Paints and coatings look to the Middle East

Fertile ground

05 April 2010 21:33  [Source: ICB]

Developments such as Abu Dhabi's proposed Masdar low-carbon city signal the huge growth potential for paints and coatings in the United Arab Emirates. Africa, a tough market, also offers long-term potential

Consultant's corner
Terry Knowles/IRL
Spurred on by the attractions of the United Arab Emirates (UAE) as a growth hub and regional nexus for business, in recent years, many chemical and coatings companies have slanted their investment expenditure in favor of the Middle East, among them US group Huntsman, Sweden's Perstorp, Norway's Jotun, as well as Germany's BASF and Bayer. Add to that the population boom in the Arabian peninsula (largely Saudi Arabia), proximity to Iraq as a recovering market and a long-term eye to an African prize, and an appreciation of the region's appeal begins to emerge.

 
Masdar
Construction, rather than manufacturing investment, is invariably the engine of growth and projects rarely arrive much larger than Saudi Arabia's plans to build six new industrial cities. The Saudi Arabian market remains the biggest and brightest jewel in the region, with paint demand approaching 900,000 tonnes. Despite a challenging year for the economy in 2009, it is a country that still extends double-digit percentage growth rates.

A number of factors shape both the quantitative and qualitative demands placed upon paints and coatings in the Middle East region. For example, the prevalence of desert reduces the significance of industrial wood coatings use (although there are smallish players in wood finishes throughout the region); instead, wooden and other furniture supplies are sourced from Turkey, which has a strong and growing market for industrial wood finishes. In the qualitative dimension, architectural coatings for example, are often required to withstand prolonged high temperatures and to be able to resist the effects of desert sandstorms.

ENVIRONMENTAL CONCERNS
Environmental perspectives are also beginning to emerge in the Middle East and Africa and if these are true green shoots then at this early stage they are still tender ones. Such awareness is growing in some economies in the Middle Eastern and African regions and concerted drives or initiatives on the part of the industry, as opposed to governments, are potentially the best way of building business for companies with top-quality, eco-friendly formulations to offer.

One environmental perspective highlighting the outstanding opportunities for the industry's players has been the plan to build Masdar City, in the UAE, billed as the world's first carbon-neutral, waste-free city. The city, under construction in Abu Dhabi, is an emerging "cleantech cluster." BASF has seized the moment with a high-profile agreement for the supply of energy-efficient and climate-friendly construction materials, ranging from infrared-absorbing roof coatings to phase-changing wall board materials that reduce the need for air-conditioning.

Africa, still in the far distance behind the likes of China and Vietnam, will become the emerging regional market of the 21st century. Dutch coatings giant AkzoNobel has long been positioned with paint interests in North Africa, while US group PPG extended its reach into the region with its takeover of Dutch-based SigmaKalon. BASF Coatings has slowly but surely chiseled its way into many Middle East and African refinish markets. Jotun, long-entrenched in the Middle Eastern region is also supremely positioned for any long-term growth in African markets. Most of the indigenous paint industries in North Africa are fairly small (less than 50 players), with external paint supplies that often originate in Turkey, Italy and France.

Egypt, just west of the Arabian peninsula, is an interesting market in its own right, yet it only seems to attract occasional investment or mergers and acquisition interest. Egypt is valuable to the paint industry as it holds enormous consumer potential. The country has a population approaching 79m but a paint market of only about 230,000 tonnes. Compare this with Germany, which has a population of 82m and paint demand in the region of 1.5 million tonnes, and its potential looks huge.

OPPORTUNITIES ABOUND
Neighboring Libya is a nascent market with unquantified levels of demand as far as the paint industry is concerned. The country's indigenous paint industry is small, comprising about 10 companies. The domestic chemical industry remains underdeveloped, but holds the well-established petrochemical complex at Ras Lanuf, which US group Dow Chemical has had a hand in expanding. For the moment, Libyan markets are being increasingly targeted by producers established in Egypt, especially the likes of Jotun, National Paints, PACHIN and Sipes, the latter three all Egyptian.

Libya is underdevelopedand will be fertile ground for the coatings industry, largely as a result of spending on energy, utilities, transportation and infrastructure; these areas will command massive budgetary expenditure in the coming years and given the likelihood of serving them, other industry segments such as iron, aluminum and steel are all likely to be developed further.

Another of the key determinants that will be sure to pitchfork the chemical and paint sectors' interest in Libya will be the country's possible accession to the World Trade Organization at a later date. That will then become good news for exporters and industry investment as its old-fashioned ways of conducting business die down.

Of course, South Africa cannot be ignored for its influence over other African markets, either through the direct supply of the coatings themselves or through the finishing of manufactured items that are despatched to these countries. The South African paint industry has witnessed significant change in its top tier, with AkzoNobel collecting the Dulux brand name in South Africa ahead of its acquisition of the UK's ICI. PPG's move to acquire SigmaKalon handed it ownership of Prominent Paints in the republic. The former Barloworld Coatings operations, spun off by that particular South African conglomerate, has enjoyed life with renewed vigor under the auspices of Freeworld Coatings, which has actively developed its portfolio since the spin-off, with new industry ties and eyes fixed more intently on the Ghanaian market.

Politics and broken promises represent the downside for the paint industry in parts of Africa. Reports seem to indicate that the Nigerian paint industry (with more than 40 producers) is facing extinction, having been crippled by the government's failure to keep its word on the development of the nation's petrochemical sector. In short, the lack of quality raw materials being produced in the country ought to be an opportunity for big names in the industry, but the call seems to be going unanswered.

Some of the problems exemplified by the Nigerian paint industry highlight more fundamental difficulties associated with paints in Africa. There is often poor infrastructure for distribution and an underdeveloped chemical industry of its own. This translates into difficulties in accessing good quality raw materials and the necessary expense of costly imported types from Europe and the US.

Add to the mix the unwelcome effects of counterfeiting and it becomes possible to understand why companies might not be going near African markets yet. Other less direct opportunities are always open to industry, such as technology licensing, production and marketing agreements, joint ventures with local partners but such activity is still being barely registered at the moment. Still a long, long way to go yet!

Terry Knowles is a consultant for global paints and coatings consultancy IRL. To find out more about IRL's Middle East and Africa paint report contact cathygalbraith@brg.co.uk

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Author: Terry Knowles



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