Home / Articles / 2005 / 03 / Challenges, Opportunities Abound for European Ink Manufacturers
The European economy is expected to pick up this year. In fact, some forecasters believe that the European Union (EU) will be the only major global region which will show a rise, although small, in its growth rate of both GDP and industrial activity.
However, the recovery in Europe may not be strong enough to lift the financial pressures on many of the region’s ink producers and their customers.
Analysts say that despite the improvement in demand in the printing market, many businesses in the printing sector, particularly suppliers like ink makers, are operating on the slimmest margins for years. This is due to rising costs and persistent overcapacity throughout the market, which is undermining efforts to push up selling prices.
In fact, some ink producers could have been in even worse trouble but for opportunities to increase sales in the relatively high growth area of Eastern Europe and, among niche players, in specific segments such as flexible packaging.
Specialist ink makers, among whom there are a lot of newcomers to the graphics sector, have also gained from the robust growth in digital printing.
While many ink companies have been struggling, some prominent mergers and acquisitions in the European ink sector reinforce its reputation for having the potential to add value and generate cash.
Just how well the European printing market as a whole does this year will depend a lot on the performances of the major economies of the EU – UK, France, Italy, and above all Germany, which has the largest national graphics market.
While the UK has been achieving comparatively high increases in GDP – 3 percent in 2004, possibly climbing to as high as 3.5 percent this year – the German economy has been in the doldrums.
Weak consumer confidence has badly affected the German printing sector. This was reflected in the attendance figures for the Drupa printing exhibition at Dusseldorf last May, which had 20 percent fewer German visitors than four years ago.
German unemployment soared to above five million in January, its highest level since before World War II and equivalent to 12 percent of the working population.
Nonetheless, German companies are demonstrating more optimism about the future, with a survey by the Munich-based Ifo Institute for Economic Research in January showing business confidence at its highest for 11 months.
Industry orders in Germany shot up by 7 percent in December compared with the previous month, the biggest rise since the reunification of the country in 1991.
Across Europe, the increase in economic activity has been signalled by an upswing in expenditure on advertising and promotional campaigns, which has been a big boost to the graphics market. Furthermore, it looks likely to carry on for at least a few years, although there are doubts that spending will return to the elevated levels of the dot-com boom of the turn of the century.
ZenithOptimedia, a leading London-based media services agency, believes that the advertising sector is facing its best prospects for five years. After growth of 5.4 percent in 2004, the rise in advertising expenditures in Europe will dip to 4.5 percent this year before returning to above 5 percent in 2006.
Ominously for the print media, the Internet is the fastest growing advertising outlet, although from a low base. On the other hand, this is partly offset in Europe by a surge in spending on outdoor advertising, which now accounts for 6.5 percent of the total ad expenditure in Europe against a global average of 5.2 percent, according to ZenithOptimedia.
JC Decaux of France, one of the world’s largest outdoor advertising groups, most of whose sales are in Europe, reported a distinct upturn last year in business in airports and railway stations. Sales of its transport division were 12 percent higher after jumping by 17 percent in the final quarter.
Direct marketing budgets in Europe have gone up by 3 percent this year, according to a study by the Brussels-based Federation of European Direct and Interactive Marketing (FEDMA).
A survey by the UK Direct Marketing Association (DMA) has revealed the possible beginning of a decline in spending on direct mail. There has been a slowdown in the growth rate of direct mail expenditure in the country as companies, especially in the business-to-business area, switch more resources into e-mail and online marketing.
“However with a growth in spam and concerns about overcrowded e-mail boxes, this may well reverse again in the future,” said a DMA report on the study.
The European Printing Industry
Still, for the moment at least, commercial printers, especially those using sheetfed offset, are unable to take as much advantage of the additional promotional expenditure as they would like.
At the same time in some European countries they are meeting increasing competition from newspaper publishers who are investing in color printing facilities. These are being employed not just to expand color pagination in their newspapers but also to print direct mail and other promotional literature for third parties to raise the utilization rate of their new presses.
In fact, many suppliers of ink to newspaper printers are benefiting considerably from the increase in marketing expenditure. The move to more color in newspapers and contract printing of promotional material has meant more sales of higher-margin coldset color inks.
Among the biggest investors in new newspaper plants with greater color capacities have been UK newspaper groups, such as News International, Trinity Mirror, Guardian Media Group and Financial Times.
In February the Telegraph Group, publishers of the UK’s best-selling broadsheet newspaper, announced it would be investing £150 million ($290 million) in new printing facilities, while cutting 17 percent of its workforce to help pay for the upgrade.
“We will invest in the new production facilities to provide full color newspapers to meet the aspirations of both our readers and advertisers,” said Murdoch MacLennan, Telegraph Group’s chief executive.
