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.
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.
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.
“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.”
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.
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, adding that premiums would probably start rising next year because of the cost pressures.
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.”