Inorganics: US paint companies frustrated by continuous TiO2 price hikes

Author: Doris De Guzman

2011/11/14

US TiO2 buyers relay customer frustrations on price hikes amid seasonal slowdown

Chief executives from US paint and coatings manufacturers ­Sherwin-Williams and PPG ­Industries have reported frustration about price hikes coming from their customers. The ­companies are passing on their own price ­increases in response to continuous rising costs of ­titanium ­dioxide (TiO2) amid ­economic slowdown.

TiO2 makes up most of ­Sherwin-Williams' raw material costs, said CEO Christopher Connor during the company's third-quarter earnings call on October 25. While costs for acrylics, solvents and packaging resins have likely peaked, Connor noted that TiO2 prices this year could still rise by as much as 40%.

"The recent decline in ­propylene will provide some cost relief in the coming quarters. However, the pricing actions by TiO2 producers are likely to continue for the balance of the year and into 2012," said Connor.

"Despite our efforts to help ­offset these higher input costs, ­including our own price increases, the lag between raw material cost inflation and higher effective pricing has pressured our gross margin in the second, third and again in the fourth quarter," he added.

Sherwin-Williams announced a price hike of 8-9% for architectural coatings effective October 1, its fifth price hike since April 2010, leading to an aggregated 30% increase in total. TiO2 pigment accounts for 24-25% of the total raw material cost to make architectural paint, said Bank of America Merrill Lynch analyst Kevin McCarthy.

Sherwin-Williams is the ­second largest buyer of TiO2 pigment in the world behind Dutch chemical firm AkzoNobel, said McCarthy. "The company buys 140,000 short tons/year (300m lbs/year) of TiO2," he added.

Ninety percent of TiO2 is ­procured on a contract basis, while 10% is purchased on the spot market. As of November 4, North American TiO2 prices were assessed by ICIS at $1.80-1.94/lb ($3,968-4,277/tonne, €2,857-3,079/tonne) following a 15 cent/lb increase on October 1.

PRICE HIKES CONTINUE
TiO2 producers Cristal Global, Tronox and DuPont recently proposed another 15 cent/lb price hike effective November 1. If successful, the hikes are expected to be implemented on February 1 2012, given the market's typical 90-day lag.

US-based Kronos, another major TiO2 producer, expects total price gains of 15-20% in 2012. TiO2 price hikes and Kronos' third-quarter net income nearly tripled because of higher TiO2 selling prices and increased production volumes, the company reported in an earnings call on November 3. Kronos CEO Steve Watson said most consumers can pass along higher TiO2 costs and end users can accept the price hikes as they flow down the chain. TiO2 suppliers cited continued tight inventory levels. Watson also noted increasing ore feedstock costs as another price driver for TiO2.

"We expect demand to grow faster than supply," said Watson. "There is no question that an extra $1 for a gallon of paint is not going to destroy demand."

He added: "My feeling is that we're not even remotely close to that sort of thing happening. I feel our customer base understands and would prefer a higher price than a lack of availability."

Unlike Kronos, US TiO2 producer Huntsman did not believe there would be a TiO2 ore shortage in coming years. However, the company does expect ore prices to continue to rise. Huntsman's third-quarter pigment sales rose by 39% year on year to $455m driven by strong pricing.

"Demand for TiO2 remained high during the quarter, although it moderated slightly," said CEO Peter Huntsman during the company's third-quarter earnings call on November 2. "Industry producer inventory levels are less than 45 days, suggesting the supply chain is tight. We continue to sell ­everything we can make," he said.

BUYERS SEEK RELIEF
Some paint formulators have begun to use extenders to diminish the amount of TiO2 necessary for opacity. Some plastics compounders have also insisted that customers are seeking cheaper alternatives to TiO2 and, in some cases, are moving away from all-white products.

US-based Dow Chemical ­announced during its earnings call on October 27 that it plans to roll out a second version of its TiO2 extender Evoque that will target a broader market compared to the first version rolled out in March, which targeted high-end premium paints. Evoque, a pre-­composite latex polymer, is designed to enhance the opacity of TiO2 in coatings and allow paint formulators to use 20% less TiO2.

While acknowledging the ­seasonal slowdown in coatings demand, Dow Chemical CEO Andrew Liveris said customers are lining up for Evoque. "They want to work with us. TiO2 is a big issue for them. Customers are launching their products now on Evoque 1, and Evoque 2 will be very helpful," Liveris said.

A company source said the rollout is imminent, but did not disclosed the exact timing. Earlier this month, Dow said that about 12 companies worldwide are ­producing coatings using the technology and will begin shipping the newly formulated product ­before the end of the year. PPG Industries said during an earnings conference call last month that the gap between the Chinese TiO2 market and the Western regions is opening up now in terms of pricing.

"I think we're going to see more Chinese product available globally and more demand from the paint companies for the value that those products are now ­offering the current environment," said chief executive Charles Bunch.

Customer frustrations are ­rising, he said, when paint formulators have to seek out price increases to mitigate cost inflation in raw material chain amid ­seasonal weak demand.

"Instead of working on a lot of new product developments or new technologies that will help our markets stimulate demand and help our customers, we're working on formulations that will just minimize the impact of some of these price increases. Certainly we, and I assume other paint companies, would feel frustrated as well," Bunch added.

PPG said it could use cheaper TiO2 from China, but it takes a ­significant amount of time to change a formula and introduce a new ingredient into the ­product stream. "If we were to use more TiO2 from the non-Western sources, most of this is sulfate technology that requires differences in processing, qualification and ­testing. That's why you haven't seen as much short-term ­substitution in the industry," Bunch noted. Sherwin-William also said that most in the paint business have been talking about replacement technologies. "The reality is we will have to depend on TiO2 for some time to come," said Connor. "I don't think there's enough volumes for these emerging technologies to make a significant difference in the overall ­market environment," he said.

Additional reporting by Brian Ford, Frank Zaworski and Stefan Baumgarten in Houston