Global Paint and Coating Industry

Overview Per World Paint & Coatings Industry Association (WPCIA), the global paint coating industry is sized at $120bn in 2012 growing 10% yoy. One of the key factors of the paint market growth is the rapid development of the global construction industry. The new environmentally friendly paint will be the development of a new trend in the global paints and coatings market. However, due to the lack of effective production technology and product quality management to and bring differentiation will face a new challenge. The Asia-Pacific region is still the world's largest paint consumption ranked first in a yield of 42% in 2012. Asia, China accounted for more than half of consumption, and the slowdown in the rapid expansion of the past. At present, India is about 15% of the trading volume of the region, and continues to increase its market share. Europe is the second largest market, accounting for 27% of global volume. Following 20+ years of consolidation in the global coating industry, Akzo Nobel (Netherlands-based), PPG, and Sherwin-Williams are the top three players. Further, the top 10 coatings players sum to ~60% of the overall market, with the business models typically asset light and thus free cash flow generative. Accordingly, experts believe that the consolidation cycle will likely be iterative and secular over the next decade, underlying continued margin improvement as a function of further supply chain optimization and improved critical mass. Mature markets tend to form an anti-inflationary environment and this compels companies to reduce costs, and at the same time, enhance productivity. As a result of this, larger companies are left with no alternative but to integrate respective operations into a single entity in order to maintain synergies, cut down on costs and to jointly initiate R&D and marketing efforts to increase sales. The paint and coatings industry largely depends on the purpose of the market, such as the need to meet the key industrial sectors are construction, steel, marine, automotive and wooden furniture. The emerging markets are showing growth potential of the huge architectural paints and industrial coatings. The growing demand to promote green-based chemicals, such as zero volatile organic compounds (VOC) paints, solvent-based products based on the replacement of water-based products. Paint manufacturers are focusing on cutting-edge innovations to meet the requirements of consumers and regulators. Key vendors dominating this space include PPG Industries, Diamond Company, and AkzoNobel.

Industry Segments The coating market can be divided into three major segments: architectural, original equipment manufacturers (OEM), and special purpose.
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Architectural: The largest segment of the coating industry produces architectural coatings including consumer paints which make up over half of the total coatings produced annually in the United States. In 2008, the US industry shipped more than 682 million gallons of architectural coatings, with a value of $8.6 bn. Products under this category are used to beautify and maintain the surfaces of homes, public buildings, offices and factories. About half are applied by do-it-yourself consumers, who recognize that paint is the most versatile, least costly and easiest to use of all home decorating products. OEM/Industrial: OEM coatings include coatings used for cars, buses, trucks, motorcycles and other automobiles. Coatings applied on aircrafts are grouped under Other Industrial coatings and coatings used for pre -finished metal sheets and plastic bodies of automobiles are not included in this segment. Special Purpose Coatings: This industry segment includes a wide array of divergent coatings. The one unifying characteristic is that these are industrial coatings that tend to be "field-applied," as opposed to being applied in a factory setting. Special purpose coatings represent the smallest of the three major classifications of coatings. This segment can be divided into the following major sub-segments: o Automotive refinish coating is the largest sub-segment, with a value of $2.052 bn in 2009. o Industrial maintenance coating is the second largest sub-segment, with a value of $737mm in 2009. o Aerosol coatings, mostly used by DIY (do-it-yourself) consumers for touch-up of painted surfaces, had a value of $721 mm in 2009. o Marine paints, including both OEM (original equipment manufacturer) and refinish applications, had a value of $275 mm in 2009. o Traffic marking paint, used on roadways, parking lots and airport surfaces, had a value of $317 mm in 2009.

US Coating Market Snapshot The U.S. coatings industry has declined significantly from the peaks of 2006-2007. In 2009, the industry hit bottom; a modest recovery began in 2010. The table below summarizes estimated consumption by segment for 2006 and 2009. Architectural coatings were 55% of the coating gallons and 42% of the dollars in 2009. The housing industry has declined significantly the last few years and commercial building activity has also fallen dramatically.
US Coating Consumption by Segment, in millions 2006 2009 Change Gallons $ Gallons $ Gallons $ Architectural 924 9,520 740 8,100 -20% -15% OEM 395 8,560 300 6,600 -24% -23% Special Purpose 377 5,750 300 4,770 -20% -17% Total 1,696 23,830 1,340 19,470 -21% -18% Source: Kusumgar, Nerlfi & Growney
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OEM coatings were the leading dollar value segment in the industry at the start of the century but architectural coatings surpassed it early on. OEM coating volume plunged in 2008 and 2009 with automotive having the steepest drop. The OEM segment comprised 22% of the coating volume and about one-third of the dollars in 2009. Consumption in many OEM end uses is tied to the manufacturing economy and several coating outlets have suffered as production has moved offshore. Special purpose coatings were 22% of the coating industry volume and nearly one-quarter of the value. Larger end uses in the segment are automotive refinish, industrial maintenance, marine, roofs, traffic paint and aerosols. All end uses have declined in recent years as consumers and industry reduced their purchases. Greener coatings continue to be demanded. Cool roofs are an example of a technology that has surged as it offers reduced building energy costs and is seen as fighting climate change. Per latest information (2011), the US coatings industry is sized at $23bn, with OEM and Special purpose segments sized at $8bn and $6bn, respectively.

