Performance Coatings end-user segment outlook

Our Performance Coatings Business Area serves all four end-user segments. Although there are relevant end-user segment trends that remain positive, we are taking a more cautious outlook than we have in the recent past. For example, we see continued evidence of moderating growth in all four end-user segments in China, with particular emphasis on Buildings and Infrastructure. The oil and gas segment has come under pressure due to lower oil prices, which has resulted in delays of new projects. Elsewhere, we have still not seen an upturn of the cycle in marine new building, and although analysts are predicting a recovery in Buildings and Infrastructure in Europe, evidence for this in practice is relatively weak.

Transportation

Transportation is the largest end-user segment for Performance Coatings, with just over a third of our revenue. Around two-thirds of this revenue comes from our two automotive sub-segments – Automotive OEM, parts and assembly and Automotive repair. The growth outlook for the former is the most certain, particularly if oil prices remain low. The Automotive repair sub-segment is much more important for AkzoNobel and is expected to continue growing at stable rates, at or slightly below GDP growth levels. Growth rates will be higher in the high growth countries than the mature markets as the car park and rate of insurance coverage continue to grow.

The remaining revenue comes from the Marine and air transport sub-segment, into which we sell both marine and aerospace coatings. The long-term outlook for marine remains strong, as wealth and international trade continue to increase. However, in the shorter term, the marine new building market has yet to return to stable growth. While analysts expect this to happen in the near future, this has been the expectation for some time now, but we have still not seen significant concrete evidence of this. The maintenance market continues to grow at a moderate rate, but freight rates have still not recovered significantly, dampening demand for maintenance activities. The recent oil price developments may have a positive effect on this segment going forward, though. Aerospace is a much smaller market for AkzoNobel than marine, but we do expect continued reasonable growth.

Of course, demand in the Transportation end-user segment is dependant on sustainability as well as demand. Thus, products sold into the Transportation end-user segment that help in utilizing less energy and other resources will grow disproportionately.

Consumer Goods

We sell powder coatings, wood finishes and adhesives and specialty finishes into the Consumer durables end-user sub-segment, as a part of furniture, domestic appliance and consumer electronics manufacture. We expect continued reasonable growth overall in the more technology-driven aspects of this sub-segment, such as in domestic appliances and mobile phones, but it is important to note that trends differ significantly by type of product. So, for example, in consumer electronics, double digit growth is expected in tablets and above global GDP growth is expected in smartphones and laptops.

In less technology-oriented parts of Consumer durables, such as furniture, global growth is expected to be at lower levels but reasonably steady, even though we have yet to see a full market recovery in furniture to pre-recession levels. Similar growth rates are expected in the other sub-segment, Consumer packaged goods, into which we sell packaging coatings for use in food and beverage packaging. In both cases, we expect growth slightly below regional GDP growth rates in both high growth and mature geographies.

The Consumer Goods end-user segment is particularly affected by growth in population and wealth, but also by other factors such as consumer trends and fads. Sustainability also plays a role as consumers around the world are increasingly concerned about this issue.

Buildings and Infrastructure

As indicated in the Decorative Paints section of this Report 2014, the Buildings and Infrastructure end-user segment is undergoing considerable change. Growth rates are dropping considerably in China, while growth is expected to accelerate in more mature geographies, particularly Europe. Although analysts are expecting market recovery level growth rates in Europe, we are not yet seeing strong evidence of this in the market and, therefore, our internal predictions are much more conservative.

Industrial

The Industrial end-user segment is the smallest for Performance Coatings. We sell protective and powder coatings for industrial uses, primarily in the Natural resource and energy industries sub-segment. With the recent oil price develoment, there are question marks around the growth outlook for the oil and gas end-user markets. However, in the short term, our business should not be significantly impacted as most of the projects that we sell into are long-term, multi-year projects that are likely to continue, even if oil prices remain lower than they have been.

The market

According to figures recently published by Orr & Boss, in a report commissioned by the International Paints and Printing Inks Council (IPPIC), the global market for performance coatings is just over 55 percent of the roughly €100 billion global paints and coatings market. Growth over the past few years has been higher in performance coatings than it has been in decorative paints. This is due in part to disproportionate growth in high growth geographies, where the share of performance coatings is higher, and also to continued issues in terms of Buildings and Infrastructure growth, particularly in Europe.