Vladislav Vorotnikov, Russia Correspondent02.16.22
Russian coatings producers are seeking a preferential position in the domestic market in order to better compete with the world’s leading suppliers.
Competition is getting fiercer in all segments of the Russian coatings market, Gennady Averyanov, chairman of the Russian association of coating producers Centrlack, said to the Russian publication Stroitelstvo, adding that small and middle-sized Russian companies have to compete with the international suppliers, which is getting tough.
Averyanov said that, in his opinion, the competition must be built on equal basic conditions, which among other things, include protectionism – meaning the authorities must encourage market players to purchase products manufactured in the same territory.
“In this regard, the Russian government has not created even conditions. For this reason, it is more difficult and expensive for Russian companies to manufacture products than for foreign companies in overseas markets,” Averyanov said, adding that the industry experienced pressure of import. “All companies with localized capacities in Russia keep importing products, in spite of an opportunity to begin manufacturing them in Russia.”
However, Russian coatings companies managed to adapt to these conditions. As explained by Averyanov, local suppliers today compete with foreign companies in almost every segment of the domestic coatings market.
“Of course, we see that competition sometimes is maintained at the expense of the lower-income levels of Russian coatings producers and lower control over the production process, which also happens from time to time,” Averyanov said.
During the COVID-19 pandemic, virtually all countries turned their sights on the protectionism policy concerning certain products. Averyanov claimed that Russia has to follow this pattern and embark on programs aimed at supporting domestic producers in various fields of the economy. Such programs already exist in some segments of the Russian economy, like shipbuilding, finished vehicle assembly, oil, and gas extraction, but not in construction yet.
“I believe we need to raise the demand for the Russian analogs of imported products. By spurring the demand [for Russian coatings], we boost production, cut prices and give an impetus to the R&D development. The whole world works this way, and Russia should not be an exception,” Averyanov said.
Centrlack calls on the government to consider changing the Russian tariff policy, subjecting foreign coatings to higher import duties.
“This policy [in Russia] differs from that adopted at foreign markets. We have import duties on raw materials, while they [other countries] don’t. We have minimal or zero import duties on products with higher added value, while out there [in foreign countries], these duties are substantial,” Averyanov said. “These differences lead to higher costs of products manufactured in Russia, and make local production less profitable, including for localized
foreign companies.”
The share of imports in the Russian coatings market remains high, especially in the industrial segment, Averyanov said, adding that it ranges among different segments. For example, the share of imports has been steadily declining in the anti-corrosion coating segment while remaining relatively high in the machine-building niche. In total, as many as 200 foreign coatings suppliers are currently operating in the Russian market, Averyanov said.
On the other hand, in the construction and decorative segment, import is within “a normal level” of 15%, he added.
Globalization is a challenge
On the other hand, Russian coatings manufacturers want the authorities to establish a more elaborated localization scheme.
As explained by Averyanov, a good idea is to try to boost the demand for products with a “Russian product” label - those that are fully manufactured in the country and not just mixed at local capacities. In this way, as much added value as possible would be generated in Russia.
Currently, the Russian government is working on a new Strategy for the Russian Chemical Industry Development until 2035. Russian coatings producers hope that in some form, it will include protectionism.
Averyanov also pointed out the challenges associated with the ongoing consolidation process currently seen in the global coatings industry. The US, Japan, and Asia-Pacific companies are leaders in this process, while Russian companies are primarily being acquired.
“Our industry from centralized coatings complex of the USSR during mass privatization [in the early 1990s] became decentralized with a large quantity of small and medium-sized businesses. Around this time, globalization processes commenced in the foreign coatings industry,” Averyanov said.
The M&A activity so far remains limited between the Russian coatings companies, but this trend is likely to gain traction in the coming years.
“Today, the leading Russian companies, competing with international businesses, understand the advantages of large, self-sufficient holdings. However, leaders are in no hurry to enlarge. Seeing that world globalization is not going to stop, it is necessary [for Russian coatings companies] to remain competitive in all areas of business, including foreign markets,” Averyanov said.
“The solution clearly lies in the consolidation of producers and capacities. In such matters, there should be both the initiative of the companies and a positive impulse from the government, taking into account the goal-setting of creating a country’s economy that would be competitive with foreign in terms of creating a high-tech coatings complex” he added.
