08.21.23
As Russian dependence on imported raw materials remains tight, a downward rally of the national currency, and the Central Bank's actions to countervail it, are expected to make the coatings business suffer.
The Russian currency has weakened by 26% this year as a result of a collapse in export revenues and growing budget spending, making it the third worst-performing global currency this year, alongside Argentina's peso and Turkish lira.
The Russian ruble briefly notched 100 to the U.S. dollar, a psychological barrier in early August, forcing the Central Bank to interfere and dramatically raise the key interest rate from 8.5% to 12%.
The Russian coating industry historically heavily relied on raw material imports, including from the European Union. In 2022, supplies from Western countries have been primarily disrupted, owing to sweeping sanctions imposed against the Russian chemical industry.
Occasional reports indicated that Russian coatings companies partly switched to import from 'friendly' countries, primarily China. To some extent, parallel import of Western raw materials through third countries like Turkey and Kazakhstan helps to compensate for the lack of direct shipments, though concrete figures remain unknown.
How the Russian coatings industry's dependence on foreign raw materials changed due to Western sanctions is unclear.
Eugeniy Vysotsky, director of the analytical center under the Russian national union of building materials and industry, estimated in September 2023 that the economy segment of Russian coatings manufacturers had a reliance on imported raw materials close to 80%. He added that in the medium-price and premium segments, this figure was much lower, at around 20% to 30%.
JSC Functional Materials, a St. Petersburg-based raw material supplier, reported that roughly 70% of raw materials in the Russian coating industry remained imported, citing calculations of the Russian coatings industry association Centlack.
While the beginning of 2023 appeared to be quite successful for the Russian coatings industry, the second half of the year made market players look into the future with concerns, said Olga Andrutskaya, editor of the Russian magazine Coatings and Their Applications, referring to the slump in the exchange rate of the Russian currency.
"In our case, this means that imported raw materials will dramatically rise in price. And there is almost nothing of our own," Andrutskaya said, adding that in light of this, there are thoughts on how to use what was created during the years of the planned economy and improve "the properties of some materials of mass demand".
For the Russian coatings industry, which generates income in rubles and pays for imported raw materials in dollars and euros, this trend meant a nearly 20% to 30% drop in production costs.
The positive currency exchange dynamics are believed to be one of the key factors helping the Russian coatings industry to successfully make it through turbulent 2022. Last year, Russian coatings production stood at 1.4 million tonnes, only 3.4% lower compared with the previous year, the Russian state statistical service Rosstat estimated.
Quite a few market players expected the decline to be more dramatic, especially in the wake of a catastrophic slump in demand in the automotive coatings segment, as all Western carmakers shut their plants in the country.
However, as the Russian ruble weakened against the dollar, the cost of imported raw materials for Russian business has nearly doubled over the past year. Though the currency exchange swings had some positive sides for the national budget, they have had a vastly distressing effect on the Russian population and business.
"Exchange rate volatility undoubtedly has both a psychological and a physical impact on markets and society: though import substitution programs are actively promoted, Russia remains too dependent on imports of many categories of goods, which are purchased in foreign currency", commented Yevgeny Tomilov, Senior Analyst at the Moscow-based think tank CORE.XP Market Research.
"The exchange rate volatility increases inflationary risks, affects the production costs," Tomilov said, adding that accelerated inflation will also force some share of customers to switch to cheaper products.
Understanding these risks, the Russian Central Bank jacked up the key interest rate to 12% to support the battered ruble. In the long run, this is likely to be another blow to the Russian economy since the cost of loans for business is going to surge, while a sharp rise in the interest rate on mortgage loans could undermine the demand for building raw materials, including coatings, according to local economists.
"Banks will once again raise interest rates on loans, which will accordingly increase the payback period and increase the cost of money for business development," stated Viktor Solntsev, Associate Professor of the Department of Corporate Governance with the Moscow-based RANEPA institute, adding that such a sharp rise in key interest rate made business cheaper.
In general, he assumed, Russian exporters should benefit from the current exchange rate dynamics. Importers are found themselves on the losing side.