US Coating Market Outlook StrategyMark, a management consulting firm specializing in specialty chemicals rate paints and coatings companies with the strongest exposure to both North America and the architectural end market as "winners" in 2013. Though the modest recovery of the North American paint and coatings market since 2009 has been primarily driven by industrial markets, StrategyMark expects growth in 2013 and beyond to largely come from architectural (58% of volume and 40% of value). Key demand drivers for StrategyMark's expectation for 8.2% North American architectural volume growth include: o New residential construction (7% of demand): +15% in 2013 o Discretionary residential repair/remodel (50% of demand): +10% in 2013 o Residential repair/remodel from existing home turnover (20% of demand): +5% in 2013 o Commercial construction (23% of demand): +5% in 2013 StrategyMark sees 2013 growth prospects for automotive OEM paints and coatings as limited to 1.9% volume growth with 90% of demand tied to car builds. However, 2014 volume growth could improve to about 5% in 2014 based on industry vehicle production forecasts. Automotive refinish (part of Special Purpose coatings), is the highest margin segment the industry but in secular decline due to lower collision rates. The firm noted that the end market has historically exhibited a high level of customer brand loyalty (e.g., market share changes measured by one tenth of a percentage point annually).
US Coating Industry Segment Contribution 2006 2009 2012 Volume Value Volume Value Volume Architectural 54% 40% 55% 42% 58% OEM 23% 36% 22% 34% 26% Special Purpose 22% 24% 22% 24% 16% Source: Kusumgar, Nerlfi & Growney, StrategyMark

Value 40% 34% 26%

StrategyMark forecasts that the North American coatings market will grow at roughly 5% in 2013, which owes in part to the fact that volume levels are still 10-12% below the 2006 peak (as coatings growth in developed markets generally mirrors GDP).

Automotive OEM Coating Industry Process The coating processes used by the automotive industry for metal bodies and plastic components differ. Coating of bodies is carried out in-house by the OEM whereas plastic components are normally supplied to the manufacturer ready finished by the Tier 1 or 2 suppliers. All coatings used by the Tier 1 and 2 suppliers must be fully approved by the OEM. Although there are some variations depending on company manufacturing strategies and production line design, all of the mass-production vehicle manufacturers typically adopt a similar coating process. The standard approach is a three or four coat process, the coatings layers being: 1. Electrocoat 2. Primer surfacer 3. Top coat. Outlook Per Frost & Sullivan, global automotive OEM coatings market will reach $14.1 bn in 2016. By comparison, suppliers earned revenues of $7.6 bn in 2009. The experts believe, Automotive OEM coating market participants can also feel optimistic about the significant rise in the number of vehicles built in Asia Pacific countries such as China and India.

Technological Advancement in the Industry Per Frost & Sullivan, coatings manufacturers continue to create new technologies to address the market demand for high performance, improved appearance, and environmentally friendly products. Nanotechnology and radiationcure technology have been developed to offer higher gloss and greater mar-resistance and scratch-resistance. In addition, coating manufacturers have also introduced novel products such as clearcoats based on UV-curable technology and clearcoats with self-healing properties. UV-cure coating technology is increasingly being seen as the future technology in the area of industrial coatings. The technology represents one of the rapidly growing segments in the coatings industry, and is arguably emerging as the answer to the rising environmental concerns and stringent regulations. Several application related advantages come to serve the technology that include absence of pot life issues, lower energy costs, fast cure speed, and reduced environmental impact. As such, one-component UV-cure coating ranks among the fastest coating chemistries available in the present context. Curing through one-component UV-cure coating takes few seconds to minutes, which makes it more ideal for use in applications that require faster turnaround time. Both types of UV-cure coating waterborne and solids formulation feature ultra-low VOC (volatile organic compound) levels. Per Frost & Sullivan, UV curable coatings in particular will gain special significance over the next 10 years, as volatile organic compound regulations become more stringent. Coating companies are also focusing on other promising areas such as waterborne technology formulations.

