The recession is beginning to cause big difficulties for the multinational European coatings businesses and their suppliers. But the ones who are being hit the hardest by the economic downturn in Europe are the small- and medium-sized players (SMEs).

They are struggling with a lack of access to finance because of the credit crunch, declining demand and even shortages in supplies of raw materials because of temporary plant closures and cut backs by chemical companies. The difficulties facing small coatings producers in Europe is leading to bankruptcies or to owners selling up their businesses.

SMEs, of which there are an estimated 1,000 in Europe with an equal number of small decorating businesses making their own paints, are particularly vulnerable to the slowdown in European economies, the effects of which are impacting a wide range of customer sectors for small coatings producers.

The European Commission, the European Union’s (EU) executive, has reported that economic confidence across a broad section of European industrial and other sectors has plunged to its lowest level since it first began monitoring economic sentiment in the region in 1985.

After gross domestic product in the EU’s 27 member states began to decline in the second half of last year, the Commission is forecasting that GDP in the EU will decrease by 1.8% in 2009 before slowly recovering next year.

The government in Germany, Europe’s largest economy, is predicting that its GDP will go down by 2.25% next year. Among the other leading economies of the EU, the UK’s GDP is expected to record the steepest drop of 2.8% this year, according to the European Commission.

Shrinking demand in both construction and automobiles are having a damaging effect on both the businesses of large and small coatings companies.

In the automobile sector new passenger car registrations in Europe dropped by seven percent in 2008 to their lowest level for 15 years. In December registrations dived by 18% compared with a year ago.

As a result automobile companies have been temporarily shutting down plants across Europe. Honda of Japan has closed a plant in the UK until June.

House sales have plummeted, particularly in countries like the UK, Spain and Ireland, which in recent years have enjoyed a construction boom. The latest construction figures in the UK show that in November orders were at that their lowest level for 25 years.

After reducing production in many of its chemical plants in Europe and elsewhere late last year, BASF announced in January that it would be introducing short-time working for approximately 1,500 employees at its main coatings site at Munster, Germany. The company’s two main outlets for coatings are the automobile and construction sectors.

The plight of both sectors is also causing major problems for SMEs involved in decorative paints and industrial coatings.

“Volkswagen, Germany’s biggest automobile company, has just announced big cutbacks in production and work for employees, which is going to affect coatings SMEs throughout the automobile supply chain,” said Michael Bross, head of public relations at Verband der Deutschen Lackindustrie (VdL), the German coatings association.

In the construction markets of southern Europe, particularly in Italy and Spain, the livelihood of hundreds of decorative painters who produce their own waterborne coatings is under threat. “In a poorly performing construction market like Spain a lot of these micro coatings businesses could disappear,” said one consultant.

Coatings SMEs in troubled sectors are have their financial strains compounded by restrictions on credit insurance for businesses in the supply chains of these markets.

“Credit insurers are virtually condemning whole sectors because parts of them might be having financial difficulties,” said an executive of one supplier to coatings producers. “It puts suppliers in a difficult position because without credit insurance you have to ask coatings and other customers for cash up front. It is the small companies which suffer when credit has to be withdrawn in this way.”

Coatings SMEs have also been facing shortages of supplies of raw materials as a result of chemical companies closing down their plants because of the slump in sectors like automobiles and construction.

“These chemical producers are shutting plants because their large customers have been doing the same but this decline in output is affecting coatings and other SMEs who are still trying to maintain their own production levels,” said Peter Fields, chief operating officer of the pan-European chemicals distributor Azelis, which is a major supplier to small coatings companies.

An additional difficulty confronting SMEs in the UK, which is not a member of the eurozone, is a sharp drop in the value of the pound sterling, the country’s currency. Between the middle of last year and January it has depreciated against the U.S. dollar by approximately 30% and against the euro by approximately 40%.

Non-UK suppliers of raw materials for the making of coatings and other products have been reluctant to trade in the country or have been hiking up their prices to compensate for the devaluation.

“SMEs in the UK coatings and other sectors have great difficulty in the current economic climate passing on these big rises in the prices of imported materials,” said Fields, who is also chief executive of Azelis UK.

Insolvency experts are warning SMEs not to delay taking remedial measures once they are in trouble. “In this climate managers must be willing to take decisive action as soon as the business gets into difficulty,” said Paul Reeves, director of Leonard Curtis, business rescue specialists in Burnley, England. “Getting control of cash flow is important but so is identifying a path through recession.”

Leonard Curtis was called in to deal with a local coatings company, Dexter Paints, when it went into administration late last year only a short time after celebrating its 100th anniversary. The company, which had approximately 40 employees made decorative and industrial paints.

Staff at Dexter has been trying to organize management buyouts of parts of the company in a restructuring exercise, which could be repeated across Europe this year.

“Restructuring of the SME sector in coatings to achieve consolidation rather than fragmentation is likely to be accelerated as a result of the recession,” said Michael Gerstenberger, chairman of Cheminvest consultancy, Waldorf, Germany.

Already over the last few months a number of acquisitions of SMEs in coatings or raw materials has taken place in Germany, Europe’s largest paint and coatings market. But the number of take-overs in the country and elsewhere in Europe will inevitably increase as the downturn begins to put severe pressure on SME’s finances.