Tough Talk - Price Increase Mania

Over the last 12 months, powder producers have been getting hammered with raw material price increases. The latest slew started last spring when the titanium dioxide producers raised prices about $300 per ton (about 14 cents per pound). Titanium dioxide is the pigment that makes everything white, including the majority of powder coatings used in the appliance and architectural markets. Reasons for this revolve around tightened supply due to the revamping of a number of rutile TiO2 sulfate process plants in China as their government imposes stricter and stricter environmental regulations. This, coupled with increased worldwide demand led by China and India, caused a tightening in the supply of titanium dioxide.

Next, the polyester resin suppliers foisted a modest 4 to 7 cents per pound increase last fall due to an increase in their raw material prices. Hurricane Harvey had thrown the polyester monomer supply off a bit and freight costs were creeping up due to an increase in fuel prices. Polyester resins represent approximately 65% of the base resin used in powder coating products. This accounts for the resin in polyester powder coatings (TGIC and HAA), polyurethanes, and the polyester resin within hybrid formulations.

Then earlier this year, powder coating raw material supply chains were hit with a 24 to 31 cents per pound increase by their epoxy resin suppliers. Reasons given were price increases in key raw materials used to make epoxies. The majority of epoxies used in powders are comprised of two components: Epichlorohydrin and Bisphenol A (BPA). BPA prices have continued to climb due to tight supply and strong demand. China has levied anti-dumping tariffs on Thai-produced phenol, the feedstock for BPA. BPA is a main component in epoxies used in coatings, adhesives, sealants and composites. Just as important, it is the key component in polycarbonate polymers used in electronics, construction materials, automotive components and aviation products. Epoxy resins represent about 20% of the base resins used in conventional powder coatings and nearly 100% of the base resins used in functional powder coatings applied to pipelines and rebar.

So how does this affect the powder coating market? Obviously, the cost to produce a pound of powder has dramatically increased in the past year, and it does not appear that these increases will reverse. While polyester prices may stabilize due to the calming of supply logistics, the price of epoxy resins and titanium dioxide will remain high. The supply of both of these key powder formulation components will remain tight and the demand for them will continue to increase, especially in the Asia Pacific region.

Analysts predict a coatings compound annual growth rate (CAGR) of 6.7 to 7.0% in China and India respectively, whereas the CAGR in North America is a more modest 3.2 to 3.5%. Because of this, an interesting trend has developed. The amount of goods exported from Asia to North America and Europe is declining as the consumption of goods rises in Asia. So production of key raw materials that transitioned 10 to 15 years ago from North America to Asia is now targeted for increased domestic consumption as opposed to export to Western nations.

The long-term effects of these developments are unknown and the burgeoning saber rattling of an evolving trade war between the U.S. and China will add instability and uncertainty to the supply chains that feed the powder coating industry. So far, the U.S. has declared steel and aluminum tariffs mainly directed at China, and China, in turn, has listed 106 product categories slated for tariffs in retaliation. These specialty products range from soybeans to beef to vehicles to an array of specialty chemicals. None of the products listed appear to directly affect the powder coatings industry.

Currently, most powder raw materials produced in China are slapped with a 6.5% tariff. Interestingly, a key ally, South Korea, has had tariffs for the same raw material classes gradually lifted over the past few years, putting them in a stronger position to compete with China.

The powder coating industry is reacting to these developments in their supply chain by increasing pricing of their product lines. Jotun Powder Coatings recently announced an up to 20% across the board price increase. Stateside, other powder producers have followed suit. Looks like the cost of doing business just went up.