Almost every basic paint industry raw material has seen sharp increase or availability problems this year, rendering projections awry and throwing up possibilities of industry capacity rationalisation.

There has been an increase of around 15 per cent in the price of titanum dioxide rutile, the basic raw material for paint manufacture which is manufactured by a single public sector undertaking based in Kerala.There has also been an increase of 13 per cent in the price of anastase. The international price of titanum dioxide rutile remained steady during the quarter.

The landed cost went up primarily due to the increase in customs duty in the union budget. The price of castor oil skyrocketed during the quarter as well.The price increase was over 70 per cent in a span of two months (July and August) while the increase in soyabean oil prices was moderate at about seven per cent during the same period. Also prices of solvents like xylene, toulene, and butanol remained weak.

According to analysts, one inevitable consequence of such a sharp raw material price increase is going to be production cutbacks, and the settling of smaller paint companies into niche segments.

The analysts said that the niche segments would be decided on two bases, product and geography. They pointed to the recent in-house merger between Rajdoot Paints and Berger Paints (both of which belong to the House of Dhingras) as a pointer to the fact that the market situation, marked by substantial slowdown, would require companies to undertake substantial restructuring.

The smaller paint companies have also been extremely troubled by the excessive monsoon this year, which extended well into the festive season. Usually, the Diwali season marks the highest sales in the year, with urban areas in particular seeing high offtake. But this year, due to the extended monsoon, the middle class did not purchase high volumes of paint.

Under the circumstances, the larger paint companies are tipped to be able to fight their way through the downturn, but it is believed that smaller companies may have to examine harder options, such as stalling expansion, scouting for equity partners with deep pockets, and rationalising manpower and capacity.

The smaller paint companies have almost, without exception, reported poor results for the first half of the current financial year, and it is expected that the impact of the high raw material prices and extended monsoons will further impact the result for the rest of the year.

INSIGHT

The inverted duty structure wherein it is cheaper to import paint than raw material has taken its toll on the paints industry. Titanium dioxide (Tio2), pthalic anhydride and pentaerythritol are the three major inputs in the manufacture of paints and together they account for 65 per cent (in the ratio of 30:20:15) of the total raw material cost for a paint company. Titanium Dioxide is actually available as anastase and rutile.

Anastase is the thicker quality grade which is extensively used in exterior paints where as the rutile grade is a finer variety used widely in industrial paints and enamels. Shortage in domestic production of Tio2 has forced the paint manufacturers to increase its import. As a result, even Asia Paints has shelved its plans to set up a paint shop at Mahad in Maharashtra.