Real Challenges for Brazil
While Brazil is still contending with the economic turmoil caused in January by the devaluation of its currency, the real, experts say it is making a faster recovery than expected. The largest economy in South America, Brazil remains a major influence on the region. For paintmakers, this is good news as Brazil continues to attract investments, particularly from car makers, that will call for greater volumes of high-end products.
"When you look at Brazil long term it is stable ... because of the size of the economy and the technological advances here," says Dilson Ferreira, executive president of São Paulo-based ABRAFATI, the Brazilian paint and coatings association that sponsored the 6th International Paint Congress held in September in São Paulo.
With a current population of about 165.8 million, Brazil is projected to grow to 244.2 million by 2050, according to United Nations reports. In the city of São Paulo, Brazil's business hub, the population is expected to swell from 17 million to more than 20 million by 2015 and be one of the five largest cities in the world. Such growth is expected to fuel the economy and, Ferreira says, the paint industry.
Brazil is the largest paint producing country in Latin America. In 1998, some 800 million liters of decorative, industrial and automotive paint were sold, according to ABRAFATI. About 65% of all paint sold is for the decorative market, with 20% for industrial, 10% car refinish and 5% OEM. Brazilian powder coaters produce about 20,000 metric tons a year (MTA). Most major multinationals have some production capability in Brazil (See Table).
Suppliers to this market say the currency devaluation significantly affected all paint application markets. Ferreira sees the currency crisis as a correction of the economy. "The drop in January was to accommodate the accumulated weaknesses of the currency during the previous years of the real. From now on we expect stability with small fluctuations caused by market forces," he says.
In Brazil, total paint sales dove about 15% due to the economic crisis, says Carlos A. Festa, Rohm and Haas Química (São Paulo) commercial director for the South Cone of South America. Impending economic uncertainties also affected Chile and Argentina, where the market plunged about 12–15%. "The issue now, with oil and raw-material prices going up, is the very small room there is to pass on cost increases. The margins for both suppliers and paint makers is really squeezed," he adds.
Trade agreements helped to protect the North Dome countries of South America, Central America, the Caribbean and Mexico against the devaluation, says Mauro Trevizan, Rohm and Haas commercial director for the North Cone. "Although we are together as a continent, the strategy is different. Venezuela and Colombia don't depend on Brazil generally for paint. They are independent," he says. Country-by-country differences and trade arrangements within Latin America make it a diverse, as opposed to a single, market he says.
The architectural paint sector has consistently been doing better than other paint markets, says Ferreira. While total paint production dropped last year by 5.5%, deco slid only about 3%. From January through August 1999, this sector grew 5% and experts expect it to finish the year showing a 5% gain.
The construction industry is expected to grow in coming years above GDP. "The driving force for this is the deficit in housing that exists in Brazil. The government is interested in how to make it grow, because [construction] absorbs a lot of labor," says Ferreira. He adds that more than half of paint sales go into the architectural market, part of which are used in the construction and maintenance sector.
Frost & Sullivan (Mountain View, CA) reports that the Brazilian architectural paint market remains fragmented, with about 200 firms. Multinationals compete in this sector with local and mid-size producers, and the situation has resulted in pricing wars for some products.
The industrial paint sector is expected to drop 8–9% this year due to in part to the fall off in automotive parts and to decreases in the home appliance market, says Ferreira. However, he says that the can coatings market is faring well due to the health of the food industry.
The automotive industry is an important sector for Brazilian paintmakers as it draws a large portion of high-end product, says Ferreira. While most Brazilian car production is for the local market, an increasing amount of cars are being exported, he adds.
However, Brazil car production has fallen from 2.1 million units made in 1997 to 1.65 million in 1998. It is expected to slide to 1.4 million units this year. Ferreira estimates OEM paint consumption has dropped by about 15%, with refinish falling by 5–10%.
Despite unit production drops, carmakers are still investing heavily in Brazil, which bodes well for paint suppliers who are mandated to use formulations standardized at the carmakers’ headquarters in Europe, the United States or Japan. This year, multimillion-dollar investments were announced by major car manufacturers, including Ford, Fiat and Mercedes-Benz.
Ferreira says car makers are attracted to Brazil because of its consumer potential. "The population growth, the expected increase of the middle class, the small fleet number of cars per inhabitant here — Brazil shows potential to grow," he says. "They believe in the continuation of the political and economic stability."
"We are working with paint producers like BASF, who is supplying Mercedes in Brazil," says Mario Lindenhayn, Bayer VP of coatings and colorants (São Paulo). Bayer supplies polyurethane (PUR) resins to Brazil's OEM and refinish markets.
Lindenhayn says the biggest application for these resins is in the refinish market, which he says is vastly different in Brazil than it is in the United States and Europe. "Most car maintenance is done by smaller shops, so a car is painted and put outside in the sun or in a room to dry. They wait for drying," he explains. For this reason, Lindenhayn says he does not believe regional growth of waterborne resins will be dramatic.
