Additives roundtable: industry leaders share their thoughts on key issues.
The global market for additives used in paints and coatings is valued at $2.9 billion, according to The ChemQuest group, a management consulting firm located in Cincinnati, OH. The North American market, which accounts for 40% of the worldwide value, is worth $1.15 billion and is growing at 3.1% per year. Despite accounting for a minimal percentage of overall formulations, additives do play a significant role in determining the performance capabilities of paints and coatings. As a result, heavy demands are placed on additives producers by their downstream customers. Market forces affecting the downstream supply chain can be strongly felt by additives suppliers as well.
Consolidation in the global coatings market is one trend that has impacted the entire supply chain. "We are seeing increased buying power on the part of the large paint companies, giving them better price leverage over their suppliers," says ChemQuest vice president Michael D. Brown. "While the smaller size of the average additives supplier makes this pressure more acute, the fragmentation and customization of the additives market gives suppliers some relief." ChemQuest forecasts continued consolidation of formulators, particularly in the architectural markets of North America and Western Europe.
The "Asia question" is also an issue for additives suppliers. Increased competition will be accompanied by increased opportunities as the Chinese domestic market grows at double digit rates over the next five years. "Local additives producers are emerging to supply the local Asian formulators, while Western additives suppliers are developing capabilities in the region to supply the Western formulators developing formulas to supply Western OEMs moving to Asia. The additives demand is driven from this relationship with the formulator consumption often taking place close to the source of application in Asia. Concerns for intellectual property protection come in to play as these local producers develop offsets for the Western additives," Mr. Brown notes.
Regulatory developments for paints and coatings around the globe will also impact additives manufacturers. VOC restrictions in the U.S. and the European Union are creating opportunities for innovative additives producers to introduce new multifunctional products that help formulators meet regulatory requirements while maintaining performance. There is concern, however, about the REACH (Registration, Evaluation, and Authorization of Chemicals) legislation in Europe, which is scheduled to take effect in 2007. "The major impact of REACH will be to slow the innovation and introduction of new products to the European markets," Mr. Brown states. "This could also impact global markets as several of the major additives suppliers are located in Europe and their base of customers are located in Europe, making it more difficult and less attractive to develop products for the North American and Asian markets only," he continues.
What can additives suppliers do to ensure continued growth under these challenging conditions? It appears that many are relying on innovation as a strategy for success in the future. Mr. Brown has two additional suggestions. "The role of additives needs to transition from one of modifying the coating formula to address environmental regulations toward a role of modifying the coating film for better performance and new characteristics. These characteristics include surface hardness for scratch and mar resistance, antimicrobial, thermal insulation and reflectivity, cleanability, and appearance. I would also like to see the industry drive the customization of products harder as this is a rich source of competitive advantage and helps to offset the buying power mentioned earlier."
What are the opinions of leading additives suppliers? How do they view current market conditions? What strategies are they employing to ensure success in the coming years? JCT COATINGSTECH interviewed representatives of leading additives suppliers to the paint and coatings industry. Their responses are presented below. Companies that participated in the roundtable include: Aqualon, a business unit of Hercules Incorporated; Borchers GmbH, a business unit of Lanxess; BYK-Chemie USA Inc.; Ciba Specialty Chemicals; Cognis; Cytec; Dow Corning; Eastman Chemical Company; Elementis Specialties; Rhodia; and Rohm and Haas Company.
JCT: How are climbing raw material and energy prices impacting the additives market? Are they affecting any one region of the world more than another? Any segment (architectural, industrial, etc.) more than another? Any additive types more than others?
Dr. Peter Manshausen, Managing Director, Borchers GmbH: Even specialities such as additives are affected by climbing raw material and energy prices, which lead to higher production costs. With global competition, support of local production by cheaper or less taxed energy and cheaper raw material supply--both of which depend on the regional situation--will always have an impact on the competitiveness of a company. All segments are affected. With regard to additive types, the impact depends on how many, and which chemical reactions and physical treatments, are necessary in order to generate the final product. Raw material prices will have less impact on the final material when more steps are necessary to produce the additive.
John Panichella, President, Aqualon: We are seeing raw materials and energy costs continuing to increase in 2006 throughout the world. We are working to offset these costs with productivity projects and price increases.
