European Paint & Resin News - Executive Briefings 2003

EPRN EXECUTIVE BRIEFING - September 2003

According to the German paint industry trade association VdL the prospects for the domestic paint market this year - excluding exports - are far from promising. Decorative paints, wood finishes and anti-corrosive systems are seen as weak spots although automotive OEM and some industrial coatings offer rays of hope.

Slight growth in the DIY sector will be unable to recoup losses in the much larger professional trade sector. Furniture/wood coatings, which contracted in 2002, will continue to make volume losses in 2003. The market for marine paints is expected to shrink in 2003, following a fall in 2002. Anti-corrosive paints, due to lack of both public and private investment, will contract in 2003.

In value terms, domestic paint consumption is projected to shrink in 2003, with decorative paints falling.

Both automotive OEM finishes and refinishes are expected show zero growth, while general industrial coatings are likely to grow in value in 2003. Maier, C. Farbe Lack, Sep 2003, 109 (9), 98-100

EPRN EXECUTIVE BRIEFING - August 2003

The White House, which is kept that way by German mineral paint supplier Keimfarben GmbH (see p3), has seized on a report showing growth in manufacturing in the United States as the latest sign the economic recovery is gaining momentum. The Institute for Supply Management said manufacturing activity expanded in August for the second consecutive month.

Mr. Bush is calling on Congress to enact measures he says will further stimulate the economy including tort reform, a comprehensive energy bill and restraints on federal spending. On Labor Day, the president announced measures designed to boost growth in manufacturing including appointing a ‘manufacturing czar’.

Results for manufacturers in this month’s Company Results section for US companies give a mixed message; PPG, Sherwin-Williams and Valspar report improved results, whereas Rohm & Haas reversed to a small second-quarter loss and Eastman Chemical Co. announced that nearly 20% of its specialty chemicals business is losing money and will need to be sold or restructured.

Since the last time President Bush addressed a Labor Day picnic the economy has lost 700,000 jobs and Mr. Bush’s only new announcement in a speech this year, the traditional start of campaign season in election years, the creation of an assistant secretary of commerce for manufacturing, is the kind of action that Republicans used to criticize. In fact, around 3M jobs have been lost since Mr. Bush took office, about 2.5M of them in manufacturing. Mr. Bush never explicitly mentioned China, but when he said much of the job loss was ‘because production moved overseas,’ he appeared to be referring to China and other low-cost countries.

The US Treasury is trying to persuade the Chinese to let their currency appreciate against the dollar, after American manufacturers have complained that the administration allowed the Chinese to keep their currency artificially cheap. Mr Bush’s commitment to bring back manufacturing jobs came despite recent statements by the chairman of the Federal Reserve, Alan Greenspan, that many of those jobs are most likely gone for good as the United States turns more into a producer of ideas, and less a manufacturer of goods. Instead, Mr. Bush said, ‘I understand for a full recovery, to make sure people can find work, that manufacturing must do better.’

The UN Conference on Trade & Development ranks the US as the leading nation in 2002 for foreign direct investment - more than three times that for China. However, the nation’s trade deficit could prove a potent issue if the Democratic candidates find an effective way to put the blame on Mr. Bush. Mr. Bush said that he would enforce trade rules in ways that would protect American workers. ‘See, we in America believe we can compete with anybody, just so long as the rules are fair, and we intend to keep the rules fair,’ he said. New York Times, 2 Sept 2003; Bill Sammon, the Washington Times 3.9.03; Financial Times, 26 Aug 2003, 1

EPRN EXECUTIVE BRIEFING - July 2003

ICI reported a fall in second quarter profits. Sales for the quarter were lower than 2002. A further 1,400 job cuts were announced, including 300 in the UK, on top of 700 redundancies announced in May as the group launched a major restructuring programme to reverse declining profits.

Earlier, the Akzo Nobel group reported sales down during the second quarter of 2003, with operating income down and net income also down. Akzo said that restructuring programmes are progressing to schedule and announced a major worldwide restructuring of transportation coatings and a restructuring of powder coatings in Italy. The Impregnated Papers business was sold in June.

For both companies however, coatings were a bright spot.

ICI claimed another good quarter for Paints, with comparable sales ahead and growth in Europe, Asia and Latin America. Gross margin percentages were in line with last year, and comparable trading profit was ahead for the quarter. John McAdam, Chief Executive, said ‘ICI’s performance improved from the first to the second quarter. Paints continued to perform well, and National Starch improved considerably, delivering comparable trading profit in line with last year.’

For Akzo Nobel The Pharma Division took the brunt of the losses. Coatings turned in ‘a solid overall performance’, with a more modest decline in operating income and in sales. The Resins business in the Chemicals Division reported sales down in the second quarter and in the first half of 2003. Akzo Nobel Report for the 2nd Quarter of 2003, 18 Jul 2003, ICI Group Results, 28 Jul 2003.The Guardian, 31 Jul 2003

EPRN EXECTIVE BRIEFING - June 2003

Europe has a 32% share of the global adhesives and sealants market.

According to PCI Film Consulting, the global market is expected to reach 16.6M tonnes by 2004.