Lindenhayn says Bayer has made significant investments in Brazil and believes the PUR market will grow 10–12% a year because of the newly opened or soon to be opened car plants.
"We don't see our business growing in water here as fast as in Mexico," says Robert J. Seidewand, VP of Latin America at Avecia, formerly Zeneca Specialties. Waterborne growth, he says, will be driven by companies that are manufacturing and exporting to the United States and particularly to Europe.
He says Mexico is going from solventborne to waterborne for two reasons: stricter VOC emission regulations that came into effect this year, and standardized global formulation mandates specifying waterbornes from U.S., European and Japanese firms. "We are seeing a lot of our customers in the U.S. forming relationships with Mexican companies so they can provide the same formulations," he says.
"As more of the major automotive companies come here and set up production lines they are going to want Tier I and II suppliers producing coatings here," Seidewand says.
Glenn H. Thompson, PPG Industries general manager for coatings in South America, estimates that about 60% of paint raw materials are imported from the United States, Europe and Japan. He says that when the currency crisis hit, paintmakers saw raw material prices increase instantly.
Compounding the problem, "Automotive OEM manufacturers had a government agreement to not layoff workers," says Thompson. "We ended up the guy in the middle. It was a hell of a squeeze." Thompson says that paintmakers have been able to recover some of their losses but remain in a tough pricing position.
"The automotive guys are looking to global pricing with local currency translation. It's tough and it's very difficult and it's competitive," he says. Brazil's automotive OEMs as well as some of the industrial sectors are large users of high-end monomers, which are largely imported. He says it is difficult to get the quality and product type needed locally.
"How do we take a given amount of raw material and convert that most cost effectively to our customers? That is our challenge," says Thompson.
To that end, in February PPG completed construction of an automotive OEM coatings plant in Pilar, Argentina, northwest of Buenos Aires. The company is building another facility in Sumaré, Brazil, for automotive OEM and refinish, as well as industrial liquid and industrial powder coatings. The facility is expected to be completed by year-end or early 2000. PPG also has a packaging coatings operation in Cajamar, Brazil.
Earlier this year, DuPont Performance Coatings announced plans to close six Herberts Plants in Europe and Latin America, including a facility in Caieiras, Brazil. The company has said it will consolidate operations with other regional operations to bring down costs and improve efficiency.
Suppliers says Brazilian paintmakers, especially in the automotive sector, must make such moves to remain competitive in the region. "There is no opportunity in South America without local production. The borders [import duties] are too high," says Thompson.
Suppliers exporting to Brazil complain of high tariffs and trade blocks which favor regional producers. Tariffs for imported raw materials vary between 5–12%, plus an additional 3% temporary surcharge for a government program set to end in 2001.
Tariffs on titanium dioxide (TiO2) imports are even higher, at 16% plus the 3% surcharge, to protect local industry. For TiO2, Brazil's only producer is the Titanio do Brazil (Tibras) 60,000 MTA plant and mineral sands mine now owned by Millennium Inorganic Chemicals (MIC). With its 1998 Tibras purchase, MIC became South America's only TiO2 producer, commanding a large share of the South American market as well as some 65% of the Brazil market.
DuPont remains a leading TiO2 supplier to Brazil and has a 50% market share of South America. But DuPont must import product to the region from its Altamira, Mexico, facility.
"TiO2 had an exceptional treatment of protection here," says Ferreira. He says that ABRAFATI has a commitment from the government to reduce the TiO2 tariff to 12% before the surcharge.
On the environmental front, suppliers say there is more bite to enforcement efforts than there was in the past, an activity that they see growing as more multinationals choose to use Brazil as a gateway to the South American market. They say that the strongest enforcement efforts at present involve the permitting process and water treatment.
Alberto D. Bittar, Exxon Química (São Paulo) market development manager for the Mercosur region, says that air and water emissions restrictions in Brazil can differ from state to state. "But usually there is no legislation like what you have in the U.S. It is totally different here," he adds.
Exxon is concentrating on the low-odor paint market and working with low toxicity technology. The company started up a newly built $30-million plant about 70 miles northeast of São Paulo. Completed in April, the plant produces de-aromatized hydrocarbon fluids, largely for the paint market. Exxon exports some of the products to Argentina.
Per capita paint consumption is four to five times greater in North America than in South America, and North American trends are moving south, says Stephen J. Hurff, coatings technical marketing manager for the Americas at DuPont White Pigment and Mineral Products. He says multinational mass merchandisers, such as Home Depot and Lowe’s, are expanding their market influence.
"This is changing the game. We see the big boxes increasing their buying power [and] aggressiveness," says Hurff. He says suppliers and paintmakers should team up to create new products and decrease costs.
PPG's Thompson says he sees great growth potential in Latin America. He says, "What we have to do as an industry is to localize as much as possible." He adds that, with trade barriers, currency crises and other issues in Latin America's developing market place, this is a formidable challenge.