Kazakhstan Coating Market Passed Tipping Point

Kazakhstan annually consumes 90,000-120,000 tons of coatings and prior to 2015 most market participants have forecasted strong growth of approximately 6-8 percent per year. However, the collapse of global oil prices provoked a crisis in the country with reduced investment activity throughout the entire economy. As a result, demand for coatings is declining and most important market trends of the past years have reversed, forcing local firms to adapt to a quite new conjuncture.

Zhaksylyk Kurmanalin, CEO of Gaudi Paint stated that in general the Kazakhstan market is divided among 15 manufacturers, who in total account for 50 percent of the overall market. He named Alina Paint, Gaudi Paint, Raduga and Remalux, as the largest domestic producers of coatings. In the opinion of Kurmanalin, local market players in terms of production range and quality can compete with European companies, however they still experience problems with the establishment of effective marketing strategies.

According to estimations of Oksana Kuznetsova, brand director of Alina Paint, at the moment the average consumption of coating in Kazakhstan amounts to only 5 liters per capita. She noted, the market basically has the ability to grow much faster than in Europe or Russia due to the low base effect.

According to Anton Peshkov, director of Tikkurila Kazakhstan, after a sharp decline in global oil prices and following strong devaluation of the country’s currency in August 2015, the coatings market is falling 15-20 percent per year now with a clear tendency that consumers are shifting towards economy segment.

Peshkov also indicated that many B2B projects scheduled for implementation this year are frozen and only some of them that have been initiated earlier are actually completed. B2B activity is expected to decline even further after the EXPO-2017 Astana. But in general it is projected to fall at the consumer market of building materials and coatings probably will slow down in the coming years, so the market will stagnate, he suggested.

At the same time, according to estimations of industry representatives the average profitability of coating manufacturing in the country today stands at 15 percent, but already in the near future it may change, amid negative market conjuncture, strengthening of competitive fight and a number of other challenges.

Fears of growing import

The recent decade has been marked with struggle for Kazakhstan coating firms against import and in general they achieved good progress in this issue. In the period of 2008-2013 share of import reduced from 70 percent to nearly 48 percent in overall market’s structure. Kazakhstan joined common custom space with Russia and Belarus in 2011, when it imported 48,000 tons of coatings. In 2012 this figure rose to 54,000 tons, but after that it started to decrease.

However, the economic crisis caused the Eurasia Union in 2014 to question efforts of market participants to replace import, since amid strong devaluation of the Russian ruble, coatings from Russian plants became more competitive at the Kazakhstan market and import started growing again.

For instance, in 2015, according to data from the Russian Federal Customs Service, the country managed to increase export of coatings by nearly 22 percent on year-to-year comparison, while Kazakhstan remained the largest foreign sales market with share close to 44 percent out of overall export sales of Russian producers.

According to Kurmanalin, at the current market conjuncture most coating manufacturers in Kazakhstan do not feel any positive changes from the country’s joining to Eurasia Union, since at the moment it is impossible to produce coatings cheaper than in Russia. He noted that several Russian coating companies over recent years opened their offices in Kazakhstan and sell their products without intermediates at very competitive prices.

A similar opinion was expressed by Alexandr Frolkin, executive director of Alina Paint, who also noted that in the first year after joining Eurasia Union, Kazakhstan coating producers managed to compete with Russian importers on equal terms, but after devaluation of the Russian ruble the situation has changed, causing significant difficulties to local market participants.

For instance, data of the Russian Federal Customs Service stated that with increasing export of coatings in natural terms domestic manufacturers reduced it in monetary terms by nearly 36 percent in 2015. Kazakhstan producers in general believe that this could be considered to be dumping.

According to Peshkov, Tikkurila targets to produce coatings locally and for this reason on April, 15, 2015, it opened its first factory in the country, which will produce waterborne paints and primers under the brands TEKS and Leningradskie Kraski in order to meet consumer demand for high quality products at an affordable price.

In April 2016,  the manufacturing line has been expanded with the launching of production of waterborne paints Tikkurila EURO. Peshkov noted that at the moment Tikkurila is the only company in Kazakhstan, producing paints in the premium segment, whilst previously all ranges of these products had been imported from Russia.

