As has become glaringly apparent over the past several years, the complex nature of a global supply chain makes it difficult to tease out one factor that will help or hinder an industry’s progress at any given time. Instead, multiple dynamics overlap and company leaders are tasked with rapid adaptations to keep their organizations out of the red.
The paint and coatings industry is certainly no exception.
As Supply Chain Dive recently reported, at least one paint maker has needed to cut production to deal with a drop in new orders.
“Paint and coatings maker RPM International is reducing production at some of its plants as it contends with softening demand, Vice President and CFO Rusty Gordon noted on a Q2 earnings call,” wrote editor Kate Magill. “The reductions are meant to help lower elevated inventories, which rose in recent months as customers began pulling back on orders after bulking up amid supply chain snags, CEO Frank Sullivan said.”
According to RPM, the construction sector was particularly hard hit. Citing an October earnings call, Magill said that was also true for paint maker PPG, which said it was “prioritizing destocking in the months ahead.”
Here, we’ll take a look at some of the dynamics involved—including trends and predictions from industry experts.
When Paint Was in Short Supply
Like so many things caught in the ripple effect of COVID-19 and supply chain snags, the paint industry eventually found itself in short supply.
In The State of the U.S. Coatings Industry 2022, George R. Pilcher, vice president at The ChemQuest Group, ChemQuest Technology Institute, and ChemQuest Powder Coating Research captured the many complex dynamics involved.
“As we sit here, in mid-2022, most raw material suppliers and coatings producers are faced with a unique situation of historic import: They cannot produce sufficient material to fill all of their orders,” Pilcher wrote. “Some raw material suppliers quietly admit that they are sold out through the end of 2024, and paint producers are missing one strategic opportunity after another because their R&D colleagues are spending the lion’s share of their time not formulating new products, but finding raw material substitutions so that they can produce existing products, for which they are unable to obtain key raw materials, from pigments and resins to additives and containers. Everything is in short supply and difficult to obtain.”
After taking a deep dive into the status of various sectors of the paint and coatings industry at the time, Pilcher summarized the big picture of July 2022 in the context of what supply chain stakeholders across industries painfully realized in the midst of the mess: COVID-19 and related challenges cast a glaring spotlight on problems that were already there.
“We have been living dangerously close to the edge for many years without acknowledging it, and there are still dominoes poised to fall that will prolong the industry’s difficulties—orders for larger-than-usual amounts placed for longer-than-usual lead times in order to deal with the global supply chain issues are now being canceled in response to both current and anticipated cash flow issues,” Pilcher wrote. “In response, suppliers are cutting back on production to avoid their own cash flow issues…”
In a recent post, the Home Improvement Research Institute (HIRI) also captured shifting industry trends.
“The home improvement market has soared in recent years due to an increasing number of renovation and remodeling projects, rising disposable income, and a growing societal focus on home aesthetics,” HIRI said. “As a result, the demand for paint and coatings has steadily increased. However, the collective of home improvement industry experts predict that growth in the category will slow in 2023. …”
The intro to a CNBC video published in February of last year, “Why the U.S. is Running Out of Paint,” captured some of the dynamics, as well: “Demand for raw materials in the paint industry soared over the pandemic as quarantined consumers took to DIY projects and home improvement. But supply couldn’t keep up as global trade networks broke down amid the Covid surge.”
Ending 2022 Strong—With Caution for 2023
As noted in the February 2022 video, “Two of the largest paint companies, Sherwin-Williams and PPG, have said worsening supply chain shortages are impairing their ability to manufacture products.”
However, both companies recently reported positive year-end results.
“Sherwin-Williams delivered strong fourth quarter results compared to the same period a year ago, including high single-digit percentage sales growth, significant year-over-year gross margin improvement, expanded adjusted operating margins in all three segments, strong double-digit adjusted diluted net income per share growth and strong EBITDA growth,” said Chairman and Chief Executive Officer, John G. Morikis. “Our strong fourth quarter performance led to record full year sales, which increased 11.1% to $22.1 billion. …
“Our more than 61,000 employees delivered these results in another year of difficult operating conditions, including relentless cost inflation, less than optimal raw material availability, slowing economies, a war in Europe and COVID lockdowns in China,” Morikis said. “We refused to be deterred by these challenges and continued to do what we do best – serve our customers. …”
Although the company ended 2022 on a positive note, Morikis cautioned that 2023 is expected to have challenges of its own.
