Paints and Coatings

Covering everything from metal cans to the wooden cabinets they're kept in, industrial coatings are as diverse as the world of manufacturing itself. As a result, there isn't a factor affecting manufacturing broadly that doesn't also influence industrial coatings.

Manufacturers in the U.S. fret over the emergence of industry in China; so do their paint suppliers. If factories are suffering from the high cost of the fuel used to run them, coatings companies' costs are also rising. Even high steel prices hurt manufacturers and coatings companies alike, if it means imports of painted parts.

Because there are so many applications in the industrial coatings sector, technology developments seem incremental and rarely revolutionary. Within individual markets and methods of painting, however, chemistry still makes great strides in improving efficiency and performance.

Overall, the U.S. coatings industry was sluggish in 2003. Product coatings, which include industrial coatings used by automakers and other original equipment manufacturers (OEMs), experienced a 6.8% decline in volume, to 384 million gal - the lowest figure in five years. However, because of higher prices for coatings, the value of these shipments declined by a less dramatic 5.2%, to $5.3 billion.

Special-purpose coatings, which cover industrial uses such as marine paints, likewise fell in 2003 - by 5.5%, down to 173 million gal. The value of these shipments decreased 3.3% to $3.2 billion. Meanwhile, because of a strong housing sector, architectural coatings volumes increased 8.6% to 781 million gal. The value of these shipments increased by 7.2%, hitting $7.6 billion.

DESPITE THE lackluster U.S. figures, coatings suppliers say the industrial coatings business globally began to turn around last year. J. Richard Alexander, vice president of industrial coatings for PPG Industries, says the improvements have so far been sustained into 2004. "We started out with pretty positive momentum midway through 2003 and have continued to gain momentum, especially in the Asia-Pacific region," he says. "We definitely saw an improved economy in the first half of the year in North America, Europe was pretty stable, and we saw explosive growth in Asia-Pacific."

Chemical raw material suppliers to the coatings industry also note a recovery. Ken Bourlier, marketing director of Rhodia's performance coatings systems unit, says the industrial coatings sector usually tracks gross domestic product growth, which has been improving. "The last two years have been good because the economy has turned around," he says.

Like the rest of the chemical industry, the coatings industry has been hit by rising feedstock costs driven by high prices for natural gas and crude oil. William L. Mansfield, chief operating officer of paint maker Valspar, told a Credit Suisse First Boston chemical conference in New York City last month that raw material costs are a wrinkle on what otherwise has been a good year for the company. "The single biggest problem is raw material costs," he said, noting that a shortage of acrylic monomers has particularly hurt.

In addition to chemical raw material prices, Tom Hoenle, business director for industrial coatings at BASF Corp., worries about steel. According to consultancy MEPS International, prices for hot-rolled coil steel increased from $330 to $570 per metric ton between June 2003 and June 2004. Steel industry observers blame surging Chinese demand for coke and scrap metal.

Hoenle says high prices and dwindling supplies are forcing U.S. manufacturers to look overseas rather than locally for coated steel coils to fabricate into parts. This cuts into the amount of coil coatings BASF can sell in the U.S. "We are seeing some weakness right now as a result of this steel shortage," he says.

But even if these were the best of times for the industrial coatings industry, the U.S. still wouldn't be the most prosperous place in the world. According to Phil G. Phillips, president of Chemark Consulting Group, OEM coatings growth in the developed world is slow: about 3% annually in North America and slightly less than that in Europe. For strong growth, coatings producers look to China, where a booming industry has driven Asian industrial coatings growth to 5% annually.

The U.S. market, however, is still significant - an $18.4 billion slice of a global coatings market worth $70 billion. In the OEM segment, the U.S. accounts for $8.6 billion of a $20 billion global market.

In the industrially important powder coatings segment, according to Brussels-based Irfab Chemical Consultants, growth in Asian countries ranges from 3 to 12% per year. From a base of 300,000 metric tons in 2003, Irfab expects regional volumes in the powder coatings sector to reach 500,000 metric tons by 2008 and 800,000 metric tons by 2013.

Edward J. Donnelly Jr., group vice president of coatings and colorants for DuPont, says that, with four powder coatings plants in China already, his company is well positioned for this growth. But DuPont is interested in boosting its liquid coatings business in the region as well. The company has an automotive coatings plant in northern China that serves Volkswagen and Audi assembly lines, and given the growth in all kinds of industry in China, Donnelly wants to broaden the scope of that plant. "We are trying to see what else we can use that plant for to grow our industrial business in China," he says.

Alexander says PPG has added capacity at two plants in China to further its focus on electronics, general finishing, and coil and extrusion coatings. "Our business has been growing very quickly in the Asia-Pacific region for the last three years," he says. "Certainly as a result of the dynamic growth there, we have done our best to take advantage of our position to grow faster than our competition."

Like DuPont, PPG is interested in domestic Chinese infrastructure as well as products destined for export markets. Preparations for the 2008 Summer Olympics, Alexander points out, are creating a vibrant market for precoated aluminum. "We have taken advantage of the indigenous growth of the economy on top of the export of materials to the world from China," he says.