Localization of production capacities, according to him, is also necessary for the company to expand distribution in the economy segment and export products to other countries of Central Asia, such as Kyrgyzstan, Tajikistan and Uzbekistan.

Focus on eco-friendly coatings

At the same time, all market participants note changing tastes of consumers, since demand is gradually shifting to eco-friendly and water-based paints. According to Kurmanalin, this issue becomes very important, since demand for such type of products is growing, primarily due to the increase of the average living standards in Kazakhstan. As the result, prior to 2015 country’s market has been gradually shifting to coatings with better quality and higher price, but the economic crisis once again disrupted this trend.

According to market participants, in the period 2010-2015 the share of economy segment in the overall structure of sales, has reduced from 45 percent to 30 percent. According to Kuznetsova, this trend has been especially observed in the enamel segment. She explains that consumers in the country started to be aware of the health risks of using cheaper coatings.

According to Peshkov, in 2016 the market has seen a reduction of demand for coatings in the premium segment, and it forces consumers to shift back to production of economy and even extra economy segments. Once again this situation is explained with devaluation of national currency and falling purchasing power of population in Kazakhstan.

At the same, Peshkov indicated that consumers’shift to eco-friendly coatings continues and takes place in all price segments: not only in premium, but also in the economy as long as domestic manufacturers also offer water-based products and position it as ‘environmentally friendly’. Peshkov believes that this trend corresponds to the global practice.

Fly-by-night competitors

However, the rise of prices for coating s and the economic crisis at post Soviet Union space in recent years created a very negative phenomenon of so-called fly-by-night companies who are producing the cheapest types of coatings, in most cases ignoring any health safety standards and avoiding any cooperating with inspection authorities. Kuznetsova said that these companies could be found both in Kazakhstan and in neighbor CIS countries.

She added that major producers also operate in the cheapest segment, but the main difference between them and fly-by-night companies is that legal manufacturers would never sacrifice safety of coatings for the sake of low price.

According to Ravshav Kutarbekov, spokesperson for the Agency of Consumer Right Protection, the problem of half-legal producers, which are manufacturing unsafe coatings, really takes place, but in generally they account for less than 5 percent of the overall market share.

Kutarbekov explained that in most cases these are underground lines, based somewhere in private garages or abandoned industrial buildings and their production does not necessary pose any harm to health, but in most cases it composition is differs from one shipment to another.

Peshkov explained that counterfeit really could be found at the market, but in terms of fakes it is quite insignificant. He said that in the border with the Russian regions some gray imports takes place, but more important is the presence of players in the spring and summer producing water-based products that do not meet any standards, without any quality and guarantees, with the price below the threshold of the economy segment.

According to Peshkov these players are as seasonal phenomenon, since they appear and disappear at certain times, but given stable demand for cheap products, in the period of their activity they could compete with official market players.

Call for merge and protectionism

Local coating firms are cautiously speaking about the future of the market, since gradual invasion of foreign products, obviously scares them.

In the opinion of Kurmanalin, in long-term forecasts domestic producers could successfully compete with import and foreign companies only if they hold a course for merger or establish an alliance. He noted that the oldest local firms are operating for less than 20 years, so they have the lack of experience to stand against international giants alone and if nothing would be done, within coming years they could be simply pushed out from domestic market.

Another representative of local coating firm, who agreed to comment on this issue only on condition of anonymity,  suggested that the industry has came to the point when it should be protected by the government. He explained, that coating manufacturers suffer from excessively high rates on loans, unavailability of raw materials in Kazakhstan, such as titanium dioxide and high taxes.

Neighbor Russian producers enjoy some state support and in general a better investment environment, so as a result they are able to sell their products in Kazakhstan at prices lower than in Russia, trying to grab huge market share for the sake of future benefits. According to market participants, this policy has clear features of dumping invasion.

Trade legislation of Eurasia Economy Union has rules about dumping, providing that if it would be proved in court, country affected with it, could enter import restrictions. However, anti-dumping investigation is very complicated procedure and none of the market participants could initiate it alone.