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Gloomy picture for paint highlights depth of supply chain crisis

Industry reels as soaring costs across sectors hit profit margins

Paint is widely used in industry. It also has a complex supply chain. This makes it the ideal raw material to illustrate the supply problems © Alexander
Ryumin/TASS/Getty

Harry Dempsey NOVEMBER 8 2021

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The cost of Malcolm Kerr’s key raw material has surged like never before as the global supply chain
crisis has rocked his business.

Kerr’s Tuscany-based company puts the sheen on superyachts — and the cost of paint, his most
vital ingredient, has shot up.

“The raw material issue might well be the final nail in lots of people’s coffins,” Kerr said as his
business, Storm Yachts, faces severe strain. “At some point, something is going to break as we can’t
keep cutting prices and increasing costs. Nothing good is coming out of this.”

Paint is one of the most widely used industrial products with a complex supply chain, making it the
ideal raw material to illustrate the depth of the crisis.

Almost every sector needs paint — from aerospace, construction and electronics to cars. It is also
used for applications in the marine, medical, military, pharmaceutical, semiconductor and textile
industries.

The global supply chain crunch has caused the cost of everything from paint and steel to energy
and cereal prices to soar.
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The complex supply chain of petrochemical feedstocks for paint
This graphic shows the
complexity of the supply
chain, which historically
may have had a few
ingredients in short
supply but now has
shortages across the
board

Crude oil Natural gas

Steam
cracker
Refinery Gas separation
Heavy and light Naptha Ethane Propane Butane

Chlorine Ethylene
Pygas Methane
Crude C4 Propylene

Styrene BTX** EHC* Methanol

Butadiene
Acetic
acid
Nitrolene Cumene

Nitrobenzene VAM

Phenol

Acrylic
MDI TDI Bisphenol A acid

Phenolic Acrylic
resins

Styrene-
butadiene Polyurethane Epoxy EVA/VAE
rubber PVAc/PVOH

Click on one of the paint ingredients to reveal its complex supply chain journey
*Epichlorohydrin **Benzene, Toluene, Xyle

Graphic: Graham Parrish. Source: The ChemQuest Group

In the energy sector, the crisis has forced companies to go under as rocketing prices have hit
producers.
In the $164bn paint market, which is dominated by global manufacturers such as Sherwin-
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Williams, PPG and Akzo Nobel, consumers are bearing the brunt as producers increase prices to
protect margins in the face of rising costs.

Prices have also surged because of the DIY boom during lockdowns and scarcity of supplies after
extreme weather events in Texas and Louisiana took out production at petrochemical plants that
produce the raw ingredients of paint.

Shipping bottlenecks, truck driver shortages and power shortages in China have added to the
supply disruptions.

Akzo Nobel, Europe’s largest paint producer, plans to keep jacking up prices into next year,
building on a 15 per cent increase in 2021 as costs, including for tin cans containing the liquid, have
jumped alarmingly.

Michael McGarry, chief executive of Pittsburgh-based PPG, said costs had jumped 25 per cent
annually — “three times higher than any previous coatings raw material inflation peak in recent
history”.

The pressure on costs for paint producers has been made worse because of the diversity of
formulas, requiring thousands of raw material inputs, most of which trace back to oil, natural gas
or titanium dioxide — commodities that have jumped in price.

Additives for paint have been among the worst hit. They are the vital, “salt and pepper” ingredients
in paint, said Dan Kersting, global business development director of additives at Allnex, a
Frankfurt-based supplier of resins.
This has prompted paint companies to consider diversifying sourcing of additives, despite the
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small quantities used. Until now, they have been adequately supplied by a handful of large
suppliers such as BYK, Dow and BASF.

A yacht hull being painted © Luke MacGregor/Bloomberg

“Once the supply chain gets pinched, then additives get hit the hardest first,” said Kersting. “It used
to be price, price, availability. Now it’s ‘where are you located, where is your back-up. We will
approve your product but we want to approve it from two sites.’”

The pressures are expected to force the paint supply chain to become more regionalised as
producers try to reduce the risks of relying too heavily on raw materials in distant parts of the
world.

“We don’t want scarce material sleeping on a boat with the long lead times,” said Katarina
Lindstroem, chief operating officer of Danish paint group Hempel.

Jeremy Pafford, head of North America at consultancy ICIS, said: “The further you get down the
chain, the more risk you have, and the more rungs you need to go right. Multiple rungs have got
clipped in the past two years. It’s harder from a logistics standpoint to call in reinforcements.

“You would be so surprised to see how many people have so few diversified suppliers.”
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Key chemicals for paint manufacturing rise
North American prices per tonne ($'000)

Solvent: Propylene glycol ether Resin: Epoxy resin Resin: Acrylic acid

Source: ICIS

For Kerr’s marine coatings business, however, the pressures are greater as there is little leeway to
pass costs on quickly as the price to paint a superyacht is agreed with shipyards about two years in
advance.

Other sectors such as insurance have also been stung as they soak up the pain of rising raw
material costs to repaint cars involved in crashes. Paint comprises almost a quarter of the cost to
repair a car, said David Creswell, chair of trade group Auto Body Professionals Club.
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Binding components being added to a paint mixing machine © Bartek Sadowski/Bloomberg

Rising paint prices are “a problem for us when we’re repairing so many cars”, said Martin Milliner,
claims director at LV= General Insurance, one of the UK’s largest motor insurers.

It usually repairs 110,000 automobiles a year, but this figure has risen because of the
semiconductor shortages, which have created a dearth of new vehicles. This has led to more cars
being repaired after accidents, forcing prices up further.

“We’re using more paint to repair more cars,” Milliner said.

For the coatings industry, the semiconductor crunch also means fewer cars need painting because
of production cuts.

Some executives shrug off worries over the market for paint, saying price rises for the product can
help expand margins without hitting consumer demand.

“You don’t remember what you paid last year for paint,” said Maarten de Vries, chief financial
officer of Akzo Nobel.

However, other executives closer to the customer fear demand will weaken.

Lick, an online paint retailer, is holding its prices at the expense of its margins after a year of cost
increases that have accelerated in the past four months.

“It’s so important in a time of inflation and the customer being squeezed to keep our prices flat,”
said chief executive Lucas London. “We definitely see strong price awareness.”
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