Water heating Chile. World heating A multi client study. By Michela Cressotti. May 2014 Edition 2

Transcription

1 Water heating Chile World heating 2014 A multi client study By Michela Cressotti May 2014 Edition 2

2 Water heating Chile A multi client study Contract: Report 57200/10 Edition 2 Date: June 2014 Issued by: BSRIA Limited Old Bracknell Lane West, Bracknell, Berkshire RG12 7AH UK Telephone: +44 (0) Fax: +44 (0) E: bsria@bsria.co.uk W: Compiled by: Name: Michela Cressotti Approved by: Name: Krystyna Dawson All rights reserved. This document may not be reproduced, transmitted or redistributed in part or full without prior written consent from a BSRIA Director. BSRIA Page 3 of 41 Report 57200/10 Edition 2

3 PREFACE PREFACE This second edition version of the report has been issued due to further information received from industry stakeholders. As a consequence the market size figures for gas instantaneous, electric storage and gas storage have been revised and the following tables and figures have been updated: Tables 2 10 and and Figures 6, 7, 9, 11, 12, 13 & 15. BSRIA Page 4 of 41 Report 57200/10 Edition 2

4 CONTENTS CONTENTS 1 MARKET BACKGROUND OVERVIEW Economy and construction Population and climate Economy Construction New house building Energy supply Residential electricity and gas supply Heating stock Local heating practices District heating MARKET SIZE AND SEGMENTATION Market size Technical segmentation by type of water heater Electric storage Gas storage Electric instantaneous Gas instantaneous Indirect cylinders MARKET DRIVERS AND TRENDS Market drivers Market trends Market forecasts WATER HEATERS STRATEGIC OVERVIEW Macro-environmental analysis Market attractiveness analysis STRUCTURE OF SUPPLY Market shares Electric storage Gas storage Gas instantaneous Product range MAIN SUPPLIERS DOMESTIC VERSUS OVERSEAS TRADE Domestic production Imports and exports DISTRIBUTION AND END USER SECTOR Overview Distribution of water heaters Major distributors Distributor profiles Wholesalers Retailers stores DIY stores End user sector...41 BSRIA Page 5 of 41 Report 57200/10 Edition 2

5 CONTENTS TABLES Table 1 Heating stock by type of heating product, Table 2 Water heating market size, volume and value, 2012 and 2013e Table 3 Electric storage heaters by product type, volume, 2012 and 2013e Table 4 Electric storage heaters by capacity, volume, 2012 and 2013e Table 5 Electric storage heaters by material type, volume, 2012 and 2013e Table 6 Gas storage by capacity, volume, 2012 and 2013e Table 7 Gas instantaneous heaters by flow rate, volume, 2012 and 2013e Table 8 Gas water heaters by type of technology, volume, 2012 and 2013e Table 9 Historical trends, water heating, volume ( 000 units), Table 10 Forecasts, water heating, volume ( 000 units), Table 11 PESTLE analysis of Chile heating products market Table 12 Competitive forces analysis Table 13 Market attractiveness analysis Table 14 Market shares for electric storage water heaters ( 000 units), 2012 and 2013e Table 15 Market shares for gas storage water heaters ( 000 units), 2012 and 2013e Table 16 Market shares for gas instantaneous water heaters ( 000 units), 2012 and 2013e Table 17 Product range of water heaters suppliers Table 18 Overseas trade traditional water heaters ( 000 units), 2013e Table 19 First point of distribution for manufacturers / importers, 2013e Table 20 Major heating products distributors, Table 21 Major heating distributors and brands, Table 22 Water heating market by end user sector, 2013e FIGURES Figure 1 Map of Chile... 7 Figure 2 Value of new house building in Chile, Figure 3 Number of permits ( 000) issued for the construction of new houses, Chile, Figure 4 Sales of new houses, Chile, 2013 and Figure 5 The main applications of hydronic systems in Chile 2013/ Figure 6 Water heater sales by type, volume, 2013e Figure 7 Electric storage heaters by material type, volume, 2012e Figure 8 Gas instantaneous heaters by flow rate, volume, 2013e Figure 9 The water heater market forecasts, volume ( 000 units), Figure 10 Competitive forces analysis Figure 11 Market shares for electric storage water heaters, volume, 2013e Figure 12 Market shares for gas storage water heaters, volume, 2013e Figure 13 Market shares for gas instantaneous water heaters, volume, 2013e Figure 14 The main distribution channels of water heaters Chile Figure 15 First point of distribution, water heaters, 2013e Figure 16 Sales by end user sector, 2013e BSRIA Page 6 of 41 Report 57200/10 Edition 2

6 Water heating Ukraine World heating 2014 A multi client study By Natalia Webb May 2014

7 Water heating Ukraine A multi client study Contract: Report 57200/81 Date: May 2014 Issued by: BSRIA Limited Old Bracknell Lane West, Bracknell, Berkshire RG12 7AH UK Telephone: +44 (0) Fax: +44 (0) E: bsria@bsria.co.uk W: Compiled by: Approved by: Name: Natalia Webb Name: Krystyna Dawson All rights reserved. This document may not be reproduced, transmitted or redistributed in part or full without prior written consent from a BSRIA Director. BSRIA Page 3 of 34 Report 57200/81

8 CONTENTS CONTENTS 1 MARKET BACKGROUND OVERVIEW Economy and construction Population and climate Economy Construction New house building Energy supply Residential electricity and gas supply Heating stock Local heating practices District heating MARKET SIZE AND SEGMENTATION Market size Technical segmentation by type of water heater Electric storage Gas storage Electric instantaneous Gas instantaneous Indirect cylinders MARKET DRIVERS AND TRENDS Market drivers Market trends Market forecasts WATER HEATERS STRATEGIC OVERVIEW Macro-environmental analysis Market attractiveness analysis STRUCTURE OF SUPPLY Market shares Electric storage Gas storage Oil storage Electric instantaneous Gas instantaneous Indirect cylinders Product range DOMESTIC VERSUS OVERSEAS TRADE Domestic production Imports and exports DISTRIBUTION AND END USER SECTOR Overview DIY Distribution of water heaters Major distributors Distributor profiles End user sector...33 BSRIA Page 4 of 34 Report 57200/81

