By Herbert Martinez
A headache has become for Venezuelan formulators the restrictions of their government on access to official dollars to be able to import raw materials necessary to produce their coatings.
The paperwork that must be followed to obtain the North American currency has been one of the obstacles that the Venezuelan painting industry has had to overcome to generate growth figures. While it is true that official measures have benefited producers of raw materials by protecting domestic industry, it is also true that these same measures have affected the international competitiveness of the sector.
State regulations that have failed to effectively control the specter of growing Venezuelan inflation that has proven to be one of the highest in Latin America, registering rates of up to 21% as a result of the prices of the dollar and the increase in circulating money. To this are added the variations in the growth of its GDP that in 2004 was 18.3%, 10.3% in 2005, 10.3%, in 2006 and was expected to be 7% on average in 2007.
This behavior of the Venezuelan economy has generated some uncertainty regarding the growth of the paint sector for this year. The figures of the development of the sector last year are very similar to those of 2006 since the percapita consumption of paint remained at 1.81 gallons and production went from 46 million gallons (2006) to 48 million in 2007.
To take stock of what happened in 2007 and the expectations for this year, we interviewed Juan Nuccio who is the executive president of Anticorrosivos y Acabados AYA S.A. and at the same time is the president of the Paints Committee of the Venezuelan Association of the Chemical and Petrochemical Industry (Asoquim).
Balance Sheet 2007
What is the balance you make of the Venezuelan painting industry last year?
Venezuela has gone through some very difficult traumas to obtain raw materials and get product to our distribution network and customers. We have had a government-controlled dollar that is already more than 3 years old and has long stood at 2,150 bolivars. In order for all paint manufacturers to have access to that currency, they have to comply with very complicated and cumbersome legislation.
After you have access to currencies, the government page to manage them called Cadivi, does not remain open all day because it is so requested. At night it is when it is less visited and then we have to have staff working at those hours to be able to have access and request the currencies.
All these complications mean that small or less organized companies that do not have the ability to access these currencies, are totally out of market and competitiveness. This is because they have to buy raw materials at a dollar not regulated by the government, which at the moment is between 6,000 and 6,500 bolivars per dollar.
This year what has made the paint industry difficult is not the market hunt or the raw material, but to be able to have access to the raw material and this is what makes the difference. The company that is able to get ahead with all the labor and legislative problems is successful because it is the one that is able to deliver product to customers. These were the setbacks.
On the other hand, the market definitely grew in two ways: first, in units. Always the Venezuelan market grows 3 points approximately on the points that the GDP of the country that was expected for last year to be between 6 and 8%. Then the paint would be growing between 9 and 10%.
Secondly, there was also a growth in product quality. The architectural lines of first and second quality, grew more than those of third or fourth quality.
Restriction on the dollar
How much did the currency restriction affect the growth of the sector?
This access is linked to resolution 195 of the Milco (Ministry of Light Industries and Commerce) that protects the national industry. For example, if kaolin is manufactured here, the government does not give a dollar to import this product. That makes a big difference in access to raw materials.
By this I mean that importing paint as a raw material for users became more difficult this year and that helped Venezuelan manufacturers place more product. But the raw materials used by paint manufacturers that were affected by that resolution had to be adapted to domestic raw materials.
Venezuela today adds a very complicated reality because it has a high consumption and a poor supply.
There are other legal systems for access to foreign exchange that is through a swap of shares but this is a much more cumbersome process, which ends in the only access for the purchase of raw materials is the official dollar.
Market growth
What were the figures for the growth of the sector in 2007?
We estimate that it grew by 9 or 10%. It would be expected to have closed the year close to 48 million gallons. Venezuela has 28 million inhabitants and its per capita consumption remained at 1.81 gallons, the same as in 2006. Prices remained in relation to Venezuelan inflation, as the increase was 16%.
What is the composition by coating lines and which ones grew the most?
Architectural coatings were the ones that grew the most because Venezuelans had more access to money in the expense account and the best way to remodel your house is painting. The other lines that grew were those of industrial maintenance and automotive refinishing. From September to September more than 300,000 new vehicles were sold and 100,000 went to the used market and, as a maintenance policy, these must be painted for sale.