Dave Brown, Global Market Manager, Industrial Coatings, Cognis: Industrial additives have been affected like all materials and have seen major cost increases over the last 18 months. All of the regions have been impacted by the amount and extent of the price increases. The difference between the regions comes to bear when the markets "return to normal." Asia and Europe were the first to return to typical market conditions whereas North America was the last due to the hurricanes.
Dirk Plas, President, BYK-Chemie USA Inc.: In the NAFTA region, raw material prices began escalating during the course of 2005, rising significantly in the fourth quarter. Some of this development has been driven by supply problems, but it has not affected delivery of products to our customers. Additional concerns are the freight surcharges and being able to find qualified HAZMAT truck drivers.
Volker Oehl, Global Major Market Leader for Coatings, Dow Corning: We have seen additives prices increasing in general but not equally across market segments. As with most chemicals, additives cost is influenced by the cost of raw materials, energy, transportation, etc. Dow Corning markets high value additives mainly to the inks, marine/protective, industrial and wood coatings sectors, and other segments. There are differences in terms of value, e.g., ink manufactures often do not consider the high value additives while automotive coating manufacturers often do. Hence, the effect of the rising cost of additives influences some market segments stronger.
Sandeep Goel, Additives Market Manager, North America, Rohm and Haas: The rising cost of raw materials and energy is driving up the cost of producing additives, including rheology modifiers and dispersants. Additives suppliers have been impacted by the run up in petrochemical feedstocks, including ethylene and butane. These feedstocks impact key materials such as PEG (polyethylene glycol) and DIB (diisobutylene), which have experienced significant increases in price. As expected, rising energy costs are also driving up manufacturing and shipping costs.
Marcelo Herszenhaut, Business Line Manager, Cytec: The rising cost of raw materials and energy has had an impact on the additives market, similar to the effect on the coating markets in general. The entire value chain has been affected, making it difficult to fully implement price increases, especially in a competitive global market. The types of additives most affected are likely those used in less demanding areas, such as in low-price commodity surfactants in interior architectural latex paints. Specialty additives, like those used for waterborne and low-VOC systems, are probably the least impacted since they have unique performance properties which are not easily replaced.
JCT: Have additives suppliers been able to pass on price increases to maintain margins? Again, has the experience been different for different regions and market segments?
John Foley, Vice President of Industrial Formulations, Rhodia: Rhodia has had no choice but to announce price increases as we attempt to recover the full cost of producing our products. However, it's always difficult to keep up with our rising costs. So we are constantly seeking--and finding--new ways to innovate and improve our operations so that we can remain the supplier of choice for our customers. We do see some differences across our markets and regions, but the drivers on higher costs and our drivers to improve are common factors across our business.
Greg Kalscheur, Industry Manager, Industrial & Decorative Coatings, Ciba Specialty Chemicals: Most manufacturers have had to pass along some of the increases on select products and in specific markets. However, globalization and cost pressures from the end of the value chain are keeping much of the dynamic in check. Ciba works hard to minimize (price) increases through process development and optimization. With additives, it is also critical to optimize system performance by matching the performance needs with the cost tolerance through the selection of the right products. In other words, pick the right products for each individual system.
Shruti Singhal, Global Market Manager, Consumer Coatings, Cognis: Due to increases in key raw material prices and rising oil and energy prices, we incurred rising costs in all areas of additives. Unfortunately, we have been unable to recover all increases that we incurred, whether it was our own raw materials or ones related to energy and transportation. This has led to a squeeze in margins and profitability, globally. It has been very difficult to pass along increases in Asia-Pacific due to severe competition from local and small size producers.
Michel Janssen, Marketing Director, Elementis Specialties: It is impossible to pass on all the cost increases, especially in the more "commodity" types of additives (meaning, drop-in replacements are available).
Dirk Plas, BYK-Chemie: Like additives suppliers, customers have grown weary of price increases. We have on occasion raised prices in response to these developments, but have not been able to keep pace with raw material price increases. We are striving to offset raw material prices with performance improvements and cost reductions, but there is a limit to what can be achieved. The NAFTA market has experienced more volatility than the European market.
JCT: Is the additives market experiencing shortages of supply? If so, in what areas?
