Chilean paint market tightens with competition: Chile's paint and coatings industry is one of the most developed in Latin America and expects positive growth.

Chile's estimated $200 million paint and coatings market is coming under increasing pricing pressure as manufacturers compete more aggressively for sales, while raw materials costs escalate and paint overproduction continues, according to Fitch analysts Andrea Jiminez and Rina Jarufe, in Santiago.

Despite greater competition in the architectural paint market, the outlook for consumption in Chile is strong and expected to rise with the four to five percent gross domestic product (GDP) growth projected for this year. Last year Chile's economy grew at 5.1%, according to the Chilean Central Bank.

One reason for the strong expectations for the Chilean economy is record prices for copper exports, which have largely insulated the country from the fallout of the U.S. economic slowdown. Indeed, Chilean GDP per capita is well over $11,000, one of the highest levels in Latin America, and inspired a 7.7% increase in household spending during 2007. Per capita consumption of paint in the country is only 1.3 gallons.

In a recent review of the credit risk for Tricolor S.A., of Santiago, one of Chile's leading domestic paint producers, the Fitch analysts indicated that the architectural segment represents approximately 60% of overall sales for all manufacturers in Chile, while the industrial segment represents the other 40%. In contrast, Tricolor derives 70% of its sales from the architectural segment, and 30% from the industrial segment. Some two-thirds of Tricolor architectural sales are made through hardware or box stores, while one-third are through large distributors like Sodimac, Easy and MTS, Fitch reported.

Tricolor reported roughly flat sales of approximately $94 million in 2007 compared with 2006, but still maintains a stable outlook, the Fitch analysts reported. The company had little success in raising prices during 2007 despite rising oil and petrochemical costs, which account for 80% of Tricolor's materials costs. As a result, Tricolor margins eroded by 5.8% last year, the analysts reported. The market preference for oil-based paints in Chile is growing faster than water-based paints, the Fitch analysts noted.

Tricolor has sales offices throughout the country, including the cities of Antofagasta, Concepcion, Temuco, Puerto Montt and Punta Arenas. The company manufactures latex paints, enamels, varnishes, anti-corrosives, industrial paints and other products at factories in Vina del Mar, and in Lima, Peru. Tricolor controls the Pinturas Iris brand in Chile and the Pinturas Vencedor brand in Peru.

The Fitch analysts noted that the Peruvian paint and coatings market is far less developed than in Chile, with per capita paint consumption only 0.3 gallons per year in Peru and a per capita GDP of only approximately $6,500. Still, Peru's economy expanded by nine percent during 2007, and early International Monetary Fund indicators suggest that this year seven percent GDP growth will take place. Fitch recently upgraded Peru's sovereign credit risk to investment grade, indicative of expectations of strong economic performance there. Chile was previously the only country in Latin America with an investment grade for sovereign risk.

BY CHARLES W.THURSTON

LATIN AMERICAN CORRESPONDENT

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