Last year, in general terms, the consumption of coating lines was presented as follows: Architectural 62%, chemical coatings (metal furniture, electrical equipment, auto parts, packaging) 14%, industrial and marine maintenance 9%, original automotive and refinished 5%, wood 2% and traffic and road demarcation 2%.
How did oil price increases affect commodity prices?
Here in Venezuela there is nothing linear with respect to international oil prices. Raw materials directly from hydrocarbon have remained stable.
What has increased the international price of raw materials is not the cost of transportation but the shortage of raw materials from the consumption of China and India.
To obtain raw materials such as zinc powder or cuprous oxide, prices have skyrocketed significantly by 30 and up to 60% because there is much less supply than demand: that does cause those raw materials and the cost of freight to rise.
What percentage of raw materials are domestic and which is imported?
The sector that grows the most is the architectural sector that has a consumption of 70% of the total, so its raw materials, more than 70%, are made up of resins and extensions. The former are manufactured locally in Venezuela and of the latter 70% is local and 30% is unimported.
More than 60% of the content of architectural painting is national. In the other lines of paints their raw materials are imported in their entirety such as epoxies, acrylics, polyurethanes, special solvents, etc. everything comes from outside.
Competitiveness
How competitive are domestic coatings relative to international licenses?
Licenses have always existed because oil industries require the latest technologies. Locally the latest technology in coatings is manufactured. Being able to import finished product to enter the Venezuelan market is impossible because being those products manufactured here do not have authorization for preferential dollar to enter. Anyone who wants to put a product made outside here would have a price three times higher than one manufactured here. There is no competitiveness there.
What are you competing with today in Venezuela? Quality, price, distribution?
Each sector has its niche. There are sectors that go in price such as architectural paintings of third or fourth quality that point to the best economic offer; those of first or second quality point to the value of the brand; in the industrial and marine market, those with the most advanced technology, internationally recognized and approved, prevail; for wood compete those with the most versatile coatings; for road demarcation those that have greater performance; for chemical coatings, paints that have the greatest number of properties that meet the specific requirements of each client.
Each sector has its characteristic that allows it to compete: price, brand, performance... each niche has its own.
Macroeconomic management
How has macroeconomic management affected the sector with GDP growing above 7% and inflations of more than 16%?
We have a market with a growing demand and in it there is a repressed demand
due to the difficulties in accessing raw materials. We are going to have a market imbalance where obtaining product is much more difficult than selling it. When supply is below demand, price levels rise and throughout Venezuela it has happened.
Although the government has tried to maintain prices in main items, the entire Venezuelan economy and even the European and Latin American ones suffers from the phenomenon that demand is greater than supply and that ends up including inflation. However, the paint industry within all that difficulty, is one of the most stable industries that has been able to bring products to the market. Actually, there is no shortage in the paint market in Venezuela.
Didn't that reduction in supply lead to an increase in the price of paints?
It should have happened. The last quarter was expected to have increased but paint manufacturers prepared very well to store raw materials and respond to the demand that occurs in Venezuela in the last four months of the year. 60% of paint consumption occurs in that period because in Venezuela the sale of paint is seasonal. This preparation prevented the price from rising because there was not so much difference between supply and demand.
Outlook 2008
What are your outlook for 2008 in terms of growth, competitiveness and prices?
If we look in the rearview mirror, we have that Venezuela grows 3 points above GDP and decreases 2 points below each point that GDP decreases. That means that if GDP grew last year by 6% the paint industry has historically shown it should grow 9%. But if, on the other hand, GDP were to decrease by 2%, the industry would decrease by 4%.
We still have no clarity on what will happen this year. Manufacturers have been prepared on the environmental issue. They have developed more environmentally friendly manufacturing methods and have been oppressing processes and technologies so that in the quality interesting surprises of new products are expected. With regard to the supply of products, this remains uncertain because we depend on a regulatory body that authorizes us or not to import raw materials, and all technology is based on being able to import those raw materials with state-of-the-art technology that allows us to manufacture products.
Venezuela's competitiveness to the world literally doesn't happen, because it doesn't export paint substantially. In the same way that the dollar protects when importing raw materials, it unprotects the Venezuelan exporter by not having a value that allows it to be competitive. So exports this year do not have any good path.
Regarding the issue of supply and demand, we do expect that the Venezuelan GDP is, as the official entities say, over 6%, so a growth of 9 to 10% would not surprise us.
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