Marcelo Herszenhaut, Cytec: The availability of acrylate polymers did show some fluctuations because of the supply of acrylic acid. However, the market has not fully felt these fluctuations because of companies' production/stocking policies.
Michel Janssen, Elementis: We are experiencing a tightness in the market for organoclays.
Dr. Peter Manshausen, Borchers: There has been a shortage of certain types of raw materials. Examples include driers and "classic" antiskinning (MEKO-) agents.
Dirk Plas, BYK-Chemie: Yes, we have been forced at times to buy materials on the open market at spot prices to meet our production requirements. This in turn increases our costs. Making sure that customers have the product when they need it is our primary concern. That is why we work closely with our national network of warehouses to ensure that product inventory levels are stable and finished goods are delivered to our customers on time.
John Foley, Rhodia: We have experienced isolated raw material shortages. We have generally been able to manage our way through them without disrupting our customers' operations. Fortunately, Rhodia operates manufacturing sites as a global network, serving global customers as well as regional customers. This gives us important flexibility, and, we feel, an advantage in reliability in meeting customer demands and expectations.
JCT: Is consolidation and globalization within the paint and coatings industry supply chain (from raw materials to additives to resin producers to formulators) affecting the additives market? If so, how? Is more consolidation expected in the coming years? If so, why, and what impact will it have?
Dirk Plas, BYK-Chemie: Clearly, the ongoing consolidation will have its effect in a number of areas. While many people are concerned that consolidation will lead to fewer players with more price leverage, this will be offset by new global players entering the market.
John Foley, Rhodia: Yes, consolidation is certainly affecting these markets. And we expect it to continue as the various players look for market, technology, industrial, and supply chain advantages to create a sharper competitive edge and deliver greater value for the customers.
Dave Brown, Cognis: There is no question that further consolidation will increase competition and reduce prices/margins in the short term as the industry reduces excess capacity in mature regions. In the long term, consolidation will stabilize prices, margins, and utilization of assets, but it will also probably reduce innovation.
Shruti Singhal, Cognis: There is no doubt that further consolidation in the paint, coatings, and ink market will continue. The smaller players are getting bought out by the larger players, thus increasing the latter's bargaining power and resulting in more competition and ultimately reduction in profits and margins. Over the long term this will lead to pricing stability, however the key to differentiation will be innovation; a "me-too" approach will not work in the architectural market. Intimate partnerships among the suppliers, paint manufacturers, and end users will be very important in understanding market trends and driving technology to meet those needs.
Marcelo Herszenhaut, Cytec: As companies merge and become global, they usually try to unify their product lines. This can put more demand on suppliers in the areas of technology, product availability, purchasing, and supply practices. For example, some companies are applying Responsible Care[R] practices globally, developing environmentally-conscious products in regions where such demand does not come from the market or government. Suppliers have to keep up with these types of demands.
Volker Oehl, Dow Corning: Dow Corning is manufacturing silicone resins for high temperature applications and silicone intermediates for improving organic resins. We have seen many companies in the marine/protective market build factories in developing countries and than utilize global formulations for their products manufactured there. Dow Corning, as a global supplier to the coatings industry, can react to that by providing local service. We expect that this trend will continue.
JCT: How do you see China/Asia impacting the additives market? Will the demand growth within the region outweigh the increased low cost production being exported to the rest of the world? What general strategies are being used to manage the competition and leverage the opportunities? Are intellectual property issues a concern?
Michel Janssen, Elementis: China/Asia is an interesting new market, but the growth of output of additives is much higher than the growth of Asian consumption. This imbalance puts pressure on prices. Strategies to cope with this include: relocation of production to China and reduction of costs (especially service costs) on product ranges affected by this increased competition.
Charlie Giaudrone, Global Marketing Leader of Coatings, Eastman: Asia, and particularly China, will continue to lead the growth in global coatings and additives in the coming years. India is also emerging as a significant developing economy. It is difficult to prescribe a general strategy for success in the Asia Pacific region. Much depends on whether a company is a global or regional player, what type of products it chooses to promote in the region (e.g., commodity/specialty), and what specific markets and applications it targets for growth. Typically, the most successful Asia Pacific strategies are tailored to fit both company and regional/country/market needs.
