Company

Mr. Andreev, how would you evaluate the situation in the world market of specialty chemicals? What are the world market’s trends, which influence the Russian chemical market?

The market of specialty chemicals is quickly developing. Generally speaking, the market of chemical products usually is 1-2% ahead of the GDP growth rate. Apart from the traditional branches, consuming surfactants, polymers, pigments, various kinds of additives and ingredients, there emerge new applications, the development of which is impossible without specialty chemicals. Those are batteries for electric cars, energy efficient materials for construction, biotechnologies and, generally, organic products, alternative energy generation, water treatment. In addition, it is well-known, that in near future, the production of chemicals in the developing countries will become higher, than that in the developed ones. The center of the chemical production is quickly shifting to Asia, new manufacturers appear on the map, for example India. I’ve had a chance to spend two years, working in Hong Kong. There are not so many people in Europe or in Russia, who realise the scale of the processes going on in Asia. We are talking not only about the traditionally powerful producers of chemicals, such as Japan, Korea and China, but also about new players, such as Malaysia, Indonesia, Singapore and other countries.

Finally, this is digital economy. I’ll give you just one example in the field of chemical production: the digital economy has radically changed the awareness of the consumers about the safety or unsafety of chemical products. While in earlier days markets were regulated by the state, today the end-user of food products, cosmetics, clothes etc. can independently evaluate the safety of the products through social networks or mobile applications. If a producer turns a blind eye to it, sooner or later, he will face problems, even if he actually observes the law.

In Russia, the importance of the specialty chemicals has been well understood. During last years, the market of the products, requiring relatively simple production technology, has been saturated with Russian-made products. These are surfactants, resins, polyesters, polycarboxilates - everything, that earlier was 100-percent imported, is now produced in our country.

I think, that any producer or consumer of specialty chemicals should take these trends into account. UTS has timely realized the significance and the capacities of Asia as a source of chemical materials for Russian market. At the moment we already have a staff of seven people at our office in Shanghai, and we are going to further enlarge it.

In 2017-2018 a number of merger-and-acquisitions took place in the world market of specialty chemicals. What kind of consequences could it have? Are these developments positive or are they negative for Russian traders and consumers?

The merger-and-acquisition process in the chemical branch is going on rather actively. The year 2017 saw over 600 deals of this kind for a total amount of $46 billion, about a quarter of this amount falling on specialty chemicals and intermediate products. There are several obvious trends. First, it is the high activity of the government-owned companies in the acquisition market. A good example of it is the purchase of a strategic stake in Clariant by SABIC at the beginning of 2018. A year before, Saudi Armaco and Lanxess created a joint-venture in the field of artificial rubbers. I think, that, having practically unlimited financial resources, such companies are interested in technologies and in diversification of their product portfolio. Another trend is the behavior of the so-called investment activists, interested in reforms and in growth of profits at the companies. A good example of that in recent past is the attempt by PPG to acquire AkzoNobel. You have mentioned the consumers: Kraft Heinz was about to buy Unilever, while P&G had to get into a long dispute with one of such “activists”, who was unhappy about the company’s results…

Facing such risks in the market, companies, particularly the medium-size ones, are forced to improve their financial indicators as much as they can and to seek alliances with bigger players. I think, that the consolidation process in the field of specialty chemistry will only intensifying over time. A “side effect” of it can be reduction of investment into maintaining and enlargement of production, cuts of the sales offices, minimization of technical support, focus on digital technologies etc., but this is my personal opinion.

The reliability of the supplier, availability of a clear and sustainable strategy vis-à-vis the partner are fundamental for the work of any distributor, including in Russia. Unfortunately, for most of the western suppliers our market, despite being a significant one, still has no systemic importance. Therefore, I do not think, that there is much, that we can do. What we are able to do is to constantly make evaluations of the suppliers and to have a diversified portfolio. UTS has about 250 suppliers. The largest one among them provides for about 4% of our sales. We strongly stick to all our agreements, but if we see any risks, we take measures in order to make sure, that our clients get the products of the required quality and at competitive prices. Speaking about specific examples, we only profit from the acquisition of Hexion Performance Adhesives & Coatings by Synthomer company, the latter being a long-standing and important partner of ours. We also hope to continue supplying our clients with A .Schulman’s products after its merger with LyondellBasell. At least, we are working to achieve this goal.

Could you outline the critical point of the Russian market of specialty chemistry?

You know, in Japanese language the hieroglyph that means “crisis”, consists of two parts: “problems“ and “opportunities”. Let me explain. One of the existing bottle necks is the sales of products and generally the reliance on categories like technologies, equipment, financing etc. instead of the market. And here we see good opportunities for partnerships with Russian enterprises. For instance, we are getting numerous requests from Russian manufacturing companies, which say: “Just sell to and we will make the product”. The market players are beginning to realise, that it is not enough to make the product, you still need to sell it in a right way at a maximum price. In order to do that, you need to be able to make calculations, to know your competitors, to be able to foresee the demand, to have a well-developed selling network etc. We can do it all at UTS. In Europe, there are distributors with the business turnover of 11 billion euros. Just think about it: a chemical distributor has a turnover similar to that of a medium-size chemical concern. It means, that the European companies, even when they work at their “domestic” market, see a value added in the cooperation with distributors. This is, clearly, an opportunity for UTS!

Another critical issue for Russian market, and maybe also for any developing market, is the access to technologies. During last few years it became clear, that nobody is willing to share technologies in today’s world, and you can only count on yourself. Russian producers often lose the competition to foreigners in the field of high-technology materials, focusing on the price. Perhaps, all the market players should remember about the need to support R&Ds at least within the framework of their own company, about supporting the quality education and about creating opportunities for the graduates. Here everything goes along the lines of the proverb: “Today’s seed, tomorrow’s harvest”. At the moment, we are actively thinking about what we could do at UTS on our side, for example in terms of education and support for young specialists.

Does the company give priority to work with European or with Asian suppliers at the moment? What are the reasons for making the choice?

UTS was created as a seller of high-quality chemicals mostly from Europe. Today we carefully select our suppliers based on the quality of the products, but our geography has substantially changed. Products from Europe and Asia represent roughly 50% each of our procurement portfolio. We are very happy with our collaboration with BASF, Synthomer, Borealis, DSM and many others. Europe is our close neighbour. We have similar visions, a short transport leg and a long history of cooperation. By the way, we occupy the 37th place in ICIS, the European rating of chemical distributors. In Asia we have an office in Shanghai, which is responsible for the work with suppliers from China and from other Asian countries. Asia provides us with quality at a reasonable price and enables us to constantly enlarge our product mix. Here we are talking specifically about a better value-for-money, not just about low prices. By the way, we have long-term partnership relationships with many suppliers.

In this year we began to actively work in India, and we are going to open an own office there at the end of 2018. We see a big potential in India in specialty chemicals as well as in fine chemistry. The country produces a wide range of unique phytogenous products. It is a very interesting country with an authentic culture and with a quickly developing chemical industry. They also have their “bottle necks”, such as stability of quality of the products, but in a number of areas, for example in pigments, India already occupies leading positions in the world.

I think, in future we will maintain the balance between the western and the Asian markets.

What application segments does the company focus on?

Today the chemical business of the company is represented by paints, dry mortars, composites, specialty chemicals and solvents, polymers and industrial rubber, as well as by ingredients for food industry, cosmetics, household chemistry. We aspire to do our job well. This is why we approach the selection of new markets very carefully. Building up our strategy, we take into account the specifics of the development of Russian industry, for example, in light of the import substitution. We know, which branches are affected by economic and financial fluctuations to a larger extent and which branches are less affected. We rely on the knowledge and on the experience available at the company.

Sometimes suppliers say: “But you are not a specialized company, which focuses on one particular branch of industry. Why should we work specifically with you?” This seems a rather ridiculous question, particularly when asked by representatives of diverse business companies, which have hundreds or even thousands of products in their product mix. But the point is not this: the availability of multiple areas of work is a cornerstone of financial stability of the company, a guarantee, that the supplier will get his money timely. This is a guarantee of a quality service for the clients, including logistics, of availability of the product in stock and of proper technical support. By the way, in this year the owners of UTS adopted the decision to invest into a new laboratory complex in St. Petersburg. The complex will include five labs, covering the main needs of our clients. We have also learnt to work with different branches and to understand their peculiarities. We are never shy to ask questions and we are ready to learn.

Our plans for near future envisage an even more active presence in the field of ingredients for pharmaceuticals, as well as in products for cosmetics. Second, to continue developing in the existing areas through engaging new suppliers. Third, to continue strengthening and enlarging the cooperation with Russian producers of chemical raw materials. Our company began this work five years ago, and at the moment we have a number of solid joint projects with Russian producers of chemicals. As an example, I could mention our cooperation with PAO “Metafraks”, which has a reputation of a knowledgeable and reliable partner. Fourth, to develop production under own trade mark, as well as to develop production operations, which do not require special expertise, but which have a high value added, such as blending, compounding etc.

The producers of paints continue being one of the main consumers of the specialty chemicals, supplied by UTS. How would you assess the overall situation in segment?

Paints are of paramount importance for us. We have an excellent team of managers, supporting the growth every year, independently of the general economic situation! We assess the situation in the market as stable. On the one hand this is good, on the other hand, we do not see many new big projects and product lines entering the market. Russian Paints and YarLi companies remain the innovation leaders in the market, in our opinion. Novbytkhim, a St. Petersburg-based company, is an example of competent work and of reliable partnership for us.

Among the market trends, we see, for example, an interest to UV-cured lacquers. We hope, that with companies like Jotun, Hempel, Nor-Maali, PPG Industries, Teknos entering the market, the segment of industrial coatings in Russia will get a new incentive for development.

Generally, we think, that in the paints segment the year 2018 will be similar to 2017. There may be some growth of production, but not a very big one.

What should your partners expect next year: any growth or reduction of prices, any shortage or surplus of products in the market?

2018 has been marked by growth of prices for raw materials. This is a consequence of the changes of the rouble’s exchange rate in relation to the imported products, of growth of prices for monomers and of shortages of some of the ingredients. An alarming development is the closure of a number of factories in China, following the government’s stricter requirements to the environment protection. The departure of enterprises leads to shortages of products in the market and to growth of prices. As far as our company is concerned, I have already mentioned, that we have partnerships with many Chinese producers. This is helpful. On the other hand, we constantly work to improve and to enlarge our product mix.

Another trend in the market is the western producers’ shift to new environment-friendly materials, which often enjoy no demand in the Russian market. Sometimes the manufacture of traditional products still goes on, but these products are at the end their “life cycle” and represent no interest for the producer with all the consequences, that this situation involves for the prices and technical support.

Therefore, we do not rule it out, that the Chinese factor will continue placing pressure on the market also during next year. These are very serious trends, which one needs to analyse and to timely take the required countermeasures.

UTS has created an own Center of Science and Technology. Could you speak of any positive experience of cooperation with Russian producers of paints?

We are proud of our Center of Science and Technology. By the way, in 2019 all our labs, including the paints lab, will move to new premises in St. Petersburg. The technology specialists will get better work conditions, new equipment will be installed, the paints lab will be situated near by the sales office. During last months, we accomplished about 15 projects with our customers, helping them to develop formulations and to launch new products in the market. We do not simply select a product. We want to provide our customers with comprehensive recommendations. There is such a notion in the market: costovation, which derives from costs and innovation. Innovations do not always involve expensive components and higher prices for the products. It can be also a reduction of prices for comparable end-user performance.

What is your forecast for 2018?

Let’s wait for the results of the year. I think, we will show a growth of revenue. The most important thing is that we have promising projects, we have ideas on how to develop the business. Let me use this opportunity to say thank you to all our suppliers and customers. We will spare no effort to meet your expectations.