Coating Industry Must Focus on Innovation & Environmental Protection

China National Coatings Industry Association

Scale expands but profits decline

The major sectors consuming coatings are real estate, furniture and automobiles. With the issuance of a new policy in the first half of this year, the real estate industry is gradually returning to rationality, and rising prices have slowed slightly. Substantial furniture firms’ main-business income in H1 2017 reached RMB441.39 billion, up 13.9% YoY. The combined profit was RMB28.34 billion, up 17.5% YoY. China’s market for high-end and environment-friendly furniture coatings has developed rapidly. In the automotive industry, from January to July 2017, 15.5852 million units were made and 15.3252 million were sold, up 4.65% and 4.10% YoY, according to statistics from China Association of Automobile Manufacturers.
In the first half of 2017, 1 358 sizeable coating producers produced 9.641 million tons, up 10.5% YoY; and the cumulative sales reached 9.443 million tons, with a sales-output ratio of 98.2%. The main-business income of 2 044 sizeable coating enterprises totaled RMB214.83771 billion, an increase of 9.3% YoY. The coating industry has been expanding but profits are declining overall. The number of leveraged enterprises and the losses were both up significantly YoY in the first half of 2017, largely due to continual feedstock price increases, reshuffling of the coating market, and environmental protection pressure. Profits totaled RMB13.63 billion, down 15.1% YoY, but adjusting for an abnormal fluctuation of RMB2 billion in 2016, the decrease was only 3.0% YoY. High investment in environmental protection equipment and continually rising raw material prices are the main reasons.
There are some changes in the first half of 2017 compared with the same period of 2016. The output in the central-southern area was up 3%, while output in Southwest and Northeast China declined. Production in central-southern area and East China accounted for 79% of the national total, and the core-business income in these areas accounted for 83% of the country’s total.
The industry is more concentrated. In 2016, there were 2 044 producers above a designated size in the coating industry (belong to 1 927 enterprises), and analysis of main-business income shows that the top 200 enterprises accounted for 62% of the total, and that of enterprises ranked from 201 to 500 accounted for 19% of the total, according to data released by National Bureau of Statistics.
The combined import and export volumes of major coating products from January to July 2017 reached US$888 million, a YoY increase of 3.89%. Imports reached about 100 kt, worth US$527 million. About 110 kt was exported, valued at US$361 million. The volumes of imports and exports were roughly equal, but the trade deficit was up significantly, indicating that demand for high-end products is still large in China.

Foreign-funded enterprises occupy high-end market & Chinese-funded enterprises need to develop by strides

In 2016, among the top 200 coating enterprises by the main-business income, there are 168 Chinese-funded enterprises, with their main-business income accounting for 63% of the total; and there are 32 foreign-funded enterprises with their main-business income accounting for 37%. This is largely because foreign-funded enterprises occupy the high-end market and continue to merge and reorganize. As for operations, among 2 044 sizeable enterprises, the ratio of number of Chinese-funded and foreign-funded enterprises is about 9:1, the ratio of main-business income between the two is 3:1, the ratio of total profits is about 8:5, the ratio of average business income 1:3, and the ratio of average profit 1:5.3. Although the number of foreign-funded enterprises is far fewer than that of Chinese-funded enterprises, their average turnover and average profit per unit are much higher. This shows that the overall concentration of foreign-funded enterprises is much higher than that of Chinese-funded enterprises and they occupy the high-end market.
To achieve leapfrog development, domestic enterprises must make great efforts to improve financing, industrial scale, technology and brand building, continue to broaden financing channels, speed up M&As, enhance their own competitiveness, and expand their international influence by developing foreign markets.
The overall outlook for the Chinese coating industry is optimistic. Demand in downstream sectors generally peaks in the middle and second half of the year, so the production in the second half of the year is expected to exceed that in the first half, and the goal of annual output exceeding 20 million tons is not difficult to achieve. Meanwhile, environmental protection is getting more and more strict. More and more producers whose environmental protection measures do not meet standards will be ordered to rectify or shut down. This is a turning point of Chinese coating industry, and enterprises should focus on product quality and environmental protection.