Higher prices, less profit
According to Centrlack, the price hike for raw materials was one of the main factors affecting Russian coating producers in 2021. Averyanov estimated that the rise in price for raw materials exceeded the increase in price for coatings last year.
“Companies have to offset a sharp and especially strong price hike in 2021 through [cutting] their own margins and to seek cost economy in manufacturing and management processes,” Averyanov said, adding that on average raw materials for coatings production jumped in price by 50% last year compared to 2020. During the same period, coatings rose in price by only 20% to 30%.
This estimate differs from the figures reported in late 2021 by the Russian road builders association ASDOR, which claimed that since the beginning of the year, the price for coatings in Russia jumped by 34.6%. In turn, the Russian Building Association said that coatings in Russia had become more expensive by 40% to 60% in different price categories.
“All kinds of raw materials got more expensive: both imported and Russian. Logistic [costs] have jumped by a factor of three times. In some product categories, the Russian raw materials jumped in price even higher than imported. We tried to influence these processes via the Russian Industry and Trade Ministry and Federal Antimonopoly Service, but those efforts were in vain,” Averyanov said.
On the other hand, the Russian coatings market is seemingly coping with the COVID-19 pandemic. Unlike some other countries in Russia, no significant decline in demand for coatings has been seen during the past two years.
“Being locked in their homes, citizens started increasingly considering home repair and turned their attention to coatings. Construction companies in Russia are rarely shifting construction schedules, which also positively impacts the coatings market,” he added.
During the first nine months of 2021, the Russian coatings market increased by 2.1% compared to the same period the previous year, Averyanov estimated. The increase in industrial production is believed to be slightly less during this period.
The Russian marketing agency Mega Research projected that the COVID-19 pandemic would hamper the Russian coatings market, where in the past sales had been growing by 10% to 15% per year. However, in the next several years, the growth is likely to be limited by a few percent, Mega Research projected.
The lack of raw materials is projected to cause a temporary shortage of some goods on the Russian market. Averyanov said that this factor raises additional concerns over strengthening competition on the Russian coatings market since it gets more challenging for small and medium-sized companies to address the shortage of raw materials and promote their products among big customers.
Competition is getting fiercer in all segments of the Russian coatings market, Gennady Averyanov, chairman of the Russian association of coating producers Centrlack, said to the Russian publication Stroitelstvo, adding that small and middle-sized Russian companies have to compete with the international suppliers, which is getting tough.
Averyanov said that, in his opinion, the competition must be built on equal basic conditions, which among other things, include protectionism – meaning the authorities must encourage market players to purchase products manufactured in the same territory.
“In this regard, the Russian government has not created even conditions. For this reason, it is more difficult and expensive for Russian companies to manufacture products than for foreign companies in overseas markets,” Averyanov said, adding that the industry experienced pressure of import. “All companies with localized capacities in Russia keep importing products, in spite of an opportunity to begin manufacturing them in Russia.”
However, Russian coatings companies managed to adapt to these conditions. As explained by Averyanov, local suppliers today compete with foreign companies in almost every segment of the domestic coatings market.
“Of course, we see that competition sometimes is maintained at the expense of the lower-income levels of Russian coatings producers and lower control over the production process, which also happens from time to time,” Averyanov said.
During the COVID-19 pandemic, virtually all countries turned their sights on the protectionism policy concerning certain products. Averyanov claimed that Russia has to follow this pattern and embark on programs aimed at supporting domestic producers in various fields of the economy. Such programs already exist in some segments of the Russian economy, like shipbuilding, finished vehicle assembly, oil, and gas extraction, but not in construction yet.
“I believe we need to raise the demand for the Russian analogs of imported products. By spurring the demand [for Russian coatings], we boost production, cut prices and give an impetus to the R&D development. The whole world works this way, and Russia should not be an exception,” Averyanov said.
Centrlack calls on the government to consider changing the Russian tariff policy, subjecting foreign coatings to higher import duties.
“This policy [in Russia] differs from that adopted at foreign markets. We have import duties on raw materials, while they [other countries] don’t. We have minimal or zero import duties on products with higher added value, while out there [in foreign countries], these duties are substantial,” Averyanov said. “These differences lead to higher costs of products manufactured in Russia, and make local production less profitable, including for localized
foreign companies.”
