08/11/2021 12:29 Gloomy picture for paint highlights depth of supply chain crisis | Financial Times

Supply chains
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 7 HOURS AGO

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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08/11/2021 12:29 Gloomy picture for paint highlights depth of supply chain crisis | Financial Times

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

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08/11/2021 12:29 Gloomy picture for paint highlights depth of supply chain crisis | Financial Times

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-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.

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08/11/2021 12:29 Gloomy picture for paint highlights depth of supply chain crisis | Financial Times

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 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

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08/11/2021 12:29 Gloomy picture for paint highlights depth of supply chain crisis | Financial Times

“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

0
2019 2020 2021

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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08/11/2021 12:29 Gloomy picture for paint highlights depth of supply chain crisis | Financial Times

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.

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08/11/2021 12:29 Gloomy picture for paint highlights depth of supply chain crisis | Financial Times

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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