Demonetization had affected the demand for most of the consumption based industries in India. One such industry which derives majority of its sales from retail consumption is the Paint industry. Demonetization affected demand in the month of November and December 2016 for leading paint manufacturers. It has been observed that the demand was affected primarily in the North and Central India while there was a sharp recovery in South India.
The paint industry is raw material intensive. Paint involves the mixing of various raw materials in various proportions. The raw materials are of a wide variety. On an average, raw materials account for 60% of net sales (industry average). In case of small-scale units it forms up to 70% of the net sales. High cost and erratic availability of raw materials mark the Indian paint industry. Around 300-400 raw materials are required to manufacture different kinds of paints. The high number of raw materials and finished goods highlights the working capital intensity of the sector.
Paint is composed of pigments, solvents, resins, and various additives. The pigments give colour to the paint; solvents make it easier to apply; resins help it dry; and additives serve as everything from fillers to anti-fungicidal agents. The basic white pigment is titanium dioxide, selected for its excellent concealing properties, and black pigment is commonly made from carbon black.
Most of the raw materials are petroleum based. Thus paint companies benefit when the petrochemical industry goes into its cyclical downswing. A hike in the price of petroleum products raises input costs negating the impact of a cut in import tariffs on raw materials.
Amongst the vital pigments used in the process of paint manufacture is Titanium dioxide (TiO2) and the industry consumes around 60% of TiO2. This pigment is available in two grades: anatase and rutile, of which anatase is exclusively used in interiors while rutile is preferred in exteriors. India has abundant raw materials for the manufacture of TiO2, especially ilmenite of which it has 12% of the world’s deposits. It is ironical that the paint industry presently imports TiO2 in excess of Rs.1 billion.
Prices of titanium dioxide hit a four-year high in the month of April 2017. TiO2 prices in China, a key exporter of TiO2, have jumped more than 50% in the past one year, on the back of increased demand and supply disruptions. Production of TiO2 in China is being curtailed by stricter environmental regulations enforced by the Chinese government this year, with small-to-medium scale producers facing the brunt of the impact. This is a concern for Indian paint companies as they import TiO2 and costs could increase as contracts get renewed at higher rates, thereby putting pressure on margins. Not only TiO2, but the prices of other crude-derivatives and monomers have also inched up.
On 7 April, spot prices of China-origin TiO2 were assessed at USD 2,800-2,850/tonne FOB (free on board) China, up by a hefty USD 675/tonne FOB China from 2 December, according to ICIS data.
Margins for paint companies such as Asian Paints Ltd, Berger Paints and Akzo Nobel are expected to reduce in the near future. Companies have already hiked prices for their products in the range of 2% to 3% during the fourth quarter of FY 2016-17 and passed on some costs to the consumers. The industry leader Asian Paints is likely to post volume growth in the range of 6% to 7% in the fourth quarter of FY 2016-17. The impact on sales due to demonetisation has receded to large extent, but decorative paint demand is yet to recover back to pre-demonetisation levels of double-digit volume growth. Growth in volumes via growth in demand for decorative paints is the only solution for Paint companies in such a kind of scenario.