9 CONTENTS TABLES Table 1 Background data economy and construction, f... 6 Table 2 Heating stock by type of heating product, Table 3 Water heating market size, volume and value, 2012 and 2013e Table 4 Electric storage heaters by product type, volume, 2012 and 2013e Table 5 Electric storage heaters by capacity, volume, 2012 and 2013e Table 6 Electric storage heaters by material type, volume, 2012 and 2013e Table 7 Gas storage by capacity, volume, 2012 and 2013e Table 8 Electric instantaneous by power rating, volume, 2012 and 2013e Table 9 Electric instantaneous water heaters by type, volume, 2012 and 2013e Table 10 Gas instantaneous heaters by flow rate, volume, 2012 and 2013e Table 11 Gas water heaters by type of technology, volume, 2012 and 2013e Table 12 Indirect cylinders by capacity, volume, 2012 and 2013e Table 13 Indirect cylinders by heating element, volume, 2012 and 2013e Table 14 Historical trends, water heating, volume ( 000 units), Table 15 Forecasts, water heating, volume ( 000 units), Table 16 PESTLE analysis of Ukraine heating products market Table 17 Competitive forces analysis Table 18 Market attractiveness analysis Table 19 Market shares for electric storage water heaters ( 000 units), 2012 and 2013e Table 20 Market shares for gas instantaneous water heaters ( 000 units), 2012 and 2013e Table 21 Product range of suppliers of water heaters Table 22 Overseas trade traditional water heaters ( 000 units), 2013e Table 23 First point of distribution for manufacturers / importers, 2013e Table 24 Major heating products distributors, Table 25 Major heating distributors and brands, Table 26 Water heating market by end user sector, 2013e FIGURES Figure 1 Map of Ukraine... 6 Figure 2 Water heater sales by type, volume, 2013e Figure 3 Electric storage heaters by material type, volume, 2012e Figure 4 Gas instantaneous heaters by flow rate, volume, 2013e Figure 5 The water heater market forecasts, volume ( 000 units), Figure 6 Competitive forces analysis Figure 7 Market shares for electric storage water heaters, volume, 2013e Figure 8 Market shares for gas instantaneous water heaters, volume, 2013e Figure 9 First point of distribution, water heaters, 2013e Figure 10 Sales by end user sector, 2013e BSRIA Page 5 of 34 Report 57200/81

10 1 MARKET BACKGROUND OVERVIEW Figure 1 Map of Ukraine Source: ECONOMY AND CONSTRUCTION Table 1 Background data economy and construction, f Units (e) 2014(f) 2015(f) Population Million GDP bn GDP per capita (ppp) 5,500 5,550 5,600 5,600 5,600 GDP real change % Inflation % Unemployment % Construction output Euro bn Number of households Million New dwellings (completions) Thousands Source: Euro Construct/ BSRIA Population and climate In 2013 Ukraine's population amounted to million people, a slight decrease compared to 2012 and 2011, according to the State Statistics Service. Thus the population of Ukraine remains the 5 th largest in Europe, but having declined by more than 4 million since December The urban population is around 69% and rural 31%. The average population density is around 80 persons per 1 km 2. The population is in decline due to a fall in the birth rate and net emigration. Thousands of labour migrants from Ukraine are currently working in EU countries. Located in the central part of the northern temperate zone, Ukraine has a continental climate with four distinct seasons. The southern coast of Crimea has a moderate Mediterranean climate. The average yearly temperature in Kiev is C. The coldest month is January, averaging a temperature of -5 0 C, and the hottest month is July with an average temperature of 20 0 C. There is a long winter season requiring space and hot water heating in the whole country. BSRIA Page 6 of 34 Report 57200/81

11 1.1.2 Economy The Ukrainian economy has now entered its 3 rd year of crisis, with basically zero economic growth, reflecting a sharp contraction from +5% growth seen in Economic stagnation has been closely linked to political developments. In December 2013 Ukraine plunged into a major political crisis after Ukraine's former president, Viktor Yanukovich, under Russian pressure, turned his back on a trade deal with the EU and accepted a USD 15 billion bailout from Moscow. That prompted three months of demonstrations concentrated at the Maidan square in central Kiev, leading eventually to the overthrow of Yanukovich on February 22 nd New elections were set for May 2014 and opposition leader Arseniy Yatsenyuk was appointed Acting Prime Minister. On March 21 st 2014, Yatsenyuk signed the stalled Association agreement with the European Union in Brussels, although the trade part of this agreement is planned to be signed only after the Ukrainian presidential election in late May. Immediately after the revolution, the half-island of Crimea was invaded by Russian forces. Russia subsequently organised an independence referendum and in March 2014 Russia accepted Crimea as a new region within the Russian federation. Although this change in Crimea is not internationally recognised, Ukraine has de facto lost part of its territory including the 2.3 million population and an important part of the country s potential market. As a result of the revolution, the bailout previously offered by Russia was cancelled, but the European Union then offered even higher funding via the IMF. Ukraine is virtually on the verge of the economic and financial bankruptcy. Ukraine s overall state debt has reached 53% of the Gross Domestic Product (GDP), or UAH 800 billion. In March, 2014 the country agreed to a minimum of USD 14 billion to as much as USD 18 billion in an IMF package that requires massive reforms of Ukraine s weak economy. It was estimated by Ukraine s prime minister in December 2013 that Ukraine will need a minimum of USD 17 billion to prevent default on payments to banks for government debt already incurred. Its foreign exchange reserves are almost exhausted and it needs USD 20 billion a year just to finance its annual current trade deficit of that amount. But if its currency continues to decline, if exports decline, and if the cost of imports rise all of which are likely- then the IMF s pending USD 15 billion may prove insufficient. Some commentators expect GDP to fall in 2014, taking into account the current instability. In recent months the local currency has taken a hammering. From late 2013 until mid-january the Hryvnia was trading at around 11:1 with the euro; at the time of writing the exchange rate is 15:1. Hryvnia devaluation will cut private consumption even deeper and budget cuts will only aggravate the problem. However, cheaper exports as well as more competitive domestic commodities will have a chance to gain momentum owing to the national currency s decline. Also the new government is expected to launch an anti-corruption drive and offer in general more competent economic management, which should certainly help the economy in the medium term Construction The construction sector has suffered low levels of activity in the last few years. In 2013 overall construction volumes reached UAH 61.2 billion (Euro 5.7 billion) down 11% from UAH 65.5 billion in In 2012 construction output plummeted by 13.8%, reversing the 11% growth seen in While housing construction registered modest growth in 2013, many non-housing projects were stalled. One problem in the construction industry has been excessive bureaucracy in the permitting system, where signatures are required from up to 20 state officials before projects can start. The new licensing system is based on the declarative principle, when the developer can begin construction after filling a BSRIA Page 7 of 34 Report 57200/81

