By George R. PilcherThe ChemQuest Group, Inc.
Insight into the state of the U.S. coatings industry is valuable for many—whether you are directly employed by paint and coatings companies or suppliers of specialty chemicals used within the industry; serve as an industry observer interested in correlating the health of the industry with similar enterprises in the specialty chemicals market space; work for an independent formulating and/or testing laboratory that does business with the coatings industry; or work on Wall Street charged with analysis of the paints and coatings sector. Regardless of the reason(s) for your interest in the coatings industry—and regardless of what you are planning to do with this information—it is statistically unlikely that you will read this article about the current state of the paint and coatings industry in 2019, and then lose no time hiring technical and marketing people to help you create a strategy for getting through the coming (and inevitable) recession, whenever it occurs, and then going on to glory following the end of the recession.
Here is a newsflash for anyone who has a sufficiently strategic point of view to follow this line of thinking: Play your cards right by making sure that you are either maintaining (or increasing) your technical and marketing departments during downturns in the economic cycle, and developing the products that your customers are going to need following the next recession, and you will be living the high life when the economy begins to recover. If you don’t maintain your technical and marketing staff during downturns under the mistaken impression that they are expendable, you do so at your own peril.
It is difficult to think in terms of strategic planning in an industry that has become not only focused on this year, but on this quarter and—all too often—on this month. It has been made even easier to ignore strategy because, during the 122 months since the ending of the Great Recession, the United States has experienced not only the longest post-war recovery from recession, but also the longest post-recession recovery in modern world history.
With regard to the state of the U.S. paint and coatings industry, it is always important to take a look at the macroeconomic picture that surrounds all businesses that depend upon the specialty chemical stream for their livelihood. For the 12-month period ending in April 2019, GDP grew from 2.2% to 3.1%, which is not bad, but not what many in the country had hoped for, especially since the United States is basically at full employment. The outlook for GDP during the remainder of 2019 is only expected to be ~2.0%, then falling to 1.9% during Q1 of 2020, and continuing to fall during Q2 to roughly 1.7%. It is within the context of the current overall economic situation that we now turn to the U.S. coatings industry performance during 2019 so far, and its anticipated performance during the remainder of the year and into 2020.
2019 will not be a bad year for paint and coatings in the United States, but it won’t be anything to write home about, either—2018 ended with production of 1.33 billion gallons valued at $24.9 billion, up 2.7% in volume and 3.8% in value, and the outlook for 2019 suggests full-year production of 1.35 billion gallons valued at $25.7 billion, up 1.6% in volume and 3.2% in value (Figures 1–3).
As a result of aggressive consolida-tion, the top three global coatings ﬁrmsaccount for 63.5% of the top 10 globalcoatings ﬁrms’ sales, up from 48% in2005 (Figure 4).
Architectural coatings sales are highlycorrelated with the health of the hous-ing/construction market. The architec-tural paints segment currently accountsfor 61% of the volume, and 50% of thevalue, within the coatings industry,compared to 60% and 49%, respectively,in 2017(Figures 2–3).
Architectural coatings grew 3.4% invalue in 2018, with volume growth of2.5%. Sales are forecast to rise 3.1% in2019, based on an anticipated volumegrowth of 2.5% and an increase inselling price of 0.6%, resulting in volumeof 832 million gallons valued at $12.8billion(Figure 5).
The percentage of PRO-appliedpaint has continued to grow, unabated,since 2012, increasing the relationshipof contractor-applied paint to Do-It-Yourself (DIY) paint to a ratio of 63% to37% in 2018—the highest that this ratiohas been since 2006 (Figure6). Barringany unforeseeable economic events, thisupward shift toward contractor-appliedpaints will very slowly continue through2019, when it is likely to stabilize for aperiod of time around 63–64% PRO-applied paint.
Because the architectural coatings seg-ment is so intimately related to construc-tion, it is positive news that constructionin the United States continues its pro-longed recovery from the unprecedentedlow point experienced in 2011. Totalconstruction spending exhibited year-over-year (yr/yr) growth of 3.8% in 2018and is anticipated to grow by ~3% during2019, due principally to moderately decelerating growth rates in residentialand non-residential (seeFigure 7).
Industrial OEM coatings beneﬁt from apickup in industrial production. During2018, the U.S. industrial OEM segmentgrew in value 3.7% over 2017 (+1.9% vol-ume; +1.8% price), generating $7.3 billionin sales (~353 million gallons by volume).Volume in 2018 ﬁnally matched the mostrecent peak, which occurred in 2013.Industrial OEM coatings are forecast toincrease by 3.4% in value in 2019, withvolume and pricing up 2.0% and 1.4%,respectively(Figure 8).
