The paints and coatings business has been weighed down over the past year by sluggish economies in North America and Europe that are depressing sales. But executives in the industry say there are some bright spots in the picture—architectural paints for home use, for example, have stayed robust—and they are forecasting a slow recovery beginning this year.

Despite their economic woes, paints and coatings manufacturers and their suppliers are innovating at a record pace. Much of that innovation is environmentally driven. Clean air rules are spurring development of more waterborne and low-solids formulations. And the long-standing industry move away from heavy-metal pigments is a boon for developers of organic-based substitutes.

"Historically, the growth rate in paints and coatings has closely tracked the GDP," says Phil G. Phillips, president of P.G. Phillips & Associates, a Southern Pines, N.C., consulting firm that follows the industry. So as the overall economy began to cool down in 2001, paints and coatings followed suit, he adds. But within the industry, Phillips says, "there are niches and pieces that are growing very well and those that are taking nosedives."

Paints and coatings manufacturers report continuing strong sales in the residential construction and home improvement markets, but say that industrial coatings markets have been weak. The automotive industry—a major outlet for paints and coatings—has shown healthy sales, largely due to incentives such as zero-percent financing. But because automakers have been paring down a big inventory of cars, new vehicle production has not picked up correspondingly; so paints and coatings sales in this market have been flat to slightly down. The aerospace industry is in a contraction mode, partly due to the events of Sept. 11, so coatings sales to that sector have declined in the past year.

The global paints and coatings industry garnered revenues of $70.7 billion in 2001, little changed from an estimated $70.6 billion in 2000, according to P.G. Phillips & Associates. Some 33.8% of those 2001 sales were in Europe, 30.0% were in North America, 20.9% were in the Asia/Pacific region, and 15.3% were in the rest of the world, the firm finds. Global sales in 2002 are expected to be down somewhat, to $69.9 billion, according to the company's forecasts. Europe will account for 33.0% of the 2002 revenues, N. America for 29.8%, Asia/Pacific for 21.5%, and the rest of the world another 15.7%.

Architectural finishes, including interior and exterior home paints, made up about 35% of the U.S. paints and coatings sales in 2000, P.G. Phillips reports; while original equipment manufacturing (OEM) markets—including coatings for new automobiles, machinery and appliances, furniture, wood, coils and cans—comprised 43% of total sales. The remaining 22% went for "special purpose" applications, which comprises auto refinishing, industrial maintenance, new construction, and marine and aeronautical.

The operating profits before taxes for the paints and coatings industry were around 4.5-5% in 2001, according to the Phillips data. But the company says this figure is likely to drop to about 3.5% in 2002 due to the recessionary climate and resulting price erosion.

The prices of raw materials that go into paints and coatings—including resins, solvents, pigments and additives—trended downward in 2001 (see charts on page 35), but since the start of 2002 some have been on the upswing. In titanium dioxide, a key paint pigment, "we were under a lot of price pressure in the past six months," says Allen Hagstrand, vice president of purchasing for Benjamin Moore & Co., Montvale, N.J. But recently proposed hikes in TiO₂ tags have been successfully resisted by paint makers, he adds. Prices this year for other raw materials such as isoparaffins and mineral spirits have been relatively stable, while ethylene glycol and propylene glycol tags "have recently increased quite a bit," reports Gregory Tyler, Benjamin Moore's corporate purchasing agent.

Although the paints and coatings sector is mature, the industry has been quick to respond to the needs of the marketplace, particularly in the environmental area. Driven by customer demands and government regulations, coatings formulators all over the world are striving to reduce VOC [volatile organic compound] levels and heavy metals such as lead and chromium in their formulations. Powder coatings, which do not use volatile solvents, are also gaining popularity for their low emissions.

"Environmental concerns have increased the number of customers demanding solvent-free raw materials solutions for producing coatings," says Chuck Reardon, a business manager for Dow Polyurethanes. The trend, he adds, has created opportunities for Dow's waterborne polyurethane dispersion technology in new coating applications.

At PPG Industries, Pittsburgh, Pa., Mike Ludlow, senior vice president, OEM coatings, says "we're moving from solvents to water-based coatings wherever possible" and also stressing high-solids formulations when solvents are necessary. Ciba Specialty Chemicals, meanwhile, has a new photoinitiator for water-based UV-curable polyurethane coatings for wood, metal and other surfaces. The product, dubbed Irgacure 819 DW, helps close the traditional performance gap between water-based and solvent-based coatings, says Peter Schirmann, vice president of Ciba's coating business line for the NAFTA region. At Air Products and Chemicals, Allentown, Pa., there is a "significant demand" for the company's waterborne curing agents and specialty resins in coatings markets, says Marino Papazoglou, market manager for Air Products' epoxy additives business in North America. The company also has a full slate of high-solids curing agents to help its customers meet government regulations, he adds.