12 declaration and sending it to the appropriate regulatory authorities. However bureaucratic difficulties remain for any developer which is reflected in the construction figures. A new regulatory approval system was implemented by the Ministry of Regional Development, Construction, Housing and Communal Services in March For example, the Law of Ukraine "On regulation of urban development" has halved the number of procedures associated with obtaining building permits - from 20 to 10. This resulted in the reduction of the duration of construction registration by five times - from 375 to 73 days. Thus, after simplifying building permits procedures, according to DoingBusiness experts, Ukraine has moved up in the ranking by 145 points, from 186th to 41st place. This demonstrates the strong interest both of the government and business entities in improving the investment climate in the country. Thus, during 9 months of 2013 alone, 167 billion USD was invested in the construction industry of Ukraine, which is up 7% year-on-year New house building According to the Ukrainian statistical office, Derzhkomstat, the volume of new dwellings completed in 2013 reached million m 2, up from million m 2 in 2012 and 9.41 million m 2 in This amounts to around 102,000 dwellings in The highest growth rates were recorded in the construction industry of Kiev and Kiev region. In million m 2 respectively were commissioned in both the capital and Kiev region. High rates of construction were observed last year in the Crimea 963,400 m 2, Lviv region 675,100 m 2, Odessa region 637,300 m 2, Ivano-Frankivsk region 631,200 m 2. New housing construction in Ukraine remained steady during the 1980 s, changing very little between 1985 and The downturn started immediately after Ukraine s independence was gained from the Soviet Union in Rates of new housing construction fell sharply from 321,000 dwellings in 1985 to a nadir of just 60,000 dwellings in It was primarily the lack of state funding for public construction and expensive credit resources which had this catastrophic effect on levels of new building, while the private sector was not yet developed to replace a state dominated industry. The new mortgage law (passed December 2005) gave Ukrainian banks a base to provide mortgage services at the reasonable rates. This created the highest demand on residential building as mortgage credit became more readily available. In addition to the rise in private financing, the government introduced a state-backed credit for key public-sector workers. This involves interest-free loans for state employees to purchase or construct flats or individual houses for a period up to 20 years. However during the period 2009 to 2013 banks made credit conditions much more difficult. Potential home owners were required to make large deposits and demonstrate a proof of their official income to obtain mortgage approvals; interest rates remain much higher than in EU countries, as well Energy supply In order to meet internal energy demand Ukraine imports 75% of energy resources. The dependence on Russian gas makes Ukraine particularly vulnerable, in both economic and political sense. The price on gas has been used as a stranglehold in more than one negotiations process. According to EIA, most of Ukraine's primary energy consumption is fuelled by natural gas (about 40%), coal (about 28%), and nuclear (about 18%), based on 2012 data. Only a relatively small portion of the country's total energy consumption is accounted for by petroleum and other liquid fuels and renewable energy sources. Ukraine has 395 million barrels of proven oil reserves, the majority of which are located in the eastern Dnieper-Donetsk basin. Although Ukraine has made efforts at exploration, particularly in its sector of BSRIA Page 8 of 34 Report 57200/81

