Moderate growth, rising prices forecast in mature market
By Christopher Reilly -- Purchasing, 10/7/1999
The market for paints and coatings is currently stable, and despite a slow first half of the year, demand has picked up to moderate levels. Supply is in line with demand; there are neither significant shortages nor surplus supplies of materials. Most analysts point to a 2%-3% annual growth rate for paints & coatings in 1999.But global market factors, such as the recovery of the Asian economies and the continued performance of the U.S. economy, along with tight producer price margins, rising feedstock costs, and the costs of complying with ever-tightening regulations, have producers and buyers alike eyeing growth segments and the next six months' materials prices.
The market picture
While in general, prices for raw materials used to make paints and coatings have been stable or declining, buyers expect to see some higher prices in the first half of next year.
Scott Wagman, president of the Scott Paint Co. in Sarasota, Fla., says he is planning for a higher price scenario for raw materials in the first quarter of 2000. "Pressure is definitely mounting to raise prices," he says.
Data based on buyers' input from Purchasing's exclusive monthly chemical price transaction survey seems to support this. The level for coatings chemicals is down just slightly from where it was in January (80.34), but is forecast to reach 83 by January 2000.
The aliphatics index is lower, but it is increasing steadily. The aliphatics index measured 58.44 in January and is currently at 63.80. By January of next year, the aliphatics index is forecast to reach 67 points.
The index for aromatics, however, is set to zigzag, according to Purchasing's price index. In January '99, the aromatics index measured 65.53 points, but has fallen more than 5 points since that time. Currently, the index is at 60.23. It will rebound back to 64 by January of next year, according to buyers' data.
The main reasons for the price pressure include rising feedstock costs, and the performance of the world's economies, which, according to Wagman, have played an important role in the paints and coatings market for the past few years, and will continue to do so in the year 2000.
Wagman believes that China's economy could be the "wildcard" affecting prices for raw materials in the year 2000. "China doesn't have much of a consumer market, but because there are so many people there, any upturn in consumer demand for paints and coatings can really tie up a lot of material," he says.
According to one Midwest paint producer, raw material costs are on the rise. "Based on spikes in the oil industry, we're going to see some price increases in the near future," he says. "Oil cost about $12/barrel 18 months ago, and now it's pushing $21/barrel," he says.
Lilly Industries, Inc., Indianapolis, Ind., announced a general price increase of 5% for industrial coatings and specialty chemicals effective in September. This increase will affect non-contractual list pricing in North America, Asia, and European markets. The company cites rising raw material costs stemming from upward pressure in crude oil, propylene, and ethylene derivatives for the price hike.
Moderate demand growth
New housing starts and consumer durables are credited with driving demand growth, which has supported the use of non-solvent water-based, high-solids, or powder-based paints and coating products. Use of more traditional paints and coatings is declining, but overall, demand will continue to grow modestly in the coming year.
"In general, the paints and coatings industry is doing well in terms of growth, and demand for materials has been pretty solid, especially for pigments such as titanium dioxide (TiO)," says John Hall, coatings market manager for the Americas region at Millennium Inorganic Chemical Corp., in Hunt Valley, Md.
Titanium dioxide market analyst Jim Fisher, president of chemical industry research firm International Business Management Associates (ibma), Princeton, N.J., says that he expects worldwide demand for TiO to increase steadily through the year 2000.
"In the first quarter of 1999, raw materials purchases were down from the previous year, and there was concern that 1999 would be a year of declines in paint production," Fisher says. "But that never really occurred. This year's paint season was slow in developing, but it turned out to be fairly strong in May, June, and July," he says.
Buyers who responded to Purchasing's monthly survey of chemical prices place current anatase-grade, TiO contract prices at about 86¢/lb. Spot tags currently average $1.02/lb. Buyers expect average prices to increase to about 90¢/lb for contracts and $1.05 on the spot market by the end of the first quarter, 2000.
A similar trend is forecast for bulk rutile-grade prices. The current contract price is about $1.00/lb in the U.S. Buyers expect contract prices to increase by about 3¢/lb to $1.03/lb by the end of the first quarter of next year. Spot tags average $1.10 currently, and buyers see an increase to about $1.12 by the end of the first quarter and then tags should remain flat through the third quarter of next year.
Production of TiO is currently down to about 35 days, in order to maintain inventories at manageable levels, according to Fisher. The industry is now operating at about a 90% to 91% utilization rate, and no expansions have been announced.
"All world markets for TiO seem to be bouncing back strongly. Europe had a soft first half of the year, but now all the signs are present to indicate that upward pressure will affect prices," Fisher says. "I think a 5% growth in list prices is likely to be phased in gradually in the U.S., starting at the end of September."
Other areas have seen some pricing activity as well.
"In recent months, there have been some slight upticks in additives pricing, but the pressure to raise prices from our suppliers is not especially strong right now," says Wagman from Scott Paint Co.
This summer, emulsions producers raised their prices for vinyls by 2¢/lb, claiming increases in styrene feedstocks and other intermediate materials. "That increase seems to have stuck," says Wagman, but explains that the increase follows years of declining prices.
Producers of acrylics and specialty products used in paint formulations have also been calling for price increases. According to an acrylics buyer based on the East Coast, a producer recently proposed a price increase, then called only three days later to rescind the proposal. "There's now a lot of competition in acrylics that wasn't there 10 years ago," he says. "Purchasers have some alternatives in sourcing, and that's keeping prices down."
Environmental issues continue to drive demand for certain products used in paints and coatings production. Solvents and alkyds are losing emphasis in the market due to environmental concerns surrounding HAPs and VOCs. "This has been a slow, gradual decline, but will likely accelerate with the release of revised national architectural industrial maintenance regulations, which are slated to go into effect later this year," says Wagman.
Millennium's John Hall says, "We have seen powder coatings generate healthy growth numbers for the last decade." Hall estimates demand growth at 11% to 12%/yr. "That's also where a lot of research is now concentrated, and we could see some market-share erosion from some of the other segments to powder coatings in the future."
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