The Russian market for industrial coating may see a sharp increase in competition between domestic plants and foreign manufacturers, as a large part of them target local production capacities inside the country, according to a recent report from the Russian Association of Coating Manufacturers (Tsentrlak). The organization’s Gennady Averyanov estimated the overall size of the Russia market for industrial coatings in 2015 at 350,000 tons, while capacities of recently announced and launched projects will reach 80,000 tons.

In particular, last year Dutch-based Hempel Group has invested €30 million in the annual production of 16,000 tons of coating at the plant in Ulyanovsk. A similar project within the coming several years targets to commission Turkish Kanat Boya, even thought its prospects can be largely complicated with the geopolitical factor. PPG Industries Group has plans to to invest $30 million in the production of 25,000 tons of coatings at its Lipetsk Oblast plant.

“Today, the size of the Russian market of industrial coating in monetary terms is estimated at RUB 128 billion (US$1.76 billion), while about 50 percent of all supplies so far has been accounted for import,” Gennady Averyanov, CEO of the Russian Association of Coating Manufacturers. “The size of the market for decorative coating today is about 792,000 tons, while in monetary terms it is RUB 89 billion ($1.22 billion). Here the share of import in recent years does not exceed 15 percent.”

Russian State Statistical Service Rosstat estimated last year the overall size of the Russian coating market at 1.26 million tons, noting that on a year-to-year comparison it reduced by 6 percent. At the same time, the situation in industrial is rather complicated, according to Averyanov, last year coating plants in Russia had to operate only at 40 percent of full production capacity, amid weak demand and inability to develop export. Rosstat has a different view on the situation, estimating this figure at 60 percent.

However, both Tsentrlak and the  Russian statistical agency agree that the launching of localized capacities of foreign brands in 2016 will make this figure even lower, especially giving the fact that overall demand for coatings will continue to decrease.

“In 2016 the Russian coating market at least will experience stagnation,” said  Valery Abramov, CEO of Russian Paintings, one of the major producers of coating in the country. “Heavy competition this year continues to push prices down, so largest market share will shift to the sub-economy segment. Demand for industrial coating in general remains stable, while for decorative coating is reducing.”

Market participants indicate that foreign manufacturers have to invest in localization of production capacities in Russia, as the collapse of Russian currency over the past two years made import too expensive. Management of Tsentrlak said that despite overall parity among domestic and foreign manufacturer, there are number of industries where country’s dependence on foreign coating materials reached 70-80 percent.

“We may admit that economic performance in the country in general will reduce and we should expect strong economic slowdown. For this reason, the situation in the coatings market in 2016 year will repeat the scenario of 2015 with reduction in sales volumes as a whole, deterioration of payment discipline of customers and reduced profitability of businesses. The main demand in the decorative segment, organic coatings and water-dispersed materials will be shifted to the economy segment,” explained Natalia Tikhonova, commercial director of KVIL Paintings.

Import substitution declared as the top priority

Following the introduction of sanctions from the U.S., European Union, Canada and a number of other countries the Russian government has declared the strategy of import substitution as the main driver for economy development for the next several years. Most market players in Russia believe that applying this strategy in the coating market may let them succeed, if the country’s authorities would support them.

“Government bodies in Russia are the main investors and the locomotives of growth [for companies]. Defense industry, oil and gas extraction, processing industry, pipe industry, railway and transport segments have stable demand for coating. So there could be found some points of growth in government programs in the defense industry, aviation, shipbuilding and many other industries,”

Abramov stated, adding that at the same time, this issue will largely depend on the state of affairs in the country’s budget which is largely dependent on global oil prices.

Market participants can really benefit from the implementation of such programs, as they may urge authorities to not let foreign suppliers to participate in such activities. This approach already proved itself in a number of other industries, where import-substitution programs also potentially may bring good result to manufacturers. However, according to Averyanov, Russian coating producers lack of experience in lobbying initiatives.

“There are numerous issues in the question, Averyanov said. “First of all, compare to the scale of oil processing or metallurgy [where companies are actively lobbying needed decisions], coating producers are rather small. Secondary, there is no any attitude among our market players to cooperate with the government bodies. So most of our manufacturers, with the exclusions of maybe 2-3 companies, are not working with the state to solve its problems”  he said, adding that with the support of industry association this situation may change in future.

“We believe that we currently see increased interest in domestic products in sectors where it previously has been used only imported coating materials, as today due to the obvious reasons [devaluation of Russian ruble] this production became less attractive. For example, domestic production already used somewhere in shipbuilding, machine building, oil and gas industries, wherever it is used large and complex steel structures, requiring strong protection against corrosion,” Tikhonova said.

“For us, import substitution is now a new theme. Already during several years we have been operating in the context of import-replacement strategy at the Belarus market,” commented Uris Avotins, director of Telko for Russia, Belarus and Kazakhstan. According to him, this situation is dangerous for the industry as numerous producers in order to cut production costs have to switch to manufacturing of a less quality product. In the long-term this main ruin all import-substitution initiatives.

“This situation has a dual effect: on the one hand, we see the growing demand for local raw materials, on the other – for domestic production of finished products with high quality it raises demand for imported raw materials. Despite the economic difficulties in the country, for the Russian coating manufacturers it is necessary to understand that reduction of both quality and prices is a road to nowhere, to a standstill. The demand for cheap coatings is a temporary phenomenon, while future will belong to companies with appropriate quality” Tikhonova claimed.

Threat of counterfeit

One of the main negative effects of Russia’s economy crisis for the market is the sharp rise of counterfeit coatings. Alexandr Boitsov from scientific development and production center SpetsPolimer estimated that the share of counterfeit in particular segments of the market today reaches 40-60 percent. The situation is very dangerous, as the price of illegal production usually is significantly lower compared to the normal product, while its use by customers brings serious reputation problems to official manufacturers.

According to market participants, there were cases when coating materials has been sold at the market at the price of RUB 30 per liter (US$0.40). Today overall in the country there are registered about 2,000 companies engaged in manufacturing of coating materials. Some experts say that there is a couple of hundred illegal sites for the production of counterfeit coatings. They are using the same labels and the same packaging as some legal brands, but sell products which are often hard to even call coatings.

“There is really counterfeit production on the market, but nobody can estimate its share. If it is one percent, the situation is normal, but if it 20 percent than everything is bad. Therefore, the evaluation of volumes of counterfeit is the task of our association for the future, and its implementation will require some time. It is necessary to start struggling with this trend and if we speaks globally, than we have some tools for that in the country. For example, the Federal Sanitary Service is fighting with counterfeiting, but the amount of funding of inspection is low and decreasing every year,” Averyanov said.

A rise in the share of counterfeit production at the market already attracted the attention of the country’s Industry and Trade Ministry. Its representatives, in the end of 2015, conducted special meetings on the issue with the representatives of major market participants. In the last months of last year in Russia it has created the Association for Assessing the Quality of Coating Materials. At the same time, representatives of Tsentrlak are pretty sure that the main goal of the new association is not to fight with counterfeit production, but to lobby interests of foreign manufacturers.

“Many companies within the industry wonder what the purpose was for establishment of the new associative, where the majority of founders are foreign brands. What it intends to do: lobby most modern Western standards for introduction into Russian legislation, so to expand their market share? We’ve put forward proposals to join our forces, but so far there was no any integration. We don’t like it, but the association has been created and we will have to live with that,” Averyanov concluded.