"The Soviet chemistry school was one of the best. It was pretty much destroyed, but it could have not be eradicated to the end. For its revival, a new chemicalization of the national economy is needed," she said, expressing hopes that the industry would get the proper attention of government officials and state aid in required quantities, including on various research and development initiatives.
Some Russian raw material suppliers are already running some projects aimed at partly substituting imports on the domestic market.
During the International Exhibition Interlakokraska-2023 in March 2023, JSC Functional Materials presented the ultra-white filler pigment WPS 02. The company said that the additive is used in the production of coatings and thick-layer decorative materials. The pigment was said to be able to partially replace expensive titanium dioxide.
Replacing 10% to 20% of titanium dioxide with the pigment lowered the cost without compromising the quality, the company said, adding there were no analogues for WPS 02 in Russia.
In 2023, Crimean Titanium, a Russian titanium dioxide manufacturer, nearly tripled output to fill the gaps in the domestic market, Bashkir Soda Ash Company, the parent company of Crimean Titanium, said. In the meantime, there are signs that titanium dioxide will be in short supply in Russia for the time being. Siberia Titanium has recently disclosed a decision to postpone the construction of a factory in Tomsk Oblast over financial issues. With an investment cost of 4.5 billion rubles ($50 million), it was designed to produce 30,000 tonnes of titanium dioxide per year from 2026.
Nevertheless, the titanium dioxide market is expected to gradually move towards full saturation, as the Bashkir Soda Ash Company has recently embarked on a five-year development plan, under which the Crimean Titanium's output is expected to surge to 120,000 tonnes per year.
The Russian government also targets to gradually lower the share of imported aluminium hydroxide and some other raw materials used in the coatings industry in the next few years.
However, despite some progress in the import-replacement field, it is undoubtful that Russia will not be able to abandon foreign supplies. Over the past year, market players stated that not a single country managed to make its chemical industry fully self-sufficient. It seems that Russian coatings manufacturers will still be dependent on the currency swings for the time being.
The Russian currency has weakened by 26% this year as a result of a collapse in export revenues and growing budget spending, making it the third worst-performing global currency this year, alongside Argentina's peso and Turkish lira.
The Russian ruble briefly notched 100 to the U.S. dollar, a psychological barrier in early August, forcing the Central Bank to interfere and dramatically raise the key interest rate from 8.5% to 12%.
The Russian coating industry historically heavily relied on raw material imports, including from the European Union. In 2022, supplies from Western countries have been primarily disrupted, owing to sweeping sanctions imposed against the Russian chemical industry.
Occasional reports indicated that Russian coatings companies partly switched to import from 'friendly' countries, primarily China. To some extent, parallel import of Western raw materials through third countries like Turkey and Kazakhstan helps to compensate for the lack of direct shipments, though concrete figures remain unknown.
How the Russian coatings industry's dependence on foreign raw materials changed due to Western sanctions is unclear.
Eugeniy Vysotsky, director of the analytical center under the Russian national union of building materials and industry, estimated in September 2023 that the economy segment of Russian coatings manufacturers had a reliance on imported raw materials close to 80%. He added that in the medium-price and premium segments, this figure was much lower, at around 20% to 30%.
JSC Functional Materials, a St. Petersburg-based raw material supplier, reported that roughly 70% of raw materials in the Russian coating industry remained imported, citing calculations of the Russian coatings industry association Centlack.
While the beginning of 2023 appeared to be quite successful for the Russian coatings industry, the second half of the year made market players look into the future with concerns, said Olga Andrutskaya, editor of the Russian magazine Coatings and Their Applications, referring to the slump in the exchange rate of the Russian currency.
"In our case, this means that imported raw materials will dramatically rise in price. And there is almost nothing of our own," Andrutskaya said, adding that in light of this, there are thoughts on how to use what was created during the years of the planned economy and improve "the properties of some materials of mass demand".
Turning tables
In the first half of 2022, the Russian ruble was one of the best-performing global currencies, reaching a seven-year high of 53 to the dollar in June 2022 as surging oil and gas prices generated a foreign currency windfall just as imports collapsed due to the Western sanctions.For the Russian coatings industry, which generates income in rubles and pays for imported raw materials in dollars and euros, this trend meant a nearly 20% to 30% drop in production costs.