In other environmental areas, "there's been a movement in the paints and coatings industry to remove heavy metals for quite some time," says Ciba's Schirmann. "There's been an awful lot of legislation on this," he continues, "and industry groups are working with suppliers to remove lead and chromates and other heavy metals in formulations." Schirmann points to several new Ciba entries in the company's Irgazin line of pigments that replace heavy metals. PPG has recently launched an "eighth generation" electrocoating formulation that is lead-free. Getting the lead out of electrocoating systems is a "major push" in the coatings industry, Ludlow says.

Industrial coatings manufacturers have also been stressing powder coatings for their environmental benefits. They are now enlarging the scope of their offerings in this area. Ludlow says PPG is now introducing low-temperature curing powder formulations. "They save our customers money because they can run their [curing] furnaces at lower temperatures," he explains.

Ciba has just introduced a UV absorber for powder coatings designed to offer "an ideal melting point, high photo-permanence and excellent thermostability." The new triazine-based additive, known as Tinuvin 405, is geared to automotive clear coats, finishes for plastics and wood, and industrial coatings.

Beyond launching innovative products, paint and coating suppliers are vigorously paring their costs. This is necessary because players in the industry are squeezed economically as never before. "We are in a period where our customers continuously look for lower pricing," says PPG's Ludlow, "while our supply base is looking for higher pricing."

Such strains have led to consolidation within the paints and coatings industry, a trend that has been going on for years. Phillips reports that there were about 2000 paint and coating suppliers in North America in 1975, a figure that was about 860 by 2001. And he forecasts that the number of suppliers will shrink by half within five to 10 years.

Consolidation has taken several forms. In one case marginal players in specific sectors are divesting these businesses. Last August, for example, Ferro Corp. announced it would sell its powder coating operations in Europe to Rohm and Haas and its powder coating businesses in North America and the Asia/Pacific region to Akzo Nobel. Both Rohm and Haas and Akzo Nobel are front-rank powder coating suppliers, while Ferro was always a secondary participant in the market.

In another example of consolidation, companies are buying up operations that broaden their global reach and technological capabilities. A case in point is PPG, which from 1997 to 2000 acquired more than 20 other paint and coating businesses or divisions in North America, Europe, Asia, Latin America, Australia and New Zealand. These acquisitions included BASFS packaging coatings operations and two ICI divisions: specialty coatings, and refinish and industrial coatings.

But even after they divest noncore businesses or acquire profitable new ones, paint makers are still striving to rein in their day-to-day costs.

To gain volume discounts, for example, Benjamin Moore sometimes enters into joint buying arrangements with noncompeting companies that purchase the same raw materials it does. "We typically go into these deals with companies that make products complementary to our lines, like caulking compounds and sealants," says Hagstrand, "since the commodities they buy have many of the same chemistries that we use in paints and coatings."

Benjamin Moore also uses reverse auctions for its purchasing, in which various suppliers bid online in real time to offer the company the lowest price for their raw materials. "A lot of preparation is necessary" for such auctions, says Ron Pousont, senior corporate purchasing agent at Benjamin Moore. In the bidding, he notes, "you typically want to focus on a handful of people you've done approval work for and whose level of quality you know something about." Benjamin Moore also uses reverse auctions to let its suppliers bid down their freight charges. Once the bids are in "if we find we have a lower cost freight carrier, we'll use our own versus the supplier's," says Hagstrand.

E-commerce is playing a role in helping paint and coating manufacturers to trim their marketing costs and assist their customers. For example, Air Products' new AP Direct online system "allows our customers to get into our infrastructure and work with our customer service organization to place orders," says Papazoglou. He adds that a new Air Products Web site offers in-depth knowledge of the company's coating products and is linked to AP Direct so that interested customers can place orders. In general, says Papazoglou, "the e-world is enabling us to reach a wider base of people."

Leading titanium dioxide supplier Millennium Chemicals recently launched an online transaction Web site for its customers. According to Gary Cianfichi, vice present of Millennium's global coatings segment, the new site, Millennium Direct, provides customers with "a secure environment to place orders with immediate delivery confirmation, the ability to check and change orders [and] access account status and invoice details."

Not only are coatings suppliers extending the efficiency of their marketing operations, they are also extending the range of services they offer. PPG, for one, has been particularly active in this area. The company recently began a program targeted at customers in the automotive, aerospace, general industrial and packaging industries who outsource their coating operations. The program, known as Total Service Solutions, offers such support as chemical and fluid management, process management and logistics. It also supplies paint reducers, paint detackification products, purge solvents and paint-line cleaners. The service can also provide the personnel to apply these products and processes.

Where is the paints and coatings industry headed? For the most part, the forecast is for slow improvement over the next two years. At PPG's OEM coatings business, 2003 will be "pretty flat compared to this year," with a gradual upturn as North America and Europe emerge from recession, predicts Ludlow. Air Products' Papazoglou believes that sales in his epoxy additives division will improve 2-4% in 2003, closely paralleling the expected rise in GDP. At Millennium, Cianfichi forecasts titanium dioxide sales in paints and coatings will increase 2-4% in North America and Europe, and 3-6% in the rest of the world. And Ciba's Schirmann thinks it could be late 2003 or early 2004 before his firm's sales in paints and coatings markets display the vigor they showed in 1999 and 2000.