Eastman employs a mix of local and global solutions to support our customers as they grow in the region. Eastman Coatings has two manufacturing sites in the region, plus two technology centers in Singapore and China; the latter having opened in Shanghai in November of 2005. Through our presence on the ground in the region and our extensive distribution network, we are able to deliver the optimum combination of product and service to our customers. Eastman complements this local mix of tailored products and services with a broad portfolio of coatings solutions from our global asset, resource, and technology base.
Greg Kalscheur, Ciba Specialty Chemicals: As for many industries, the China/Asia dynamic is having a major impact on the global additives market. Whether competing in the China/Asia region or competing against exports in mature markets, suppliers must recognize that customers have new options to consider regarding non-traditional (new) additives suppliers. Regarding the balance between export and local use, I expect export to continue to lead in the short term. Longer term, I see the domestic consumption leading the way and taking priority in sales by the local suppliers. As a global company, Ciba is exploring and implementing several strategies for expanding local presence and establishing appropriate relationships for participation in the global market. Ciba remains focused on meeting our customers' needs globally through delivering consistent quality, proven performance, strong technical support, and innovative new products and technologies to meet future needs.
Dave Brown, Cognis: My belief is that China's internal demands will require it to continue to rely on technology from developed regions because its growth will outstrip its ability to supply its own needs. China is basically a bi-modal market today with the local market being served by local Chinese companies and the international one dominated by the multinationals. The multinationals bring the latest and best technology and push the local market to adopt the best technologies. The local market demands that it does this at the lowest possible price. This dynamic will play out over the next 5-10 years and it's hard to tell which side will benefit the most. Intellectual property is a tricky issue in China and there isn't one strategy that will work. Local manufacturing is a big plus today but the cost advantages must be balanced with protecting proprietary know-how.
Shruti Singhal, Cognis: Every major supplier is investing in China and India. With double digit growth, presence and intimate knowledge of these markets is key for a sustainable future of any business. Local sourcing and manufacturing have helped maintain market share. Sourcing from China to the U.S. and Europe is being done already in many areas and is a possibility with architectural additives in the future. At this time, the internal demand from Asia is more than the available capacity, but with all the foreign investment, in 5-10 years supply may outweigh demand, and expansion will have to be in markets outside of Asia-Pacific. Intellectual property has always been a concern in the past in Asia-Pacific, but stricter laws and changes in overall thinking have set the tone for progress in the right direction. This still does not mean that we can relax. We have to protect our know-how as best as we can without compromising on performance or quality.
Dr. Peter Manshausen, Borchers: When China/Asia first emerged in the industry, modern paints were produced based on imported technology and formulations using imported additives. Now there are more local producers offering domestically produced additives for domestic consumption. In the future, we expect to see more and more paint ingredients coming out of China. In the short- to medium-term, we don't expect this effect to limit exports to the rest of the world. In the long-term, I believe environmental issues will become more important and working conditions and salaries will be adjusted in China. As a result, supply chain advantages and marketing efforts such as local technical support will finally be the basis for future growth.
John Foley, Rhodia: There is no question that the impact of China and Asia is significant. Beyond the well-documented advantages in manufacturing, the market in Asia continues to provide significant growth opportunities. We are seeing more innovation driven in Asia by both our global customers and local companies who are starting to focus on developing more value-added, differentiated products. Rhodia has made significant investments in both local manufacturing and technical capabilities. We are committed to our continued growth in the zone and will put the resources in place to make it happen.
Marcelo Herszenhaut, Cytec: At the moment, China has international standards and technologies. As the market continues to develop, demand for raw materials and energy could continue to drive costs upwards. We have seen swings in the export/import balance in coating products between China and the U.S. Low price materials seem to be available for export during slow months, with smaller quantities being available when production is stronger. Once the economic pace in Asia steadies, exports, in theory, should decrease.
JCT: How will regulatory developments impact the additives market (VOC legislation, REACH in the EU)? What can the additives industry do to prepare for increasing regulations?
Lynne Dant, Global Marketing Director, Architectural Coatings, Rohm and Haas: Additives suppliers must ensure that their products are compatible with new low-VOC binders and paint systems. Additionally, the additives industry must maintain a healthy level of profitability to reinvest in innovative product development so that customers have high-performing products that meet new and emerging regulations.
