Opportunity for Prepaint is Building ... Slowly

By Myra Pinkham, Contributing Editor

Growth in construction pushed demand for prepainted metals into positive territory in 2015, with expectations of further modest gains this year.

Consumption of prepainted metals in the U.S. grew just 1-3 percent last year as strength in building and construction was offset by weakness in other applications, including transportation and consumer goods. Expect more of the same in 2016, predicts Aaron Small, president of the National Coil Coating Association in Cleveland.

Building and construction products account for about 65 percent of the prepaint market, followed by 23 percent business and consumer products, 5 percent transportation, and the balance containers, packaging and other miscellaneous uses, estimates Metal Strategies, Inc., West Chester, Ohio. Coil coaters—be they mills or toll processors—paint coils at high-volume speeds by running them through a coating bath, then curing them quickly in long ovens before rerolling them for shipment to various manufacturers. Coil coating is much more economical than post-painting for products ranging from roofing and siding to car parts. But construction is the bellwether.

“As building and construction goes, so goes the prepaint market,” says Mike Keown, a North American senior vice president and general manager for Aleris International, Inc. “We are still waiting for the housing market to really take off given the impact that would have on such prepainted aluminum applications as rainwear, fascia, gutters and downspouts.”

U.S. construction spending has been rebounding slowly but steadily since early 2011, though it remains well behind the peak levels of March 2006, said Associated General Contractors of America Chief Economist Ken Simonson during a recent webinar. On the other hand, the rate of construction spending has accelerated in recent months. Overall, construction spending was up 14.1 percent year on year as of September, the fastest rate of growth in nine years. That includes a 17 percent increase in home building, a 15 percent increase in nonresidential construction and a 9 percent increase in public construction.

For 2015 as a whole, total construction spending increased 9-12 percent over 2014, Simonson says. This includes spending increases of 9-13 percent in private residential construction, 8-11 percent in private nonresidential construction and 6-7 percent in public construction. He forecasts 6-10 percent increases in construction spending overall in both 2016 and 2017.

“We are looking for another good year in 2016 for the construction industry,” concurs Kermit Baker, chief economist for the American Institute of Architects in Washington. Based on AIA’s Architecture Billings Index, a leading indicator of construction activity 9-12 months in the future, construction spending should be healthy in the coming months.

Commercial construction, the major user of prepainted metal products, will lead the way, says Alex Carrick, chief economist for the CMD Group, Norcross, Ga. He predicts total U.S. nonresidential construction spending will jump 3.8 percent in 2016, including an 8.1 percent increase for commercial buildings and a 4 percent increase in institutional building, but a 4 percent decline in industrial construction.

Many coil coating companies—both independent toll coaters and metal producers with paint lines—are cautiously optimistic they will see modest growth in 2016. “While 2016 will likely be slightly better than 2015, and 2017 will likely be slightly better than 2016, I doubt we will see any spike in demand,” says Kevin Ebert, vice president of sales for Dura Coat Products, Inc., Riverside, Calif.  “Competition is likely to remain keen.”

Suppliers of prepainted metal are most enthusiastic about the product’s growing use in residential roofing, says Dan Knight, NCCA vice president and marketing manager for construction at Steel Dynamic, Inc.’s Flat Roll Group in Butler, Ind. Each 1 percent increase in market share for metal roofing calls for an additional 100,000 tons of metal, plus another coating line to paint it.

About 40 percent of all prepainted metal is used in roofing and siding, says Christopher Plummer, managing director at Metal Strategies. Most of the growth potential is on the residential side, as 90 percent of nonresidential buildings already have metal roofs and fascia.

Within the residential sector, the biggest opportunity lies in roofing replacements, not new construction, says Bill Hippard, executive director of the St. Louis-based Metal Roofing Alliance. Just 5 percent of new homes are built with metal roofs. But nearly 10 percent of the seven million homes that are reroofed each year end up with metal instead of conventional asphalt shingles. The metal reroofing market overall has grown 3 percent over the past three years, thanks in part to the industry’s marketing efforts touting the structural, environmental and design benefits of metal roofing products. About 70 percent of metal roofing systems are made of coated steels, while aluminum has a 15 percent share. Even copper and zinc are sometimes used.