13 the Sea of Azov, oil production has remained relatively flat since independence. Consumption, on the other hand, has fallen dramatically. The Ukraine energy sector is dominated by State ownership. The most liberalised market in the Ukrainian energy sector is that of oil and oil products. Prices on the market were freed as early as 1995/1996. As a result supply is guaranteed for solvent customers and competition, especially between private filling stations. For domestic use, oil is considered the most expensive fuel for central heating. The gas and coal markets remain subject to state regulation. The national gas distribution system is run by the state company, Haftogaz Ukrainy. Gas tariffs for all consumer groups are set by National Electricity Regulation Commission (NERC), according to methodology elaborated in There is a a clear differentiation in gas price depending on the consumer group. Industry and public institutions pay much more than households. The disparity is meant to be a social protection step for households and is based on a complicated system of cross-subsidies. Ukraine's power sector is the twelfth-largest in the world in terms of installed capacity, with 54 gigawatts (GW), with 15 nuclear reactors (all VVER type) in 4 power plants. In 2013 the share of nuclear power plants was 43% of Ukraine's overall electricity output (compared to 45.5% in 2012), the ministry's thermal power plants and combined heat and power plants accounted for 44.7% (44.7%), hydropower plants for 7.3% (5.5%), while the share of municipally owned heat stations and district power stations was 4.3% (4%). The share of alternative energy sources in total electricity output was 0.6% (0.3%). Due to the developed agricultural infrastructure, Ukraine has impressive potential for biomass energy production. The Organisation for Economic Co-operation and Development (OECD) has named biomass one of the most attractive sectors for foreign direct investments in Ukraine. According to Ukraine s energy balance, the share of biomass in the total primary energy supply is only 1.24 %, whiles there is an opportunity to increase this number up to 10%. In October 2012 Ukraine made a commitment to the European Energy Community to increase renewable energy share in its energy balance up to 11% by In addition, the State Energy Strategy for 2030 stipulates that Ukraine may produce up to 19% of energy from renewable energy sources by Residential electricity and gas supply The density of gas distribution pipelines is high in Ukraine by Soviet standards, although lower than the OECD average. According to the latest census data available (December 2000), there were 161,077 km of gas pipelines in total, including 67,558 km in urban areas. Gas supply is high in cities, towns and villages. Not surprisingly cities have predominantly mains gas, while villages have a high proportion of bottled gas and less mains gas. Towns also have very high gas supply overall, with a significant share of bottled gas. According to Derzhkomstat, around 83.2% of the total housing stock had gas supply in 2012 compared to 81.5% in The lowest number of gasified dwellings is in predominantly rural Central-Northern Ukraine and Western Ukraine, while industrial Eastern Ukraine and Crimea have the highest levels of gas supply. The International Monetary Fund (IMF) was pushing Ukraine to increase domestic gas prices by as much as 50%. In March 2013 Ukraine was expected to increase domestic gas prices by 40% once discounted import prices from Russia expire. Household gas and heating tariffs still remain among the lowest in Europe and well below import parity. BSRIA Page 9 of 34 Report 57200/81

14 1.2 HEATING STOCK Table 2 Heating stock by type of heating product, 2012 Type of heating Million dwellings % District heating (> 600 kw) % Collective heating ( kw) % Individual central heating gas % Individual central heating oil % Individual central heating solid fuel % Individual central heating others % Total individual central heating % Room heating % No heating / other heating % Total % based on industry sources Most individual central heating is now based on natural gas boilers. There are some solid fuel boilers, particularly in rural areas, a growing niche market in electric boilers, while oil boilers are virtually extinct. More than half of new dwellings are believed to be equipped with individual central heating, compared with around 23% of dwellings in the overall heating park in existing dwellings. 1.3 LOCAL HEATING PRACTICES Government reforms have been applied in several areas, including privatisation in the energy sector, the phasing out of energy subsidies, legislation allowing the decentralisation of district heating, and energy saving standards in new construction including the installation of heat meters and energy saving equipment, such as thermostatic radiator valves. Only limited success, however, has been achieved in these areas. Conversions from district heating started in 1993, after a regulation was introduced to allow for the installation of roof boilers. Roof boilers may be installed in residential and public buildings only if they have 9 floors or less. During there were some conversions (mainly in non-residential buildings) from district heating to individual and collective heating systems, although there was no coordinated national government policy to decentralise the district heating system. Instead local authorities tended to hinder progress in this area, demanding a baffling number of permissions from official state bodies before disconnections from district heating were permitted. There was, however, progress in 2001 with the publication of new building regulations, which allow the installation of gas heating products in apartment blocks up to 10 stories high (DBN B.2. published on May 20th 2001). Paragraph 6.34 of this document translates roughly as follows: To heat living premises in buildings up to 10 floors high it is allowed to install gas stoves, convectors, heaters and other types of mass manufactured gas heating equipment with waste gases emitted via the building s outside wall (as designed by the manufacturer). On December 14th 2001 the State Committee of Building, Architecture and Housing Policy of Ukraine published the following amendment to the DBN (their translation): With regards to requests received from the Ministry of Health Protection of Ukraine and other organisations as for the use of individual gas heating appliances in apartment blocks, State Build of Ukraine is clarifying the following: Requirements of paragraph 6.34 DBN B which allow installation of gas stoves, convectors, heaters/radiators and other types of gas heating appliances in apartment blocks up to 10 floors high including, are applied only to newly built and renovated apartment blocks (on condition that individual heating shall be installed in all apartments of apartment block). BSRIA Page 10 of 34 Report 57200/81

15 Some commentators suggested that this amendment did not have legal force and may be ignored. Others noted that although the local Ministry of Health should give their permission for district heating conversions, in reality there are ways around this problem. Anecdotal evidence from industry interviews suggest that while boiler suppliers are aware of the amendment, outside of Kiev the stipulation that all apartments in a block must be converted is largely ignored (especially if district heating stops working!) Conversions in Kiev are more difficult as the local district heating network is a powerful lobby for its own interests. But in regions, particularly far from Kiev in, for example, Crimea, Western Ukraine, and Lugansk in the East, it seems very unlikely that momentum building up for installation of wall hung boilers in apartments will be stopped by any attempts to modify the new building regulations. As many market operators have concluded, laws in Ukraine are not necessarily adhered to and there is a lot of regional flexibility, all depending on the local politics, views of the administration and lobbying. For example at the end of 2006 the Mayor of Donetsk declared that individual heating in the region is for the moment forbidden. In Lugansk disconnection from district heating is forbidden during the heating season. 1.4 DISTRICT HEATING Ukraine has traditionally had a high proportion of district heating, the legacy of its Soviet era heating systems. Total district heating is now gradually decreasing, as a lower proportion of new house buildings are connected to the centralised network, and some houses are disconnected to the heating system conversions or have collective heating systems. Most district heating conversions are taking place in towns with a population of under 500,000 people. Larger cities, such as the capital Kiev, can afford to maintain the centralised system in good working order and undertake the necessary upgrades and maintenance work. However in some towns there are major problems with maintenance of boiler houses. Government progress in reforming the district heating system has been painfully slow in the last few years. The old problems remain, such as the maintenance of a Soviet subsidy system for residential customers, endemic over consumption of energy, the lack of flexibility and controls for end users, and mass non-payment of energy bills. The payment system for water and heat is based on the theoretical consumption volumes of apartments, calculated by the number of residents, building materials used in the building, insulation, and the size in m 2 of the apartment, with no focus on actual water and heat consumption (apart from buildings with meters installed). There is no incentive for individual residents to change their energy consumption habits, particularly when non-payment of utility bills is not punished by individual disconnection. There have been some improvements in the industrial sector where consumers are being forced to install metering equipment and consume less energy due to higher energy prices. While the installation of meters in non-residential buildings may help lower bills for some tenants, the structural problems of the district heating system remain, such as non-productive losses resulting from heat energy transportation from producers to consumers. BSRIA Page 11 of 34 Report 57200/81

