Eastern Europe used to be regarded by Western European coatings producers as the buoyant market on their doorstep – in which demand could be depended upon to boost their sales especially at times of sluggish domestic growth.
Now, however, much of Eastern Europe is no longer playing the role of the helpful neighbor. Many countries in the region are having the sort of economic difficulties that are dampening demand for coatings in their Western European counterparts.
In the five years to 2007 GDP growth was in most Eastern European countries more than double that of the annual average for the European Union of 2.5 percent.
Since 2008, the gap in GDP growth rates has narrowed dramatically, with GDP rises in some Eastern European countries even falling below the EU average.
The economies of new Eastern European entrants into the EU have not so far gained the sort of impetus that other Eastern European states have enjoyed from membership. The average rate of GDP growth has declined in Romania and Bulgaria since they joined in 2007.
“Some of the weaker Eastern European economies are taking far longer to recover from the 2008 economic crisis than expected,” explained Armodios Yannidis, vice-president of the Greek coatings producer Vitex-Yannidis Group which has been expanding its decorative paints operation into southeastern Europe.
The Eastern European construction sector, the mainstay of coatings demand, has been struggling to return to the relatively high investment levels before 2008. In some countries construction production has been falling by more than 10-20 percent over the last two years.
In Hungary construction has been recovering this year with production in the second quarter almost 11 percent higher than in the same period in 2012. But this was still approximately 8 percent lower than in 2010, according to figures from Eurostat, the EU’s statistical service.
“The construction sector had been virtually dead until quite recently when there was a small revival in investment,” said one Hungarian analyst.
In Romania a rise in construction activity this year has not yet generated higher decorative coatings sales in value terms. In the first half of 2013 growth by volume went up by 3-5 percent but by value dropped by 2-4 percent due to low prices, said Yannidis.
“Since 2008, when Romania’s decorative paints market was worth €210 million ($295 million) it has been constantly shrinking due to the crisis in the country’s real estate construction sector, the loss of consumers purchasing power and the overall decline in industrial production,” said Yannidis.
In Serbia, due to join the EU shortly, decorative paints sales plummeted by 25 percent last year and have continued to contract by 15 percent in 2013, he adds.
Vitex-Yannidis opened just before the 2008 financial debacle a new €30 million coatings plant at its headquarters in Aspropyrgos near Athens with an annual capacity of 24,000 tons. The strategy was to use the facility to consolidate a leading position in the Greek decorative market while expanding exports in southeast Europe where it had established sales and distribution networks in Romania, Bulgaria and Serbia.
While these Eastern European markets collapsed, demand for decorative paints in Greece went into freefall in the wake of severe government austerity measures to deal with a national debt crisis.
The sales of Vitex-Yannidis dived by half with the company making its first losses in its 80-year history. It has been restructuring to focus more sharply on decorative paints, especially in the Greek market where there are signs that a 55-60 percent slump in sales is starting to flatten out.
“2013 has been a good year for us,” said Yannidia. “Our sales figures are positive – up an estimated 4 percent by the year end-- for the first time for six years. The constant restructuring we have been doing is also paying off and our result will be positive again.”
The company last year extended its toll manufacturing activities at Aspropyrgos to enable other international coatings producers to use it as a base to supply the Eastern European market.
“This type of outsourcing is a sign of companies downsizing their export activities in the region,” explained Yannidis. “We’ve been talking to one company which is thinking of closing a plant. With a toll manufacturing arrangement it can at least maintain some presence in the market.”
Russia is one major Eastern European country that has been attaining growth well above EU average rates in recent years although not so high as the 8 percent annual peaks before 2008. This is reflected in high levels of local demand for coatings.
“Economic growth in Russia has been slowing down slightly this year but it is still the fastest growing coatings market in Eastern Europe,” said Patrik Gallen, head of the coatings business at Bang & Bonsomer, a Finnish-based chemicals distributor whose sales to coatings producers in Russia have been increasing at over 10 percent annually.
“The Russian market has been attracting the leading multinational and regional coatings companies because when demand in much of the rest of Europe is flat this is a major Eastern European country showing some kind of growth,” he added.
Top coatings players have been stepping up their investment in the country. “We are now investing continuously in our business in Russia in the area of brands, supply chain, new products and our distribution network,” said Jan-Piet van Kesteren, AkzoNobel’s decorative paints regional director for Eastern Europe and Africa.
Western European companies have been exploiting a rising preference in the Russian coatings market for quality products. Russia now accounts for around 40 percent of sales of the Finnish coatings company Tikkurila which targets the premium-priced part of the country’s market.
A liking for quality also helps distributors of foreign-made speciality chemicals for which Russian production is unable to meet demand. “We have been able to benefit from the growth of the upper-end of the market,” said Gallen. “The higher the quality of the coatings the more there is a need for speciality chemicals which are not produced locally.”
Poland is another large Eastern European country that has quickly recovered from the 2008 crisis. But even it has been vulnerable to reversals, particularly in the construction sector. In the second quarter of this year construction production dropped to 23 percent below the level a year ago, according to Eurostat.
Russia, which is susceptible to changes in prices of oil and gas, the cornerstone of its economy, has been having its blips as well. The World Bank is predicting that its GDP growth will drop by almost half to 1.8 percent this year but will bounce back to 3.1 percent in 2014.
The underlying trend in Eastern Europe, nonetheless, even in the countries with more thriving economies, like Russia and Poland, is one of steadily decreasing GDP growth rates. As these are closely linked to paint demand, that means slower rises in the region in coatings sales.