A Quarterly Newsletter from the UAE and Oman member firms of the PKF International Ltd.

VOL 13, Issue 3 July 2011

The Paint Industry in the UAE

‘When I see a colour or hear a sound, I am aware of something, and not of nothing.’ – Charles D. Broad

The paint industry in the UAE has experienced phenomenal growth in the pre-recessionary period, exhibiting year-on-year growth rates of over 30%. However, since 2008, the significant slowdown in the projects market coupled with the rise in cost of raw materials has adversely affected the paint industry, resulting in lower sales, tightening of margins and delayed payments.

Paint or coating is a covering that is applied to an object to protect it or change its appearance. The material on which the coating is deposited is usually referred to as a substrate. The two main functions of paints and coatings are:

  • protect the substrate from damaging temperature, moisture, chemicals, or other elements
  • enhance the physical appearance of the product by providing a distinctive colour or design on the substrate

The global paint industry comprises of decorative, protective, marine and Original Equipment Manufacturer (OEM) coating. In the UAE, the first two segments represent approximately 85% of total sales. The manufacturing process of paint involves the mixing of pigments, solvents, resins and additives in various proportions.

Industry characteristics
Key characteristics of the UAE paint market are briefly discussed below.

Raw materials: On an average, raw materials account for between 50% and 60% of sale price and are mostly imported. Although international raw material suppliers have increased their prices by 50% in the last two years, this increased cost has not been fully passed on to the consumer, thereby exerting pressure on margins. Between 300 and 400 raw materials are utilized for the manufacturing. High cost and erratic availability of raw materials mark the UAE paint industry.

Pack sizes: Paint products are generally sold in sizes of 1 litre, 1 gallon and 5 gallons. More than 50% of sales in this industry take place directly from the factory, and are therefore in bulk packs of 5 gallons. In the retail segment, the most popular pack size is 1 gallon. Market trends have suggested that higher capacity environment friendly drums may be introduced in the future to save on packaging and transport costs.

Price sensitivity: The average prices of decorative paint products range from AED10 to AED18 per litre and for protective coatings between AED18 and AED25 per litre. Certain specialized products go up to AED50 or more per litre.

Credit terms: Credit extended by manufacturers for real estate projects are usually 90 days and above, depending on the customer and size of the order. In the retail sector, however, majority of the sales are conducted on cash basis and credit is only extended to a few regular customers.

Seasonality of product sales: Direct factory sales to projects and sale of protective coatings are independent of the seasons. However, distributor/retail sales for decorative products do display seasonality, and are usually greater during summer holidays, winter and Ramadan period.

Warranty period: Warranty for paint products can normally range from as little as a year to even a lifetime warranty depending on the type of product. However, time consuming warranty claims documented by most manufacturers make it difficult to claim warranty.

Prevalent environmental rating standards: The three popular rating tools used in the UAE are the LEED rating introduced by US Green Building Council; BREEAM rating by the British Research Establishment and the Pearl Rating introduced by Estidama Approved by any of these rating agencies is currently voluntary in the country.

UAE paint industry – a glimpse

The paint industry witnessed significant growth in the five years ended 2008. The year-on-year growth in the industry had been around 30% to 50% in 2007-2008. The industry has witnessed lower demand and decline since 2008 and witnessed a 5% growth in 2009 due to a downturn in the construction and real estate sector.

The paint industry in the UAE was estimated to be between AED1.5 billion and AED1.7 billion in 2010. There appears to have been no marked improvement in the market in 2010. However, industry experts believe that the market may have witnessed some improvement in 2011 due to the increased oil and gas activity in the region and forecast supply of around 500,000 residential units.

Local manufacturing: There are two key international brands both of which have a local manufacturing presence for decorative and protective coating paints. However, the marine coating market is more competitive with five key players of international repute. Nonetheless there are numerous other local manufacturing companies carving out a niche for themselves in the market. These companies mainly concentrate on the decorative segment, leaving the specialized protective coating segment to the international companies who have well established global R&D centres.

Exports: According to industry sources, approximately 10%-15% of the locally manufactured paint products from the UAE are exported.

(Source: PKF research)

The biggest export destinations from the UAE are Kuwait, India and Iran which historically constitute almost 40% of the total exports.

Imports: Import of paints in the UAE is relatively small as compared to local production capacities and accordingly re-exports are also limited. Only some paint products are imported, mainly for their aesthetic qualities such as rich lustre, colour, etc. Imports comprise an estimated 2%-4% of the overall paint demand in the UAE.

