Europe Reports

Looking beyond the recession

By Sean Milmo | March 6, 2009

Anticipating economic recovery, Western coatings companies continue to invest in growth markets like Russia.

The economies of many countries in Eastern Europe, including Russia and its neighbors, have dragged down into the recession after several years of strong growth in their gross domestic product (GDP).

In February the region was on the edge of a full-blown economic crisis as investors pulled out of the area, sending local currencies into a sharp decline, which prompted calls for a rescue package provided by the International Monetary Fund (IMF).

However, Western and domestic coatings companies are already planning for the economic recovery in the region because its battered economies are expected to be among the first in Europe to come out of the downturn. Coatings will be one of the first sectors to benefit from this revival.

A quick recuperation is predicted to take place in the ten Eastern European (EU 10) states, which in recent years have joined the European Union (EU).

The London-based European Bank for Reconstruction and Development (EBRD), a public-sector body that invests funds into companies and development projects in Eastern Europe, expects that growth in its 30 countries will be static this year against a 4.8% increase in GDP in 2008.

The World Bank has predicted that the economies of six of the EU 10 countries-the Czech Republic, Poland, Bulgaria, Romania, Slovakia and Slovenia-will grow by between zero and two percent this year.

It is also forecasting that although output in the whole of the Eastern European region may suffer a small decline this year it will return to growth in 2010. Overall the area's economic performance will be better than that of Western Europe's.

Outside of the EU Russia's government is conceding that its GDP will fall by more than two percent this year while some analysts expect that that of neighboring Ukraine could decline by more than five percent.

But during the downturn across Eastern Europe some coatings segments, particularly for decorative paints, which comprise a major proportion of the total market, are proving to be surprisingly resilient.

Kingfisher plc, a UK-based retail company with a chain of DIY stores in Eastern Europe, reported strong sales growth in the region in the fourth quarter of its fiscal year ending January 31, 2009. In the full year like-for-like sales, after excluding factors like new stores and currency fluctuations, went up by 5.5% in Poland and 17% in Russia, where the company now has seven large stores.

"Both the Russian and Polish DIY markets are very fragmented and relatively new," said a Kingfisher official. "People in both countries have a strong interest in improving their homes after years of neglect. In Russia the government has handed over large numbers of state-owned homes to their occupiers who are now trying to catch up with their improvement after many years of underinvestment. Levels of personal debt are comparatively low so there is more disposable income to be spent on homes."

Even in Eastern European countries with static or declining economies this year, the downturn is an opportunity for Western coatings companies active in the area to reinforce their presence in preparation for the recovery.

Some economists are forecasting a rapid rebound in Eastern Europe once international demand starts to revive, particularly in Western Europe. The economies of most Eastern European countries are dependent on exports to the richer parts of Europe.

The current financial turmoil gripping Eastern Europe has driven down the value of its currencies so that, on top of its low labor costs, the region is becoming even more cost competitive in global markets.

"The weaker currencies of Eastern European countries will make it easier for their economies to bounce back quickly," said David Thomas, chemical markets analyst at Oxford Economics, a forecasting consultancy in Oxford, England. "Coatings companies in Eastern Europe importing high value chemicals will have to pay more for them because of depreciated domestic currencies. But once demand picks up this extra cost will be more than offset by a rise in sales of downstream exporting customers."

Major markets for industrial coatings in Eastern Europe include automotive, metal and wood products. The region has experienced a big surge of investment in car plants in recent years while countries like Poland and Russia are major exporters of furniture and other wood items.

"We may see Eastern Europe get back to annualized trend growth of approximately five percent by as early as the fourth quarter of this year," said Thomas. "Inventories will be low and when demand begins to recover buyers will want to go to where costs are low. Eastern Europe will be well positioned to respond to that trend."

Optimism among economists and foreign coatings and other industrial companies about the medium- and long-term futures of the Eastern European economies partly stems from the rapidity with which they have rallied after previous financial meltdowns. After Russia's financial markets collapsed in 1998 triggering a five percent dive in GDP, the country recorded growth rates of 6.4% and ten percent in the next two years.

The recession is not deterring Western coatings and raw materials suppliers from building a strong position in terms of production and logistical capacity in Russia.

"We are sure that, in spite of the world economic crisis, it is important we continue to invest in markets with high potential such as Russia," said Cheryl Martin, vice president and general manager for paints and coatings materials at Rohm and Haas when the company recently opened a coatings additives plant in Moscow.

BASF Coatings has just started operating a 6,000 ton-a-year plant for basecoats and clearcoats at Pavlovskij Posad, near Moscow-the first OEM coatings facility of an international paint manufacturer in the country. The company already has production capacity for coil coatings in the country.

The OEM unit is initially making solventborne paints but will be able to switch to waterborne basecoats at any time.

"Despite the economical worldwide crisis, Russia is still an attractive market and location for the production of cars," said Semen Beylakov, head of BASF Coatings in Russia. "Our new site expands the European production network for automotive paints and also offers its customers local support for application techniques and laboratory services. The production line puts us in a strong position for current and new business. We are now in a strong position in the region and are well prepared for the future."

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