European coating industry has got rid of the Energy crisis, but new problems are coming

The soaring energy prices have dealt a heavy blow to the European paint industry, leading to a decline in production, particularly in the fourth quarter of 2022. A study last year by PricewaterhouseCoopers' Synopsis Consulting showed that the soaring prices of energy and natural gas may promote Deindustrialization in Europe. In the future, many companies may decide to restructure production in Europe or completely withdraw from Europe, "said Andreas Sp ä ne, President of Strategy&Europe

The report predicts that the biggest problem will occur in the energy consuming industries: automobiles, metals, and chemical industries. Poland and other countries that heavily rely on Russian oil and gas are particularly disadvantaged. On the other hand, due to the high proportion of nuclear and renewable energy in the energy structure, the production cost growth in France and Spain is relatively moderate.

Aleksandra Svidler, an economic advisor at Euromonitor International, a London based think tank, said that the coatings industry is directly affected by soaring energy prices and indirectly by rising costs and disruptions in raw material supply.

The direct impact of the European energy tightening is particularly evident in countries such as Germany and Italy that heavily rely on energy imports. Svidler stated, for example, in Germany, which has the largest paint industry in Europe, between 2020 and 2022, paint and varnish manufacturers' natural gas spending surged by 143%, and electricity costs surged by 21%.

Svidler added, "Due to the dual impact of soaring costs and deteriorating economic conditions, German paint and varnish production decreased by 8.0% in 2022

In addition, Svidler added that the paint industry is also indirectly affected by rising costs and disruptions in raw material supply. This is particularly true for energy intensive chemical products, which account for about one-third of the total costs of paint and varnish manufacturers in major European markets such as Germany, the UK, and France.

According to the German Chamber of Commerce and Industry (DIHK), more than a quarter of German chemical producers were forced to reduce production last year due to high energy prices, which brought additional pressure to the cost of coating manufacturers and the supply of intermediate materials.

An imminent risk

Svidler pointed out that although energy prices have fallen from last year's highs, especially natural gas prices in Europe, they remain at historical highs. A survey conducted by DIHK in early summer 2023 shows that more than 80% of German chemical manufacturers believe that high prices of energy and raw materials are one of the biggest risks.

Thanks to mild weather, energy-saving efforts, and strong imports of liquefied natural gas, Europe's natural gas storage rate is higher than expected, which helps to significantly reduce market price pressure. According to the European Natural Gas Infrastructure Association, on April 1, 2023, when the EU officially ended the 2022-2023 heating season, the EU's gas storage capacity was already 55.7%, far higher than the five-year average of 34.8% during the same period. As a result, the average price of natural gas in Europe fell to its lowest level since July 2021 in March 2023.

Svidler stated that although the current natural gas supply balance in the EU is more favorable for solid storage, efforts to reduce demand need to continue until 2023 to help the EU replenish storage before the next winter. EU countries have agreed to extend the voluntary agreement to reduce average natural gas demand by 15% for another year until March 2024 to alleviate the balance of natural gas supply and demand in Europe. However, if market conditions become too tight, this goal may become a mandatory target.

More than expected reserves, weaker prices, and efforts to limit consumption will make it easier for the European Commission to achieve its 90% natural gas storage target by November 1, 2023. However, the shortage of natural gas supply in Russia and potential tension in 2023 pose some major downside risks for European buyers, as global liquefied natural gas supply is affected by increasingly fierce competition from China.

Cost of living crisis appears

Analysts say that by 2023, the European paint industry may face problems on the consumer side as rampant inflation forces consumers to urgently revise their budgets. To some extent, this may be considered as the result of last year's Energy crisis, especially because the countries with the highest inflation rate are Eastern European countries, which in the past relied most heavily on Russian hydrocarbon imports.

For example, according to the Eurostat, Hungary (25.6%), Latvia (17.2%) and the Czech Republic (16.5%) have the highest annual inflation rate in the EU. Estonia (15.6%), Poland and Lithuania (15.2% each) have similar figures.

Svidler stated that as consumer purchasing power continues to be squeezed by high price pressures, household spending in Europe is expected to remain sluggish, ultimately leading to a weakening of demand for coatings used in the manufacturing of various consumer goods.

In fact, 32% of European respondents in the Euromonitor lifestyle survey plan to reduce overall spending in 2023, compared to 23% last year.

In addition to high inflation, rising interest rates have also damaged consumers' affordability, hindering them from carrying out home renovations or purchasing new properties, indirectly affecting the demand for coatings used in construction and home renovation projects. According to Euromonitor International's prediction, consumer spending on residential maintenance and repair in Europe is expected to actually decrease by 0.9% year-on-year in 2023.

Svidler mentioned that one of the key issues of the Cost of living crisis is that the increase of household price sensitivity will also make it more difficult for producers to pass on the increased costs to consumers.

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Recovery is not just around the corner

According to Euromonitor International's forecast, due to the global economic slowdown, rising costs, and ongoing uncertainty in the energy market, the industry will continue to be suppressed. In 2023, the output value of the European paint and varnish industry is expected to actually shrink by -1.1% growth.

The latest results of the European Commission's monthly business survey also confirm that global and local demand for chemicals is weak, as EU chemical producers have been facing challenges from a decline in domestic and international orders in the past few months, while finished product inventory levels have significantly increased.

However, assuming the current price and supply pressures ease and the current macroeconomic uncertainty weakens, it is expected that the situation will gradually improve in the coming years, "Svidler said.

For example, in the next five years, the revenue of the European construction and automotive industries is expected to actually increase by 5.6% and 7.0%, respectively, to support the demand for coatings. In addition, in the medium to long term, it is expected that investment in clean energy transformation will also support the demand for coating solutions such as renewable energy equipment, energy-saving machinery, transportation and construction, and hydrogen infrastructure. Svidler added that there were some Energy crisis that led to higher production costs, which affected profitability, undermined business confidence and hindered expansion plans. In addition, Swedler stated that the increase in interest rates has put additional pressure on companies' ability to finance their capital investment projects. For example, in 2022, the construction activities and machinery expenses of German paint and varnish manufacturers have decreased by 3.5% and 1.6%, respectively, while in France, they have decreased by 12.9% and 10.3%, respectively.

As the financial situation in the region continues to tighten, high borrowing costs will further limit the capital expenditure capacity of enterprises. On the other hand, despite the challenging economic environment and tightening financial conditions, companies are still encouraged to invest in energy-saving solutions and alternative energy sources such as renewable energy to mitigate the impact of the current crisis and enhance their resilience to potential future energy market shocks.

However, the prospects of the European paint industry are still affected by several key challenges, including continuously strengthening environmental and safety regulations, the burden of bureaucratic procedures, and potential fluctuations in raw material costs and supply.