“We enter 2023 with confidence and energy. We have clarity of mission, the right strategy and a focus on solutions for our customers,” he said. “Above all, we have the right people, and we expect to outperform the market in 2023 just as we have in the past.
“At the same time, we will not be immune from what we expect to be a very challenging demand environment in 2023,” Morikis added. “Visibility beyond our first half of the year is limited. On the architectural side, U.S. housing will be under significant pressure this year.
Slowing existing home sales and continued high inflation also will be headwinds. On the industrial side, we have already seen a slowdown in Europe, and the same is beginning to appear in the U.S. across several sectors. In China, COVID remains a factor and the trajectory of economic recovery is difficult to map. The U.S housing slowdown also will impact some of our industrial businesses, namely Industrial Wood and Coil. Our team is focused on winning new accounts and growing share of wallet in this challenging environment, while leveraging our exposure in more resilient end markets, including residential repaint, property maintenance, auto refinish, and packaging.”
“Against this backdrop, we expect 2023 first quarter consolidated net sales growth to be flat to up a mid-single digit percentage compared to the first quarter of 2022,” he said. “For the full year 2023, relying on indicators we see at this time, we expect consolidated net sales to be down a mid-single digit percentage to flat compared to 2022. …”
In a January 19 press release, PPG also had good year-end news—reporting “record full-year 2022 sales of about $17.7 billion, aided by 8% organic growth.”
“We continued to make good progress on our focus to achieve full operating margin recovery, as year-over-year earnings improved in both segments despite more acute pandemic-related demand disruptions in China,” Tim Knavish, PPG president and chief executive officer said. “This earnings improvement was driven by aggregate selling price increases that totaled 19% on a two-year stacked basis, as we remained focused on mitigating the significant cumulative cost inflation incurred the past two years.”
His summary of results also demonstrated the benefits of product diversification.
“Overall sales volumes declined 5% year over year as manufacturing activity slowed in most regions, including Asia Pacific where volumes were down a low double-digit percentage primarily due to the pandemic-related impacts in China,” Knavish said. “As anticipated, demand remained soft in global architectural do-it-yourself (DIY) coatings. In Europe, aggregate industrial activity weakened sequentially, and sales volumes were down a mid-single-digit percentage; however, our quarterly operating earnings in that region were consistent with prior-year levels, driven by strong price realization and cost management. We delivered record net sales in our automotive refinish and PPG Comex coatings businesses reflecting our leading products and strong commercial relationships. Global aerospace demand continued to recover leading to strong year-over-year organic sales growth of about 20%, even though certain supply chain challenges remained.”
As far as 2023, Knavish struck a positive tone.
“Looking ahead, we remain highly focused on building further momentum to restore margins in line with our historical profile,” he said. “In the first quarter, we will continue to prioritize supporting our customers through superior service and products, executing our cost-savings initiatives, and optimizing inventory.
We expect the overall demand environment to remain consistent sequentially with the fourth quarter with soft economic activity remaining in Europe and China. However, as the year progresses, we anticipate several positive catalysts that will enable earnings improvement, including certain PPG commercial initiatives with our valued customers and the continued rebound in demand for our technology-advantaged aerospace products. Other catalysts include moderating raw material costs, coatings demand stabilization in Europe beginning in the second quarter, and strong economic recovery in China as the pandemic reopening progresses. Finally, with fewer supply chain disruptions we expect ample commodity raw material availability and improved manufacturing efficiencies.”
A Balanced View
HIRI also offered a balanced view of 2023.
“Looking ahead to the remainder of 2023, demand is expected to cool slightly for consumers, but the market will continue to grow among professionals and overall,” HIRI said.
Although HIRI’s predictions for growth on the consumer side weren’t too rosy for the year ahead, the organization offered a word of encouragement, too.
“Manufacturers needn’t fear a long downturn, however: This forecast is in line with predictions from other experts who believe the remodeling industry will slow in 2023, only to pick back up in 2024 and beyond,” HIRI said.