16 2 MARKET SIZE AND SEGMENTATION 2.1 MARKET SIZE The Ukrainian water heater market grew from around 800,000 units in 2012 to around 830,000 pieces in 2013 (including all types with indirect cylinders). There are two main types of water heaters sold in Ukraine: electric storage and gas instantaneous. Electric storage water heaters were less affected by the economic crisis, especially because gas prices have been growing faster than electricity prices in the last 4 years. Growth in 2013 is believed to be only in the electric storage market, while other water heater types were flat. The other segments are much smaller in size, although there is a substantial market for electric instantaneous appliances, often sold in commercial premises, non-housing and summer houses (dachas). The market for indirect cylinders is small. They are mainly sold with imported floor standing boilers by boiler suppliers. The market was stable in value at around 70 million in both 2012 and 2013 due the continuing shift towards cheaper products and falling prices. Table 3 Water heating market size, volume and value, 2012 and 2013e e Volume Volume Euros US $ ('000 ('000 (million) (million) units) units) Euros (million) US $ (million) Traditional water heaters Storage water heaters Electric Gas Oil Instantaneous water heaters Electric Gas Air to water - cylinderintegrated water heater Indirect cylinders Traditional cylinders (1 coil) Renewable cylinders * Thermal stores Buffer tanks Total * Please note that renewable cylinders include 2 & 3 coil cylinders + 1 coil dedicated renewable cylinders Exchange rate: 2012: 1 = US$ 1.29; 2013: 1 = US$ 1.33 BSRIA Page 12 of 34 Report 57200/81

17 Figure 2 Water heater sales by type, volume, 2013e 2.2 TECHNICAL SEGMENTATION BY TYPE OF WATER HEATER Electric storage Multi-point products account for the majority of sales (90%), while single point heaters are a less popular choice. Table 4 Electric storage heaters by product type, volume, 2012 and 2013e e '000 units % '000 units % Single point / non-pressure % % Multi point / pressurised % % Total % % Capacity By capacity most electric storage water heaters are sold in the range of litres, with 80 litre models being particularly popular, followed by 100 litre products. Larger water heaters are often installed in large detached houses. BSRIA Page 13 of 34 Report 57200/81

18 Table 5 Electric storage heaters by capacity, volume, 2012 and 2013e e '000 units % '000 units % 5 litres % % 6 to 15 litres % % 15.1 to 30 litres % % 31.1 to 50 litres % % 51.1 to 120 litres % % to 300 litres % % Over 300 litres % % Total % % Material type By material, the majority of electric storage water heaters are glass lined steel (90%). Stainless steel products amount to an estimated 6.5% of all sales, including some Ukrainian made products. Copper and plastic models have a small combined share of around 3%. Table 6 Electric storage heaters by material type, volume, 2012 and 2013e e '000 units % '000 units % Glass lined steel % % Stainless steel % % Galvanised steel % % Stone lined % % Copper % % Plastic % % Other % % Total % % Figure 3 Electric storage heaters by material type, volume, 2012e BSRIA Page 14 of 34 Report 57200/81

19 2.2.2 Gas storage Gas storage is a marginal water heater type. These products are typically sold for larger commercial premises rather than the residential market. In this segment, large models ( litres) are the more popular. Table 7 Gas storage by capacity, volume, 2012 and 2013e e '000 units % '000 units % < 30 litres % % litres % % litres % % litres % % > 200 litres % % Total % % Electric instantaneous In terms of power rating, the majority of electric instantaneous water heaters have small output products, mostly in the range of 3-9 kw (Table 8). The majority of electric instantaneous water heaters sold in Ukraine are small single-phase products (Table 9). These are supplied by leading importers such as Atmor. The market for large 3-phase products is much smaller and is led by Stiebel Eltron. Table 8 Electric instantaneous by power rating, volume, 2012 and 2013e e '000 units % '000 units % < 3 kw % % 3 9 kw % % kw % % > 20 kw % % Total % % Table 9 Electric instantaneous water heaters by type, volume, 2012 and 2013e e '000 units % '000 units % Electric showers % % Single-phase (< 6-8 kw / 3-4 litres / min.) % % Three-phase (> 6-8 kw / 3-4 litres / min.) % % Total % % Gas instantaneous The most common Ukrainian instantaneous gas water heater is the VPG (which stands for water heater - instantaneous - gas). In spite of its low flow rate, it is used as a multi-point water heater, for hot water in the kitchen and bathroom, and is often installed in the kitchen. The most sold instantaneous gas heaters are medium sized products with a flow rate between 5 and 13 litres. However, there is also a small market for smaller locally produced water heaters with a flow rate of less than 5 litres per minute. BSRIA Page 15 of 34 Report 57200/81

