Market Reports

Russia’s instant growth

The Orimi Trade Group as recently announced plans to invest up to US$130 million in the construction of a new coffee factory in the St Petersburg region. The new factory will be built within the Utkina Zavod industrial park and will specialise in the production of instant coffee. Construction will begin in 2017 and should be completed in 2019. The new plant will have the capacity to produce approximately 4000 tonnes of coffee per year. It will allow the company to localise production of instant coffee within Russia and reduce its reliance on imports.  Sergei Yakhnyuk, Deputy Chairman of the government of the St Petersburg region, says the project will be one of the largest in the Russian coffee industry in recent memory. According to Yakhnyuk, the local government is supporting the development by granting subsidies and special benefits to Orimi Trade to guarantee the success of the project. The launch of the new factory will make St Petersburg one of the centres of coffee production in Russia. At present, the region already accounts for 35 per cent of the total production of coffee in Russia, a share that will increase upon completion of the Orimi Trade project. Despite the financial crisis in Russia caused by Western sanctions, the Russian coffee market is steadily growing. According to data from the Russian Ministry of Agriculture, the market amounted to 140,000 tonnes in volume terms for all types of coffee in 2016, which is comparable to the figures from 2015. According to predictions of analysts from the Russian Ministry of Industry and Trade, amid the ongoing recovery of the Russian economy from the consequences of the crisis, coffee production in Russia in 2017 is likely to grow by 13 per cent compared to 2016. In value terms, the market is estimated at US$3 billion. In 2016, the market grew by about 15 per cent compared to 2015. Domestic consumption of coffee is also growing in line with production. According to Rusteacoffee, the Russian association that represents leading Russian tea and coffee producers, the volume of coffee consumption in Russia since 2014 has significantly increased and amounted to 135,000 tonnes, while the biggest growth observed was in the roasted coffee segment. Domestic production accounts for about 70 per cent of consumption in the Russian market. It is planned that building of the new factory will reduce further coffee imports into the country. Currently the Russian coffee industry comprises more than 400 processing plants, the vast majority of which accounts for small roasting plants. The number of large enterprises is estimated at about 15. The growth of production will be also driven by the predicted growth of coffee consumption in Russia, which should be in the range of 2 to 4 per cent annually until 2020. This is mainly attributed to the ever-growing popularity of coffee houses in the country. Analysts from the Russian Ministry of Industry and Trade predict that coffee production in the country will continue to grow in the coming years, while in addition to Orimi Trade, expansion of production may be announced by other industry players. That will be largely due to huge volumes of state support, allocated for the needs of the Russian coffee industry by the Russian government, which resulted in a significant reduction of imports in recent years. In the case of imports, currently Italy remains the main importer of coffee to Russia, supplying an estimated 44 per cent of imports to the country. The Russian government plans to continue support of the domestic coffee producers during the next several years, while major measures of the industry’s state support mainly includes tax benefits, and in particular a zero rate on the imports of raw materials, such as green coffee, as well as a customs duty of 7.5 per cent on the imports of finished coffee into the country. Potential threat
The growing volume of domestic production has stymied the growth of coffee prices in Russia in recent years. However, there is a possibility that such a situation may be changed, while the protection of the Russian market may be significantly weakened due to the forthcoming creation of free trade zones between Russia and Vietnam, which is currently being discussed by governments of both countries. In the case of Vietnam, the country remains the world’s largest supplier of Robusta coffee, while its government is strongly lobbying for the easing of tariff protection for the supply of its coffee to Russia and other countries of the Eurasian Customs Union, which comprises Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan. If successful, an agreement between Russia and Vietnam may result in the bankruptcies of many local producers, in particular those of small and medium size. In the meantime, local producers are aware of the current situation and have already called on the Russian government to take measures for the prevention of the flooding of the domestic market with cheap coffee from Vietnam. According to the Russian Association of Coffee and Tea Producers, the planned lifting of duties will have a negative impact on the domestic coffee industry, while any reductions of the existing duties for the import of finished products can prevent implementation of new investment projects in the industry, and lead to losses of jobs and producers’ taxes. In addition, according to producers, this will result in the reduction of the quality and safety of coffee produced in Russia, and will result in the growing of market vulnerability to fluctuations of foreign currency. Currently, the roasted and ground segment remains the major driver for growth of the Russian coffee market. This has seen a booming number of specialised restaurants and small coffee shops, all of which have contributed to the increase in consumption. In the case of Orimi Trade, the company is currently controlled by Russian billionaires Alexander Yevnevich and Sergei Kasyanenko. In 2015, the company’s turnover amounted to US$630 million. The company produces coffee under the brands of Jockey and Jardin, along with tea under the brand names Greenfield, TESS, Princess Nuri, Princess Java, Princess Kandy and Princess Gita. The products are mainly supplied to the domestic market, though they are also exported to some 35 international markets. Orimi Trade already operates two production sites, both of which are located in the St Petersburg region. Both factories specialise in the production of roasted coffee, as well as prepacking of instant coffee, which is purchased from abroad. The company’s total volume of coffee production is currently estimated at 50,000 tonnes, while building of the new plant should contribute to significant increase of these figures already in the coming years. GCR

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