Axalta shows a helpful picture below of how pricing and costs are moving. All coatings producers are seeing the same cost inflation, some of it energy/hydrocarbon input related and some of it supply chain-related – either for inputs such as pigments or higher costs of getting products to markets. How pricing looks relative to costs is very customer dependent, as shown in the chart below. Auto OEM customers have long lead times on price adjustments and this is why Axalta is signaling the end of the year before prices will be aligned with costs. This of course assumes that costs do not rise again in 2H 2022 as they will also drive a lag in price increases and create a further gap as shown in the “Mobility” bar below. In the more consumer-facing coatings, it is easier to raise prices more quickly and Axalta and others have managed to keep pace with costs. We see the pricing versus costs issue as a much greater headwind for the specialty chemical companies than for the commodity companies and the industrial gas companies – the commodity chemical companies can raise prices more quickly and most industrial gas pricing is on a cost pass-through basis.
Source: Axalta – 1Q22 Report Presentation, April 2022
The second chart below emphasizes the very different market structures for polymers in Europe and the US today versus Asia and a picture that began to develop in late 2020 and has endured ever since. These are supposed to be global and largely fungible markets, and the disconnect was triggered by a couple of events – the first being significant capacity additions in China, which started in 2H 2020 and is ongoing. This capacity adds coincided with a COVID-driven pullback in consumer sending in China, which is yet to correct, lowering domestic demand versus expectations, and a complete snarl-up in global trade, which has been well documented and which have covered in depth. China has a significant polymer surplus and has limited opportunity to move polymers and/or derivatives offshore in higher volumes because of shipping, port, and other logistic constraints. A more normalized freight environment would allow China to close some of the pricing gaps, and this remains a risk to western price premiums as historically you could move almost anything for 20 cents per pound – today the container rate alone is more than that. Better access to the international markets could see China flood the west with basic polymers and their derivatives, but it does not look like logistics will improve soon unless we have a major consumer spending pullback – something we see as increasingly likely and something that is beginning to appear in some earnings reports – see “others” section in today's report.
Source: Bloomberg, C-MACC Analysis, April 2022