China, Japan and the USA are the largest adhesives markets. Globally, the market, with some 4000 companies, remains fragmented.

The European adhesives industry numbers some 480 companies, employing 32,000 people. The four largest producers are Henkel, National Starch (ICI), HB Fuller and Bostik Findley.

The European product breakdown by chemical type favours dispersions.

Economics and environmental legislation are the major issues facing industry while economic threats include overcapacity, declining margins and rising raw material prices. The cost of feedstocks is the biggest current problem; raw material prices over the last year have been rising - higher for vinyl acetate and acrylic monomers.

Legislative issues centre on the European Commission’s proposed Chemicals policy. The requirement to register, evaluate and authorise chemicals is likely have a profound impact; relocation of the industry outside the EU being a real possibility. Gordon, M. Europ Chem News, 2-8 Jun 2003, 78 (2055), 29-30

EPRN EXECUTIVE BRIEFING - May 2003

Ahead of its traditional spring analysts meeting, Akzo Nobel’s new CEO Hans Wijers announced a divestment programme for its chemicals business to cut debt and acquire coatings activities. The immediate result was a rise in Akzo Nobel shares, although they were down by more than 20% since the start of the year.

Two weeks later on 28 May Akzo Nobel duly announced the divestment of its Impregnated Papers business to Deutsche Beteiligungs AG and Harvest Partners Inc. by the end of June. By then Akzo Nobel’s Car Refinishes business had acquired the bus painting facilities of Omni AB in Sweden.

The bulk of the divestments were likely to be in the chemicals unit, which has a number of underperforming activities, Wijers said. It also planned to cut at jobs strong pharma unit by the end of the year. Both Akzo Nobel and ICI suffered in the first quarter of 2003 due to parts of the chemicals groups other than their coatings activities.

First quarter results from ICI (see page 6) were mostly downward with group sales lower, while pre-tax profit for the group fell. The Paints Division, however, reported higher profits on lower sales.

Akzo Nobel group meanwhile experienced a drop in net earnings with group sales down. Adverse factors included negative currency movements higher pension charges and a significant increase in generic competition in its human healthcare business Organon. The coatings business showed a drop in sales but an autonomous sales growth due to an increase of both volume and prices against a negative currency effect. Return on sales during the quarter fell, resulting in operating income falling and EBITDA down. Industrial activities, however, held up well. The restructuring programme continued, with a reduction in the workforce in the first quarter.

Chemicals were slightly down and operating income down in the first quarter. The resins business also experienced a decline. Earnings are expected to be significantly down in 2003. Cost and debt reduction will be strong priorities.

Akzo is feeling robust about its coatings activities however, aiming to reach 30% return on income. Innovation in clean technologies, it says, is to be stepped up. While the economic conditions in Europe and the Americas are ‘testing’, it also reports the new Ferro acquisitions in China and Korea are performing better than planned and the newly opened facility in Vietnam is progressing well.

A chemicals portfolio assessment is in progress, focusing on scope, performance and cost. Divestment are expected to create more room for manoeuvre.(Akzo Nobel Press Release, 15 May 2003, 16 Apr 2003, 29 April 2003, www.pressi.com 28 May 2003)

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EPRN EXECUTIVE BRIEFING - April 2003

The latest source of scare stories in the UK press has emerged. The Prince of Wales has made it known that he is worried about ‘potentially enormous environmental and social risks' of nano-technology based on the report The Big Down, published in January by ETC, a group of Canadian environmental and social campaigners. This puts forward an apocalyptic vision of 'grey goo', where nano-robots replicate themselves millions of times over. The Prince of Wales is concerned that the science might not be adequately regulated.

In reality, nano-technology is a wide-ranging concept, spanning processes, applications and products in diverse areas with one common denominator: the nanometre size order. The concept comprises nano-based materials and products as well as manufacturing and analytical techniques.

A survey by the US-based Nano Business Alliance (NBA) into 150 nano-technology start-ups and spin-offs gives an insight into the scope of their applications, although nearly one-third relate to materials and production techniques.

US Nano-Technology Enterprises by Application, 2001 are as follows:

NBA estimates the global market at €54BN. DG Bank, reckoning with a 15-17% annual growth rate, predicts a market size of €220BN by 2010, which NBA thinks could be reached in 2005.

The nano-technology market in 2001, according to DG Bank, is composed of ultra-thin layers, nano particles & composites, surface treatment processes, analysis of nano structures and lateral nano structures. For 2010, global nano-technology activities are projected to have changed.

In the global nano-technology coatings market, still dominated by traditional applications, nano-technology is expected to make an impact in the electronic and information technology niches, eg coatings for data storage or thin coatings for IT building elements. Innovative coatings are likely to include easy-to-clean or self-cleaning surfaces. Surfaces with programmable properties, pertaining to variable colour or adhesion, are still further in the future. Scratch-resistant surfaces offer further opportunities.

Niche markets are capable of generating substantial sales in the future. Small start-ups will contribute significantly to growth, but making money from nano-technology will be more difficult than first imagined, even in science fiction.