Local production capacity: The majority of the local and international manufacturers have production facilities located in the UAE and other GCC countries. Collective annual installed manufacturing capacity of the UAE is approximately 500 million litres per annum. The bulk of the UAE demand is met from local producers and the reliance on imports is mainly for specialised paints.

Demand-supply: It appears that the UAE currently witnesses an excess of production capacity with demand remaining stagnant and even witnessing a significant reduction on account of the decline in the real estate and construction sector. Consequently, the local producers are exploring opportunities in other regional countries for sustaining growth.

Industry segmentation
The UAE paint market can be categorized into decorative, protective, marine and OEM coating segments. The estimated share of the different segments is depicted below.

(Source: PKF research)

Decorative segment: Also known as architectural paints, they are used primarily for their aesthetic properties such as colour, texture, finish, etc. Decorative paints are primarily utilized in real estate and infrastructure projects. They can be further classified as interior and exterior decorative paints based on application or as emulsion and enamel paints based on content. Key colour preferences within various segments of paint products are summarized below.

(Source: PKF research)

Protective coatings: The most common use of protective coatings is for corrosion control and protection against fire, heat, UV rays, water seepage, skidding, marks, etc. Protective coatings are based on global colour standards and the majority in the country follow the RAL and BS colour standards. Protective coatings are mainly used by manufacturing industries, oil and gas industries and steel and associated industries.

Marine coatings: Marine coatings are applied to marine structures such as offshore oil rigs, buildings in the vicinity of marine bodies, ships, recreational boats and yachts. Coatings offer protection against fouling, corrosion, reactive chemicals, heat, UV rays, etc. Marine vessels require specially formulated marine coatings for use above and below the waterline. Darker colours such as black are chosen for container ships whereas lighter colours such as different shades of white are chosen for the decorative segment mainly used in yachts, cruise boats, etc. The manufacturer is instructed to supply their products at any port of call of the vessels and thus dynamism exists in the marine market. Such orders are placed centrally through the manufacturers European or American central office. Local demand can also arise from the various dry-docks where vessels are being refurbished as part of ongoing repair and maintenance schedule.

OEM coatings: OEM coatings include powder and radiation cured coating which is generating substantial interest in the UAE. Since the region has traditionally been an export hub rather than a production centre, there are only a few industries which use OEM coatings in the UAE.

Asa consequence of the diversification away from the oil sector in the UAE, innovative specialized coatings may be required to support the growth.

Industry innovations

The paint industry globally has evolved from the basic purpose of providing protection for surfaces to incorporate innovations such as improved environmentally “green” solutions primarily aimed at protecting the surrounding environment as well.

Green innovations – Manufacturers in the UAE have introduced various green innovations to the local paint industry, in line with international standards. Some of these are reduction in embodied Carbon dioxide, Volatile Organic Compounds, waste and water usage.

Nanotechnology – Usage of nanotechnology in paint products helps the users to achieve better energy ratings for buildings, better indoor air quality and fewer allergy-related illnesses. Nano-coatings can be anti-graffiti, anti-static, anti-mist or anti-glare.

Product innovations – Manufacturers are attempting to produce paints that have more than one distinguishable quality. For example, a 1 coat paint system instead of the regular 3 coat paint system is being developed and may be introduced into the UAE.

Don’t confuse the art of the possible with the art of the profitable. Although some of these innovations may not see the light of day immediately, nonetheless it certainly gives a definite direction to the future of the UAE paint industry.

Outlook for the UAE paint industry

The paint industry has switched back to reality from a dream run between early 2006 to mid-2008 when growth was in double digits. However, much has changed since the “wonder” years and consequently the industry’s outlook has had revisions more suited to the current business environment.

Industry demand generators – The main demand drivers for paint products in the UAE are growth in real estate and infrastructure projects, the oil and gas sector, manufacturing industry, hospitality and marine sectors.

Industry outlook – Competition in the market is certainly high with around 50 or more paint manufacturing companies based in the UAE. Given that the UAE market is already over supplied, the paint market may be increasingly viewed as congested and the manufacturers may well continue to export until local demand and construction activity pick up. On the other hand, specialized segments in protective coatings in the UAE market may post a growth in the next couple of years due to the increased manufacturing and oil
and gas activity in the country, and the reduced activity in the real estate sector.

In conclusion, a focus on innovation, integration and sustainability may be the key to a promising future for the UAE paint industry.

(This article has been contributed by Ittira Chandy, Assistant Manager in the Management Consulting Department.)