The raw materials game
Driven by an extreme shortage of raw materials, the European coatings industry has never before carried out as many formulation adjustments or changes as quickly as it has in the last year and a half.
The market situation has forced purchasing departments and labs to become extremely creative and flexible overnight. This is a novelty for what is generally a very conservative industry. Of course, even before the Covid-19 pandemic, there were always paint manufacturers who were always extremely resourceful and flexible. However, they constituted a small, albeit usually financially successful minority. The “raw materials supply crisis” also shows us the technical and economic potential that many paint companies possess. It just needs to be activated. In this situation, paint manufacturers have also got to know what their suppliers and partners are really like. Business relations with current suppliers have in some cases been further strengthened or supplemented or else replaced by new suppliers who would otherwise have had little chance of acquiring that status prior to Corona.
Many people are asking themselves: What are the causes of this unprecedented situation in the chemical industry and what does the future hold? The answer is very complex and is additionally exacerbated by the very rapid V-shaped economic recovery by China in 2021 and the associated demand for key raw materials. That demand is the reason why the available raw materials are not even reaching Europe, but rather are being sold in Asia at significantly higher prices. Further aggravating the situation is state-controlled bans imposed on exports of certain raw materials from this region.
The influence of China
China has been the largest chemical producer in the world since 2019, with sales of almost EUR 1.5 trillion, followed by NAFTA at around EUR 570 billion and Europe at EUR 543 billion . The Chinese chemical industry accounts for some 40.6 % of global sales . Sales by the European chemical industry have continued to decline on a global scale in recent years, and came in at around 14.8 % (EU27) in 2019 . The current boom in the Chinese petrochemical industry is happening in the production of ethylene via steam cracking of inexpensive ethane sourced mainly from shale gas deposits in the USA . Among other things, ethylene is required for the production of vinyl acetate. The bulk of the ethylene in China still comes from steam reforming of naphtha in petrochemical refineries . The European coatings industry’s dependence on the Chinese market is set to increase because China is the only country pursuing a long-term strategy of independence for its chemical industry. It is the main producer of numerous basic raw materials needed for the production of, e.g., photoinitiators, pigments and dyes. The Chinese chemical industry is striving for complete independence from the rest of the world. China is currently concentrating its petrochemical industry into five regional chemical clusters in order to exploit cluster synergies (arising from integrated production sites). Reasons for this concentration are the avoidance of accidents and environmental damage, control and cleaning of process wastewater, better management of chemical production and, last but not least, sufficient distance away from cities and proximity to seaports. In recent years, a tightening of state controls has led to temporary or permanent closure of chemical companies, and especially of smaller companies, that did not want to settle in the new chemical parks. The impact on supply chains was present even before the corona pandemic, and is still being felt today. The situation is made worse by a global container-shortage, fully booked freighters, congested ports and the temporary closure of central ports due to Corona outbreaks, as a result of which transport costs from Asia to Europe have surged.
The oil cartel
The vast majority of the basic chemicals used in the production of coatings raw materials are obtained from crude oil and natural gas. This means that availability stands and falls with crude oil production and refining. In the current corona situation, relatively low refinery output has been and still is a further factor contributing to the general shortage of raw materials. Reducing production volumes should stabilise the collapse that has occurred in crude oil prices during the pandemic. Lower oil prices resulting from the corona pandemic and production cuts by OPEC+1 have led to falling export revenues in the oil-dependent Gulf states . A further driver of the decline that should not be overlooked is the most recent price war between Saudi Arabia and Russia in spring 2020 . Thus, disruptions to the supply chain have been around since the very outset. Apple’s mobility data show that mobility increased significantly again in Europe, Great Britain and the USA at the beginning of 2021 . However, oil production remained low during this period [6, 7]. Currently, from December 2021, OPEC is to increase output by 400,000 barrels a day  and is to keep producing at the higher level until at least April 2022 . OPEC is struggling with a number of challenges: a seasonal decline in demand, a partial draw-down of strategic reserves in some countries (e. g. China, Japan, USA) and demand uncertainty due to the new omicron variant of coronavirus. According to market analysts, it can be assumed that the risks to oil demand are already priced in at 70 US dollars per barrel and that the oil-exporting countries are comfortable with this price . Current estimates by BP, an oil and natural gas company, are for oil demand to again hit around 100 million barrels per day, or the pre-pandemic production level . The most important petrochemical feedstocks made by steam crackers are ethylene and propylene. These basic chemicals are used to produce ethylene oxide and propylene oxide, and others. In a further step, for example, they are converted into diethylene glycol, ethylene glycol, propylene glycol and polyols, which are used for the production of unsaturated and saturated polyester resins, oil-modified polyester resins, emulsifiers and paint additives.
Force Majeure in Asia, Europe and the USA
The term “force majeure” is used to describe unusual, damaging events that prevent a contracting party (supplier) from fulfilling a contract through no fault of its own . There have been more than 200 reported cases of force majeure in the global chemical industry so far in 2021. Last February, an arctic cold front also affected half of the US states. Hardest hit by the polar storm, with temperatures of down to minus 39 degrees Celsius, was the state of Texas, which is not accustomed to freezing winters of such severity. The outcome was a further tightening of the global supply of raw materials, as more than 70 chemical plants had to shut down. The impact on the global market was excessive and continues to this day. The availability of raw materials was extensively impaired, especially in the case of ethylene and propylene, which serve as feedstocks for most of the other basic building blocks for the paint industry.
This led to an extreme shortage of raw materials for acrylic monomers, ethylene glycol, propylene glycol, polyols, epichlorohydrin, bisphenol A, phenol, isocyanates and many more. As a result, prices skyrocketed by up to 70 %, e.g. for alkyd, polyester, polyacrylic, phenolic resins, acrylic dispersions, acrylo-styrene dispersions and epoxy resins. In addition, there were numerous disruptions in European plants for the production of isocyanates, methyl-ethyl-hydroxyethyl cellulose, organic solvents such as dipropylene glycol methyl ether, n-butyl acetate, acetone, ethyl acetate, n-butanol, MIBK, and methoxypropyl acetate. Compared to spring 2020, the average prices in Europe for solvents rose by 42 – 63 % and for binders, by 20 – 45 % .
Titanium dioxide – Modern-day gold in the paint industry
Due to global consolidation of the titanium dioxide industry and a strategic change in the pricing policy adopted by the leading manufacturers, the prices for titanium dioxide have risen continuously since 2016. The titanium dioxide industry has identified the dependence of the paint industry on titanium dioxide and is very purposefully pursuing a high rate of return in the double-digit range for its shareholders. According to the latest report by RND, the global titanium dioxide market is expected to generate sales worth USD 30.72 billion in 2028, up from USD 22.1 billion in 2020. That translates to a compound annual growth rate (CAGR) of 4.2% . Small and medium-sized companies are the losers here, as they are forced to pay 25 – 35 % higher prices via distributors, compared to large companies.
Allocation of titanium dioxide
The titanium dioxide industry currently finds itself in a comfortable position as regards the allocation of its products. At the current high price level, it is seeking out long-term contracts, mainly with large customers, on the pretext of security of supply. The battle between large buyers in the coatings industry and their smaller counterparts is already in full swing. Many large companies are playing hardball, no matter what the losses are, in their attempts to secure supplies of titanium dioxide. A large company, in this context, is one with, e.g., a requirement for more than 250,000 t/a. For the paint industry, which is mostly made up of SMEs, this poses major risks in terms of both the supply chain and vastly over-inflated prices.
Placing hope in Chinese manufacturers
A ray of hope for the smaller, price-sensitive companies is the intention of Chinese titanium dioxide manufacturers to boost their production capacities. However, the Chinese titanium dioxide industry itself is currently facing cost spikes. A price adjustment comparable to that of the other global titanium dioxide manufacturers is already in play. It can be assumed that there will be no significant changes in pricing and availability in Q1 and Q2 of 2022. Nonetheless, the situation remains very tense. As long as demand in China remains high, price reductions and a higher share of exports cannot be expected. The always slightly lower titanium dioxide prices asked by Chinese manufacturers in the past were based on lower domestic demand and a motivation to boost their share of exports and thus their global market share.
