Adjustments in China’s Coatings Industry

By Yang Yuande, Secretary General of China National Coatings Industry Association

China’s Coatings Industry Saw Slowing Growth in Both Output and Profit

By the end of September 2012, China’s coatings output had reached 8.87 million tons, up 9.1% YOY, totaling RMB209.3 billion, up 11.1%.
   In the first three quarters, the production value has increased 11.1%, while the profit growth rate has been lower than 5%, attributable to soaring costs of raw materials like titanium dioxide, solvents and resin. Though coatings prices increased, their growth is far slower than that of raw material costs.
   Architectural coatings are major coating products in China, with the yield of coatings used on interior and exterior walls accounting for 36% of the total, climbing to 45.6% if including coatings applied on floors, for fire protection, for decoration, etc. The two industries of building coatings and real estate are closely related. From January to September, China’s building areas – ongoing and newly-activated – have significantly shrunk; the growth of housing maintenance areas has decelerated; the production and sales volume of both automobiles and ships have been lower compared with the same period in 2010 and 2011; due to trade barriers and economic slowdown in North America and Western Europe, the export of furniture and household appliances fell.

Production Bases Relocated to West China

Domestic production bases for coatings are moving toward West China. Hubei provincial government intends to construct a base in Qiaokou district, Wuhan city; Henan government plans to build in Zhongzhan district, Jiaozuo city; Sichuan government has established coatings production bases in Dayi county and Qionglai county. In addition, many enterprises have relocated from Beijing, Shanghai and Guangzhou to Sichuan province. In the first three quarters, coatings output growth in traditional production areas like East China and South China has decelerated, with some places even seeing decrease in production (Jiangsu, down 2.0%; Shandong, down 4.0%). The output in Shanghai rose just 0.8%, while the production volume in Midwest China soared – Hubei province seeing 28.6% growth; Henan province, 22.1%; Sichuan province, 37.5%.

Industry Structure Adjustment Decelerated

Facing pressures, growth in both production and sales, most coatings enterprises adjust their product structures more actively, ensuring rapid development. Following adjustments, coatings products will be high-end oriented. From January to September, the average price has climbed to RMB23.5/kg from RMB23.1/kg in 2011 as environmentally friendly coatings have developed rapidly, especially water-borne woodenware coatings, water-borne container coatings and water-borne automobile coatings; coatings industry made new technical progress boasting improvement in production processes featuring “informatization- industrialization link” and “internal integration;” coatings products develop at a sound rate, increasing prices and improving technical content; the industry has made breakthrough in key basic raw materials.

Industry Chain Extended

More and more competitive coatings enterprises have extended their industry chains to develop business. Wuhan Twin Tigers Coating Co., Ltd. entered the solar industry; Changzhou Guanghui Chemical Co., Ltd. entered the dye business; AkzoNobel cooperates with titanium dioxide firms to establish joint ventures; BBMG Corporation and Shenzhen Grandland Decoration Group Co., Ltd. develops real estate markets; Hangzhou Transfar Coatings Co., Ltd. runs a detergent business; Chongqing Sanxia Paint Co., Ltd. conducts research on pharmaceutical intermediates; Jiangsu Sanmu Group is involved in the metallic copper industry. Most of them are listed enterprises, and getting listed is an important way for companies to develop. Many coatings giants in the world have grown rapidly through financing upon listing, and by means of extending industry chains. Enjoying advantages in coating applications, some corporations have stepped into related fields like building materials, heavy machineries, auto parts, furniture and toys, expanding corporate business with similar process conditions in these areas.

Promising Future

The coatings output is expected to see 10% YOY growth to reach 11.5 million tons in 2012, when the output value will be RMB278 billion, up around 12%.
   China’s economic growth rate is forecast to bottom out in 1Q 2013, and then rebound gently with slight fluctuation. It is estimated that with slower growth, China’s GDP was RMB35.35 trillion by the end of September 2012, gaining 7.7% YOY – the primary industry increased RMB3.31 trillion, growing 4.2% YOY; secondary industry, RMB16.54 trillion, 8.1%; tertiary industry, RMB15.50 trillion, 7.9%. Local economies will enter a new development period considering rapid growth of the country’s industrialization and urbanization, high domestic demand, completion of the change of state leadership. Since October 2012, inflationary pressures have been alleviated, making flexible macro-control policies possible.
   Domestic industries such as real estate, automobile, ships, furniture, household appliance and key projects remain major consumers of coatings, which is closely related to national policies, and greatly influenced by purchase costs, capital situation, labor costs, stock and capacity in 2013. Costs of fuels, power and transportation will continue to rise moderately; due to global financial difficulties, the prices of oil, ore and nonferrous metals can hardly soar; facing little pressure from imported inflation, costs of resins and solvents used in coatings will show limited change in 2013. Though financing will cost small and medium sized coatings enterprises more, the financing environment will be better in 2013 benefiting from alleviated inflationary pressure. But the financial costs are expected to be higher in 2013 as coatings enterprises engaged in large projects will face more risks in accounts receivable recovery.
   With an expected double-digit rate, the economic growth will rebound stably from a bottom in 2013, when coatings production will increase 12%; production value, 15%, according to analysts. Owing to cost pressure and structure adjustment, coatings prices will go up steadily, with profit climbing 5%, slower than costs of production and marketing.

Table 1 Comparison of Output & Production Value Growth in three quarters of 2012 and in 2011
        1Q 2012    2Q 2012    3Q 2012    2011
Output Growth    11.8%    5.85%    9.96%    16.4%
Production Value Growth    12.8%    7.5%    13.4%    25.6%