Lin Xuanyi, Shanghai STO
The spreading Covid-19 pandemic in 2020 crippled world economy and hit the architectural coatings industry. However, driven by the 7% increase in the real estate investment and old house renovation projects, China’s architectural coatings industry posted a rapid recovery, with its output up by 3% in 2020. The industry sustained a sound growth rate in the first half of 2021 but changes took place in the second half of the year, tracking the movements of the real estate sector.
Repaint market becomes a new driving force, while falling second-hand housing transactions weighs
on the market
The economic indicators which are highly correlated with the architectural coatings market are construction areas completed, real estate investment, M2, GPD and old house renovation. In recent years, the total construction areas completed keep falling but remain large and there are a great number of existing buildings. So, such strong driving forces lay solid foundation for China’s architectural coatings development.
1. Construction areas completed
In 2020, China’s construction areas completed totalled 3.85 billion square metres, based on the statistics of the construction industry. The floor space completed of real estate development enterprises stood at 912.18 million square metres and 510.13 million square metres respectively in 2020 and the first nine months of 2021.
2. Old house renovation area
China’s existing building areas are estimated at over 66 billion square metres. The old house renovation market, also known as the repaint market is brand new and is a new driving force for architectural coatings development. The repaint market can be divided into three categories. The first is old house reform, the second is repaint of second-hand house, basically the same as new house painting and the third is renovation and repainting, also called refresh.
According to the Ministry of Housing and Urban-Rural Development, in 2020, there were plans to renovate 39 000 old communities in cities and towns, involving nearly 7 million households, covering 490 million square metres, calculating based on 70 square meters per household. The renovation of old houses refers to the areas under construction, not the areas completed.
As for the first and second-tier cities, second-hand houses have dominated the real estate market. The first-tier cities in particular, second-hand houses occupied over 80% of transactions and the proportion exceeds 50% for most second-tier cities.
In 2020, the domestic refresh market shrank by 5% as crippled by the Covid-19 pandemic. Only 2.85 million sets of houses were refreshed, covering areas of 200 million square metres, calculating based on 70 square metres per set.
The residential area needed decorating in 2020 totalled 1.643 billion square metres. Among them, the areas of newly completed residential buildings were 659 million square meters, accounting for 40.1% and the areas of renovated old houses were 984 million square meters, accounting for 59.9%.
The residential repaint market accounted for 59.9%, that is nearly 60% in 2020, and has become the new growth point for China’s architectural coatings industry.
In 2021, China’s intensive control measures over the real estate sector triggered a dramatic fall in the volume of second-hand house transactions in many cities across the country. This will have a significant impact on the architectural coatings industry.
Fierce competitions in the architectural coatings industry, accelerated structural adjustment
The Covid-19 pandemic made a hard hit on the architectural coatings industry in the first quarter of 2021. However, with the pandemic gradually being under control, the industry posted a rapid recovery and regained a 3% growth in 2020. It has sustained a rapid development pace in the first half of 2021.
1. Output and sales revenue
The output growth of architectural coatings enterprises was around 3% in 2020 and their total production volume reached 7.15 million tons. Their sales revenue stood at RMB141.4 billion, if the real estate investment is calculated as 1%.
Domestic coatings output reached 13.416 million tons in the first half of 2021 and main business income at RMB169.995 billion, with profits at RMB11.082 billion, up by 32%, 34% and 32% respectively. Despite a relatively sound development, architectural coatings face fierce competitions and squeezed margins left by soared raw materials costs.
Table 1 shows the domestic output of architectural coatings, coatings and the proportion of architectural coatings in coatings in 2011-2021.
2. Some leading enterprises
Some leading architectural coatings enterprises’ main business incomes grew by 30-40% in 2015-2020 and their market share kept increasing. Table 2 shows the main business incomes and profits of several leading architectural coatings enterprises in the first half of 2021.
3. Product innovation
Outstanding performance in the innovation of architectural coatings in 2020-June 2021:
(1) Anti-virus architectural coatings: Several enterprises launched anti-virus coatings amid the pandemic. To meet such demand, the group standard T/CNCIA 01014-2020 "Antibacterial and Antiviral Coatings" was put into effect on January 1, 2021. The group standard T/CNCIA 03002-2020 "Coating (paint film) anti-virus performance test method" was also on the same day.