The OEM segment increased nomi-nally in 2018 by slightly less than 1% inthe automotive sub-segment (deﬁnedas automobiles, light trucks, vans andSUVs; total of domestic production,transplants, and imports), but is forecast to decline by roughly the same amountduring 2019(Figure9).
The OEM segment contains over adozen sub-segments, of which appli-ances, HVAC, heavy equipment, micro-waves, rigid and ﬂexible automotiveexterior trim systems, brake systems,coil coatings, and wood furniture andcabinets are just a few representativecoatings areas(Figure 10).As a resultof this diversity of goods, the industrialOEM segment tends to be driven by avariety of factors, although most areinvolved either directly or indirectlywith the macroeconomic environment.
Major trends in the OEM market seg-ment are driven by the need for prod-ucts that create operational eﬃciencies(increase productivity/reduce labor/lower cycle times), increase sustainabil-ity (reduce CO2footprint) and demon-strate innovation (infrared reﬂectance/noise reduction/insulation).
•SPECIAL PURPOSE COATINGS
Special purpose coatings tend to trackwith automotive sales, accident rate,the size of the car parc (total number ofregistered vehicles in use at any giventime), and total miles driven (reﬁnishpaints)—and industrial construction andthe price of crude oil (protective/indus-trial maintenance coatings).
In 2018, special purpose coatingsgrew in value at a rate of 4.9% (+5.0% involume; –0.1% in price),and contributed$5.2 billion (~157 million gallons) of the$24.9 billion generated by the U.S. paintand coatings industry. This representsonly 12% of the volume, but 21% of thevalue, of all coatings produced. In 2019,we are expecting a moderate increasein the value of special purpose coatings,from $5.2 to $5.4 billion, with gallonsincreasing from 157 to 162 million gal-lons(Figure 11). This represents forecastsales dollar growth of 2.9% (+3.2% involume but –0.3% in price).
The special purpose coatings marketsegment serves far fewer end-marketsegments and sub-segments than areserved by industrial OEM coatings,but—as an overall segment—typically commands higher margins than OEMcoatings. The major end-markets forspecial purpose coatings include auto-motive reﬁnish, industrial maintenance/protective coatings, traﬃc-markingpaints, marine coatings, and aerosolpaints(Figure 12).
Marine coatings are directly relatedto shipbuilding activity, which is cycli-cal in nature. Because shipbuilding is concentrated principally in South Korea,Japan and China (40%, 30% and 24%,respectively), this leaves only a 6% shareof the global market for all other coun-tries. For this reason, shipbuilding is nota driver for the sale of marine coatingsin the United States, where marine coat-ings primarily address the needs of plea-sure craft, military ships, platform andoﬀshore supply vessels, etc. This market segment was valued at $460 million (9.6million gallons) in 2018, up 2.9% in valueand 1.1% in volume. Moderate growthis expected in 2019—2.8% in value, and2.1% in volume.
Automotive reﬁnish paints areindirectly tied to the number of milesdriven and directly tied to the accidentrates. Growth, therefore, of automotivereﬁnish coatings is driven by a number of conﬂicting factors, including negativeones such as improved education of thepopulace with regard to safer drivinghabits, as well as the advent of safer and“smarter” cars that are making it easierfor drivers to avoid accidents—and tominimize the amount of damage when anaccident does occur—with an assortmentof devices from energy-absorbing bum-pers to back-up cameras and automaticcontrols that keep cars from accidentallycrossing the center line. These nega-tive factors are countered by positivefactors, such as the increase in disposableincome, changing lifestyle and buyingbehavior, and the demand for luxuryvehicles, including crossovers and SUVs,since luxury car owners tend to havescratches and minor dings repaired on aluxury car than may have been the casein a non-luxury vehicle. Finally, the acci-dent rate has been negatively impactedby the newest driving distractions in theform of activities such as talking andtexting while driving and glancing atGPS screens. We believe that, over time,these various conﬂicting factors will set-tle down and work against the automo-tive reﬁnish market, causing it to begintrending downward at perhaps 0.5–1.0%per year in volume during the period2020–2023, as distractions are reducedand safety factors enhanced.