20 Table 10 Gas instantaneous heaters by flow rate, volume, 2012 and 2013e e '000 units % '000 units % < 5 litres / min (< 8.8 kw) % % 5-13 litres / min ( kw) % % > 13 litres / min (> 22.7 kw) % % Total % % Figure 4 Gas instantaneous heaters by flow rate, volume, 2013e The market for condensing products has not developed in Ukraine (Table 11). Table 11 Gas water heaters by type of technology, volume, 2012 and 2013e e '000 units % '000 units % Gas storage % % Condensing % % Non condensing % % Gas instantaneous % % Condensing % % Non condensing % % Total % % Indirect cylinders The most common capacity range for indirect cylinders is litres. This capacity accounts for 75% of all sales. Most indirect cylinders are sold without an electric heating element, as these products are usually sold with boilers as part of central heating systems. BSRIA Page 16 of 34 Report 57200/81

21 Table 12 Indirect cylinders by capacity, volume, 2012 and 2013e e '000 units % '000 units % < 100 litres % % litres % % 301 1,000 litres % % > 1,000 litres % % Total % % Table 13 Indirect cylinders by heating element, volume, 2012 and 2013e e '000 units % '000 units % With electric heating element % % Without electric heating element % % Total % % BSRIA Page 17 of 34 Report 57200/81

22 3 MARKET DRIVERS AND TRENDS 3.1 MARKET DRIVERS Continuous demand for water heaters comes from the inability of the district heating system to provide reliable hot water supply. While in Kiev and other large cities the district heating systems are more stable, in smaller towns they can be turned off for several months, forcing people to look for alternative sources of heating and hot water supply. The major beneficiary is electric storage units, while gas instantaneous appliances enjoy continuous replacement demand. A large proportion of standard Ukrainian apartments had gas instantaneous water heaters installed in the 1960s and 1970s. Due to a shortage of production in the Soviet Union, during this period s economic stagnation, replacement levels were low. In the widespread economic recession of the 1990s, public owned municipal utility services were responsible for the existing installed base of gas water heaters. Since the last financial crisis from autumn 2008, the following constraints or negative market drivers emerged: Replacement market. Although the park of heating products is well beyond its intended lifespan given to previously low replacement levels, the crisis has undermined the spending power of Ukrainian end users, who put off their decision to replace old heating products. New housing construction. There is currently lower demand due to low construction levels in Although there was some growth in new house building in 2013, it remains at a low level for a country the size of Ukraine. Increasing gas prices for consumers, affecting all gas products. 3.2 MARKET TRENDS During the Soviet Union era, production of water heaters was controlled by a State body, Gazmashapparat. As for many other products, there was a supply shortage of water heaters. While water heaters were produced in sufficient quantities to meet the needs of new construction, there was only limited additional production to cater for the needs of the replacement or first time installation market. The typical Ukrainian made water heater is called VPG (instantaneous gas model), which is of basic design and poor quality. There were three exclusive water heater factories whose overall production provided the vast majority of water heaters in the Soviet market: Gazapparat (St. Petersburg Russia), with 270,000 unit annual production capacity, Lvovski Zavod Gazovoi Apparatury (Lviv, Ukraine), with 100,000 unit capacity and Sukhumi (Abhazia / Georgia), with 100,000 unit capacity. Of these, only Gazapparat adapted to market conditions and continues to manufacture water heaters today. There was also a very narrow range of supply of electric water heaters in Soviet times, with very limited domestic production and virtually non-existent imports. Around 35% of Ukrainian dwellings derive their hot water supply from the district heating system. However, the fact that the district heating is turned off for one month or more in the summer and is in any case very unreliable has created a back up water heater market in addition to these sold for primary needs. This has helped create a significant market for imported water heaters, especially for electric storage products. While in Kiev and other big cities the district heating system is more reliable, many smaller places see their hot water switched off for several months. This also means that demand for imported water heaters is very seasonal, with most sales made in the summer months. During the last 10 years, sales of electric storage water heaters grew from 57,000 units in 1999 to reach a peak of 600,000 units in 2008 and to become the leading type of water heater in Ukraine (Table 14). Sales dropped to 450,000 in 2009 but picked up again in 2010 to reach 550,000 units in The market expanded further to 645,000 in 2012 and 675,000 water heaters in BSRIA Page 18 of 34 Report 57200/81

23 The gas instantaneous water heater market has also experienced an impressive growth from 23,000 units in 1999 to an estimated 200,000 units in The market halved in 2009 and saw only minimal growth during As the majority of the installed products are rather basic and old-fashioned, there remains a replacement demand. Table 14 Historical trends, water heating, volume ( 000 units), CAGR Water heaters % Storage water heaters % Electric % Gas % Oil % Instantaneous water heaters % Electric % Gas % Indirect cylinders % Total* % Table 15 Forecasts, water heating, volume ( 000 units), CAGR Water heaters , % Storage water heaters % Electric % Gas % Oil % Instantaneous water heaters % Electric % Gas % Air to water - cylinder-integrated water heater % Indirect cylinders % Traditional cylinders (1 coil) % Renewable cylinders * % Thermal stores % Buffer tanks % Total , % * Please note that renewable cylinders include 2 & 3 coil cylinders + 1 coil dedicated renewable cylinders BSRIA Page 19 of 34 Report 57200/81

24 Figure 5 The water heater market forecasts, volume ( 000 units), Market forecasts The total water heater market is forecast to grow at 5% per year during the next 4 years, although growth rates will vary strongly according to type of appliance. In 2014 the market is expected to be flat, with growth resuming only in Like in Russia, there is currently a large park of water heaters in Ukraine, which have easily outlived their intended life span and are ready to be replaced. Therefore quite reasonable growth is expected as soon as the general economy gets back on track. During the forecast period of , electric storage water heaters will continue to dominate thanks to sales for district heating back-up, the largest application for water heating in Ukraine. There should also be growth in central hot water heating. The indirect cylinder market is expected to remain small, but combi boilers should become the preferred option in first time installations and new buildings. Forecasts also assume that combis will be increasinglysold for district heating conversions. Sales of electric instantaneous water heaters will remain a comparatively small market. The best selling electric storage water heaters available are in a very low price range, and compete with cheap electric instantaneous water heaters in terms of cost. Demand for gas instantaneous will persist due to a vast replacement market. Gas storage water heaters, however, are expected to remain a niche market. BSRIA Page 20 of 34 Report 57200/81