Cost Trend Prices of raw materials used in the formulation of paints and coatings have been rising over the recent years. While the prices of raw materials, such as acrylic acid and resins, have been oscillating in tandem with crude oil prices, prices of titanium dioxide (TiO2) rose significantly in 2010-11. o TiO2 is a white pigment used to add opacity, brightness and/or whiteness in various applications; it is known as a quality of life product, with end-uses in coatings (roughly 56% of consumption), plastics (26%), paper (9%) and other specialty markets (10%). o In mid-2010, feedstock shortages and tightness in the TiO2 market due to industry shutdowns were met by surging demand, especially from China and other emerging markets, driven by restocking of supply chains, overheated housing markets, and a pickup in infrastructure spending. These dynamics resulted in rapid price escalation through late 2011, as feedstock prices drove up the cost curve, inventories of TiO2 pigment fell dramatically, and customers engaged in panic buying. However, by the end of 2011, economic uncertainty and elevated TiO2 prices encouraged customers to reverse course, and begin destocking, right as Chinese capacity expansions were coming online. This quickly reversed the aforementioned supply imbalance, with inventories rising sharply throughout 2012 and producer utilization rates falling dramatically. In turn, precipitous price declines and anemic demand led to a very unprofitable 2012 for TiO2 producers who found themselves with excess inventory and minimal pricing power. o Per Industry experts, supply-demand imbalances in the TiO2 market appear to be correcting as we move throughout 2013, setting the stage for a possible recovery in the back-half of the year.

In addition to these, prices of other raw materials that are short in supply have been witnessing price rises in relation to increasing demand for these products. In response to the recent spike in demand for environmentally friendly paints and coatings, formulators have been increasingly investing in technological advancement in the area of non-hazardous chemical feedstocks. This led to a tremendous spurt in prices of raw materials, such as resins, additives, and pigments. Leading international giants, such as BASF and DuPont, have embarked on a vertical integration approach for cushioning some of the pressure being witnessed on their margins due to price growth.

Raw Materials The raw material basket for the coatings businesses (~74% of sales) include both organic (petroleum based) and inorganic materials. Special-Purpose coatings are more exposed to resins, solvents, pigments, monomers and TiO2, whereas Architectural coatings are most exposed to TiO2.
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In 2009, Resins were about one-half of the total material cost and are a major driver in the development of improved coatings. WB polyurethanes, polyureas, alkyds, and vinyl versatate polymers are among the faster growing resin technologies. Pigments were about one-quarter of the material value. Additives were 10% of the coating material cost and are keys to successful product development and performance. Solvents comprised 10% of the raw material costs. The major change that has taken place in the coatings industry during the last twenty years has been the adoption of new coating technologies. Until the early 1970s, most of the coatings were conventional low-solids, solvent-based formulations; waterborne (latex) paints, used in architectural applications, accounted for 3035% of the total. In the late 1970s, however, impending government regulations on air pollution control focusing on industrial coating operations stimulated the development of low-solvent and solventless coatings that could reduce the emission of volatile organic compounds (VOCs). Energy conservation and rising solvent costs were also contributing factors. These new coating technologies include waterborne (thermosetting emulsion, colloidal dispersion, water-soluble) coatings, high-solids coatings, two-component systems, powder coatings and radiation-curable coatings.

Global Coating Market Outlook Per IHS Chemical, emerging economies of the world, coatings are growing at a much faster rate. The best prospects for growth are in Asia Pacific (810% growth per year in the near future), Eastern Europe (6%) and Latin America (6%). Growth of coatings in China is expected to continue at 810% per year, and in India and Indonesia at 510%. Growth in value terms will be even higher as a result of the production of relatively higher-valued coatings. Most of the major multinational paint producers, including PPG, Akzo Nobel, Kansai Paint, Nippon Paint, BASF, DuPont, Chugoku Marine Paint, Valspar, Sherwin-Williams and Hempel, have production in China. The multinational producers should gain even more presence in the developing world as living standards increase and per capita consumption of coatings rises. Over next five years, air pollution regulations will continue to be a driving force behind the adoption of new coating technologies. Despite the relatively slow growth in demand anticipated for coatings overall, waterborne and highsolids coatings, powders, UV curables and two-component systems appear to have good growth prospects.