INSIGHT: Coatings sector reflects US market woes

06 August 2008 16:47  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The world’s leading paints and coatings makers have given some idea in this latest reporting season of the extent of the current economic downturn if not its depth.

That is likely to become clearer towards the end of the year if the industrial slowdown becomes more pronounced in Europe and we have a better idea of 2008 industrial growth in China.

Coatings producers are tied closely to a number of important industrial sectors – from automobiles and construction to shipbuilding and packaging; and paint makers to the professional as well as domestic consumer. The handle they have on demand growth across different sectors and economies is extensive.

Number three global coatings producer Sherwin-Williams tells it like it is for the US decorative paints market with its chief executive, Christopher Connor, speaking about managing through an unprecedented downturn in the US housing market that he calls “both deep and wide”.

The downturn has severely depressed paint demand in the domestic new residential, residential repaint, DIY (do it yourself) and commercial markets, Connor says. The company’s Consumer Group faces the same market softness and has had to cope with a rapid raw material cost increases.

Sherwin Williams is exposed particularly in the housing market but all firms selling into the US automotive industry know that times are hard indeed. Ford and General Motors reported huge second quarter losses and privately-held Chrysler is not believed to have done much better. Continued difficulties in this industrial segment will have a considerable knock-on effect in coatings.

Of real worry perhaps amid the bunch of second quarter and first half numbers, and, it has to be said, still fairly robust full-year forecasts, is the reflection of the wider industrial downturn in the US.

PPG talked of “significant declines” in its sales into the US automotive, OEM (own equipment manufacturers) and residential construction market. (PPG makes coatings and chemicals.).

The “headwinds” in industrial coatings were felt mainly in the automotive and OEM markets in North America (packaging is also in this reporting segment) where industrial coatings sales volumes were down 10% in the second quarter and in the first half.

It is the continuation of the downward trend that is of most concern – and the fact that the media are talking openly about possible bankruptcies among the big three auto makers.

Companies like PPG and others in the global coatings top five, which includes the coatings businesses of DuPont and BASF, can militate against the impact of the US industrial downturn with sales and earnings growth elsewhere but the decline in demand and sharp drop in regional earnings in themselves are heavy burdens to carry.

The flurry of large-scale coatings merger and acquisition (M&A) activity last year illustrates one way in which they are trying to gain a broader regional as well as product footprint.

Coatings sector leader Akzo Nobel will ultimately benefit from the former ICI decorative paints business and the inroads it gives into fast growing local paints markets in Asia (primarily China) and Latin America (primarily Brazil). PPG expects to make gains following its purchase of Europe-based coatings maker Sigma Kalon.

Akzo Nobel acknowledges that the US decorative paints market has been under pressure since 2006 and that new build homes account for something like 22% of the US decorative paints market, so the sub-prime mortgage fallout is expectedly severe.  

Akzo Nobel’s decorative paints sales were down 14% in the Americas in the second quarter and down 1% in Europe. In the first half Americas decorative paints sales were 12% lower.

Last week, Akzo Nobel said that the weak economic conditions in the US showed no signs of easing. In the second quarter, its Industrial Finishes business continued to be affected by weak demand in the industrial markets and construction industry in North America.

The Asia component of that business had also felt the impact of the US downturn because of its heavy reliance on North American demand.

A powder coatings slowdown in Europe was more visible, the Netherlands-based coating producer said, but was being countered by demand from China. North American packaging coatings were called “disappointing” in the quarter.

That performance reflects a decline in the beverage can market but shows that coatings producers are facing slowing if not declining market growth in a number of important segments. As increasing pressures are felt in developed world economies so the focus has to be on emerging geographies.

To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly