COUNTRY SPOTLIGHT: RussiaCOUNTRY SPOTLIGHT: Russia

Assessment of the Coatings Market Potential

in Russia

RigaSeptember 25, 2014

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One of Frost & Sullivan’s core competencies is our breadth of industry across four primary industry sectors, representing hundreds of individual subsectors and markets.

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&

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3

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Chemicals,

Chemicals & Materials in Construction &

Utilities

Chemicals & Materials in Food, Drugs &

Cosmetics

Chemicals & Materials in Transportation

4

Chemicals, Materials & Food

Utilities

Food & Beverage Ingredients

Personal Protective Equipment (PPE)

Source: Frost & Sullivan

Mega TrendsTop Mega Trends for Coatings to 2020

Using Bio-based Feedstock

Improving Health, Safety & Security

Globalizing

Major Trends 2014 2017 2020

Making coatings from available

bio-based resources e.g. chalk

and china clay

Use of novel feedstocks e.g.

plant oils and tree resins

Crop strain developments

targeted at optimizing

coatings feedstocks

Low VOC coatings

Water-born coatings

REACH US Chemical Management Ethical manufacturing, fair REACH equivalent in

Coatings that base on the

innovative technology e.g. high

solid coatings

Environment-acceptable

coatings e.g. powder

coatings

5

Globalizing Regulations

Growth in Intelligent Solutions

Globalizing Competition

Waste Reduction

Source: Frost & Sullivan

and Eco

Labels

US Chemical Management

Program

Ethical manufacturing, fair

trade, traceability

REACH equivalent in

developing economies

Multifunctional

coatings

Significant reduction

in toxicity, improved

working conditions

Intelligent re-use of waste streams e.g.

chemical industry supplying heat and CO2

to other industries

Investments and growth in

developing economies

Rise of global coatings

manufacturers originated in

BRICS

Development of

recycling technology

More effective use of

natural resources such as

water and oil

Real “cradle-to-cradle”

solutions

Russian Economy at a Glance

After a swift recovery from 2009 crisis, the Russian economy has entered into recession, however is expected to return to 2.5% growth

beyond 2015

10.0

Key Socio-economic Indicators, Russia (2010-2019)

Real GDP Inflation Unemployment

6

4.5 4.33.4

1.3

0.21.0

2.5 2.5 2.5 2.5

0.0

2.0

4.0

6.0

8.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

%

Source: IMF

Russian Coatings Market Overview

1.5

1.6

Russian Coatings Market Volume, 2009~2015

digit growth in 2013, the market is expected to stall in 2014 After double-digit growth in 2013, the market is expected to stall in 2014 and rebound to a moderate growth in 2015 and onwards

Market value (2013) ~ EUR 4 billion

7

1.15 1.18 1.21.25

1.4 1.41.5

1

1.1

1.2

1.3

1.4

1.5

2009 2010 2011 2012 2013 2014F 2015F

‘000 t

on

nes

Example – Automotive market as a benchmark of industrial growth

2.46

2.75

2.53 2.45

41%

40%

50%

2.5

3

Veh

icle

Sale

s (

mil

lio

n u

nit

s)

Passenger Vehicle Sales - Russia, 2009~2018

Industrial sectors, like automotive, are expected to slow down in 2014-2015 and thus negatively impact the coatings market in Russia

8

1.37

1.74

2.46 2.53

2.192.1

2.22.32

2.4527%

12%

-8%

-13%

-4%

5% 5% 6%

-20%

-10%

0%

10%

20%

30%

0

0.5

1

1.5

2

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Gro

wth

rate

Veh

icle

Sale

s (

mil

lio

n u

nit

s)

Source: LMCA

Market Segmentation and Competition

� Despite the existence of over 200 coatings producers in Russia, themarket is consolidated and dominated by foreign companies

� Increasing presence of Asian (mainly – China) manufacturers

� Industrial segment to grow towards global average 45%-55% split

Competition (value terms) Market segmentation

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40%

60%

Russian Foreign

60%30%

5%5%

Decorative

Industrial

Automotive

Other

Source: F&S

Example (segment analysis) – Automotive Refinish Market

� 3-5% annual car park growth; nearly half vehicles > 10 years old

� After 12-15% growth in 2012, slowdown due to ASP decrease

� Key competitors: Polish manufacturers (Novol, Solid, Troton), PPGIndustries, HB Body, AkzoNobel, DuPont, Roberlo SA

Market value (2013): EUR 53 million

10

75%

20%

5%

Acryllics Alkyd Other

35%

16%13%

22%

14% Putties

Clearcoat

Basecoat

Hardener

Filler

Source: F&S

Dri

vers

Short-term Impact Long-term ImpactLow per capita

consumption Consumer purchasing

powerInfrastructure

development Revival of manufacturing

Market Drivers and Restraints

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Restr

ain

ts

Short-term Impact Long-term Impact

Worsening economic

environment

Substitute products

(decorative paints

market)

Multifunctional coatings

longer product lifetimeLow quality/falsified

products

Drivers Explained – Infrastructure Modernization

Investment: $ 57 billion

�Construction/modernization of ~20,000 km of roads“Fools and Roads”

Up in the Air

Investment: $ 3.5 billion

�New and modernization of existing airports

�Acquisition (lease) of 450 airliners

�Air traffic passenger turnover is forecast to double

12

�Construction/modernization of ~20,000 km of roads

�Localization of automotive manufacturers and

component suppliers

“Fools and Roads”

Investment: $ 13.5 billion�20,000 km of new railway links by 2030

�The dawn of high-speed railway: St-Petersburg–

Moscow– Yekaterinburg

�Modernization of rolling-stock (passenger and cargo)

Back on Track

Total Investment 2012-2019: ~ $ 400 billion

Localization and Expansion

Both foreign and Russian producers are expanding their manufacturing Both foreign and Russian producers are expanding their manufacturing capacities in light of the market’s growth

13

Coatings and Sanctions

� The first real example – AkzoNobel stopped supplying its

aerospace coatings to Kazan Helicopters (September)

� 35% of total coatings export from Russia was destined for

Ukraine in 2013, but constitutes only 39 th. tonnes (~3% of

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Ukraine in 2013, but constitutes only 39 th. tonnes (~3% of

market volume)

� Overall trend in construction materials industry – re-

orientation towards domestic production and supplies from

Asia

Top Opportunities Across Coatings Market

Top Growth Sales channel:

Business models:• Localization

• M&A/partnerships

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Top Growth Opportunities

Sales channel:• Do-it-Yourself

Market segments:• Powder coatings

(automotive, pipes)

Key success factors: optimal pricing, sales and marketing strategy

Q & A

Vitaliy Lehkyy

Senior Consultant – Russia, CIS and CEEBrussels / Moscow

+32 489 508 896

vitaliy.lehkyy@frost.com

Thank You!Спасибо!

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vitaliy.lehkyy@frost.com

Dr Leonidas Dokos

Research Director - Chemicals, Materials & Food (CMF); Oxford

+44 (0)1865 398 685

leonidas.dokos@frost.com