When the dollar weakens: a look at how the weakening value of the U.S. dollar against stronger Western European currencies is affecting paint and coatings raw material supplier.

The weak U.S. dollar against a strong euro and other Western European currencies, like the UK pound and the Swiss franc, has been raising hopes among European coatings producers for a decrease in raw material costs or at least a stabilization of prices.

So far, however, there have been few signs of a change in the pattern of continuous rises in raw material prices throughout most of this year.

Nor has the robustness of the euro and other currencies provided much of a cushion against soaring dollar-denominated oil prices.

Furthermore, Western European coatings companies are now facing the prospect of paint and coatings buyers in Eastern Europe, as well as in Asia and the Americas where most currencies are linked in various ways to the dollar, having to pay more for their exports.

Also European multinational paint manufacturers with production plants and other assets outside Europe could experience a fall in profits from dollar areas because of the effect of translating earnings into the euro and other currencies.

Economists are predicting that the fall in the dollar is likely to continue well into next year. This could mean that the euro, which breached the $1.40 level in September, could soon rise above $1.50.

Since its creation approximately seven years ago, the euro has appreciated by 70% against the dollar. It has also been climbing against other major currencies such as the Japanese yen.

The UK pound has also risen to its highest levels against the U.S. currency since the early 1980s, having appreciated against the dollar by over ten percent in 18 months.

Coatings producers in Europe have been expecting that at least the low dollar would help ease the costs of petrochemical-derived materials whose prices are dictated by the cost of oil. But the big hikes in oil prices to over $1.80 per barrel has offset any benefits of a high domestic currency.

Because of the current relative buoyancy in Europe's economies with GDP growth in the eurozone expected to average 2.6% this year, there have been shortages in some raw materials for coatings, particularly in base chemicals for resins. These have exerted more upward pressure on prices.

In fact, the continued vigorous demand in the coatings sector, which in some segments has been well above GDP rates, has enabled raw material producers to push through price rises.

"These scarcities of raw materials, which in some cases have been due to plant closures, have wiped out any benefits from changes in the value of currencies," said David Miles, marketing manager for coatings materials at the UK-based distributor Chance & Hunt.

"There has also been an imbalance between demand and supply in commodity chemicals like methanol, which has triggered steep rises in prices of certain materials," he added.

Prices of imported Chinese-sourced raw materials, which in recent years have tended be as much as ten to 20% below those of domestically produced chemicals, have been increasing due to the Chinese government eliminating VAT tax refunds on approximately 2,800 product types, including pigments and resins. At the same time the value of the Chinese remimbi, which has loosened its ties with the dollar, has been appreciating against the U.S. currency.

"The costs of Chinese resin producers have also been going up while there is a shortage of raw material supplies in some cases in China," said Paul Walden, a director at Langley-Smith & Co., London, a global distributor of resins. "There is now a more level playing field in Europe with respect to Chinese imports. European domestic resin producers have been able to use stocks of raw materials bought before the latest decline in the dollar to compete against the Chinese products."

Because of the high value of the euro and other European currencies, Europe has been a big attraction to exporters of coatings and other raw materials from outside the region, particularly from the US.

Over the last two months producers of titanium dioxide (Ti[O.sub.2]), many of them owned by U.S. companies, have announced a series of price rises of approximately three to five percent in Europe after a period of fierce competition in the region's market.

In October Tronox Inc. of the U.S., which has two Ti[O.sub.2] plants in Europe, and Cristal Group, the Saudi owners of Millennium Inorganic Chemicals with three units in the region, revealed they were putting up their prices by 100 [euro] ($1.43) and 80 [euro] per metric ton respectively.

Cristal also declared planned price rises elsewhere in the world but the rise in Europe was by far the largest. "Cost escalation in Europe is higher than anywhere else in the world, which accounts for why the price increase is higher in Europe," said Amy Drusano, communications manager at Millennium.

Rockwood Holdings, Princeton, NJ, owners of the German-based Ti[O.sub.2] producer Sachtleben, conceded that a profit decrease in its titanium dioxide business in the second quarter of this year was partly due to lower selling prices.

"There has been a lot of undercutting of prices in Europe because of the intense competition caused to some extent by U.S. producers becoming more active in the region because of the decline in demand in the U.S. market," explained Tim McKenna, Rockwood's investor relations manager.

Some observers believe that the recent spate of announced Ti[O.sub.2] price increases are aimed primarily at stopping a continued slide in European prices for the pigment.

This would confirm a belief that the underlying trend with raw materials at the moment in Europe is for a gradual levelling off of price increases as the effects of changes in the currency market begin to kick in.

"Historically at times when a major currency weakens or appreciates against other currencies, there is a time lag before the full effects are felt," said Miles. "Coatings and other producers are tending to hold back from replenishing their stocks until they see for sure that the dollar will stay low. We may well see raw material prices starting to go down in this last quarter and during the early part of next year. There is also new capacity in some commodity chemicals due to come on stream in 2008 which could weaken prices even further."

by Sean Milmo

European Correspondent

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