EPRN EXECUTIVE BRIEFING - March 2003

The top ten decorative paint producers in Western Europe have a combined market share of 53. The leading companies are as follows:

Speaking at the recent Coatings Summit in the Bahamas (see EPRN, Februray 2003, page 1), SigmaKalon’s CEO Pierre-Marie De Leener highlighted the degree to which concentration prevails in various sectors of the paint industry.

In the facade paint market, the top three producers control a quarter of the West European market.

The degree of concentration varies from country to country - with a tendency for greater concentration in Northern Europe. Thus in Finland, two companies - Tikkurila and Teknos - cover most of the market. Likewise in Norway (Jotun and Akzo Nobel), in the UK (ICI, Akzo Nobel and SigmaKalon) and in Sweden (Tikkurila, Akzo Nobel and Fluegger). In Germany, the three market leaders DAW, Ostendorf and Sto control about half of the market. A similar situation prevails in France where the market is divided between SigmaKalon, Lafarge and Akzo Nobel.

In contrast, the Italian market could easily sustain further consolidation as the top three - Lafarge, Akzo Nobel and ICI - enjoy less than 20% overall.

Other sectors are more concentrated: in the automotive OEM industry, DuPont, PPG and BASF control more than half of the world market. The case is similar in the global packaging market, which is shared by ICI, PPG and Valspar. In the refinishing market, Akzo Nobel, BASF, DuPont and PPG have a combined share of more than three quarters. (Farbe Lack, Mar 2003, 109 (3) 9).

EPRN Executive Briefing - February 2003

In what sounds an ideal retreat for blue sky thinking, key figures gathered for the a global Coatings Summit at the British Colonial Hilton Hotel in Nassau, on 13 and 14 January. Hosts Neville D. Petersen, President of the International Coatings and Printing Ink Council and Juergen Nowak, Publisher at Vincentz Netzwork plus thirteen speakers, including the heads of global top ten players PPG, BASF Coatings, SigmaKalon, RPM and Valspar, discussed their visions over two days.

Common problems identified were low profitability caused by paint companies being squeezed half way in the value chain between its suppliers and the final customer. Dr. Alan Barton, Vice President/BU Director of Coatings, Rohm and Haas, charted the positions of petrochemical producers, at the source (very profitable), the chemical feedstocks companies (holding their margins), the coatings manufacturers (low profitability), yet the, next in line, retailers enjoying some very healthy profits. Manufacturers are selling ‘below value’, and failing to convey the benefits to customers was the verdict.

Steen Bjerre, President and CEO of Dyrup, Denmark, told his coatings colleagues that it will become more and more important to manage skilfully a mixture of brands. It was vital to get away from technology-laden brand name towards names that clearly described the benefit to customers. Ronseal in their UK advertising has successfully, and clearly, communicated that their products "does exactly what it says on the can".

To redress the imbalance of power between supplier and customer the consensus was the need to consolidate. Chuck Bunch identified four sectors which have completed this process: automotive OEM, auto motive refinish, packaging and aerospace coatings. Marine coatings could arguably be added to the list. However, in other end uses, and in territories such as southern Europe and Germany, there remains a "hopeless plethora" of small formulators. Few of these companies are attractive to acquirers, so many are destined to suffer a slow death, while damaging the market for any survivors. (Europ Coat Journal, 1- 2.03, 63 - 65; PPCJ Feb 2003, 11 - 13)

EPRN Executive Briefing - January 2003

Seldom has a year started with such gloom, even the UK Prime Minister told us on New Year’s Day that this is going to be one of the worst years ever. However, this column refuses to flounder in pessimism and hopes to point toward paths through the slump.

The Coatings Agenda Europe 2003 survey of CEOs of 17 of the largest paint and coatings companies operating in Europe showed roughly the same levels of pessimism as last year although there was a slight improvement in the numbers feeling positive about recent market conditions. Over two third were of the opinion that there will be little change in the market.

Markets are chaotic and fickle, especially when investors are subject to a herding mentality. However, without inventing signs of a mythical upturn, in some respects the economy is robust with inflation and unemployment relatively low, at least in the UK.

A falling stock market leads shrewd investors to look for panic prices. In the 1930s John Maynard Keynes wrote, ‘many illogically become euphoric when stock prices rise and unhappy when they fall. I feel no shame at being found still owning a share when the bottom of the market comes’. Or as Warren Buffett, of Berkshire Hathaway, put it in 1990 ‘The most common cause of low prices is pessimism. We want to do business in such an environment, not because we like pessimism but because we like the prices. It’s optimism that is the enemy of the rational buyer.’

Business leaders may expect things to muddle along but 2003 may be a time for the wise to invest. Appalled at the prospect of war, many will be put off, but this worry, fear, and distaste for what lies ahead can distort appraisal of purely economic factors. In his book, "Common Stocks and Uncommon Profits" Philip A Fisher states ‘whenever American forces have become involved in any fighting whatever, the American stock market has plunged sharply downward...Nevertheless, at the conclusion of all fighting - regardless of whether it was World War I, World War II or Korea - most stocks were selling at levels vastly higher than prevailed before there was any thought of war at all.’

Previous Years: 2002: 2001