China coatings output in 2017 surpassed 20 million tons for the first time in its history and reached 20.41 million tons, an increase of 12.3 percent over 2016. Domestic consumption is the main driver for this fast growth, and export volume grew by 12.9 percent to 201 thousand tons in 2017.  But trade interruptions threatened by trade protectionism make the future unpredictable. For the coatings market, the impact might be serious.

Positive growth trend faces multiple threats

Reports in March said the U.S. government is considering a trade package including tariffs on $60 billion worth of Chinese goods, which may target the tech and telecommunications sectors. If this comes true, it will have a huge impact on plastic and metal coatings consumption in China. For example, U.S. imported $128 billion computers, most of which are imported from China, and U.S. also imported $132 billion cell phone and TV products. Around three quarters of imported cell phone comes from China.  So if the trade war between these two countries really starts, the industrial coatings market in China, especially the high value segment, will take a hit. It will be extremely bad news for foreign coatings companies such as PPG in China because they are the leaders in this market segment.

Except for this unpredictable future, the general business environment for the coatings industry seems very positive. Real estate and automotive industries still grew in 2017, though slower than before. Electronics and information(cellphone, computer, etc.) industries grew by 13.8 percent in 2017 over 2016 based on value calculation, with export value increased by 14.2 percent. Even the ship building industry is recovering. In 2017 China completed ships with a combined gross tonnage of 42.68 million tons, an increase of 20.9 percent over 2016.

However, the coatings industry is developing multiple challenges. Facing another round of cost increases in raw materials, many coatings companies elected to increase their selling price in the first quarter. Downstream companies, especially those for industrial coatings, are feeling more pressure from environmental regulations when the government extends and deepens their control and management to the coatings application sector.

Water trend met challenges on industrial coatings applications

Environmental protection demand from society is still high, although air quality was improved noticeably in 2017. PM2.5 concentration on average for the whole country in 2017 was reduced by 6.5 percent over 2016. But defeating this invisible enemy entirely is rather difficult, and China’s coatings and ink industry is at the forefront of this campaign, and its length will not be short. On January 1, 2018, China implemented a new environmental tax policy, effectively ending the pollutant discharge fee. All tax income will be retained by local governments, meaning the local governments have more willingness to enforce this new policy.

After the government asked businesses to move manufacturing facilities from major cities to remote areas, the government focused on the next phase, especially in large cities. This will restrict the release of VOCs during coatings application and for coatings industry this means more change for the users instead of producers, therefore facing more resistance and sometime, conflicts from downstream markets.

The Shanghai government requested in their air cleaning action draft that the ship building and repairing industry should largely increase the use of water coatings in 2018. But in reality the proposed action plan met rather resistance and complaints from ship building manufacturers. Besides, the ship manufacturers wanted to lower the percentage of painting jobs requested be carried out in closed environment from 80 percent to 65 percent.

Similar policies have been announced by Tianjin government, who requests to replace solvent coatings with waterborne coatings for vehicle repair in two phases, and entirely stop using solvent-based coatings from January 1st, 2019. Compared with ship building and anti-corrosive coatings, automotive refinishes sector has seen the launch of many waterborne varieties, but to meet the deadline, this means cost increase, training and change at a fixed time frame. The end user, many of which are small shops, may not be ready but have to do so. Furthermore, Shenzhen released China’s first local technical regulation for coatings VOC requirements, which took effect on March 1st, 2018. The regulation lists VOC release limit for each coatings variety.

All these new regulations and policies will push coatings downstream companies to adopt water borne coatings faster than they would have planned originally, a positive trend for waterborne coatings producers. This will push the consolidation further down from coatings producers to downstream market, meaning large companies with more financial power will invest much faster to make the change needed. On the contrary, small or family owned coatings users, such as car repairing shops or small ship building companies might have to close their business, for their own good.

The whole coatings industry needs to have a fair judgement of the status quo. The anti-corrosion coatings market in China, even in the world, is still a solvent-based coatings market. Architecture and wood coatings adapt faster to regulation changes, and water borne varieties have become dominant for architecture coatings for many years, a change which will be followed by wood coatings, and quick. But for industrial coatings, the producers and downstream markets might need more time to catch up because the functional requirements for industrial coatings are more difficult to be matched by waterborne technologies, but in the context of China’s current political and social environment, this may be luxury.