For coatings producers one of the big benefits of the sharp fall in oil prices in the second half of last year (2014) should be a drop in raw material costs.
Some commentators are also predicting a rise in demand due to the effect of lower oil prices cutting the production and distribution costs of a wide range of industrial and consumer products.
However, neither is likely to happen on a significant scale in the short-term in Europe. While oil prices have been plummeting suppliers of some coating raw materials have in fact been announcing price increases.
At the same time, rather than boosting demand, the oil price drop has had the opposite effect in Russia, which has been one of Europe fastest growing coatings markets. Instead the country which relies heavily on revenues from oil and gas exports is expected to be stuck in a recession this year (2015).
Nonetheless if oil prices stay at the current low level or fall further, analysts are forecasting that in the longer term they could start bringing down raw materials costs in many sectors.
“Continued low prices will create a glut in oil and its derivatives following a flow of investment funds into the sector in recent years and an expectation of continued high growth in China,” explained Paul Hodges, chairman of International e-Chem, a London-based chemicals consultancy.
“Raw materials suppliers will have to cut their prices because otherwise they will not have any customers,” he added.
This will first require the removal of a number of obstacles in the supply chain which have curbed the availability of some coatings raw materials.
“Since the 2008 financial crisis in Europe, producers of raw materials like basic chemicals have tended to keep low stocks,” said Amit Sharda, chemicals analyst at Oxford Economics, Oxford, England. “This has resulted in a lack of sufficient flexibility in the system for downstream users to stock up their own raw materials in order to take advantage of upstream price decreases.”
The result has been that even at times of economic crisis or supply/demand imbalances prices have gone up, sometimes steeply.
“As coatings manufacturers, we would of course, expect to see a knock on effect from the falling price of oil onto raw materials in the wider market,” said Tom Bowtell, chief executive of the British Coatings Federation (BCF)
“(But) raw material prices for the coatings and inks sector have been rising almost continuously since 2002 and increased by well into double figures in the two peak years of 2008 and 2011 while other years also showed steady increases,” he continued. “ Many solvents were typically 30 percent to 40 percent higher in price (in 2012 compared with 2012).It is only in the last 18 months that we have seen any real softening of purchase prices and even this means only a 3% fall in overall raw material prices in the last year - a drop in the ocean compared with what has gone before.”
Raw material suppliers which are currently attempting to push up their own sales prices are blaming other factors outside the oil value chain.
Clariant, the Swiss-based coatings materials supplier, for example, said that increases in operating costs was the main reason behind the announcement in late 2014 of a 10 percent rise in prices of additives for coatings and other products made by its Plastics and Coatings segment.
“Most of our raw materials in Plastics & Coatings are at least 3 – 4 st EPS downward in the value chain (from oil),” said Ernesto Dongiovanni, Clariant’s head of marketing, polymer additives. “Therefore the impact of a lower oil price is substantially less pronounced as other factors--inflation in labor costs etc.-- outweigh this effect.”
Prices in the coating raw materials supply chain have also been deeply influenced in recent years by cutbacks in capacity following the 2008 recession and a lack of investment in new plants or expansions.
This is reflected in variations in price trends between segments. Figures from the European Chemical Industry Council (Cefic), Brussels, which include downstream sectors like coatings, show that in the first three quarters of last year (2014) chemical producer prices dropped 1.7 percent, but petrochemical prices declined by over double that level while those for polymers dipped by only 0.3 percent.
Europe’s ageing chemical plants are vulnerable to supply interruptions which has prevented some prices decreasing by as much as would be normally expected after a drop in oil prices. “There have been a relatively high number of breakdowns, and outages in basic chemical plants over the last few months,” says one chemicals analyst.
Some commentators are predicting that due to the lower margins stemming from lower oil prices, there will now be more plant closures. The rating agency Moody’s reckons that as much as 6 percent of European capacity for ethylene, the building block for organic chemicals, could be closed down.
Cefic was predicting in December that total output of chemicals including downstream products like coatings will rise only 1 percent in 2015—around the same level as in the previous year (2014). “Monthly data point to continued anaemic growth, with energy-intensive petrochemicals output falling,” said Hubert Mandery, Cefic’s director general.
Nonetheless there has been some evidence of a sudden rise in business confidence. In October the EU chemical industry confidence indicator (CCI) soared to its highest level since July 2011.
Stronger European demand for coatings later this year will be offset by depressed sales in countries like Russia. Tikkurila, the Finnish coatings producers which has a big presence in Russia, has issued a profits warning because of reduced demand in the country and a sharp depreciation of the Russian rouble.
There could also be decreased coatings exports to oil producing areas outside Europe like the Middle East, where the construction sector has been booming.
The tight supply/demand balance in chemicals in Europe is likely to trigger a rise in some raw material prices in the event of any surge in coatings sales in the region. This could happen before low oil prices start to have a major influence on raw material costs.
“Even if there would be an impact on raw materials prices from lower oil prices, its effects could be delayed by several quarters,” said Dongiovanni.