The protective coatings market seg-ment (also referred to as the “industrialmaintenance [I/M]” market segment)represented volume of 42.3 milliongallons valued at slightly under $1.6billion in 2018. Although volume from2017 was down slightly (~1%), value wasup by 6.2%. I/M coatings are tied veryheavily to construction, maintenance of medium- and-heavy duty facilitiessuch as petrochemical and wastewatertreatment plants, infrastructure, and oiland gas production—and indirectly tiedto the global price of crude oil, whichranged from $67–$76/barrel (globalpricing) in 2018. The protective coatingssector beneﬁtted, in 2018, from theuptick in construction activity that con-tinued from 2017. Going into 2019, weexpect to see the price of crude stabilizein the $67–$70/barrel range. Lookingat 2019, we expect to see an increase involume of protective coatings of 2.1%,and an increase in value of 2.6%.
•2019 AND BEYOND
From a purely economic viewpoint,2018 was a good year for the U.S. coat-ings industry value (+3.8%), and not allthat bad for volume (+2.7%). Pricingoutpaced volume by 1.1%, which meansthat the coatings producers were able tokeep ahead of raw material increases,but not by award-winning numbers.Looking ahead to 2019, we can expectto see a similar scenario, albeit some-what diminished in both volume andvalue growth—1.6% and 3.2%, respec-tively, with pricing outpacing volumeby 1.6%. Growth, of course, is alwaysgood, but it is clear that the rate ofgrowth is slowing, not just in the paintand coatings industry, but in the U.S.economy, in general. Nonetheless, thecoatings industry value will outpace theanticipated GDP (2%) in 2019, but theperformance of both will fall consid-erably short of robust—and that prettywell sums up the continuing crawl ofthe longest post-recession recovery in U.S. recorded history, which has lastedso long that it has become, for thosewith a taste for irony, the “status quo.”
The real question here should be,“Is the status quo good enough?” Theanswer depends entirely upon who isasking the question, and who is answer-ing it. It’s certainly good enough forpaint and coatings producers that onlycare about this quarter’s earnings, butit is most certainly not good enough forthose companies that are less concernedabout this year than they are about 5–10years from now.The latter understandthat the type of data in this article onlyhas value when it is used to predicttrends in the future, based upon theexperience of the past, and a knowledgeof the market dynamics and generalmindset of the present. Such companiesare quite aware that technology-basedindustries are constantly in needof newer, safer, more durable, moresustainable and more user-friendlyproducts.
For these companies, it is certainlynecessary to make money this yearso that they are still in business nextyear—that’s pretty basic business sense,and it deﬁnitely requires some tacticalmaneuvering. They recognize, how-ever, that year upon year of nothing buttactical decisions will eventually leadnowhere, and that there is a tombstonesomewhere in the future with theirname on it. The naked truth is thatmaking money in order to stay in busi-ness this year is necessary—but creatingnew products to stay in business in thefuture is absolutely mandatory. We’veall seen what happens to paint andcoatings companies that lack a strategyfor moving into the future, and whathappens is that they cease to exist,either because they are acquired by acompany with a strategy, acquired bya company without a strategy but withmoney to burn, or because they simplyclose their doors. For some, Door #1appears reasonable—but who reallywants to be forced into accepting what’sbehind Doors #2 and #3? Unfortunately,like it or not, these are the options thatare most readily available for paint pro-ducers that have only lived for moment,rather than for the long haul; that havesacriﬁced their future on the altar ofthe tactical.
The future is essentially written instone for companies that are commit-ted to this month, this quarter and thisyear—for companies lacking both vision and strategy to enable them to enterinto the future. The long, slow, unex-citing post-Great-Recession recoveryperiod is nearing its inevitable end, andmany of them will be among the victimsclaimed by the coming recession. Forthose companies with a concise, care-fully considered and clearly articulatedstrategy for the future, however, theirreward will be that they will weather the next recession and be the ﬁrst outof the gate during the post-recessionrecovery, with exciting new productsand processes for an eager and recep-tive marketplace.
Whether these companies createtheir strategies and new products ontheir own, or work with outside part-ners—whether business consultants orindependent laboratories or both—is strictly a business call that will need totake both time and personnel resourcesinto consideration. Both approacheshave their merits, depending upon thesituation. What matters is that they havea strategy and implement that strategy,because this is what separates the win-ners from the losers, and they will bethe winners in the years following thenext downturn in the economy.
GEORGE R. PILCHER,Vice President, The ChemQuest Group and ChemQuest Technology Institute,570 North State St., Ste. 210, Westerville, OH 43082-7135;email@example.com.
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