Russia is once again one of the fastest growing coatings markets in Europe with the strong likelihood that it will soon be the region’s largest by value.
However there are doubts about whether it will be able to keep up the pace of expansion. Another key question is how much Russian coatings producers will be able to take full advantage of growth of their domestic market in the face of intense competition from coatings companies elsewhere in Europe, particularly the European Union.
The country with a population of 142 million has been vulnerable to global economic downturns because of its reliance on massive gas reserves and to a lesser extent oil production capacity.
Russia’s economy tends to do well at times of rising oil and gas prices, but it struggles when oil and gas demand is plunging.
When the world went into recession in 2008, the Russian economy collapsed. Gross domestic product (GDP) whose level is the main influence on coatings demand dropped by almost eight percent in 2009, with industrial production diving by 11 percent and manufacturing by 16 percent.
However the impact on the coatings sector, currently worth around $4 billion, was even greater than that on GDP levels. Coatings production went down in 2009 by almost 15 percent and demand by 17 percent, according to official Russian statistics.
The economy has now bounced back. GDP rose by 3.7 percent in 2010 and is expected to increase at around four percent in 2011 and the following year. But with coatings the trends have been reversed with production and demand rising well above GDP rates.
Coatings production soared by 22 percent in response to a 27 percent rise in total consumption to 1.1 million tons, close to its pre-recession levels. Paint imports went up by 25 percent while exports dropped by 21.5 percent as booming domestic demand sucked in coatings normally destined for foreign markets.
The market has continued to grow at a strong pace in 2011 although not as rapidly as last year. “ The main driving force behind the growth is the growth of GDP and the stable rouble (the Russian currency),” said Janno Jaju, senior vice-president responsible for the Russian business of Tikkurila, the Finnish coatings company, a third of whose annual sales are now in Russia.
Imports made up around 25 percent of the Russian coatings market last year, while in volume terms the share is around 20 percent. In addition a large amount of coatings raw materials are imported because of the shortage of production capacity in resins, pigments, additives and other speciality chemicals.
An increasing proportion of local coatings are made in plants owned by foreign companies, mainly from the EU from where investment in coatings and related sectors has steadily been increasing in recent years.
This investment has given foreign producers a strong position in the Russian market, particularly in sectors for added-value products.
Tikkurila, which has two plants in Russia and a third in neighbouring Ukraine, is market leader in decorative paints with an 18 percent share, well ahead of the Russian producer Empils in second position with seven percent.
In addition to investing in production facilities, the Finnish company has put money into marketing, distribution and training of staff to strengthen its services backup. It is the most well known brand in Russia with an awareness of 40 percent.
In decorative paints and industrial coatings, in which it has a smaller presence, it is focusing like other foreign companies on the premium end of the market where growth is fastest. “(We) believe demand is gradually moving towards high quality products in the medium-to-long term due to increasing quality expectation,” said Paju.
With its global Dulux and Sadolin brands, AkzoNobel also has a big presence in the Russian premium decorative paints sector while Germany’s Caparol is another player in the sector in which Russian producers have made virtually no inroads.
AkzoNobel has also been expanding sales in a range of other sectors in Russia, such as marine, protective, powder, wood and automotive coatings. “(We) plan substantial growth of our activities there in the years to come,” said a company official.
Hempel, the Danish-based industrial and decorative paints producer, is the latest EU company to invest in its first manufacturing facility in Russia where it has been building up a distribution and marketing infrastructure.
“We’ve had a very good experience with our organization in Russia and (we) have become well established in the market,” said Kim Junge Andersen, Hempel’s chief financial officer. “This plant will significantly increase our ability to service our customers in the region.”
In most coatings segments Russian producers have tended to concentrate on the low and medium priced categories. They have also taken advantage of their relatively large-scale production plants to export coatings and raw materials to neighbouring central Asian countries.
When domestic demand slows down, exports tend to go up as a proportion of output. In 2009 they accounted for around 12 percent of production, while during last year’s rapid growth in consumption they fell to 7.5 percent.
However Russian coating companies are gradually becoming more competitive in their own market as they invest in new process and product technologies.
Empils based at Rostov-on-Don has been modernizing its production plants and upgrading its coatings in the decorative, wood and pipe coatings sectors. In particular it has been increasing its capacity for waterborne coatings for which there has been strong demand in Russia.
Last year its coatings sales went up by six percent while those for water-dispersion paints rose by 30 percent. The company is expecting paints and varnish sales to rise by around 15 percent in 2011.
Russian Coatings Corp., Yaroslavl, another leading domestic producer, says it has been making “substantial investment” in the upgrading of its existing manufacturing processes and in new production capacity, particularly in categories like waterborne and powder coatings. Last year when sales rose by 15 percent, output of waterborne and powder coatings went up by 45 percent and 64 percent respectively.
The company is well positioned to exploit future growth in OEM coatings, which is likely to be the most buoyant sector for higher value paints. Since 2006 it has had a joint venture in automotive coatings with DuPont, which has given it access to Western technology.
The Russian vehicle market is expected to regain its pre-recession peak next year after sales plummeted by 50 percent in 2009. It will then be on track to become Europe’s largest vehicle market, according to a recent study by AutomotiveWorld of the UK. Last year car sales in Russia rose by 30 percent while they are expected to rise by 20 percent in 2011.
An expanding Russian construction market could potentially trigger a huge rise in volume demand for paint. But the sector has still not fully recovered from the recession with utilization rates in the Russian construction industry at only 60 percent in the first half of this year compared to the pre-crisis level of 68 percent, according to PMR Publications of the UK.
The Russian government has drawn up a large-scale investment program to renovate the country’s dilapidated housing stock, a lot of which has not been repaired for decades.
Housing and other investment programs will depend on oil and gas revenues. Russia’s coatings sector will be hoping that oil and gas prices at least remain steady over the next several years so that the strong demand for paints continues uninterrupted.