End-user segment and market sector outlook
The Performance Coatings market represents around 55 percent of the €75 billion global paints and coatings market. It is growing and profitable. However, growth rates and levels of cyclicality and profitability differ somewhat across end-user segments and sub-segments.
Transportation is the largest end-user segment for our Performance Coatings Business Area. For all end-user segments, apart from marine, the outlook is positive in the short to medium term, due to strong automotive demand, recovery from the recession and continued high demand levels in high growth markets. Going forward, growth rates are not expected to reach the levels experienced prior to the economic downturn. However, in this end-user segment, growth rates for coatings can outstrip overall demand where products provide sustainable or other performance benefits. For example, there is strong demand for coatings solutions that reduce energy use and/or help to enhance production efficiency for our customers. It is also possible to differentiate products in terms of functionality for high-end customers, leading to higher margins.
Taking each of the three sub-segments in Transportation in turn:
Automotive OEM, parts and assembly
This sub-segment is fairly cyclical and has been recovering well from the substantial market downturn. The large (roughly €7 billion) automotive OEM coatings market sector serves this end-user sub-segment. AkzoNobel’s participation is limited, however, as we do not sell liquid automotive body coatings for original equipment manufacture. Our involvement is focused on commercial vehicle OEM coatings, powder coatings and specialty finishes, generally for plastic automotive components. We expect these sectors to experience above average growth due to underlying end-user segment growth.
This is a more stable and less cyclical sub-segment, but has lower growth rates. We sell automotive refinishes into this sub-segment and our expectation is that growth rates will remain average in this market sector, as the vehicle car park increases while repair rates decrease.
Marine and air transport
This sub-segment can be highly cyclical as shipping rates and air travel tend to reduce dramatically during economic downturns. However, given the long lead times involved in shipbuilding and aircraft construction, downturns in new construction often occur quite late in the cycle and some balance in demand is created by the existence of both new build and maintenance markets. Currently, very low shipping rates are putting pressure on demand for marine coatings, even for maintenance. We sell both marine and aerospace coatings into this end-user sub-segment and expect little or no growth in the marine coatings market sector, while in aerospace, we anticipate average to above average growth.
The Consumer Goods end-user segment is only slightly smaller than Transportation for our Performance Coatings Business Area. The outlook is relatively positive, as we see some demand growth in mature markets and reasonably high demand growth in high growth markets, driven by increases in wealth and population. Growth rates vary, however, with higher growth in consumer electronics and domestic appliances and lower growth in furniture and food and beverage. In addition, as is the case in Transportation, our expectation is that growth rates will be lower in the short to medium term than they were prior to the recession.
There are two sub-segments in Consumer Goods – Consumer durables and Consumer packaged goods.
Consumer durables can be relatively cyclical, but the outlook for growth is generally positive, with some growth in mature regions and higher growth rates elsewhere. Growth levels can be tempered by the switch in product mix – in both mature and high growth countries, the highest growth levels tend to be in lower end segments. Growth rates also vary, with some consumer durables (such as consumer electronics) enjoying a very positive outlook, while others (such as furniture) have much lower growth expectations. As a result of these differing underlying segment growth patterns, we expect above average growth in the powder coatings and specialty finishes market sectors and lower growth (average at best) in the wood finishes market sector.
Consumer packaged goods
This is a slower growing, but less cyclical, sub-segment. We sell packaging coatings into this sub-segment and expect growth in this market sector to be somewhat below the average for the performance coatings market.
Buildings and Infrastructure
Many parts of this end-user segment have been badly affected by the recent recession. The expectation is that the underlying issues will continue to exist in the short to medium term, particularly in mature regions in Europe. However, growth rates are increasing in the United States and will remain high in high growth regions.
Building products and components
The vast majority of our revenues in the Buildings and Infrastructure end-user segment come from this sub-segment. In terms of outlook, we expect continued growth in high growth geographies, but not at pre-recession levels. In more mature regions, a very moderate return to growth is expected, created by maintenance rather than new build demand, and oriented towards non-residential building components. For example, we are expecting some mature market growth in areas such as doors and windows, which are maintenance-oriented and used in a broad range of building applications. We also expect reasonable growth rates in coil and powder coatings from high growth geographies due to the non-residential profile of these market sectors. Growth rates for the more residentially-oriented wood finishes and adhesives market sector will be lower.
New build projects and Maintenance, renovation and repair
In the other two sub-segments of New build projects and Maintenance, renovation and repair, the general outlook is for low levels of growth as housing markets continue to experience considerable issues, particularly in mature Europe. However, our Performance Coatings revenues in these two end-user sub-segments generally come from large building projects and infrastructure (e.g. bridges, stadia, airports), rather than housing. Typically, investments in infrastructure continue, and even accelerate, during economic downturns as governments use these kinds of projects as an economic stimulus. Furthermore, many high value infrastructure projects are over multiple years and are difficult to bring to a halt during a recession. Demand is, therefore, generally expected to remain strong for protective coatings, which are sold into these two sub-segments for non-residential applications.
Many parts of this end-user segment can be quite cyclical. However, domestic high growth market demand means that, on a global basis, the downturn had less of an impact than might be expected due to the recent recession. Oil, gas, energy and utilities were particularly strong and growth is expected to continue at above GDP levels going forward in all geographies. We serve this end-user segment through protective coatings and some powder coatings, both of which are strongly oriented towards the higher growth applications. As a result, we are expecting above average market sector growth in this segment.
Our vision for Performance Coatings specifically is to be the leading business-to-business coatings company. To us, leadership in business-to-business coatings means that we must have strong processes and capabilities in terms of:
To capture market opportunities while ensuring that we continue to have strong processes and capabilities in the above areas, we have four main strategic priorities. These strategic priorities are:
Key actions going forward
Key raw materials