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2016 PPG ANNUAL REPORT AND FORM 10-K 11
fiber glass business. Coatings raw materials, which include both
organic, primarily petroleum based, materials and inorganic
materials, including titanium dioxide, comprise between 70%
and 80% of the Company’s cost of sales, excluding depreciation
and amortization, in most coatings formulations and represent
PPG’s single largest production cost component.
Most of the raw materials and energy used in production are
purchased from outside sources, and the Company has made,
and plans to continue to make, supply arrangements to meet the
planned operating requirements for the future. Supply of critical
raw materials and energy is managed by establishing contracts,
multiple sources, and identifying alternative materials or
technology whenever possible. Our products use both
petroleum-derived and bio-based materials as part of a product
renewal strategy. While prices for these raw materials typically
fluctuate with energy prices, such fluctuations are impacted by
the fact that the manufacture of our raw materials is several steps
downstream from crude oil and natural gas.
The Company is continuing its aggressive sourcing
initiatives to broaden our supply of high quality raw materials.
These initiatives include qualifying multiple and local sources of
supply, including suppliers from Asia and other lower cost
regions of the world, adding on-site resin production at certain
manufacturing locations and a reduction in the amount of
titanium dioxide used in our product formulations.
Our global efforts to reduce titanium dioxide consumption
have been successful to date and are expected to continue.
Titanium dioxide is a raw material widely used in the paint and
coatings industry as a pigment to provide hiding, durability and
whiteness characteristics. PPG purchases both sulfate-grade and
chloride-grade titanium dioxide from suppliers for use in
coatings formulations. The Company has undertaken a strategic
initiative to secure and enhance PPG’s supply of titanium
dioxide, as well as to minimize PPG’s use of this raw material.
PPG possesses intellectual property and expertise in the
production and finishing of titanium dioxide pigment. PPG
intends to continue to leverage this technology and intends to
develop innovative supply solutions through technical
collaborations, joint ventures and licensing arrangements with
other interested parties.
PPG signed a license agreement with Henan Billions
Chemicals Co., Ltd. (“Billions”), under which PPG has licensed
certain chloride-based titanium dioxide technologies for use at
Billions’ titanium dioxide refinement facilities in China. In
addition, PPG has signed long-term purchase agreements for
chloride-grade and sulfate-grade titanium dioxide with Billions.
In late 2015, PPG began using chloride-grade titanium dioxide
produced by Billions using PPG’s licensed chloride-based
technology. PPG’s usage of Billions’ chloride-grade titanium
dioxide increased in 2016. PPG is using the chloride-grade
titanium dioxide to produce standard grades of coatings
products. Under the license agreement, Billions has the right to
sell chloride-based titanium dioxide to other parties.
We are subject to existing and evolving standards relating to
the registration of chemicals which could potentially impact the
availability and viability of some of the raw materials we use in
our production processes. Our ongoing global product
stewardship efforts are directed at maintaining our compliance
with these standards.
Changes to chemical registration regulations have been
proposed or implemented in the EU and many other countries,
including China, Canada, the United States, and Korea. Because
implementation of many of these programs has not been
finalized, the financial impact cannot be estimated at this
time. We anticipate that the number of chemical registration
regulations will continue to increase globally, and we have
implemented programs to track and comply with these
regulations.
Given the recent volatility in certain energy-based input
costs and foreign currencies, the Company is not able to predict
with certainty the 2017 full year impact of related changes in
raw material pricing; however, PPG currently expects overall
coatings raw material prices to increase modestly in 2017, with
impacts varied by region and commodity. Further, given the
distribution nature of many of our businesses, logistics and
distribution costs are sizable, as are wages and benefits but to a
lesser degree. In aggregate, raw material feedstock prices in
2016 were lower, including oil-related products, although some
products experienced price inflation late in the year. Since oil is
traded in U.S. dollars globally, the strengthening of the dollar
against a wide variety of foreign currencies reduced some of the
oil-related benefits in certain regions, and in certain cases
resulted in inflationary raw material prices.
Research and Development
Technology innovation has been a hallmark of PPG’s
success throughout its history. Research and development costs,
including depreciation of research facilities, were $487 million,
$494 million and $499 million during 2016, 2015 and 2014,
respectively, and totaled approximately 3% of annual sales in
each year. We have obtained government funding for a small
portion of the Company’s research efforts, and we will continue
to pursue government funding where appropriate.
PPG owns and operates several facilities to conduct
research and development relating to new and improved
products and processes. In addition to the Company’s centralized
principal research and development centers (See Item 2 of this
Form 10-K), operating segments manage their development
through centers of excellence. As part of our ongoing efforts to
manage our formulations and raw material costs effectively, we
operate a global competitive sourcing laboratory in China.
Because of the Company’s broad array of products and
customers, PPG is not materially dependent upon any single
technology platform.
The Company seeks to optimize its investment in research
and development to create new products to drive profitable
growth. We align our product development with the macro
trends in the end-use markets we serve and leverage core
technology platforms to develop products for unmet market
needs. Our history of successful technology introductions is
based on a commitment to an efficient and effective innovation
process and disciplined portfolio management.
Patents
PPG considers patent protection to be important; however,
the Company’s reportable business segments are not materially
dependent upon any single patent or group of related patents.
PPG earned $15 million, $20 million and $29 million in 2016,
2015 and 2014, respectively, from royalties and the sale of
technical know-how.