The positive currency exchange dynamics are believed to be one of the key factors helping the Russian coatings industry to successfully make it through turbulent 2022. Last year, Russian coatings production stood at 1.4 million tonnes, only 3.4% lower compared with the previous year, the Russian state statistical service Rosstat estimated.
Quite a few market players expected the decline to be more dramatic, especially in the wake of a catastrophic slump in demand in the automotive coatings segment, as all Western carmakers shut their plants in the country.
However, as the Russian ruble weakened against the dollar, the cost of imported raw materials for Russian business has nearly doubled over the past year. Though the currency exchange swings had some positive sides for the national budget, they have had a vastly distressing effect on the Russian population and business.
"Exchange rate volatility undoubtedly has both a psychological and a physical impact on markets and society: though import substitution programs are actively promoted, Russia remains too dependent on imports of many categories of goods, which are purchased in foreign currency", commented Yevgeny Tomilov, Senior Analyst at the Moscow-based think tank CORE.XP Market Research.
"The exchange rate volatility increases inflationary risks, affects the production costs," Tomilov said, adding that accelerated inflation will also force some share of customers to switch to cheaper products.
Understanding these risks, the Russian Central Bank jacked up the key interest rate to 12% to support the battered ruble. In the long run, this is likely to be another blow to the Russian economy since the cost of loans for business is going to surge, while a sharp rise in the interest rate on mortgage loans could undermine the demand for building raw materials, including coatings, according to local economists.
"Banks will once again raise interest rates on loans, which will accordingly increase the payback period and increase the cost of money for business development," stated Viktor Solntsev, Associate Professor of the Department of Corporate Governance with the Moscow-based RANEPA institute, adding that such a sharp rise in key interest rate made business cheaper.
In general, he assumed, Russian exporters should benefit from the current exchange rate dynamics. Importers are found themselves on the losing side.
New import-replacement push
In this background, the Russian coatings industry is braced for a new wave of import-replacement initiatives. Andrutskaya claimed that it might be the best time to turn Soviet-era technologies."The Soviet chemistry school was one of the best. It was pretty much destroyed, but it could have not be eradicated to the end. For its revival, a new chemicalization of the national economy is needed," she said, expressing hopes that the industry would get the proper attention of government officials and state aid in required quantities, including on various research and development initiatives.
Some Russian raw material suppliers are already running some projects aimed at partly substituting imports on the domestic market.
During the International Exhibition Interlakokraska-2023 in March 2023, JSC Functional Materials presented the ultra-white filler pigment WPS 02. The company said that the additive is used in the production of coatings and thick-layer decorative materials. The pigment was said to be able to partially replace expensive titanium dioxide.
Replacing 10% to 20% of titanium dioxide with the pigment lowered the cost without compromising the quality, the company said, adding there were no analogues for WPS 02 in Russia.
In 2023, Crimean Titanium, a Russian titanium dioxide manufacturer, nearly tripled output to fill the gaps in the domestic market, Bashkir Soda Ash Company, the parent company of Crimean Titanium, said. In the meantime, there are signs that titanium dioxide will be in short supply in Russia for the time being. Siberia Titanium has recently disclosed a decision to postpone the construction of a factory in Tomsk Oblast over financial issues. With an investment cost of 4.5 billion rubles ($50 million), it was designed to produce 30,000 tonnes of titanium dioxide per year from 2026.
Nevertheless, the titanium dioxide market is expected to gradually move towards full saturation, as the Bashkir Soda Ash Company has recently embarked on a five-year development plan, under which the Crimean Titanium's output is expected to surge to 120,000 tonnes per year.
The Russian government also targets to gradually lower the share of imported aluminium hydroxide and some other raw materials used in the coatings industry in the next few years.
However, despite some progress in the import-replacement field, it is undoubtful that Russia will not be able to abandon foreign supplies. Over the past year, market players stated that not a single country managed to make its chemical industry fully self-sufficient. It seems that Russian coatings manufacturers will still be dependent on the currency swings for the time being.
