Raw material inflation to continue, despite ‘some stabilisation’ – Axalta

HOUSTON (ICIS)–While Axalta has seen “some stabilisation” in prices of key raw materials it uses, the US-based coatings company expects cost inflation to continue in Q4 and into 2022, CEO Robert Bryant said on Tuesday.

Bryant, speaking during Axalta’s Q3 earnings call, said that there was “a slight dip” in prices for monomers and powder resins, from highs in mid-summer.

Nevertheless, prices in all of Axalta’s raw material categories remain “elevated”, and some continue to climb due to supply-chain disruptions, including isocyanates, pigments and liquid resins, he said.

“Isocyanates, acrylic emulsions and certain polyester resins have been the most challenging,” he added.

Meanwhile, solvent prices are “more level” compared with the summer, but the recent oil price increases will cause prices in that raw material category to rise further, he said.

“It’s hard to say that there is any easing [in raw material pricing] going on at the moment,” Bryant said.

As some of the supplier force majeures come off in coming months, prices may ease somewhat, but it was still too early “to call a turn”, given that oil prices are hovering around year-high levels, he said.

He also noted the backdrop of high natural gas prices – in particular in Europe – as well as the logistics issues, with shortages of truck drivers and port and warehouse workers.

“I think we are in an environment in which we expect continued cost inflation as we go forward,” he said.

The company raised its guidance for variable cost inflation to “mid-teens” for the full year 2021 and nearly 20% for Q4.

Axalta is reacting by “pricing through” the raw material inflation and by keeping its focus on “cost and productivity actions”, he said.

In Q3, Axalta managed to increase prices in all its businesses, which was necessary to offset the persistent inflation seen since 2020, the CEO said.

As Axalta is always innovating and creating “so much non-product value” for its customers it would be able to “hold on to pricing”, regardless of raw material price developments, he added.

Despite the tight raw material availability, Axalta managed to secure raw material supplies and has “largely” been able to keep pace with strong demand for its products, Bryant noted.

Axalta passes higher costs on to customers by raising prices, rather than implementing surcharges.

Using surcharges to supplement pricing requires customers to modify their systems to incorporate a new line item – something many customers prefer to avoid, CFO Sean Lannon explained.

Axalta uses thousands of different raw materials, which fall into seven broad categories: Liquid resins, powder resins, pigments, solvents, monomers, isocyanates and additives.

On average, the company’s total raw material spend represents between 40% and 50% of cost of sales, according to its 2020 annual report.

CHIP SHORTAGE
Regarding the semiconductor shortages in the auto industry, those issues will likely continue well into 2022, with ongoing impacts on earnings before interest and tax (EBIT) in Axalta’s Mobility Coatings business.

Mobility sells coatings to original equipment manufacturers (OEMs).

The semiconductor chip shortages continued largely unabated through Q3 and masked “sound” consumer-level auto demand, Bryant said.

The “unprecedented” impacts on Axalta’s auto industry customers from the the chips crisis saw Mobility Coatings fall to $3m adjusted EBIT loss in Q3 – from positive EBIT of $49m in Q3 2020.

The business’ EBIT margin dropped to a negative 0.9% in Q3, compared with a positive 14.1% in Q3 2020.

While Axalta expects the semiconductor shortages to last through at least H1 2022, Mobility’s results should improve marginally in Q4, with EBIT turning positive, Bryant said.

Paints and coatings are important end markets for titanium dioxide (TiO2), a white pigment.

Solvents used in paints and coatings include butyl acetate (butac), butyl acrylate (butyl-A), ethyl acetate (etac), glycol ethers, methyl ethyl ketone (MEK) and isopropanol (IPA).

Blends of aliphatic and aromatic solvents are also used to make paints and coatings.

Additional reporting by Al Greenwood

Please also visit the ICIS topic pages
–  Automotive – impact on chemicals
–  Supply chain

Thumbnail shows paint. Source: imageBROKER/Shutterstock