Semi-annual Report on Coatings Market in EU Countries

The European economy is being affected by the global economic recession.

But for European paint manufacturers, this is an opportunity to show how they can restructure themselves to cope with economic pressures.

In the first half of this year, the demand for coatings in downstream application industries has been stagnating, and some industries have even declined. However, although the sales of coatings enterprises at home and abroad have been declining, or at most only slightly increasing, their profits are increasing, some even reaching double-digit levels. Coatings companies are seeing the benefits of adopting a strategy focused on improving profit margins by streamlining product mix, introducing cost reduction plans and implementing operational efficiency.

Although economic analysts predict that economic growth in Europe and the world will slow down this year, paint companies expect that 2019 will be a year of weak sales growth but increased profitability.

The Economic and Financial Affairs Bureau of the European Commission, the European Union's executive body in Brussels, predicted this summer that the EU's GDP growth rate would fall from 1.9% in 2018 to 1.2%.

It attributes the slowdown to trade frictions and other factors, such as tensions between China and the United States, and the continued weakness of global industrial output. An index of industrial confidence in the European Union based on a company survey showed the biggest decline in eight years. The main reason for this decline in confidence is the difficulties of Germany's export-oriented economy, with Germany's output falling by 0.1% in the second quarter compared with the previous three months.

In the autumn of this year, the economic growth rate of the 19 euro-zone countries fell by half to 0.2% in the second quarter. Germany is the economic stronghold of Europe and has the largest coatings industry. Its export value of coatings products is almost three times that of imports.

Most of the economic slowdown in Europe occurred in Western countries, while the GDP of Central and Eastern European countries continued to grow relatively strongly, and the paint industry flourished.

Britain's paint business also seems to be doing well. Despite uncertainty about Britain's exit from Europe, Britain will postpone its exit from the EU in late March until the end of October 2019. From April to June this year, the British economy shrank by 0.2%, the first contraction since 2012.

Usually, the British paint industry follows the trend of GDP, so when the domestic economic recession, the paint industry output will also decline, usually along with sales.

In fact, the opposite has happened since this year. In the first half of 2017, sales of decorative coatings in Britain increased by 5% in sales and 8% in value terms, while annual sales in 2017 and 2018 declined or remained flat.

"This is the reserve effect of Britain's de-Europe," said Tom Bauer, chief executive of the British Coatings Federation (BCF). "Businesses are worried about tariffs and customs delays after Britain's exit from Europe".

Once Britain leaves Europe, supply chain difficulties may become a problem in some markets, especially in Nordic Europe, where Britain is currently the European supplier of finished products and raw materials.

According to BCF data, 84% of imports of coatings and inks in the UK come from other parts of Europe. However, for most parts of Europe, the main challenge now is to offset the slowdown or decline in sales caused by the current recession, as well as rising prices and lower costs of production and other businesses. Akzo Nobel, a European paint multinational company, is the market leader in decoration and key industrial coatings industries in Europe. In the first half of 2019, it offset the impact of flat or low sales revenue with higher sales revenue.

The adjusted operating income increased by 25% in the second quarter and 36% in the first half of the year.

Akzo Nobel has more than 40% sales in Europe, and most of the rest in the Asia-Pacific region have been focusing on price, discount and credit portfolio initiatives, using price increases to tap the value of its high-quality products to prevent sales falling. In decoration business, sales fell by 5% in the first half of the year, mainly due to the decline in the Chinese market, but offset by a 5% rise in price portfolio.

In high performance coatings, there is a similar strategy, that is, production decline is mainly compensated by 6% price combination increase.

The company is trying to achieve an average 15% sales return (ROS) by 2020. In the second quarter, the ROS of Akzo Nobel decorative coatings business was 13.5%, compared with 12.2% in the same period in 2018, and 13.6% in the high performance coatings business, compared with 11.8% in the same period. Basf lags behind Akzo Nobel in sales, but is also a leading supplier of raw materials. It has followed a similar strategy to compensate for the decline in sales through price increases and cost control.

This year, the company was hit by a slowdown in car sales in Europe and other parts of the world.

According to BASF, global auto production fell by 6% in the first half of the year, while China's auto market, the main exporter of BASF, fell by 13%. Nevertheless, the company achieved a "significant" rise in paint prices, which helped EBITDA (interest, tax, depreciation and pre-amortization profit) of its surface technology sector (including its paint business) grow by 7%.