Record feedstock costs make resins and pigments pricier

Paint ingredient suppliers say they have to boost rates to survive, but their options are limited in a competitive market.

Gordon Graff -- Purchasing, 10/7/2004

When costs of the hydrocarbon raw materials for paints and coatings started rising about two years ago, producers of the resins, emulsions and pigments that go into paints held off putting through any major price hikes of their own in the expectation that hydrocarbons would soon retreat, as they always had in the past. But those rates have stayed elevated, forcing resin and pigment makers to ratchet up their prices this year at a frenetic pace. Contributing to this upward price pressure, say industry sources, is a strong demand for paints and coatings and growing competition for some scarce paint raw materials from Asian customers.

But raw materials costs remain the paint and coating industry's biggest challenge. Take natural gas, a precursor to many ethylene-based and vinyl-acetate-based paint resins. For years, the going rate for natural gas in North America was in the $2-$3/million Btu range, with occasional higher spikes. But beginning in late 2002 and into early 2003, gas began climbing toward its present level in excess of $5/million Btu, and has seldom dropped below that mark.

Or consider propylene, the starting point of many acrylic paint emulsions. Two years ago the price of this commodity was 15-20¢/lb. Today it hovers in the 25-30¢/lb area. Another paint and coating monomer, styrene, sold for $650-700/metric ton early this year; it is now going for about $1,300/metric ton.

For pigment raw materials, the increases have been similar in magnitude. Sun Chemical, for example, reports steep increases in the costs of the azo intermediates and phthalocyanine crudes it uses to produce its paint pigments. Most azo intermediates are derivatives of benzene, which has more than doubled in price this year. The other raw materials, phthalocyanine crudes, are derived from phthalic anhydride, which has jumped 25% in price this year. Meanwhile, costs of the glycol solvents used to produce the phthalocyanine pigments have nearly doubled, which Sun attributes partly to exports of large amounts of glycols from the U.S. to China, where prices are favorable at the moment. Even cuprous chloride, an inorganic paint pigment, is up 50% in price this year, Sun notes, mostly due to rising copper prices.

Of course, sudden jumps in raw materials costs are nothing new in the paint and coatings industry. But Thayne Hansen, global business director for the UCAR Emulsion Systems unit of Dow Chemical, says the temporary spikes of the past were tolerable, likening them to waves impacting a bather at the beach. "If I get hit by an occasional wave, but the level of the ocean stays the same, okay I just endure it," he says. On the other hand, "if I'm standing there and the tide comes in and stays up, then I'm under water." This "high tide" of raw materials prices is the situation that now confronts paint and coating ingredient manufacturers, Hansen says, and is the reason why they can no longer "eat" those higher costs as they once did. As he sees it, raising prices is the only way resin and pigment manufacturers "can remain viable, competent, quality suppliers" to their downstream customers.

Those price increases have been widespread and frequent this year, with companies stepping up their rates every three to six months. Among the major paint ingredient manufacturers, Dow, BASF, Rohm and Haas, DSM, Air Products Polymers and Resolution Performance Products have recently announced hikes. Products that have seen the biggest increases include acrylic, vinyl acrylic, styrene acrylic, styrene butadiene, polyester and polyurethane resins and emulsions. Epoxy coating resins have also gone up steeply. In almost every case, these companies have attributed their higher rates to surging petrochemical feedstock, energy and transportation costs.

While the announced increases have been mostly in the 8% to 15% range, these hikes have not been totally accepted by paint and coating formulators, who have very limited ability to pass through these higher costs to their consumer and industrial customers. According to Phil G. Phillips, president of Chemark Consulting Group, Southern Pines, N.C., the actual percentage increases in paint ingredient tags that are sticking are closer to 3% or 4%. Some resin and emulsion suppliers, he adds, are raising their rates in relatively small but frequent steps—say 2.5% every three months—to make the increases "a little more digestible" for their customers.

Whatever the magnitude and frequency of the hikes, suppliers say they are not enough. When it comes to paint and coating ingredients, "unfortunately, we have only been able to pass on a fraction of our cost increases to the market this year," says Werner Peter, business director for BASF Performance Chemicals.

One reason paint ingredient suppliers cannot totally recoup their higher cost burdens is that many of their customers sell into very competitive markets where higher price tags do not go over well. "The big-box stores like Wal-Mart, Home Depot and Lowe's are not going to allow their paint suppliers to do much in raising prices," says Phillips. "If anything," he adds, "they tend to push back" when the subject of higher prices comes up, offering their suppliers various inducements to lower their rates.

With pressures from their downstream customers to hold the line on prices, paint ingredient suppliers are finding other ways to economize. One option is to source in lower-cost regions. Werner says that his division of BASF, which supplies coating resins and pigments in North America, sees "declining market price pressure via Asian imports." A spokesman for Sun Chemical, which produces pigments for paints, coatings and inks, says the company is dealing with cost increases by "constantly searching for alternative sources" of raw materials and "focusing on [raising] the productivity of our factories."

Rohm and Haas vice president for powder coatings M. Reggie Horne says that the company has partially offset cost increases by maximizing its manufacturing efficiencies and purchasing power, and by "reducing cost through the supply chain."

For U.S. or European companies, however, sourcing in Asia or elsewhere for raw materials has its limits, Hansen says. For instance, some acrylic monomers such as two-ethylhexyl acrylate, methyl methacrylate and butyl acrylate have gone up in price nearly everywhere, he notes.

Paint companies have tried to save money by switching to less expensive ingredients, or by reducing levels of the higher-priced components in their formulations. Others are sourcing their latexes and other paint ingredients overseas. However, notes Hansen, reformulations are often impractical for quality and qualification reasons. And U.S. paint manufacturers who purchase latexes in Asia, he adds, have to pay a premium in transportation costs because of the long distances involved and the heavy water content (about 50%) of most latexes.

But the staggering hydrocarbon costs that are at the root of the turmoil in the paint and coatings industry are unlikely to ease in the near future. Natural gas, says Hansen, will probably remain at its present towering level "for at least the next two years." In the past, he adds, petrochemical feedstock hikes tended to be absorbed primarily by first- or second-tier users of hydrocarbons. But for the paint and coatings industry, says Hansen, the latest cost hardships will have to be borne "up and down the value chain."