2011 Review and 2012 Preview on China's Coatings Industry


1. Overall situation of China's coatings industry in 2011

Coatings production by China's 939 coatings producing companies with annual sales of RMB20 million or above hit a record high of 10.7951 million tons in 2011, an increase of 16.4% year over year. Of which, the combined output by architecture coatings companies was near 4 million tons. In 2010 the production by 1 401 coatings producing companies with same scale was 9.6663 million tons.
The Chinese coatings industry posted combined production value of RMB272.976 billion in 2011, up 17.43% from RMB232.459 billion in 2010. Total value of exported goods was RMB8.443 billion, an increase of 3.4% year over year. In 2011, 148 out of 1 711 Chinese coatings companies lost money. The number of losing companies was 33.3% more from a year earlier. The coatings industry posted core business revenue of RMB264.12 billion in 2011, up 25.3% year over year. Total employers increased 9.4% to 220 300. Production costs including finished products costs, finance charges and management fees kept rising.
The imports and exports of China's coatings industry totaled US$1.724 billion in 2011, compared with US$1.641 billion in 2010. The industry posted a trade deficit of US$634 million, versus US$679 million in 2010. In breakdown, coatings imports totaled 231 500 tons, while import value reached US$1.179 billion. Exports totaled 217 100 tons in volume and US$545 million in value. Iron oxide pigments imports rose 7.9% year over year to 256 100 tons while imports value gained 14.1% to US$157.6 million. Exports of iron oxide pigments fell 9.9% to 326 500 tons while exports value rose 12.1% to US$347 million. Titanium dioxide imports fell 15.0% to 228 600 tons while imports value rose 9.2% to US$703 million. Exports of titanium dioxide surged 49.5% to 398 100 tons while exports value jumped 122.6% to US$1.154 billion. Titanium dioxide prices in domestic market rose in 2011 while trade was also active because of robust demand at home and abroad. China's titanium dioxide prices rose at the beginning of 2011 before pulling back, but still managed to close the year higher, drawing a deep V curve. Prices remained at high level in early 2012.

Higher costs, slowing profits

Chinese coatings makers posted a 13.8% earnings growth in 2011 while the industry's production value rose 25.6%. Costs rose fast with a 9.3% increase in operating expenses, an 18.8% rise in management fees and a 31.8% growth in financial expenses. Another factor behind higher costs is labor. Most companies saw labor costs rise around 15%. The rise in raw material costs also reduced the overall profit of the coatings industry. The rise in raw materials prices far outpaced the growth of the coatings industry. Commodity prices for titanium dioxide, solvents and resins have risen sharply.

Downstream industries' impact on the coatings industry

Architecture coatings production accounts for about 45.6% of China's total coatings production, with interior and exterior paints alone making up around 36% in total. So the house building industry actually decides the demand for architecture coatings. The central government intensified its crackdown on the house market in 2011.
   The demand for automobile coatings was mainly triggered by the automobile manufacturing industry in 2011. Automobile production growth was 0.84% only in 2011, falling sharply from an annual increase of 32.44% in 2010. The demand for coatings from the engineering machinery industry has been increasing over the recent years but this industry is one full of ups and downs. Coatings demand from the shipbuilding industry also maintained double-digit growth in recent years, at 320 000 tons in 2008, 355 000 tons in 2009 and around 400 000 tons in 2010. However, as there is a delayed impact from the global financial crisis and European sovereign debt crisis, the shipbuilding sector will see business decline in the second half of 2011 and 2012 after keeping rising in the first half of 2011.

Structure changes in the coatings industry

The upgrade of coatings products is accelerating in China. The development of environmental friendly products is picking up, especially for products such as waterborne wood coatings, waterborne container coatings, and waterborne automotive paints. The output of waterborne wood coatings was around 50 000 tons in 2011.
   China has also made breakthroughs in the development of key raw materials such as polyurethane resins, polyurea resin and its curing agents, as well as inorganic pigments cladding membrane technology, coating pretreatment for steel products surface, organic-inorganic hybrid, and waterborne UV-curing resins, among other coatings products and processes. Some domestic companies have also started to make high-end auto paints.
   China's leading coatings companies are looking at extending their industry value chain. For example, Wuhan Linuo Shuanghu Coatings Co., Ltd. has formed a tie with a solar company. Yabang Chemical Group has entered the dyeing business. Akzo Nobel is cooperating with a titanium dioxide maker on a new plant while BBMG Corp and Shenzhen Grandland Decoration Group are engaged in house building business. Also, Hangzhou Transfar Paint Company is involving in the detergents business while Chongqing Sanxia Paint Company is engaged in the development of pharmaceutical intermediates and Jiangsu Sanmu Group has entered the copper industry.

2. Analysis and forecast for the coatings industry in 2012

The Chinese economy is expected to expand at a slower pace but still steadily in 2012. The country's rapid urbanization is set to trigger strong domestic demand. The main coatings markets in China are still house building, automobiles, shipbuilding, furniture and key infrastructure projects. Demand growth will become steady gradually in the first half and bounce back a bit in the second part of the year.
   Procurement costs for the coatings industry will increase steadily while costs for fuel, power and transport will continue to rise. The funding costs will also keep rising for medium and small-sized coatings makes but the financing will generally be easier this year than 2011. Labor costs will continue to rise.
   From the policy environment perspective, China is gradually easing its macroeconomic policy which is expected to benefit the coatings industry.
In conclusion, coatings demand growth will continue to ease moderately in the first half of 2012 while get back to normal levels in the second half. Total coatings demand is expected to rise in 2012. Total production is expected to rise about 12% while output value is set to increase around 20%. Also, it is expected that a 10 percent rise in profit of the industry.