The share of imports in the Russian coatings market remains high, especially in the industrial segment, Averyanov said, adding that it ranges among different segments. For example, the share of imports has been steadily declining in the anti-corrosion coating segment while remaining relatively high in the machine-building niche. In total, as many as 200 foreign coatings suppliers are currently operating in the Russian market, Averyanov said.
On the other hand, in the construction and decorative segment, import is within “a normal level” of 15%, he added.
Globalization is a challenge
On the other hand, Russian coatings manufacturers want the authorities to establish a more elaborated localization scheme.
As explained by Averyanov, a good idea is to try to boost the demand for products with a “Russian product” label - those that are fully manufactured in the country and not just mixed at local capacities. In this way, as much added value as possible would be generated in Russia.
Currently, the Russian government is working on a new Strategy for the Russian Chemical Industry Development until 2035. Russian coatings producers hope that in some form, it will include protectionism.
Averyanov also pointed out the challenges associated with the ongoing consolidation process currently seen in the global coatings industry. The US, Japan, and Asia-Pacific companies are leaders in this process, while Russian companies are primarily being acquired.
“Our industry from centralized coatings complex of the USSR during mass privatization [in the early 1990s] became decentralized with a large quantity of small and medium-sized businesses. Around this time, globalization processes commenced in the foreign coatings industry,” Averyanov said.
The M&A activity so far remains limited between the Russian coatings companies, but this trend is likely to gain traction in the coming years.
“Today, the leading Russian companies, competing with international businesses, understand the advantages of large, self-sufficient holdings. However, leaders are in no hurry to enlarge. Seeing that world globalization is not going to stop, it is necessary [for Russian coatings companies] to remain competitive in all areas of business, including foreign markets,” Averyanov said.
“The solution clearly lies in the consolidation of producers and capacities. In such matters, there should be both the initiative of the companies and a positive impulse from the government, taking into account the goal-setting of creating a country’s economy that would be competitive with foreign in terms of creating a high-tech coatings complex” he added.
Higher prices, less profit
According to Centrlack, the price hike for raw materials was one of the main factors affecting Russian coating producers in 2021. Averyanov estimated that the rise in price for raw materials exceeded the increase in price for coatings last year.
“Companies have to offset a sharp and especially strong price hike in 2021 through [cutting] their own margins and to seek cost economy in manufacturing and management processes,” Averyanov said, adding that on average raw materials for coatings production jumped in price by 50% last year compared to 2020. During the same period, coatings rose in price by only 20% to 30%.
This estimate differs from the figures reported in late 2021 by the Russian road builders association ASDOR, which claimed that since the beginning of the year, the price for coatings in Russia jumped by 34.6%. In turn, the Russian Building Association said that coatings in Russia had become more expensive by 40% to 60% in different price categories.
“All kinds of raw materials got more expensive: both imported and Russian. Logistic [costs] have jumped by a factor of three times. In some product categories, the Russian raw materials jumped in price even higher than imported. We tried to influence these processes via the Russian Industry and Trade Ministry and Federal Antimonopoly Service, but those efforts were in vain,” Averyanov said.
On the other hand, the Russian coatings market is seemingly coping with the COVID-19 pandemic. Unlike some other countries in Russia, no significant decline in demand for coatings has been seen during the past two years.
“Being locked in their homes, citizens started increasingly considering home repair and turned their attention to coatings. Construction companies in Russia are rarely shifting construction schedules, which also positively impacts the coatings market,” he added.
During the first nine months of 2021, the Russian coatings market increased by 2.1% compared to the same period the previous year, Averyanov estimated. The increase in industrial production is believed to be slightly less during this period.
The Russian marketing agency Mega Research projected that the COVID-19 pandemic would hamper the Russian coatings market, where in the past sales had been growing by 10% to 15% per year. However, in the next several years, the growth is likely to be limited by a few percent, Mega Research projected.
The lack of raw materials is projected to cause a temporary shortage of some goods on the Russian market. Averyanov said that this factor raises additional concerns over strengthening competition on the Russian coatings market since it gets more challenging for small and medium-sized companies to address the shortage of raw materials and promote their products among big customers.
