Storm in Russian Coatings Industry has Passed, but Dark Clouds Remain

The Russian coatings industry has left the peak of the tension in the rear window, but the reborn operations are braced for new challenges in 2024, primarily the worsening labor shortage, according to analysts.

The almost two-year-long process of industry restructuring is finally over, LKP Expert, a Moscow-based think tank, said in an industry survey. In November 2023, Swedish Eskaro Group AB sold its St. Petersburg coatings factory to Russian entrepreneur Alexander Prosekin. This was one of the few assets in the Russian coatings industry still owned by foreigners.

With a rare exception, all coatings factories owned by Western businesses in Russia changed hands during the past two years. The Lithum Group, the former Russian branch of Norwegian paint maker Jotun, has consolidated former Russian factories of PPG, Hempel and Jotun.

The key question is how they will perform under new management and in the new market reality in the years to come, LKP Expert stated.

When the first Western sanctions wreaked havoc on the Russian transport and logistics industries, the Russian coatings factories were the first to feel the impact. Having a tough dependence on imported components, the businesses urgently need to rejuggle the entire supply chain to keep their operations running.

The raw material issue has largely loosened its grip on the industry, so in 2024, a new challenge comes to the fore, which is a persistent labor shortage.

Labor Crisis Unfolds

In the coming years, it will have a powerful influence on the Russian coatings industry and the market, LKP Expert said.

“This issue is more pressing than the search for alternative raw materials, and it will largely determine the pace of the Russian coatings industry development,” LKP Expert said.
The labor shortage is a problem common for the entire Russian economy. A research conducted by the recruiting firm Superjob in early 2024 showed that 86% of the Russian firms experience difficulties filling vacancies.

In the Russian industrial sector, this figure is estimated at 87%, Superjob reported.

Russia lacks around five million workers, the Economy Institute under the Russian Academy of Science said in a study published in December 2023. Analysts admitted that this problem has already started to put breaks on the wheel of Russian GDP growth.

In November 2023, Elvira Naviulina, head of the Russian Central Bank, labeled the labor shortage the biggest threat to the Russian economy.
There are numerous reasons for the unfolding labor crisis. The authors of the Economy Institute research cite demographics and “the migration of the population” as the reasons for the crunch.

The Central Bank also expressed an opinion that the partial mobilization of around 300,000 men in September 2022 by the Russian Defense Ministry contributed to the labor deficit. Last year, new contracts for military service were signed with nearly 0.5 million recruits, Dmitry Medvedev, deputy chairman of the Russian Security Council, disclosed on his social media channels.

Alexey Raskha, a Russian demographer who previously worked with the Russian state statistical service Rosstat, estimated that between 550,000 and 800,000 Russians have immigrated from the country over the past two years.

In addition, the Russian ruble’s decline has driven some foreign workers from Central Asia out of the country, occasional reports indicated, though there is no concrete data to support this claim. The Russian ruble lost nearly half of its value against the hard currency in 2023, encouraging foreign citizens to explore working options in Turkey, UAE and several other countries.

Alexander Shikhanev, general director of Pigment Holding, the leading Russian supplier of anticorrosive coatings, said that the growing labor deficit is the biggest problem for his company and the entire industry.

He added that competition for workers forced the company to sign a partnership agreement with several Russian universities and kick off a promotional program for Russian high schools in a bid to lure more workers into the coatings industry.

In general, the Russian coatings factories will have to raise salaries to keep their staff intact, LKP Expert noted.

“It is already clear that the problem has no quick and easy solution, so it is likely that in 2024, we will see something new in this field,” LKP Expert said, assuming that in response to the labor deficit, Russian coatings factories could pass some work to outsourcing to Chinese companies.

Falling Margins

In the wake of the labor crisis, Russian coatings factories will see their margins shrinking, LKP Expert warned. In addition to paying higher wages to employees, Russian coatings manufacturers bear higher production costs, and the market conjuncture is also far from perfect.

“In 2022 and 2023, not a single coatings factory in Russia suspended operations, while a considerable number of new manufacturers entered the market striving to fill in the vacant positions. In the meantime, the number of coating consumers remained the same,” LKP Expert said.

While in previous years, Russian market players expressed fears over a product shortage in some segments, in 2024, the market could be braced for a supply surplus.

“The supply will greatly outpace the demand, which will entail a drop in sales margins,” the analysts explained.

The rise in the number of new players in the Russian coatings market primarily refers to Chinese and other Asian companies, who indeed doubled down on their efforts to gain a foothold in Russia.

As of December 2023, nearly 140 Chinese companies were registered to participate in Interlakokraska-2024, the biggest Russian coatings exhibition. This starkly contrasts with the previous years when only a few Chinese coatings manufacturers took part in this exhibition.

Among the companies that are putting their efforts into expansion in the Russian market, the analysts list Kanat, Moravia, Dyo and Hilong.

“We can hardly expect the introduction of restrictive measures against these products, so we must get used to living with them,” the analysts added, pointing out the fact that not only Chinese coatings companies but also raw materials suppliers increasingly eye theRussian market.

According to analysts, the inflow of new foreign competitors will make the lives of Russian coatings manufacturers harder.

Some common Russian economic challenges are expected to put additional pressure on the Russian coatings business. In a bid to tame inflation, the Russian Central Bank has recently jacked up the key interest rate to 16%. Russian business community have repeatedly expressed concerns that this level makes bank loans extremely expensive for
most companies.

Quality Concerns

A shift in consumer demand towards less expensive products is another factor promising to undermine business margins in the Russian coatings industry.
LKP Expert indicated that judging from the current trends, a premium segment in the Russian coatings market may soon virtually cease to exist.

In the past, the premium segment represented a substantial share of sales in the Russian market. It was comprised primarily of products from foreign brands like Jotun and Hempel. The analysts believe that Russian coatings manufacturers are locked in the race to make their products les expensive, in some cases sacrificing
quality.

“At the moment, there is still an opportunity to lower production costs by moving to Chinese raw materials, but this potential will not last forever,” the analysts reported.
In general, quality issues are expected to be a common feature of the Russian coatings business in 2024, according to LKP Expert.

The problems primarily come from manufacturers’ attempts to replace Western raw materials with available alternatives. The efforts are being done without sufficient research and development work “to suit current needs,” and this leads to some undesired effects.

Quality issues are expected to be even more common for those companies bringing new products to the market.

“Alas, but the high-quality products are not to be born quickly,” the analysts stated.

Despite that, the analysts believe that the acute phase of the crisis that followed the first Western sanctions has ended, and expect no further major turbulence in the Russian coatings market in 2024. CW