25 4 WATER HEATERS STRATEGIC OVERVIEW 4.1 MACRO-ENVIRONMENTAL ANALYSIS The following table looks at factors that may affect the market, covering political, economic, social, technical, legal and environmental issues. The factors are assessed in terms of their certainty and relevance or importance to the market. Table 16 PESTLE analysis of Ukraine heating products market Political C. I. Economic C. I. Social C. I. Instability following Maidan revolution Crimean conflict with Russia. New government signs agreement European Union Uncertain economic growth outlook. Highly unstable exchange rate and Hryvnia devaluation Country divided between Ukrainian West and Russian East Depopulation of smaller towns as people move to cities and emigrate Technical C. I. Legal C. I. Environmental C. I. District heating conversions continue Trend away from gravity feed boiler systems 5 9 Large unofficial (grey) market Certification for imports creates barriers for entry Scores: I: Importance. From very important (10) to irrelevant (0) C: Certainty. From very certain (10) to very uncertain (0) 4 4 Low interest in environmental issues No real market for energy efficient products (condensing/renewables) 4.2 MARKET ATTRACTIVENESS ANALYSIS The following chart analyses the market in terms of 5 forces which affect the market s attractiveness and profitability for manufacturers. Figure 6 Competitive forces analysis Threat of new entrants: Low Bargaining power of suppliers: Medium Competitive rivalry: High Bargaining power of customers: Medium Threat of substitutes: High BSRIA Page 21 of 34 Report 57200/81

26 Table 17 Competitive forces analysis Force Bargaining power of suppliers Threat of new entrants Bargaining power of customers Threat of substitutes Competitive rivalry Comments For the domestic industry importing components from large international suppliers can be costly and make final products far less competitive compared to locally sourced parts. Low for European manufacturers but high for Chinese players. Although individual customers are much smaller than most suppliers, there is strong price pressure due to strong competition. The main substitutes are the rapidly growing combi boiler market and also domestic hot water provided by the district heating system (which however also creates back-up demand for hot water appliances). There is strong competition, and Ukraine is a market dominated by economyrange products. European importers face competition from low cost domestic industry and Chinese imports. The wall hung boiler market is attractive due to high growth rates in recent years, although margins are limited due to competitive pricing. The floor standing gas boiler market is rather unattractive, due to extreme low cost prices of most domestic manufacturers, and market volume contraction. The jet burner boiler market is a niche segment that has never taken off in Ukraine. Condensing boilers are growing well but from a small base, as are solid fuel boilers. The market for commercial boilers is small considering the size of the country. This is mainly due to the widespread use of district heating in towns and cities. The radiator market is becoming more attractive for steel panel and aluminium imports, as the cast iron market has now gone out of fashion. Both steel panels and aluminium may be considered of medium market attractiveness and medium market size. The water heater market is dynamic especially in electric storage appliances. This market has grown rapidly, driven by demand for district heating back up supply as the centralised system often fails. Gas instantaneous water heaters fell sharply since 2009 and now this market has stabilised at a much lower level than before the crisis, although replacement demand remains reasonable. BSRIA Page 22 of 34 Report 57200/81

27 Table 18 Market attractiveness analysis High Condensing boilers Wall hung boilers (noncondensing) Market Attractiveness* Medium Low Commercial boilers Solid fuel boilers Electric instantaneous water heaters Cast iron radiators Aluminium radiators Steel panel radiators Gas instantaneous water heaters Floor standing atmospheric gas boilers Electric boilers Electric storage water heaters Low Medium High Market Size Source: Note: BSRIA *Market attractiveness measured by market growth, competitiveness and manufacturer profitability BSRIA Page 23 of 34 Report 57200/81

28 5 STRUCTURE OF SUPPLY 5.1 MARKET SHARES Electric storage Table 19 Market shares for electric storage water heaters ( 000 units), 2012 and 2013e Holding group Company / brand Importer / representation e 000 units % 000 units % Atlantic, Round, Tera Group Thermor Atlantic-Geyser % % Ariston Thermo Group Ariston Subsidiary % % Gorenje Gorenje Subsidiary % % Thermex Thermex Thermex Kharkov % % Gidropom Nova Tec Ukrainian manufacturer % % Thermex Garanterm Thermex Kharkov % % Electrolux Group Electrolux Subsidiary % % Ferroli Ferroli, Blue Ocean Subsidiary % % Ficosota Tesy Geizer, Genezis % % Fagor Fagor % % Drazice Drazice % % Ross Ross Ukrainian manufacturer % % BDR Thermea Baxi Titan % % Galmet Galmet Mirtex % % Others % % Total % % Figure 7 Market shares for electric storage water heaters, volume, 2013e The electric storage water heater market has seen a positive trend in the last 3 years, with sales increasing from 550,000 units in 2010 to 610,000 units in 2011, 645,000 in 2012 and 675,000 in Domestic production and imports from Russia have grown stronger at the expense of European brands. BSRIA Page 24 of 34 Report 57200/81

