Soaring costs look to continue for paint makers

Difficulty in passing on raw materials hikes reported

Gordon Graff -- Purchasing, 10/6/2005

Like just about all segments of the chemical industry, paint and coating manufacturers have been battered this year by record hikes in raw materials and energy costs. Unlike other chemical businesses, however, paint and coating companies have been only partially successful in passing along these higher outlays. Supplies of paint and coating raw materials have been tight but adequate for most of the year, but production disruptions caused by the recent hurricane along the Gulf Coast could lead to some shortages, say industry sources.

When it comes to raw materials price increases for 2005, "we've never seen anything like it," says Cliff Tishler, vice president for sales and marketing at Soluol, a manufacturer of polyurethane coatings based in West Warwick, R.I. And the problems are not confined to raw materials prices alone. "Our suppliers want to be paid sooner than they ever have," he adds, "and double-digit price increases every three to six months are common these days" for the steel and plastic containers used to package the company's coatings.

"Almost across the board our raw materials have seen unprecedented increases this year," says Tom Dougherty, marketing manager for the Pittsburgh Paints brand of PPG Industries. Specifically, he adds, the increases have affected resins, pigments and solvents, as well as packaging and distribution costs.

For coatings producers "energy costs have gone through the roof" in 2005, comments Scott Borst, team leader in the buildings and coatings division of silicone coatings producer Wacker Chemical. This trend, he notes, has driven up raw materials and operating costs at his Adrian, Mich.-based company. "But we can only raise our own prices to a limited degree," Borst notes, due to "push-back" from downstream customers.

Most purchasers of paint-related materials view raw-materials supplies as snug. This is particularly true of titanium dioxide (TiO2), the widely used white pigment. In fact, DuPont cited the "continued tight supply-demand situation for TiO2 around the globe" as the reason behind its 4¢/lb jump in prices for that pigment (about a 5% increase), effective last July 1. Similar hikes in TiO2 rates were announced during the past few months by Kronos, Kerr-McGee and Lyondell Chemical.

The already constrained supply situation for TiO2 could get worse as a result of Hurricane Katrina. In early September, DuPont said that its major TiO2 facility in DeLisle, Miss. was put out of commission due to extensive flooding caused by the storm. The company did not give an estimate when the plant could be restarted.

For the most part, though, there are no critical shortages of paint ingredients. "We have not been in a situation where we couldn't put out a product because we lacked raw materials," says Dougherty, adding that his company's large size and long-term contracts with suppliers have ensured a steady flow of supplies. The biggest impact of raw materials tightness on paint and coating manufacturers, he notes, has been its upward pressure on prices.

Some 1.56 billion gallons of paints and coatings were shipped by U.S. manufacturers in 2004, an increase of 6.2% over the previous year, according to the U.S. Dept. of Commerce. The value of these sales in 2004 was $19.5 billion, 7.5% greater than in 2003. Architectural coatings made up the largest segment of paints and coatings in 2004, with 52% of U.S. sales by volume, the Commerce Dept. figures show. Product coatings at OEMs comprised 27% of the total sales volume, and special-purpose coatings made up 11%. Miscellaneous allied paint products such as paint removers, paint thinners and pigment dispersions, accounted for the remaining 10% of sales.

Global demand for paints and coatings by volume is expected to grow by an average of 3.5% annually through 2007, according to a 2004 report on the industry by the Freedonia Group. Highest growth rates, the firm predicts, will be in the Asia/Pacific region, as well as in Eastern Europe and Latin America. Faster than average expansion will also occur among products with environmental benefits, such as powder and radiation-curable coatings. The long-term switch from solvent-based to water-based paints is a trend that should continue unabated through 2007, Freedonia says.

Government and industry statistics illustrate just how restrained producers of finished paints and coatings have been in passing along higher raw materials costs. Between July 2004 and July 2005, the producer price index of prepared paints, as recorded by the U.S. Dept. of Labor's Bureau of Labor Statistics, rose 7.3%. But during the same period, the producer price index for paint ingredients ("paint materials"), as reported by the National Paint and Coatings Assoc., a trade group, climbed 13.6%.

Most manufacturers of finished paints and coatings have pushed through two or three price increases during the past 18 months. PPG has followed suit along with the rest of the industry, says Dougherty, who notes that the rate hikes at the company "are nothing close to the magnitude [of cost increases] we're absorbing." Paint producers say they face resistance to price increases at all levels, from the "big box" stores and retail outlets to contractors and OEMs.

Given their inability to transfer their extra cost burdens completely to their customers, paint and coating producers are keeping up their margins by cutting their own costs, wherever possible. For example, Borst says that his firm tries to formulate products with raw materials that show "less volatility" in supply and price than conventional ingredients. But the need to keep up quality in the product, limits the changes that can be made in formulations, he adds. Dougherty says that "we try to improve our manufacturing efficiencies in the factory" to lower costs. As for the reformulation route to savings, he says that "we avoid that," at least as a short-term fix for sudden jumps in ingredient costs.

While tags for nearly all classes of paint ingredients have shot up over the past year, some have risen faster than others, and this could eventually work to the advantage of some classes of products. For example, Tishler says prices of raw materials for urethane coatings have not gone up as fast as for the ingredients used to make acrylic coatings, which are typically cheaper than urethanes. This has made the price differential between these two competing coatings smaller. And that, he says, could cause some acrylic users to switch to urethanes because of their better cost-benefit profile.