Coatings in Russia 2011: event report

September 06, 2011

Russian coatings industry tries to solve two problems at the same time: competitors with cheap substitutes and growing imports. But to get success in the struggle, players of the market and officials must unite to create the country's own domestic production of raw materials for paints and varnishes.

This year's autumn conference season Creon opens with the event, devoted to coatings industry. The conference “Coatings in Russia 2011” took place on Tuesday, 6 September in the "Baltschug Kempinsk Moscow" hotel. In welcome note CEO of Creon Sandjar Turgunov expressed hope that the discussion would help to develop a common strategy for solution of industry problems accumulated during recent years. Coatings industry is very interesting and has a great potential for investment. That’s why Creon decided to pay attention to this area of Russian chemical industry and "open" the sector for real and potential market players.

The key problem of the Russian coatings industry is disunity and disorganization that leads to a weak lobbying of its interests and a lack of common technical standards. The situation leads to quality degradation of the market where counterfeit and surrogate coatings manufacturers feel confident. This is the opinion of association Centrlak CEO Sergei Yermilov. He encouraged the industry to create a self-regulating organization that would develop common technical standards, lobby industry's interests before the government and develop relationship with the major consumers of paint products. According to his opinion, now the government position regarding the coatings business is that support of this industry is useless. This opinion was represented in one of the government officials’ reports. Adresses which are regularly sent to the regulators by the association Centrlak and individual companies meet very cold response at best.

The coatings industry is fragmented not only organizationally but also technologically. Just 100-120 companies report statistics of production of paint products, while the total number of producers exceeds several hundreds. In this case the top ten producers account for only half of the total output in Russia, while about 200 thousands tons of paint (20% of the market) is produced illegally. However, mass production of substitutes and the lack of a unified technical regulation lead to degradation of the formulations of paints and lacquers and traditional manufacturers - the filler materials, chalk, and hydrocarbon petroleum resin being added in paints extensively. The state standards still placed on virtually any paint products. Following these regulations, however, has long been completely unnecessary. As a result, the cost of coatings can be reduced to two or more times in comparison with the classic formulations produced, but their quality is incomparably lower. As noted in the statement of the brand manager "Factory of packaging products," Valentin Turuntaev, even for packaging of paints and coatings manufacturers often use cheapest cans that can cut worker’s hands. To solve the problem of “garage firms” Mr. Ermilov suggested setting a price range for some brands of paint products, to make surrogate purchase unattractive.

Deputy CEO for Science and Technology of ECOR-Neva Svetlana Polyakova told about the experience of business survival in current market realities. The basis of the company's strategy, she said, is the creation of cheaper analogues of imported products and individual work with the major consumers of industrial coatings. But it is problematic. Higher prices for imported raw materials make competition with foreign-made finished paints more difficult. And it is difficult to get orders from larger customers. The conference participants confirmed that to obtain an order from the major public and private companies in Russia an initial "contribution" of at least 50,000 US dollars is necessary. Only large international firms can pay such price and their products are also more expensive and that’s why all of them actively get more and more orders of shipyards, gas and petroleum industry. At the same time the state procurement regulatory documents have no information about mandatory quota for coatings produced in Russia. But Mrs. Polyakova rightly called the loss of image as a good product by domestic paints as the main problem of the industry. In the sector of household paints Russian players almost entirely surrendered to imports, now the same process begins in the market of industrial coatings. Mrs. Polyakova said that consolidation of the industry is a rational response to such changes and the company she represented, has already established a holding company with a larger firm, VMP. However, cooperation with major Western is feared by most of the players, because Westerners are not interested in support and development of domestic companies. According to the Head of the laboratory of RSU of Oil and Gas Victor Protasov, negative developments in the industry occur greatly as a result of loss of close relationships with customers, which should be interested not primarily in the quality of paints but in quality of surface after painting. In this case the relevant requirements for the coatings should be defined as clearly as possible to reduce corruption component in choosing of supplier.

Anton Zharinov, leading adviser of the analysis and regulation of foreign economic activity Department of Russian Economic Development Ministry, considers it’s not justified to reproach the state authorities. According to him, regulation of market must have a goal not in support of “dying” plants and industries but in rise of competitive plants, that could substitute import and then begin an export. In that case, since 2012, duty on import of raw materials for coatings production will be zero, although before it exceeded duty on import of coatings itself (5%). Domestic companies can get some benefit from it, but for more consistent and detailed protection it’s necessary to have argued, worked legislative initiatives, which are not in great number yet. Participants of the discussion related it with weak integration of industry and the fact that a number of key players follow the principle of "every man for himself".

Dmitry Altukhov, Director of Marketing Service of Empils, one of the largest producers of coatings in Russia, said that the main task of state regulation should be to make running business in the industry more easy, not more complicated and bureaucratized. He confirmed mass presence of production with cost 18 rubles per kg on the market and falsification of all technical standards in the industry, especially in economically peripheral regions. However, producers of such coatings and paints, often working illegally, will not belong to any Associations and Unions. Mr. Altukhov urged industry’s players to gather for detailed objectives, for example, for protection against excessive imports pressure. According to him, in Uzbekistan Tashkent paint factory have attained an introduction of fence 30% duty to import coatings, which became wild, but effective instrument of protection of the national market.

Alexander Reznichenko, owner of Homa Group running business in manufacturing of glue and paint products consider that the main problem of majority of producers is a lack of financial resources and small business scale. Due to this, company has to purchase raw materials by small batches at higher prices than foreign competitors. “Garage firms” don’t allow engaging in a price race as they offer cheaper counterfeit products. Industry consolidation through mergers and acquisitions could become way out of this situation; however, large Western players are not interested enough in domestic plants, that barely make ends meet. Domestic development of raw materials for coatings and special chemicals or, at least, change the customs policy could improve the situation radically. For example, according to Mr. Reznichenko, there is an import duty on polyurethane dispersion although it is not produced in Russia.

Eugeny Kelih, Sales Director of Russian Representation of Hempel, told that the company is going to launch its new plant in Ulyanovsk region in December and will be at the same conditions as domestic companies. Company doesn’t plan to struggle with anyone, protect from anyone and participate in prices races. Mr Kelih notices that the question why production is sold worse should be addressed to oneself, rather than to competitors. Gennady Averyanov, CEO of Russian Representation of Helmos, encouraged participants not to hope on market principles. According to him, situation when solvents for paints are cheaper in Europe than in Russia, although it’s being manufactured from Russian feedstock, says about the complete disorder in the industry, which lives spontaneously. In Europe national industrial associations are very strong and their efforts are aimed at quality development and protection of industry’s interests, that’s why it’s impossible to imagine there that products with costs of 60 rubles and 18 rubles, will be freely sold under the same title on the market.

According to Fares Kilzie, The Head of Creon Company, the Conference indicated all key problems of coatings industry in Russia, which was not in the focus of the market for a long time. Now potential for its development is huge because just 4-5 liters of paint per year are consumed per capita in the country, while in Europe this figure is 20 liters. Unfortunately, not all market participants understand that, and it’s a pity that the Conference was not visited by representatives by some large and well-known producers. Localization of production of raw materials for coatings, which can become impetus for the development of other specialty chemicals, could be the only strategic solution of industry’s problems in Russia. During the discussion participants touched upon the problem of feedstock prices increase, however, it’s impossible in the frames of event to review it more detailed. That’s why, in December of this year Creon will hold one more conference, devoted specifically to this issue, where some investment plans of market players will be disclosed too.



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