Akzo, PPG Profit Squeezed by Paint Materials Shortage
June 30, 2010, 4:35 PM EDT
(Updates with closing share prices in 16th paragraph.)
By Jack Kaskey
June 30 (Bloomberg) -- The world’s largest paint makers are raising prices as they try to overcome a shortage of raw materials and keep store shelves stocked during the prime house- painting season in North America, Europe and Asia.
Akzo Nobel NV, which makes Dulux paint, and PPG Industries Inc., which produces the Olympic and Pittsburgh brands, have seen the price of acrylic acid, a resin that binds pigments together, jump 71 percent in the past 12 months. Titanium dioxide, which makes paint opaque, has risen close to a record this year, while there’s not enough methyl methacrylate, which is used to create weather-resistance.
Dow Chemical Co. and rival paint-ingredients suppliers shut plants in the recession and are suffering mechanical failures as their remaining factories are pushed to full output, said George Pilcher, vice president of Cincinnati-based industry consultant Chemquest Group. Demand in the $70 billion-a-year paint industry is growing, led by Asia and the recovering U.S. economy.
“I don’t see any of this clearing up before the end of the year,” said Pilcher, who formerly worked at Akzo, the world’s biggest paint maker, and Sherwin-Williams Co., the third- largest. “There won’t be enough house paint to go around.”
Dow, the world’s largest producer of acrylic, can’t fill all its orders, said Gregory Baldwin, a company spokesman. Dow and competing makers of paint ingredients probably won’t catch up with the backlog of acrylic-acid and methacrylate orders until September or October, Chief Financial Officer William H. Weideman said in a June 8 presentation.
Low Inventories
“Inventories are low all through the chain,” said Ian Davenport, a former director of Dow’s acrylics business who runs New York-based consultant Davenport International Associates.
“Pricing of paint absolutely must go up,” he said. “It’s a global issue.”
U.S. shoppers can expect to pay 5 percent more for paint, or almost $2 a gallon for premium brands, said Phil Phillips, president of Chemark Consulting in Southern Pines, North Carolina.
“We have or are in the process of increasing prices across the globe and in every product line,” Bill Mansfield, chief executive officer of U.S. paint maker Valspar Corp., said June 3 at a Goldman Sachs Group Inc. conference in New York. Higher prices may not be fully implemented until year end, he said.
Road paint is already in short supply. The Texas Department of Transportation last month suspended retracing to conserve material for new pavement. DuPont Co., the world’s biggest maker of automotive paint, has been forced to find new suppliers, said Panos Kordemenos, sourcing director for DuPont performance coatings.
Spanish Restart
About 10 percent of capacity for making titanium dioxide has been scrapped, including a plant in Grimsby, England, that was shut by Huntsman Corp., the fourth-biggest maker. Huntsman is advancing the restart of its plant in Huelva, Spain, by eight months to help meet demand for the pigment, known by its chemical formula, TiO2.
“If we get back to not euphoric highs but halfway, I can see where there will be some fundamental long-term supply shortages, not just in TiO2, but also in acrylics,” Huntsman’s Chief Executive Officer Peter Huntsman said in a phone interview from The Woodlands, Texas, where the chemical maker is based.
Earnings estimates for paint makers have been rising, even as improving demand makes supplies scarce. Whether profit margins get squeezed by higher costs depends on how quickly paint makers can increase consumer prices, Pilcher said.
Earnings Estimates
Earnings at Valspar, the world’s sixth-biggest coatings maker, are poised to increase 33 percent this year, the most since 2002, according to a Bloomberg analyst survey. Profit at Akzo may rise 32 percent, the biggest gain since 2004, and PPG’s profit may surge 46 percent, the most in at least a decade. Sherwin-Williams earnings may gain 15 percent, according to analysts’ estimates.
Shares of Akzo Nobel, with almost half its sales in Europe, fell 20.5 cents, or 0.5 percent, to close at 43.005 euros in Amsterdam trading. They have dropped 7.3 percent this year.
PPG, which generates almost half its sales in the Americas, has gained 3.2 percent in 2010. The shares fell 1 percent to $60.44 at 4:15 p.m. in New York. Sherwin-Williams, with 86 percent of sales in the U.S., fell 1.2 percent to $69.19 in New York. The shares are up 12 percent this year.
“We see tight supply in certain markets today, which we are monitoring closely and managing appropriately,” said Tim van der Zanden, a spokesman for Amsterdam-based Akzo Nobel.
Sherwin-Williams’s size will help it overcome shortages and keep shelves stocked at its 3,357 paint stores, said Mike Conway, a spokesman for the Cleveland-based company. PPG spokesman Jeremy Neuhart didn’t respond to requests for comment.
Plant Explosion
Acrylic-acid supplies tightened after a December explosion at American Acryl’s plant in Bayport, Texas, Davenport said. Dow is still limiting acrylic acid sales even after its Deer Park, Texas plant restarted following a February failure. Also in Texas, a center for the U.S. chemicals industry, Germany’s BASF SE limited sales ahead of a June maintenance closure at its Freeport plant, company spokesman Daniel Pepitone said.
Methyl methacrylate is in short supply after plant closures at Mitsubishi Rayon Co.’s Lucite unit, the largest producer, and an equipment failure at Dow’s Deer Park site. Arkema SA sued Dow last month to provide contracted quantities of the chemical.
Acrylic acid, which is also used to make absorbent material for diapers, increased to a record $2,440 a metric ton in May, according to data from ICIS-LOR, a chemical news and pricing service. Producers paid $1.12 a pound for titanium dioxide in March, 1 cent short of the record set in November 2006, according to data from Purchasing Magazine. About 60 percent of global TiO2 output goes into paint, Peter Huntsman said.
“We are holding our breath and hoping the chemical industry can respond to the increased demand and supply the product we need at an economical price,” said Tony Mash, chief executive officer of the British Coatings Federation.
--Editors: Simon Casey, Steven Frank
To contact the reporter on this story: Jack Kaskey in New York at jkaskey@bloomberg.net.
To contact the editor responsible for this story: Simon Casey at scasey@bloomberg.net
