The size of the Ukraine coatings market in natural volumes has collapsed from 302,100 tons in 2012 to 149,100 in 2015 and most likely will continue falling amid sharp rise of prices and low purchasing prices of the population, according to a recent study of the country’s analytical agency Pro-Consulting.

Agency’s experts suggested that this is primarily connected with the decrease of the number of construction projects, while ordinary citizens are no longer putting money into home improvement. Market participants hope that the market already hit bottom, since the sharpest drop in sales of 35 percent on a year-to-year comparison was observed in the first half of 2015, while after that paces of decline significantly reduced.

Pro-Consulting noted serious consolidation tendency, as at the moment at the market there are 200 companies operating, but the top-20 companies produce 70 percent of all coatings and are steadily increasing their share, with some portion of the smaller players over the recent two years had to leave market.

In terms of import, according to Pro-Consulting, Ukraine currently purchases coatings from 30 countries around the world, but most of the deliveries are from Europe. Depending on the different segments its share accounts for 70-92 percent in overall structure of import. However, the amount of orders for purchasing of coatings from abroad has significantly reduced since the time of the crisis.

Sergei Khomenko, CEO of the Ukrainian Paint and Coatings Association (UPCA) has a quite similar vision of the situation. He has indicated that at the moment Ukraine coatings producers met domestic demand by almost fully, but still have to operate only at 50 percent out of their full capacities.

Market participants admit that in fact coating producers in the country faced the period of the perfect storm with numerous challenges brought by the strongest demand since the time of independency political and economical crisis, which took place in the country during the recent two years.

Economy crisis

Over the last two years the Ukraine experienced the collapse of the national currency against the dollar by almost two times, causing the similar rise in prices for most type of coatings. Pro-Consulting estimates show strong shifts in consumers demand towards cheaper product, so as the result today 50 percent of the market accounts for coatings in the sub-economy segment which roughly involve coatings with the price lower UAH 50 (US$ 1.8) per pack of 1.5 kg, while the basic economy segment occupy shares of 30 percent.

“We have been also strongly affected with the growth of the exchange rate [of hryvnia], which led to rise in price of imported raw materials, energy and fuel. As a result, manufacturers were forced to cut imports of raw materials from abroad and to increase prices for their products by at least half,”  Khomenko explained.

As the result, in monetary terms collapse seems to be much smaller, than in natural terms. According to the data of UPCA the fall of production volumes in the country has been primarily associated with the bankruptcies of small manufacturers. Since the beginning of the crisis they were trying to cut spends, changing receipts in the first place substituting imported components with cheap domestic analogues.

As the result, quality of the final product has been damaged and a large number of such firms have been forced to leave the market, as they immediately lost all customers. At the same time, medium-sized and large producers have been able to take advantage from this situation, increasing their market share also because of the falling import.

“In Ukraine, there are operating more than 200 manufacturers of coating, which in better times have been producing 300,000 – 350,000 tons per year,” said Khomenko. “In 2015, according to the State Statistics Service, the volume of production amounted to 190,000 tons, which is 12.3 percent less than in 2014. Overall, in contrast to other industries, we can not talk about an extremely critical situation,” he stated, meaning that some industries, like automotive, since the beginning of crisis showed reduction of production volumes close to 90 percent.

He added, that the crisis in the industry has been partly connected with the Russian annexation of Crimea and armed conflict at the east of the country. Because of these two factors the number of private customers was reduced by 3 million people, so with the average rate of coating use in Ukraine at 6 kg per capita it means a decrease of the market size by 18,000 tons.

Domestic analogues

Ukraine imports 20 types of raw materials for coating manufacture primarily from Europe and despite numerous attempts of the UPCA and other market participants, there is no progress in any localization initiatives.

“In 2015, we saw the rise in the share of domestic production in Ukraine market with falling share of imported. We expect this trend to continue in future. As for raw materials, we are importing them almost fully from Europe, maybe with the exception of semi-finished nail for organic-soluble coatings,”  Khomenko stated.

According to the data of UPCA at the moment the market for raw materials for the coating industry in the country has not even started developing. In the country there is no scientific base and money for the development of such types of business, while foreign companies refrain from any investments into Ukraine’s economy into its current state.

“Real foreign investors do not see the investment attractiveness of our territory. First of all, they absolutely do not understand the financial policy of the state. Although all companies with foreign investments in Ukraine are profitable, their owners for two years do not have access to their capital. National Bank does not allow Ukrainian producers to buy foreign currency for the payment of dividends. As a result, the investors simply lose [the access to] money here,” Khomenko explained.

A similar opinion is expressed by representatives of local offices of foreign producers. According to them, amid very tough budget policy and the possibility of full default of the Ukraine economy, government has to apply to very strict measures in 2014 and still did not cancell them now.

“Restrictions from National Bank for companies to getting currency seems pointless, as struggling against inflation, regulator is killing any attempts for the development of the country’s economy. Ukraine should return fundamental principle of the inviolability and free movement of capital, as soon as possible, as today foreign business are not even considering any further investments,” commented local market participant who wished to stay unnamed.

Meanwhile, representatives of UPCA also complain that any development of Ukraine analogues of foreign raw materials is hampered with the high interest rates on bank loans which are equal to 25-30 percent. As the result, organization forecasts that situation in this area will not get better in the foreseeable future, at least until improvement of general situation in country’s economy.

Call for reforms

Representatives of UPCA believe that to improve the situation at the domestic coating market government should apply to several measures to stimulate domestic demand and establish some first export supplies.

According to Khomenko Ukraine today should look to the experiences of Japan, the U.S, Germany and some other countries who in times of recession supported manufacturers through reduction of taxation by 7-10 percent  as well as cutting imported tariffs on equipment and technologies.

At the same time with the support of UPCA’s experts in 2013 the Ukraine coating industry has adopted European standards on water-dispersion coatings in part thanks to the created free trade zone with the European Union some Ukraine coatings producers has been approved to export to Europe.

So far, the volume of supplies is miserable and may bring overall export to 1 percent -2 percent in the structure of sales of Ukraine coating producers. However, Khomenko believes in the future export deliveries may play quite an important role in terms of the development of the country’s industry, even though he said export should not be considered as a panacea for Ukraine coating manufacturers to deal with problems.

Development of export becomes especially hard today as Ukraine producers mostly focus on the production of the cheapest products, which often have poor ecological conditions.

“With the tightening of ecological standards in Western countries some imported components may become more expensive, so it is hard to speak about development of export supplies from Ukraine. At the same time, it is necessary to understand that manufacturing of environmentally friendly coatings is more expensive, while its promotion requires some additional efforts,” he stated.

In terms of organic-dispersion coatings harmonization of technical regulation in accordance with European standards took place only in 2015, so here in Ukraine producer is still in the beginning of the way.

Khomenko believes that the overall situation in the Ukraine economy remains rather complicated, so 2016 will continue to be tough for coating producers. In general, representatives of UPCA attribute the restoration of the coating industry to general improvement of the country’s economy as it is very dependent on the situation in related branches, as automotive, shipbuilding and others, as well as general human wellbeing.