Titanium dioxide – Prospects for the future
As a rule, multinational titanium dioxide manufacturers have no interest in building up new capacities as that would weaken their share price. Instead, they are looking for large titanium dioxide customers that can commit to long-term purchase agreements and are active in less price-sensitive markets. In return, they offer security of supply and a certain degree of price stability.
In fairness, it should be mentioned that producers of titanium dioxide are also under a certain amount of cost pressure. The rapid rise in world market prices for chlorine, titanium ores, the higher costs of container and bulk freight, and much higher energy prices will lead to further price hikes. This will give rise to further market consolidation in the coatings industry. China, Australia and South Africa are the leading producers of titanium ores. Worldwide, China is also one of the largest exporters and domestic consumers of titanium minerals. The largest deposits of titanium iron ore (ilmenite) are currently in China, Australia, India, Brazil, Norway, and South Africa. Australia has the world’s largest reserves of rutile ores. World reserves of ilmenite, expressed in terms of titanium dioxide content, are approx. 740 million tons, with those of rutile running at approx. 700 million tonnes . In summary, it can be said that the TiO2 manufacturers have changed the “game” in their favour and are applying more and more pressure on the buyers in paint companies.
The causes of the shortages and the increases in raw materials prices are very complex. They are mainly a combination of stronger market demand and plant shutdowns due to storms and plant maintenance, temporary port closures due to corona outbreaks, congestion in seaports, shortages of sea-going containers and ocean-going vessels, extreme increases in freight costs, shortages of trucks and drivers, lower oil production and, after the corona pandemic, the swift upswing in the Chinese economy and, in its wake, the global economy. There is every reason to believe that energy prices for coal, oil and gas will continue to rise in the first few months of 2022. Very high coal prices have already triggered the first power cuts in China in 2021. Possible consequences are further shortages of raw materials on the world market. In an attempt to avert further price increases in the energy sector, numerous countries have started tapping into their strategic oil and gas reserves.
It can be assumed that the raw materials shortages will continue in 2022 even as the global economy starts to recover after Corona. The EU’s dependence on raw materials from abroad has increased further. Climate change is creating additional uncertainty, with severe weather events becoming more commonplace. As a result, plant shutdowns and short-term delivery bottlenecks are likely to happen more frequently than before. The raw materials situation in 2022 will keep the coatings industry preoccupied with new formulations and reformulations. Over the next few years, the restructuring of the product portfolio in favour of bio-based and more sustainable products as well as carbon-neutral production will be an ongoing topic in the chemical and coatings industry (“European Green Deal”). Product development departments will base their choice of basic raw materials increasingly on their carbon footprint and sustainability.
Europe should draw its conclusions relatively quickly from the lessons of the Covid-19 pandemic and, in addition to targeting decarbonisation of the chemical industry by 2050, should formulate a clear, EU-based “Raw Materials and Recycling Strategy 2030” (“independence strategy”) that is backed up by appropriate measures, and then implement it in conjunction with the European chemical industry. Europe and the coatings industry need a stronger chemical industry that is more independent from Asia and the USA. True to the motto: “Learning from crises means being courageous and gaining more independence from the rest of the world”.
The European Coatings price ticker offers up-to-date information on costs for important raw materials for the paints and coatings industry.
 Cefic Chemdata International, 2020
 Bork, Henrik; Ernhofer, Wolfgang: „Chinas Petrochemie baut auf billiges Ethan aus den USA – mit hohem politischem Risiko“, China Market Insider, 21.02.2021
 DIW Wochenbericht 48/2020, Dawud Ansari und Hella Engerer
 DIW Wochenbericht 36/2020, Dawud Ansari und Claudia Kemfert
1)OPEC+ stands for the Organization of the Petroleum Exporting Countries (OPEC) and other important ones Oil producers, especially Russia, originally against the background of the collapse in prices between 2014 and 2016 agreed on joint funding cuts to stabilize the price.