and Haas's cost increases totaled more than $200m over the five quarters ending with the first quarter of 2008. Price increases have totaled less than $50m in the same period.

And Rohm and Haas predicts lower demand for paint and coatings this year, says McCarthy. Consumption will be near a 10-year low in 2008, as weakness in building and construction, the largest end-use markets for the segment, representing about 32% globally, and 18% in North America, has reduced demand.

Rohm and Haas expects a 7-8% decline in US market volume and does not expect the decline in demand to bottom out until the end of 2008.

"The good news is that we may be near a bottom now," says McCarthy. For 2009, the company sees relatively flat demand, and eventually a long-term growth rate of 2.4% in North America.

As of May 1, Rohm and Haas implemented global indexed raw material and energy surcharges in its Specialty Materials businesses. The index will be adjusted monthly, with the surcharges increasing or decreasing with costs.

The global coatings market was estimated by Citigroup at $85bn in 2007. Bank of America projects that the current global coatings materials market is around $48bn.

Paints and coatings sales in North America for 2007 were about $21.4bn, says Phillips, with the US representing roughly $18.5bn. From 2004-2007, the annual average for North America was $21.3bn, and for the US, $18.5bn.

Sales have remained fairly flat over the past four years. "Raw material cost pass-throughs did take hold," says Phillips, but they were offset by lower demand from housing, automotive and electronics applications.

BEHIND THE GREEN PAINT

Neither Dow nor Rohm and Haas believe the industry will adopt green solutions if it means compromising performance, quality, or significantly increasing prices.

"The impact of green trends on the business has been to drive research and product development into high-performance sustainable solutions," says Hamilton.

Some of these products include Dow's ECOSURF SA surfactants, a product being showcased at the American Coating Show in Charlotte, North Carolina, in June. This surfactant is made from renewable palm oil feedstocks and has high performance factors.

The company has also developed AEPD VOX 1000 multifunctional amines for interior water-based paints. The company is touting AEPD's zero-VOC classification in Europe and overall low-VOC classification globally.

The trend toward low-VOC, low-odor paints in the architectural market is undeniable, notes Fernandez, who expects good demand for his products. He adds, though: "What might not be as apparent is the push for environmentally advanced technologies in industrial applications."

This would include formaldehyde-free insulation, water-based traffic paints, reflective elastomeric roof coatings, cementitious coatings and corrosion-resistant, water-based industrial metal coatings.

Rohm and Haas continues to see strong demand for these products as well, "in part because they are better for the environment than competitive products," says Fernandez. "Product performance will always remain paramount, but environmentally advanced technology that also performs very well, will be the product of choice."

Rohm and Haas is championing its Avanse MV-100 used to make water-based, corrosion-resistant coatings for highway bridges, storage tanks, and other outdoor, industrialized applications.

North American Region (NAR) energy/raw material price increases, January 2007-May 2008

Material	Increase
Crude oil	84%
Natural gas	71%
Propylene	59%
Ammonia	57%
Butadiene	45%
Tin	92%
Acetone	14%
VAM	25%

Sources: Rohm and Haas, CMAI, ICIS and London Metal Exchange

Both Dow Coatings Solutions and Rohm and Haas will be exhibiting at the American Coatings Show, in Charlotte, North Carolina, US, from June 2-5, 2008.

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