Residential reroofing slowed due to the economic downturn, but has started to recover. The National Association of Home Builders’ remodeling market index held at 57 points in third-quarter 2015, its 10th consecutive quarter of readings above its breakeven point of 50. “This shows the remodeling market is gradually strengthening in what has been a longer-than-anticipated recovery,” says Robert Criner, chairman of NAHB’s remodelers group.

The increase in the remodeling market is driven in part by how long individuals are staying put. On average, homeowners are remaining in their homes for 12 years, compared with the pre-recession average of seven, Hippard says. If the industry is capable of successfully marketing the product’s energy-saving advantages, particularly the use of reflective pigments, prepainted metals ultimately could gain an additional 10 percent of the market for residential roofs, Hippard says.

Growth of prepainted metals for other end uses has been much slower, says NCCA’s Small, who also serves as president of the coil coated services group of Kloeckner Metals. While the Association of Home Appliance Manufacturers reported a 7.4 percent increase in shipments of major appliances through November, prepainted metals’ share of that growth has been more modest. Prepainted coils are widely used to form the wrappers of washers, dryers and refrigerators, as well as other internal parts. “At one time, appliances accounted for tremendous growth for prepainted metals, but it has receded a little over the last decade,” Small says. New applications, such as fingerprint-resistant coatings for stainless steel, could help stem the slide.

Contemporary appliance designs are incorporating a wider range of colors, but not necessarily using prepainted materials. OEMs are looking to offer more colors, but produced in smaller volumes. “Small volumes are not good for prepainted metals,” Knight acknowledges. Small-batch coating is typically handled through post-painting.

HVAC demand is also trending up with construction, but not necessarily to the benefit of coil coaters that apply paint. Greater utilization of powder coatings is taking some market share.

Despite a booming automotive market that produced over 17 million vehicles last year, use of prepainted metals in that sector has been flat, especially for high-end automotive trim, says William Capizzano, president and chief operating officer of ChemCoaters LLC, Gary, Ind. Industry suppliers see future opportunities to supply more prepainted parts to the transportation sector, however.

With growth in prepainted metal demand projected to be modest, the market is likely to remain oversupplied. Despite some consolidation over the past decade, coil coating capacity utilization remains near 50 percent. It has hovered around that number for much of the past 40 years, Capizzano says. “While a coil coater often closes a few paint lines after acquiring another company, there is always someone who will buy those operations and is willing to restart them.” To cite the most recent example, St. Louis-based Precoat Metals acquired the metal coil coating and processing assets of Consolidated Metal Products in Columbia, S.C. last month. Precoat now operates 16 coil coating lines in 14 locations.

The cycle is often repeated because companies have different goals. For instance, even in an environment of abundant capacity, there is logic in Steel Dynamics’ decision to invest $100 million in a new paint line that adds 250,000 tons of annual coating capability to the steelmaker’s Columbus, Miss., facility, observers say. SDI already runs two lines with paint and Galvalume capabilities in Indiana. “This project allows us to provide higher product quality, double-wide steel and access to the southern markets, including Mexico,” said SDI President and CEO Mark Millett during the company’s third-quarter conference call. The new paint line, scheduled for startup in first-quarter 2017, is designed for SDI’s surface-critical, appliance-grade steel, as well as construction-related products.

While SDI is the only domestic steelmaker to have a continuous paint line at a mill location, several aluminum producers, including Aleris, Alcoa, Constellium and Kaiser, also have such capabilities.

“We think there is great value for mills to offer painted products as well as the substrate,” says Keown at Aleris. “This allows us to have full control over the entire process.”

On the other hand, toll coaters have more flexibility as they can paint all substrates and offer a greater variety of coatings and finishes, says Tom Lewis, sales manager at Pittsburgh-based Centria Coating Services. He doesn’t expect other domestic steelmakers to follow SDI’s lead and add paint lines.

Toll coaters have another distinct advantage over mills that operate coating lines. Because they don’t own the metal they paint for their customers, they have been less affected by imports and the declining price of steel and aluminum. The relationship between metal imports and demand for prepainted coils is difficult to parse, say the experts, but imports are expected to ease in 2016, providing some pricing relief to domestic suppliers of coils, coated or not.

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Tuesday, March 20, 2018