INSIGHT: Coatings makers face a difficult second half

22 July 2013 17:20  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The coatings business has not been great this year and there are concerns about growth in the second half.

Coatings major AkzoNobel last week highlighted some of the issues facing producers.

The company’s decorative paints business has struggled but managed to find 4% extra volumes in the second quarter. Volumes were stabilising but Europe was a challenge, the company said in its second quarter report, adding that “the slowdown in global markets continues to affect the top line”.  

China’s demand for decorative paints was still growing strongly in the quarter and AkzoNobel appeared to be doing well by selling higher volumes of premium products.

There was some cost relief from comparably lower titanium dioxide prices but exchange rates movement hit earnings from Brazil, an important decorative paints market for the Netherlands-headquartered coatings producer.

The second quarter performance of AkzoNobel’s industrial coatings businesses reflected the difficult manufacturing operating environment in Europe and some end-use, sector-specific trends.

Marine coatings were affected by the decline in new ship construction, but coatings sold into the oil and gas sector did relatively well.

Volume growth in aerospace helped to lift the Automotive and Aerospace business. Powder coatings sales were better in Asia than in Europe. Weakness in Europe meant that results from industrial coatings were mixed.

AkzoNobel agreed the $1bn (€0.76bn) sale of its North American decorative paints business at the end of last year, extracting itself from a business and a competitive environment that it and its predecessor in the market, ICI, had struggled with for years. The sale to PPG was completed in the second quarter.

PPG’s take on the coatings industry is more upbeat than AkzoNobel’s as its acquisition strategy plays out.

The company has shifted strategically towards coatings and away from businesses like chloralkali. It likes the market segment for the relative stability of its earnings and cash-generating potential, for its low capital intensity and because it is consolidating.

PPG’s coatings sales between 2002 and 2012 grew at an average annual growth rate of 10%.

PPG talked of sluggish coatings activity in Europe in the second quarter, with weakness in its architectural coatings segment (which is what AkzoNobel would call decorative paints).

The business overall was buoyed in North America in sales terms by the acquisition from AkzoNobel, and PPG said that US demand growth for its coatings generally was ongoing.

Volume sales in the second quarter were higher in all end-use markets in Asia except marine new build, it added.

In Europe, PPG said that low double-digit percentage volume growth in automotive manufacturing, and “modest” aerospace and packaging coating growth had been more than offset by the persistent weakness in other industrial sectors.

The other 'big three' coatings maker, Sherwin-Williams, said that higher architectural paint volume sales through its own Paint Stores segment had helped lift group sales in the second quarter and the first half. It said that in the first half these sales were higher across all market segments.

Volumes were lower in the quarter to most of the company’s retail customers, however. And Sherwin-Williams’ Latin America Coatings Group results suffered from adverse exchange rate movements with Brazil.

The company’s stock price dropped sharply the day the second quarter and first half results were announced on news that the planned $2.34bn acquisition of the Mexican coatings and paint firm Consorcio Comex had been blocked by Mexico’s federal competition commission.

The deal has not been scuppered but Sherwin-Williams has admitted that the outcome of an appeal against the decision could be months away.

The commission had been expected to approve the acquisition, which had been passed by the relevant US and Canadian authorities.

Comex is a family-owned paints seller, with more than 3,600 stores in North America.

The acquisition would be the largest in Sherwin-Williams’ history, and the company’s performance in the first half shows how important such an acquisition could be to its Paints Stores segment.

Market growth is under par for the three big paint makers, which are struggling with an uncertain demand environment and one that does not get any easier to address cost effectively.

How consumer confidence in the US, the European economies, China’s newly emerging path to growth, and economic growth in Latin America play out will all have an impact on performance in the second half.

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By: Nigel Davis
+44 20 8652 3214

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