Much of Europe is now in the midst of an economic downturn,which is likely to plunge the region into its second recession in four years.
But most of Europe's large and even medium-sized coating companies,as well as many of their raw material suppliers,seem to have the financial strength to cope with it.
The coatings sector in most of Europe has recovered sufficiently from the debacle of the 2008 financial crisis to regain margins in the face of rising raw material costs.As a result they have been able to build up adequate cash reserves to see them through further economic trouble.Many of their raw material suppliers have been performing even better.
The 17-country eurozone forming the core of the region is looking like it will move into a double-dip recession this quarter,which economists believe will continue into next year.
Already the UK,a non-euro member of the European Union,has entered a new recession.Germany has been showing slight growth while France has been flatlining.The economies of Italy and Spain have been shrinking while Greece,whose economy faces catastrophe,could dive by seven percent this year.
"The economic outlook for Europe looks relatively grim at the moment,"said Alan Eastwood,senior economist at the UK Chemical Industries Association(CIA)and chairman of economic forecasting task force of the Brussels-based European Chemical Industry Council(Cefic).
"But chemical companies,including coatings producers and their raw material suppliers are much better prepared than they were for the 2008 crisis,"Eastwood said."They've been battening down the hatches and preparing for a long haul through possible further financial difficulties ahead."
In the first five months of this year production of chemicals in Europe,including that of coatings and other downstream chemical segments,declined by an average 2.1 percent,according Cefic.
Output of coatings and inks showed from January to May an even bigger drop of six percent,which was 5.2 percent lower than the level in May 2011,according to Cefic.Without a recovery in demand in the second half of this year,coatings and inks output will return to the same level prior to the post-2008 recovery.
On the other hand the Cefic figures reveal that prices of coatings and inks went up by an average six percent in the first five months of this year,following a 5.7 percent average rise in 2011.
"What we have been seeing in the European coatings sector are lower volumes with higher prices,which is a response to high raw material prices but may be hard to maintain much longer,"said one UK-based analyst.
In fact there were signs of an easing in both the prices of raw materials and coatings and other downstream products in the summer."Our customers are reducing their inventories,in expectation of falling prices due to declining raw material costs,"said Kurt Bock,chairman of BASF,both a coatings and raw materials producer,after the publication of the company's second quarter results in July.
Many European coatings companies have adopted a strategy of increasing cash flow by focusing on margins rather than sales volumes.In many cases margins are being maintained through cost-cutting and restructuring programs in European operations.
"Not much of the profits from relatively strong margins are going into investment,"said Paul Hodges,chairman of International eChem(IeC),a London-based consultancy."Instead they are being used to build up cash reserves.A lot of coatings and other companies are still extremely nervous about the future.They don't want to have to rely on the banks at a time of credit shortages."
Coatings producers are also targeting higher value-added segments in the search for higher margins in Europe,such as specialist niches in architectural and industrial coatings.
In the UK while coatings output has been sliding in the post-2008 period,paints producers have been maintaining in recent year a gross value added(GVA)revenue minus input and raw material costs of around 30 percent of turnover.
"Coatings companies have been able to take advantage in the UK of sectors like automobile manufacture which has been doing well through higher exports and offers opportunities to suppliers to gain improved margins,"said Eastwood.
The latest second quarter and half-year results of European coatings companies show evidence of the financial benefits of existing or previous cost cutting initiatives.But they also indicate how much paint producers have been striving to take advantage of variations in economic conditions in Europe.
With the help of additional supplies from the opening of a new state-of-the-art factory at Sandefjord in its home country of Norway,Jotun achieved record decorative paint sales in the first four months of the year in Sweden which in the first half had had one of the fastest GDP growth rates in Western Europe.
Kingfisher Group of the UK,one of Europe's largest DIY retail chains,has been increasing sales in its depressed domestic market during its second quarter by launching a marketing campaign to persuade customers to switch to internal repair projects during the wet summer.In Russia,whose energy-based economy has been boosted by continuing high oil and gas prices,the company's sales went up by 19 percent.
Tikkurila of Finland pushed up its sales in Russia by 15 percent in the first half with operating profit in the country jumping by 60 percent.In Central Eastern Europe,in which its main market is Poland,sales and operating profit both went up by 10 percent.In its home market of Finland,the company,mainly a decorative paints producer,managed to raise margins to almost 16 percent on an improved operating profit of 9.7 percent despite a slowdown in the economy.
In the second quarter Tikkurila's group margin rose to just under 16 percent after total operating profit went up by 21 percent,while in the first it increased by 15 percent on a sales rise of 7.7 percent.
With the help of cost-cutting measures,the company is expecting to achieve at least last year's operating profit of€61 million($76 million)on 2011 sales of€644 million especially since raw material pressures are easing."The situation with raw materials(costs)seems to have stabilized,"said Erkki Jaervinen,Tikkurila's president and chief executive.
AkzoNobel reported flat revenue in decorative paints in Europe during the second quarter due to weak demand across the whole region,particularly in the south.It also said that in its performance coatings segment there had been soft or lower demand in Europe for wood finishes,automotive refinish paints and powder coatings.
Like most multinationals,AkzoNobel was able to offset falls in sales and profits in Europe with increases in high growth emerging markets.It blamed an eight percent drop in earnings before interest,tax,depreciation and amortisation(EBITDA)in decorative paints on a total sales rise of six percent on the poor European performance.But in performance coatings,despite feeble European demand,total revenue rose by 12 percent with EBITDA up 25 percent.
Smaller coating producers,dependent on national or regional markets in Europe,have less flexibility.They will have a tougher time during the impending recession.But even they have become more financially resilient in recent years.