GROWTH IN CHINA comes at a price, however, Alexander says. Imported goods from China and other developing nations into the U.S. put PPG’s domestic customers under pressure. “Without a doubt, in the low-labor-cost countries, whether they are in China, Southeast Asia, or Eastern and Central Europe, the manufacturing base is going to grow at a more rapid rate than the North American base.”

Valspar’s Mansfield told investors that his company’s strategy is to move with the shifting manufacturing base, particularly in furniture coatings. “Growth in furniture building is double digit as production is [moved] offshore from the Carolinas in the U.S. to China,” he said. The company has adopted a policy of offering medium-priced coatings in China—instead of only premium formulas—and that has helped it capture furniture industry growth there.

But growth strategies aren’t locked only into exploiting China. Donnelly says DuPont, which entered the industrial coatings sector outside of the automotive industry through its 1999 acquisition of Herberts from Hoechst, is diversifying the markets it serves. The company is investigating marine and aerospace coatings, as well as protective coatings for infrastructure applications—in particular, gas and oil exploration equipment and windmill shafts.

To these industries, Donnelly says, DuPont can offer technologies such as waterborne acrylics low in volatile organic compounds (VOCs). “We are looking at ways to bring in environmentally friendly systems because that is the way the industry is going,” he says.

Though DuPont will not take on a role as an industry consolidator, Donnelly says, it will look into acquisitions as a means to build its capabilities. “If we can find the right acquisition to get into new technologies we don’t have today, we would definitely consider that,” he explains.

Even though the industrial coatings industry is mature, new coatings technology still creates business opportunities, although often at the expense of other coatings techniques.

Chemark’s Phillips expects a backlash against one of the most dynamic technologies of the past 20 years: powder coatings, which are applied to parts electrostatically and then heat-cured. He says powder coatings makers have reached their limits in both the transfer efficiency of coatings onto the substrate and in film thickness, making it difficult for customers to continue reducing costs. Moreover, he says, unlike with high-solids liquids, powder coatings colors can’t readily be changed, and marketers are getting bored with only being able to offer about a half-dozen colors.

AS A RESULT, Phillips says, companies that have to buy new equipment to replace older powder coatings lines are increasingly thinking about opting for low-VOC high-solids liquids.

Phillips says powders are especially vulnerable to liquid technologies such as oligomer-based low-VOC liquid coatings. Unlike polymerized resins, which need to be used with solvents to achieve adequate viscosity, oligomers have a liquidlike viscosity on their own. The oligomers polymerize and cross-link after they are applied on the part. The main barrier to oligomers, he says, is the cost of the special equipment required to control temperature and other conditions for polymerization.

Donnelly says DuPont has been developing oligomer technology for years. For example, the company has been applying an oligomer-based high-solids clear coat at a Dodge Durango plant in Newark, Del., for more than two years. "Much of our product innovation is based on oligomer chemistry, and much of that originates in the automotive segment," he says.

However, Donnelly disagrees that powder coatings are under fire. "I don't see oligomer technologies interfering with powders," he says. "If you have a requirement for zero VOCs, your solution today is powder. I don't think powders are under threat; I think they are the biggest growth area of industrial coatings."

PPG's Alexander says the application itself will dictate what the most appropriate  application process is. "You have to ask yourself what is the best coatings technology to finish the part," he says. "We have seen situations where electrodeposition coatings have saved our customers money in terms of the applied costs of the paint on the part."

However, Phillips points out that even if powders do not face a technical threat, they do face an economic one. The powder coatings business, he says, is dangerously fragmented in the U.S., with 70 manufacturers fighting over a $1 billion market. And they have up to 60% excess manufacturing capacity. He says this is the perfect formula for companies to lower prices, become unprofitable, and be forced to consolidate.

Powder coating isn't the only application process that may see big changes. With their ability to be coated onto metal, rolled into coils, and stamped into shapes without cracking, yet remain scratch-free in use, coil coatings are already a modern marvel. Technological developments are typically relegated to modest improvements, although BASF's Hoenle notes that energy- and time-saving ultraviolet curing could be a future breakthrough for coil coatings, which must now be baked at high temperatures to cure.

Even without breakthroughs, Hoenle says coil coatings are finding new markets. In North America, metal roofing is starting to take off as a replacement for tar shingle. And unlike the tin roofing seen throughout the developing world, metal roofing is stamped into attractive shingle patterns and can last decades.

In industrial maintenance coatings, a regulation-driven switch to low-VOC coatings is helping to drive demand for polyurethanes based on aliphatic diisocyanates by 4 to 8% per year, Rhodia's Bourlier says. "Alkyds are going away and are being replaced by other products," he says. "One of those is polyurethane."

John Martin, a principal with Boston-based Tiax, contends that despite some steady improvement, the coatings industry can speed up the rate of progress. He suggests the industry make greater use of combinatorial chemistry and high-throughput screening. "I visit coatings companies and am amazed by the trial-and-error approach to experimentation," he says.

According to Martin, some big coatings companies are already embracing the approach. He says high-throughput testing methods are ideal for perfecting paint and coating formulas that can include 10 or more components."It works very well for reactive chemistries; this can be an important development for coatings."

But, Martin stresses, paints and coatings makers don't have to quicken their pace to be dynamic. "The coatings industry is an interesting industry," he says, "because it is in some ways mature and in some ways very exciting."