Dirk Plas, BYK-Chemie: While these regulations will increase the overall cost of doing business, we, as an additives supplier, see this as a perfect opportunity to help our customers meet the challenges that these regulations pose to the industry.
Dr. Peter Manshausen, Borchers: New regulations are always a challenge and an opportunity for all players in the market to create new and improved coatings systems. Sometimes they are even the driving force for innovations. However, this only works when these regulations are applied to all players.
Ming Tsang, Senior Technical Service Chemist, Cytec: Low-VOC requirements/regulations are driving coating manufacturers to adopt waterborne technologies, for example, which generally require higher additive use than conventional solvent-borne systems. In addition, additives for waterborne, high-solids, or UV systems are more complex technologically than those used for solventborne systems.
John Panichella, Aqualon: Regulatory issues around VOC legislation are a major driver. Our U.S. customers are all formulating to meet low-VOC targets and we are providing both formulating support and product modifications in support of this need. Particular needs are no-VOC additives and improved open time.
John Foley, Rhodia: There's no question that customers want more environmentally benign products. We field such inquiries regularly. We feel that with our zero and low VOC products and APE replacements, we are very much in step with global regulatory trends. Rhodia gives coatings manufacturers the choice of responsible chemistries without sacrificing performance. Waterborne and other environmentally sensitive products are helping meet the need to address expected future environmental regulations.
Francois Gallouedec, Business Manager, Consumer & Industrial Coatings, NAFTA, Cognis: Innovative technological development, based on renewable resources and environmentally friendly materials, has been and will remain the main focus of Cognis, in our efforts to help our customers meet the ever more demanding constraints of environmental regulations. Driven by new regulations, Cognis has had to develop solvent-free, APEO-free and heavy metal-free materials in every category of additives that we supply to the coatings market. Just about every new development is centered around these critical parameters, while trying to keep the level of performance that our customers are accustomed to.
Dave Brown, Cognis: The VOC regulations will have the largest impact on additives and resin technology, as it has had for the last 30 years in North America and the EU. The basic trend is to go from low-solids to high-solids to 100% solids systems. The limitation for going to 100% solids today is that it's not yet practical in many cases. There will be additional research needed to improve the resins themselves so that the application issues are minimized. Also, there will need to be more development in terms of environmentally friendly "solvents" and diluents.
Del Rector, Manager of Coating Specialties Technical Service, Eastman: More stringent regulatory requirements have continued to drive product modifications and innovation in all parts of the coatings industry, and that is certainly true of additives. The goal of the manufacturers of additives and other raw materials is to help the paint maker achieve required VOC levels while maintaining the best performance possible within those restrictions. As regulations have become more restrictive, this task has become continually more difficult. The higher solids coatings required to meet regulations, or the change to waterborne systems which the regulations may drive, offer unique performance challenges, some of which require new additives to meet them.
For example, tightening regulations in architectural and industrial maintenance coatings in the U.S., which are already primarily waterborne systems, have recently led to the introduction of a variety of low- to zero-volatility coalescing aid additives, including our own Eastman Optifilm Enhancer 400, introduced in 2004. Unlike traditional coalescents, such materials are designed to remain in the coating after the film forms. The impact of their continued presence in the film naturally requires other formulary changes. In other cases, the technological changes taking place can lead to challenges in fundamental application and performance properties such as film build, sag resistance, flow and leveling, and appearance, any of which may have both performance and economic impacts. The coatings industry is counting on its additives suppliers to develop the products to address these needs.
JCT: Are there any other issues you see impacting the additives market that will be key in the next several years? Why are they so important and what can the industry do to respond?
Volker Oehl, Dow Corning: In addition to ongoing regulatory issues, a key trend for paints and coatings is the drive toward using the absolute minimum of additive, which in turn is leading to development of multifunctional products. At the same time, paint formulators are often very conservative and do not want to re-formulate. However, in the current regulatory and competitive climate, additive suppliers are challenged to anticipate needs and respond proactively.
Dr. Peter Manshausen, Borchers: Depending on the region, the consumption of traditional coatings is expected to grow slightly. In this mature market, only new coating technologies will create new business opportunities. Therefore, innovative R & D and strong cooperation with customers will be the keys for lasting success.
