Ukraine manufactured 136,000 metric tons of decorative coatings in 2015, down by 8 percent against the previous year and by 27.7 percent less compare to the pre-crisis 2011, when domestic consumption reached its peak, the Statistical Service stated.
In total Ukraine released 212,200 tons of coatings in 2015, reducing the production performance from 231,500 tons in the previous year and 243,000 tons achieved in 2010.
The strong fall in production output in the industry among other things had also reduced the number of coating manufacturers in the country. Association of Ukrainian Coatings Producers estimated that nearly 46 coatings plants or 25 percent from the total number of producers for some reason had ceased operating in the period between 2013 and 2015.
As of early 2016, approximately 200 coatings producers were active in Ukraine, according to Sergei Khormenko, the president of the Association of Ukrainian Coatings Producers. To some extent, the fall in production performance could be attributed to the annexation of Crimea by Russia in August 2014 and the following armed conflict with rebels in the eastern regions.
Ukraine coatings market had lost nearly 3 million customers as the result of those events, Khormenko estimated. It is believed that some share of coatings producers in Ukraine have not actually gone bankrupt, as they keep operating in Crimea and eastern regions, but their businesses have not being reflected in the national statistic databases since 2014.
In most cases it is the low-effective coatings producers with small workshops, who were closing their business during the previous years. However, amid harsh market conditions even some major companies opted to withdraw their investments from Ukraine.
Late 2016 Tikkurila announced that it would sell off its coating plant in Ukraine together with some assets in the neighbor Belarus.
The deal with the purchaser –FarbaHouse – was completed shortly after that announcement, and the plant changed its name to Farba Colorit.
Valery Molchanov, the general director of the local coating manufacturer Lakma, suggested that Tikkurila was scared with some crisis signs on the domestic market in 2015, when sales of some categories of coatings, according to his observations, slumped by nearly 50 percent, while price on average at the market jumped by almost 45 percent as compared to the previous year.
It turned out that maintaining its Ukraine branch became simply not justified for Tikkurila from the economic point of view,
Molchanov assumed. Tikkurila’s plant in Ukraine was manufacturing coatings under Colorit brands, while all Tikkurila coatings were imported to the country. New owners promised that the plant would keep sustainable operation and would be even able to expand the products range.
Nevertheless, most forecasts suggested that sales of coatings in Ukraine hit the record-breaking lows in 2015 mainly due to the deferred demand effect, so at some point they must start rising again. The recover at the market really began in 2016, when according to the official statistical information sales in decorative segment increased by 15 percent to nearly 159,000 tons.
In 2017 Ukraine coatings manufacturers sold products for UAH 4.6 billion ($169 million), including UAH199 million ($7.3 million) at the foreign markets, as compared to UAH 3.9 billion ($143 million) in total and UAH 168 million ($6.1 million) at the foreign markets in the previous year, according to the State Statistical Service.
In natural terms the growth in sales at the domestic market is yet to be estimated, but basically it is believed that it was comparable with the growth in monetary terms. In 2016 Ukraine released 235,200 tons of coatings, while the forecast for 2017 stipulated the country should produce nearly 258,200 tons, according to the Association of Ukrainian Coatings Producers.
According to the optimistic forecast the demand for coatings at the domestic market reached 305,000 tons in 2017, as compared to 231,000 tons seen in 2015. The share of import at the domestic market reduced from 21.1 percent in 2013 to 12.6 percent in 2015, according to the official information. However, in 2016 import regained lost positions increasing its share to 17 percent.
The largest suppliers of coatings to Ukraine were as follows Poland (18 percent of all supplies in 2016), Russia (18 percent), Germany (16 percent), Italy (10 percent) and UK (3 percent). On the other hand, Ukraine exported its coatings primarily to Moldova (38 percent), Russia (23 percent), Kazakhstan (10 percent), Georgia (10 percent), Lithuania (6 percent) and Uzbekistan (4 percent).
As the crisis in the coatings industry in Ukraine seems to be over, it is time to think about how to overcome the old problems, according to Alexander Brichko, the executive director of the Association of Ukrainian Coatings Producers.
In November 2017 his organization signed an open letter to the Ukraine President Petro Poroshenko, the government and to the national parliament, asking to adopt a package of measures aimed at improving the business environment in the country.
Ukraine authorities were not supporting coating manufacturers at all, and moreover in some ways they even posed some obstacles to the development of their businesses, Brichko claimed.
For example, the state agencies in Ukraine consider some solvents in the industry as precursors, which must be stored in special conditions, Brichko said. Coatings producers on a daily basis must provide information to the national watchdogs on how many those products they used.
However, what is more important is that solvents, like white spirit and xylene are considered by the Custom Service as a type of motor fuel, so their importers are obliged to pay the excise fee on those products, according to Brichko. This significantly increases the final price of solvents for the coatings producers, who already tried to appeal that practice in courts, but achieved no result.
On the top of that the most important challenge is related to conditions of the state competitive bidding procedures in Ukraine. According to Brichko there are two unofficial definitions widely used in the national coatings industry – “a good coating” and “a coating for tenders.”
The reason is that low price turns to be the more important factor within the tenders placed at the national system ProZorro than the quality of products, and in some cases customers want to purchase coatings at the price of €0.5 per liter only.
The worst thing was that these coatings were used widely in the tenders in the military infrastructure, shipbuilding, railways, as well as the public places, like schools, Brichko said. At the same time, it was absolutely clear that a responsible manufacturer would not be able to release coatings at that price, while the so-called “garage” suppliers, as the rule, offered cheap coatings mainly because they don’t care about either its safety or its quality parameters.
Last but not least, Ukraine is very dependent on imported raw materials, and the continuing devaluation of hryvnia turns this into a big problem for coatings plants. Ukraine lost access to the rather cheap titanium dioxide, when its sole manufacturer in the country, Crimean Titan, found itself at the territory controlled by the Russian authorities in the Crimea Peninsula in 2014.
The sole plant for the production of white spirit has been recently also shutdown in Ukraine, Brichko said. In this regard, the Ukraine coatings industry imported from 70 to 80 percent of raw materials in 2016, he added.
This is a particular problem, because due to the weak purchasing power of population Ukraine coating plants are very limited in the ability to raise prices for their products. The cost of raw materials, however, is gradually increasing due to the devaluation of the national currency. This situation pushes coatings plants towards the use of some cheaper components, which eventually negatively affected the quality of the final products, according to Brichko.
Back on track
Prior to the crisis Ukraine was considered as one of the most promising markets in Europe. With a population of 45-million citizens the country was consuming only 5 kg of coatings per capita.
In 2012 it was forecasted that this figure would be gradually growing within the next decades, to reach the European average of about 15 kg per capita between 2030 and 2035. That would take the total sales at the domestic market up to nearly 700,000 tons per year.
Though, that forecast seems unrealistic today, the local market participants believe that the consumption of coatings will inevitably grow, fueled mainly with the anticipated economy recovering in the country in the years to come.
It is also believed that the share of organic coatings will be rising, alongside with the improvement of purchasing power of the local population.