NCIA Industry Development Department
Upstream and Downstream Development Trends
Of the 41 Chinese industrial fields, 39 posted increases in total profits in the first half of 2021, one turned losses into profits and one reported largely stable profits. For the upstream and downstream sectors of the coatings industry, chemical raw materials and products manufacturing together saw their profits rose by 1.77 times and up by over 176.8% year on year (as shown in Table 1), far outpacing its growth rate in operating incomes and costs. This reflects that the prices of chemical raw materials and products stayed at high levels. Downstream industries, including auto, furniture and mechanical manufacturing fields logged in an average of around 25% rise in operating incomes, a bit lower than that of the main business income of the coating industry at 34.4% (take the data of the same period of 2020 as a comparison base). This means that the downstream markets lacked activeness and gave limited driving force to coatings. In the second half of 2021, especially the third quarter, the activeness and demand are the linchpin for the annual operating income and profit growth for the coatings industry in 2021.
Analysis of Coatings Industry Economic Operations
1. Overall operating data analysis
According to the apparent statistics, China’s coatings industry maintained overall stable economic operation in the first half of 2021, with main business income of RMB170 billion, total profits of RMB11.1 billion, output of 13 420 kt, up by 34%, 32% and 32% respectively from the same period of 2020. However, considering the Covid-19-induced impact on the market and production, the comparison base is low and cannot fully reflect the real development of the coatings industry. Hence, to make it more clear, the comparison and analysis were made between the first half of 2021 and the same period of 2019. Details are shown in Table 2.
The comparison reflects that the economic operation of China’s coatings industry remained in stable development phase in the first half of 2021 and explosive growth did not show up after the trough caused by the pandemic. Industry and enterprises managers shall keep a clam perspective when analyzing the market.
2. Analysis of industry development features and strategies
(1) Costs rise at accelerated rates, control costs to ensure increase in operating incomes
Operating costs maintained a growth rate of above 12%, squeezing industry margins, which needs paying great attention to. From the second half of 2020 to the first half of 2021, upstream feedstock costs hovered at high levels. Titanium oxide, resins and auxiliaries prices rose consecutively, imposing pressure on the coatings industry development. Increased liquidity of enterprises technical and management personnel, as well as recruitment difficulties became the key problems affecting the normal production of some enterprises.
Rising products sales costs and financial costs reflect low demand increase expectations among downstream industries, relatively weak marketing of coatings enterprises and lack of bargaining power. On the other hand, stricter environmental protection and safety control measures over chemical producers, including their moving into industrial parks, production suspension and installation of environmental protection equipment, coupled with tightened loans all impacted coatings enterprises. Their financial costs rises at a fast pace.
Suggestion: First, enterprises shall focus on feedstock purchase costs and adopt volume purchases to enhance its bargaining power. Second, they shall focus on premium and green products development, rather than low-end, homogenous competition, increase R&D and other labor and material investment, cut sales and financial costs so as to achieve the goal of managing sales volumes and price with quality products and ensure the increase in operating incomes.
(2) Pay attention to liabilities growth, to reduce accounts receivable and capital risks
China’s coatings industry posted a rise in monthly accumulative growth rate of finished products, inventories, liabilities and accounts receivable in the first half of 2021, with notable increases seen in the second quarter.
Suggestion: The third quarter is the traditional peak season for sales and construction. Hence, inventory pressure will ease, with growth rate slowing down. Enterprises shall watch closely the supply-demand relation and adjust production tasks to reduce inventory risks. Meanwhile, they shall pay great attention to the increase in accounts receivable and liabilities, enhance the capital flow, reduce the risk of working capital and alleviate their pressure.
(3) Pandemic outbreaks
Coronavirus infections in several domestic regions in the first half of 2021 hardly hit regional production, logistics and material supply, pushing up enterprises’ costs and triggering a lag effect or temporary halt in supply. China’s Ministry of Industry and Information Technology (MIIT) has attached great importance to the situation and made timely coordinated solutions to key issues such as pandemic prevention and control, production guarantee, material supply and logistics for enterprises in the above affected regions.
Suggestion: Enterprises in the affected areas can coordinate with NCIA on production, logistics and local pandemic prevention and control issues in a timely manner and give quick feedback to China’s MIIT to form a rapid response mechanism for specific problems and coordinate solutions.
In general, China’s coatings industry maintained stable economic operation in the first half of 2021 and achieved normal growth. However, elevated raw materials prices, which hovered at high levels for a long period of time heavily impacted enterprises’ costs. Hence, they shall continue to pay close attention to the rapid rise in costs, liabilities and accounts receivable, as well as downstream demand and adjust product structure and orders timely to strive for better performance in the third quarter.