Greg Kalscheur, Ciba Specialty Chemicals: Globalization, environmental impact, and balancing performance with cost will continue to be the key drivers for the additives industry. Additives suppliers and paint manufacturers must work together to meet consumer/customer expectations of improved performance and reduced total cost while minimizing impact to the environment.
Shruti Singhal, Cognis: Color, fashion, and ambience are key to the consumer today in all facets of their lives, including wall paint. Therefore, these are key drivers to our development efforts, especially for interior paint. Additives have to meet the tough demands and requirements to satisfy the choices of the end user.
Sandeep Goel, Rohm and Haas: Continued volatility of energy and raw material costs, as well as VOC regulations, will continue to be issues for the additives market over the next several years. These issues are long-term challenges for the additives market and for the broader coatings industry. Additives suppliers must work hard to keep costs under control and to put systems in place that ensure the highest level of efficiency and cost effectiveness. Healthy margins are important to maintain to allow reinvestment in product development.
JCT: What can the additives industry as a whole do to maximize success over the next five years? What about individual companies?
Greg Kalscheur, Ciba Specialty Chemicals: The additives market is about delivering or matching the desired performance with the end customers' expectations and cost tolerance. It is easy to over or under design a system. Additives suppliers and formulators must work closer together to realize synergies and meet customer needs.
Michel Janssen, Elementis: Our industry is forced to consolidate because of price pressure. Individual companies can choose from various strategies ranging from "low cost supplier" to bringing innovative new products to the market at better margins.
John Panichella, Aqualon: Aqualon will focus on aligning our technical and customer service resources with our customers. As the complexity of coating systems increases, there will be an increased need for integrated solutions.
John Foley, Rhodia: Besides continuous innovation and service, we will focus on ensuring efficient and consistently high quality production. Customers rely on us around the world and we must continue to earn that trust every day.
Marcelo Herszenhaut, Cytec: Continue developing a portfolio of innovative additives technologies that delivers value to formulators and manufacturers. Specifically, provide additives and related products on a global basis that help customers realize the economic advantages of VOC-compliant coatings.
Dr. Peter Manshausen, Borchers: Provide as much technical support as possible to major accounts and create strategic alliances. The additives suppliers market is very diversified. Numerous small- to medium-sized companies are globally competing with a handful of larger producers. Particularly smaller companies have to generate a fast organic growth in order to exceed at "critical mass." Only suppliers with sufficient financial support will be able to afford intensive regional technical support requested by the major coatings producers.
Dave Brown, Cognis: Additives continue to grow mainly due to the fact that most of the coatings systems continue to change from conventional solvent-based technologies to UV, high-solids, and water-based systems. The newer coating technologies are not as robust as conventional solvent-based coatings. Consequently, there is a need to do continuous product development to make an additive more easy to use and more robust so that it can be used across many formulations. The key to this is simply excellent technical service, product development, and sales/marketing. The additives supplier that is closest to the customer and is able to solve their problems will always win.
Shruti Singhal, Cognis: INNOVATION, INNOVATION, INNOVATION. Globalization has led to customers requiring high standards of supply chain excellence and technical service worldwide. Being close to the customer and end users will help in developing new concepts and solutions, thereby enabling us to differentiate ourselves in this competitive market by offering superior performance and formulation cost savings.
Francois Gallouedec, Cognis: Staying ahead of environmental regulations by being proactive rather than reactive and bringing regional standards to all of the global customers that we service and anticipating consumer demands for new features will be the key to survival for additives companies. Concept development rather than product line extension is the innovation driving force for Cognis.
Charlie Giaudrone, Eastman: Over the next five years additives will continue to serve as a critical success factor for the coatings industry. As the environmental and regulatory landscape continues to change and evolve, they will continue to be critical "solution" components for coatings manufacturers. Additives will also play a key role in driving value creation across the value chain. Whether enabling lower formulation, applied or total life-cycle coatings costs, or delivering essential performance properties for given applications that deliver returns across the value chain, additives will be key to continued industry success in the coming years.
by Cynthia Challener
JCT COATINGSTECH Contributing Writer
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|Title Annotation:||Market Update|
|Date:||Apr 1, 2006|
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