Paint manufacturers look to exports, diversification to stay viable

Paint manufacturers look to exports, diversification to stay viable
By Julian Richardson Business Observer reporter richardsonj@jamaicaobserver.com
Wednesday, August 20, 2008

Faced with spiralling raw material costs in the context of a stagnant local market that is flooded with cheaper imports, Jamaican paint manufacturers have turned their eyes overseas and diversifying their product line to maintain their viability.

“We have been working very hard to increase our exports,” says EdgeChem’s managing director Doreen Frankson. “The countries that we export to have been doing better than the Jamaican economy, so what you find is that the export markets are growing but our local markets are shrinking.”
Michelle Welch, sales supervisor at Diamond Paints, displays some of the company’s paint products at its operating facility on Waltham Park Road in Kingston. Diamond Paints is currently conducting a multimillion dollar expansion project to double its capacity. (Photos: Naphtali Junior)

EdgeChem’s overseas distribution network is comprised of exporting to Caribbean countries such as Barbados, Antigua, Trinidad, Belize, St Lucia and Dominica.

“We are always doing research and development, but our plans now are to expand our export markets because we have to get our units back up,” notes Frankson.

Diamond Paints, which operates from a 90,000 square-feet manufacturing facility on Waltham Park Road, has invested in a $70-million expansion project aimed at creating the critical mass needed to satisfactorily supply the overseas segment of their target market. The project, to be completed by the end of the year, will double Diamond’s annual production capacity which now stands at 650,000 gallons of paint per year. Diamond’s expansion plans entails a lot of product diversification into different commodities of building finishes. According to Seaton, the company recently brought on stream a “phenomenol” wall paste product, which they have already began exporting to Barbados.

“We are exporting this product to Barbados and are sending our technicians there to train them in terms of its usage and application,” disclosed Neil Seaton, principal and chairman of Diamond Paints.

Seaton also revealed that the company has been commissioned by furniture giant Courts Plc to supply painting to all their stores in the English- speaking Caribbean. “The fact that Courts have chosen us speaks to the quality of the product that we are making,” said Seaton.

Even while local manufacturers are looking overseas they have to confront the growing challenge of cheaper imports entering in an already shrunken market.

“I think for a country that has a foreign exchange problem, we should not be importing paints because we have so many good local manufacturers,” argued Frankson. “Every other country in the region protects their manufacturing sector, but Jamaica doesn’t.”
McDonald concurred with Frankson.

“We are basically on our own because we don’t get any protection; this is why we have so many brands in Jamaica,” he added.

One of the major importers of foreign paint, according to Seaton, are the foreign investors. This stems from the fact that a lot of foreign companies are given a duty-free tax holiday by the government, which includes importing certain items, such as paints. As a result, paints are imported at a discounted price, making it cheaper than the local brands.

“We are concerned that a lot of these projects that are coming into Jamaica are bringing in their own finished products like paint and construction finishes which are already available in Jamaica,” said Seaton. “I question the wisdom of having them bringing their own product.”

Berger Paints have also intensified its efforts to widen its product range. The paint manufacturer, which controls close to 70 per cent of the local market, is attempting to reverse the fortunes of its eroding bottom line with this diversification compounded with more prudent cost management.

“We are expanding in certain areas; we are looking at various niches,” said Warren McDonald managing director of Berger Paints Limited. “We are looking into areas where perhaps we don’t have that market share where we can grow at bigger ratios.”

One of the areas that Berger is trying to penetrate is that of vehicle finishing.

“Traditionally we are late entrants in that market, but we represent (American chemical company) Dupont in Jamaica and we are growing at over 30 per cent for the year over last year,” revealed McDonald.

According to Berger’s second quarter ended June 30,2008 financial report, for the six-month period the company saw its revenue grow by 16 per cent over the corresponding period in 2007. During the period under review, according to the report, the company’s operations were severely impacted by the increases in oil prices, derivatives and other raw material costs which were not fully passed on to its customers. The company thus posted a $2 million loss for quarter.

The challenging environment for the sector starts with the out of control oil prices that leapt to an all-time high of US$147 per barrel just last month. This has had a corresponding ill effect on the cost of oil-derivative inputs in the paint industry, thus resulting in increased cost of production which is heavily absorbed by manufacturers. For instance, the cost of major ingredients of paint such as titanium dioxide and resin have risen by 15 per cent year to date on the world market, while mineral spirits have skyrocketed by 50 per cent.

“The major challenge in the industry is that the raw materials for the industry is a by-product of the oil industry, so everytime the oil goes up the raw materials go up,” says Frankson.

Frankson, the immediate past president of the Jamaica Manufacturers Association, says that this has resulted in the erosion of margins and volumes at her company, which does not factor most of the cost increases in its selling price.

“We have absorbed some and we have passed on some,” she told the Business Observer. “The full brunt of it has not been passed on to the consumer, so our bottom line has been getting weaker and weaker.”

Checks with major retailers revealed that the per gallon selling price of the most popular oil-based low sheen emulsion paint has increased from $1,483 to $1,691 plus tax since the beginning of the year, a 14 per cent increase.

According to McDonald, exacerbating the pricing challenge is the fact that suppliers no longer sell raw materials at the price of initial purchase, but at the price on delivery, making companies ill prepared on how to manage cost increases.

“Big conglemerates have stopped giving out forward quotes,” said McDonald. “They wont give you a price until delivery so its harder to plan because on each delivery you have an adjustment.”

In addition to the pricing woes faced by manufacturers on the world market, a sluggish local economy have seen paint sales slow down significantly.

“There have been a slow down here since last November and it hasn’t come back up since,” noted Frankson.

Neil Seaton, principal and chairman of Diamond Paints, points to the fact that paint sales have been adversely affected by the fall-out in numerous alternative investment schemes, which reportedly had billions of dollars in funds under management. This, Seaton believes, has resulted in a major erosion of disposable income normally spent on paint.

“We are seeing some negative signs in the market in view of the fact that the whole financial atmosphere is in so much limbo mainly from the fallout of Cash Plus and Olint and other negatives in the financial sector,” highlighted Seaton. “We have seen marked slowdown in the type of market activity that we are used to.”

Berger’s McDonald agrees, adding that there has been a noticeable slowdown in construction activity, a major complement to the success of the paint industry. He also pointed to the negative effect of the slowdown in the US economy on remittance outflows towards Jamaica, as another hinderance to how much local consumers can spend on paint.

“Carib Cement is down volume wise, so I dont think construction is expanding; Also, remittances from the US is certainly not increasing because of what is going on up there,” said McDonald.

“Disposable income is definitely down and a lot of this money was used to fix up homes and so on.

“All these things are having an effect on the paint market which we don’t feel is growing right now,” he noted.