(2) Inorganic architectural coatings: There is a trend towards functional development based on previous years’ research and development.
(3) Environmental-friendly architectural coatings or green architectural coatings further developed. The Shanghai Coatings and Dyestuff Association is preparing a group standard to limit both volatile organic compounds (VOCs) and semi-volatile organic compounds (SVOCs) to improve the environmental friendliness of coatings. In addition, green certification continues to advance under the need of green buildings.
(4) Cost cut. Under the circumstance of excessive currency issuance, substantial price increases of raw materials, reduction in the completed areas of new houses, and dramatic decline in the transaction volume of second-hand houses, coupled with the homogeneity of architectural coating products, architectural coating enterprises are under heavy pressure to reduce costs. They shall make great efforts to ensure the products quality but reduce costs.
4. Structural adjustment of architectural coatings industry
The driving force of architectural coatings has gradually shifted from real estate investment to the combination of real estate investment and old house renovation. And the latter is becoming the dominating growth engine. Old house renovation took a share of over 50% in 2019 and nearly 60% in 2020.
The rising concentration level of the downstream real estate industry and the increasing proportion of fully furnished houses in newly completed houses are boosting the concentration level of architectural coatings enterprises. The role of brand in marketing is expanding.
A new trend has emerged in the architectural coatings field. For instance, Oriental Yuhong entered the architectural coatings industry based on its success in waterproofing field, while 3Trees Group and Asia Cuanon bringing with it the success in the waterproofing field entered the architectural coatings industry. Taking advantage of the listed capital, they seized the market share of enterprises which rest on their laurels or having made mistakes. Small and poorly managed architectural coatings enterprises are hard to survive and some of them ceased production after the outbreak of the pandemic.
The reduction in completed areas of new houses and slump in second-hand house trade, rising raw materials coats and fund shortages at several downstream real estate enterprises all have had a huge impact on the structural adjustment of the architectural coatings industry.
5. Solid wastes identification
China National Coatings Industry Association (NCIA) and some other organizations have introduced group standards. According to these standards, the solid wastes from architectural coatings enterprises can be treated as general industrial solid wastes after identification. The harmlessness and recycling of solid waste from architectural coatings enterprises will be gradually pushed forward.
Sound industry development shall focus on quality and R&D
Private fixed-asset investment is a barometre of the economic situation. Table 3 shows the growth comparison between private fixed-asset investment and total fixed-asset investment since 2013.
Since 2016, the growth rate of private fixed-asset investment was mainly below that of the total fixed-asset investment. The exception was only seen in 2018 and the first three quarters of 2021. This reflects lack of confidence in private fixed-asset investment.
The real estate market is in rapid adjustment amid government’s tightening regulations. It only took a few months in 2021 for the policy to shift from "containing speculations in the housing market” to "suppressing malicious price cuts". Zhang Dawei, the chief analyst from Centaline Property said that the core of real estate regulation is housing loans and if housing loans continue to tighten, the housing prices are poised to continue falling.
The real estate industry is viewed as a bellwether of the architectural coatings industry. And so is the case in 2021. Calculating based on the fixed-asset investment in 2021, the completed areas of new houses will decline further to around 2 billion square metres, coupled with 66 billion square metres of existing buildings. The government pays more attention to old house renovation and energy-saving renovation, but the dramatic fall in second-hand house trade will weaken the overall downstream demand for architectural coatings.
The architectural coatings industry registered a rise in the first half of 2021 before a fall in the second half of the year. The output growth for the whole year is estimated at around 7%. Green manufacturing, energy conservation in buildings, pollution and carbon emission reduction and high quality are the development focus for the architectural coatings industry. The rapid rise in raw materials prices imposed a significant impact on the cost control. Surplus capacity and fierce market competitions narrowed the room for raising prices of architectural coatings. They together squeezed the enterprises’ margins. Some enterprises had to reduce costs and put lower-quality products on sale. Under such a circumstance, enterprises shall focus more on products quality and R&D investment to enhance a sustainable and healthy development of the architectural coatings industry.