29 Domestic supply contains the following main players: Atlantic-Geyser further increased its market share and now holds almost 30% share of the total with 200,000 water heaters sold in 2013, up from 185,000 units in The company launched its own production of electric storage water heaters at the newly acquired plant in Odessa (formerly Teploservis) in The total initial factory capacity was over 150,000 units per year. Apart from Atlantic, Atlantic-Geyser s other brands include Round and Thermor (both private label imports). NovaTec from Odessa uses some imported (possibly Chinese) components for their production of water heaters. The factory underwent some modernization in , including the installation of a new painting line. At the beginning of 2011 there was further modernization and production increased as a result to reach 50,000 units in 2011, reducing slightly to 45,000 in 2012 and stable in Ross, the supplier of gas floor standing boilers, has been also selling some electric storage water heaters, positioned in the upper price segment with stainless steel products. Sales remain low, as water heaters are not the main focus of the company. Nord from Donetsk is also known to be supplying stainless steel products, with quantities being small. The company s main focus is refrigeration equipment. Major importers include the following: Ariston Thermo Group has been sourcing their water heaters from their factory in Russia, as well as from China and Italy. In 2013 significant growth was registered in all price segments, from low to upper, imports from Italy particularly grew. Gorenje is present via a representative office and a growing number of distributors, including the white goods chain ABV Tekhnika, Mirtex, Foxtrot, Vesy. Sales via DIY chains have been growing as well. Thermex is part of the Russian supplier based in St. Petersburg with its own production in Russia and some Chinese imports. Torgovyi Dom Thermex is a distribution company for both domestically manufactured and imported products. Imported brands include Garantherm and ATT (China). ATT was previously Thermex s second most important brand, however its sales were replaced by Garantherm in the past three years. Overall Thermex s sales fell in , possibly due to internal restructuring. Electrolux is another importer player, having enjoyed strong sales growth in 2012, but saw sales decrease in Also present in this market are some of the leading European boiler manufacturers, such as Ferroli and Baxi, with modest sales. Both Vaillant and Protherm are present, with sales below 100 pieces each in Gas storage Demand for gas storage water heaters in Ukraine is small due to their high prices. Demand comes to a large extent from small hotels, cafes, restaurants and other commercial premises but not domestic premises. There are a number of companies present on the market, including Ariston Thermo Group, but sales are low. The leading suppliers were known to sell around 100 units per year in 2008 and half of these amounts during Ariston sold 80 units in both 2011 and BSRIA Page 25 of 34 Report 57200/81

30 Ferroli was offering gas water heaters under the Ferroli brand, sourcing from their factory in Spain (Cointra). Cointra has been also on the Ukrainian market offered by other Ukrainian importers independently. However, sales were small as the company is positioned in the middle price segment where demand has been particularly low following the financial crisis in Oil storage There is no market of oil storage water heaters in Ukraine Electric instantaneous The Ukrainian electric instantaneous water heater market is confirmed to have been flat at 40,000 units sold in 2012 and The leading brand is Atmor from Israel, which is imported amongst others by the Gresa Group in Kiev. Siemens is the leading supplier in the upper price segment. Stiebel Eltron from Germany is also active on the market, especially with 3-phase water heaters. There are also a number of Polish manufacturers on the market, including Kospel and Biawar Gas instantaneous The sales volumes of gas water heaters remained stagnant in 2012 and 2013 (Table 20). Table 20 Market shares for gas instantaneous water heaters ( 000 units), 2012 and 2013e Holding group Company / brand Importer / representation e 000 units % 000 units % Gorinnja AquaHeat own brand from China % % Vodnaya Tekhnika Selena own brand from China % % Dion Dion own brand from China % % Bosch Thermotechnik Junkers Subsidiary % % Riello Beretta Subsidiary % % Ariston Thermo Group Ariston Subsidiary % % Epicenter Aston own brand from China % % Vaillant Group Demrad Subsidiary % % EcoStar EcoStar Gas own brand from China % % Vaillant Group Vaillant Subsidiary % % Gazmash Neva Russian manufacturer % % Ukrtekhnoprom Atonmash Ukrainian manufacturer % % Nash Gaz Nash Gaz own brand from China % % Termet Termet various % % Others % % Total % % BSRIA Page 26 of 34 Report 57200/81

31 Figure 8 Market shares for gas instantaneous water heaters, volume, 2013e Under the Soviet times there used to be four major Ukrainian manufacturers of gas water heaters, Lvivski Zavod Gazovoi Apparatury, Azovmash (Mariupol ), Emal in Lugansk and Electron in Zheltye Vody. All 4 factories saw their sales levels contract in the 1990s, due to the loss of the Russian market and their difficulties in modernising under market economy conditions. Of the four manufacturers, Luganskemal and Electron stopped production in mid 1990s. Azovmash-Therm stopped making water heaters in summer Finally, Lvivski Zavod Gazovoi Apparatury (Teploobmennik) stopped production in 2008, being unable to compete with cheap Chinese brands. On the other hand, the leading Ukrainian floor standing boiler suppliers started offering gas water heaters but sales are unlikely to develop due to the competition from China. Atonmash s sales grew from 400 units in 2007 to 4,600 water heaters in 2008 but since then decreased to 1,000 units per year. Agroresurs offers two water heater models Danko-17 and Danko-23, although sales have been insignificant. The major development in the past three of years came from private label products sourced from China, which are now occupying the majority of the Ukrainian gas water heater market. Chinese products come at much lower prices than European manufacturers, at an average price of USD 100. There are three clear market leaders, all own-brand supply from China, although with sales falling in 2013 due to better performance from competitors: Aqua-Heat, with sales reaching 19,000 in 2012 and 14,000 in Selena is Vodnaya Tekhnika s own brand sourced from China. Vodnaya Tekhnika is one of the leading players on the heating products market in Ukraine, with a well-developed distribution network. Dion, the former market leader, saw sales decreasing in 2012 and 2013 but remains in third position. The most popular model is 10 l / min (20 kw). Dion as well as Aqua-Heat and NashGas emerged on the water heater market in 2006 and are all conveniently located in the port town of Odessa. There are a large number of other private label brands sourced from China, including the following: Aston (sold by EpiCenter DIY stores) Nash Gaz (formerly the market leader Amina) saw sales fall in 2012 and virtually disappearing from the market in BSRIA Page 27 of 34 Report 57200/81