Both newspaper and magazine companies in Europe have been combining their printing activities or investing in joint printing projects in order to exploit economies of scale.
The biggest of these has been a proposed plan by Axel Springer and Bertelsmann to merge their gravure printing facilities in Germany and the UK. If approved by the competition authorities, it would account for 40 percent of the magazine market in Germany.
Consolidation in the Ink Industry and Suppliers
The creation of these partnerships are symptomatic of a quickening in the pace of consolidation in European printing operations, especially in publishing and in packaging.
Among suppliers to ink producers, resin manufacturers have agreed on a series of mergers in Europe. The biggest of these were DSM’s takeover of Avecia’s NeoResins and Cytec’s acquisition of Surface Specialties UCB, the resins activities of UCB of Belgium.
Akzo Nobel sold its resins operation to Nuplex Industries of New Zealand last year but chose to keep its printing resins business. However, after a further review of the activity it decided last month to put it up for sale as well, on the grounds that it did not have enough critical mass in the marketplace.
Ink producers are having to respond to this trend towards greater integration among both suppliers and customers by reorganizing themselves into larger operations.
In the third major consolidation initiative in five years in the European ink sector, BASF Printing Systems, the third-largest ink manufacturer in the market, has just been merged with ANI Printing Inks, the seventh-largest producer in Europe.
The combination was engineered by CVC Capital Partners, a London-based private equity company, which acquired both businesses to create an operation with sales of around €830 million ($1.1 billion). But the initiative behind the amalgamation of the two producers apparently came from their own senior executives.
The new group moves into second place behind Sun Chemical in the European market with a share of approximately 18 percent. Although Sun, BASF/ANI and Flint Schmidt now account for nearly two-thirds of total ink sales in Europe, there is considered to be room for further consolidation.
“There are a few medium-sized ink players which are not now big enough to compete,” said a senior executive in one of the leading ink companies. “There could also be a fair amount of buying and selling of activities between the big operators because the long-term trend is toward specialization, even among the large producers.” A powerful impetus behind more consolidation will be the activities of equity funds, which continue to be drawn to the potential high returns from the ink and related sectors.
CVC, which currently manages funds of more than $9 billion, says it targets businesses with a market-leading position, opportunities for growth by acquisition, stable cash flows and above-average returns on internally invested capital.
Christian Wildmoser, CVC’s managing director, describes the ink sector as a “fragmented industry,” in which BASF/ANI will not only be able to “maintain its market position but expand it further.”
The money-making capability of the ink sector was demonstrated in January when Saratoga Partners, a New York private equity firm, sold Sericol, the UK-based screen printing and digital ink producer, to Fuji Photo Film Co. for £123 million ($227 million). This was approximately 75 percent more than what Saratoga paid when it took Sericol over from BP two years ago.
Sericol, originally part of Burmah Castrol, the oil products and chemicals group before it was acquired by BP in 2000, has been considered to be one of the most profitable ink companies in Europe. It currently has annual sales in screen and ink jet inks of approximately £150 million, 15 percent higher than when Saratoga purchased it.
In a recent survey of nearly 20 ink and consumable producers and suppliers in the UK by the journal Printing World, Sericol was estimated to be one of the few making a reasonable profit.
Openshaw Group, a leading UK supplier of inks and consumables, succumbed to its financial difficulties early this year when it called in the receivers Ernst & Young. As a result, parts of the business was sold off.
The future of Bousfield, Openshaw’s ink-making subsidiary which sells its products around the world, was in doubt in early February after its pressroom chemicals activity was sold to Ultrachem of the UK. In recent years it had expanded into laboratory and technical services in which chemicals had become a core business.
Bousfield’s management reportedly said last year that its customers were not paying enough for services so that suppliers of inks and consumables had to carry a disproportionate share of their costs.
Litho Supplies, Breaston, England, which has now become a dominant national distributors of ink and consumables in the UK following the demise of Openshaw, has already warned that services may have to be curtailed to reduce costs.
Raw Material Prices And the Ink Industry
Worries among ink producers and distributors about the rising costs of providing services have been overshadowed in the past year by anxieties about the spiraling cost of raw materials.
Much of these have stemmed from the soaring cost of crude oil, which has impacted chemicals made from petrochemicals. However, higher energy costs and the effects of a massive demand for chemicals and materials in China have also helped to push up prices of other ink components.
There have been shortages of a wide range of materials, both worldwide and in Europe, which have pushed up prices. These have not only been caused by the power of China to acquire a huge amount of imports but by low investment in Europe in upstream chemical plants and even in some refinery units.
Cutbacks in benzene capacity in European refineries have had a ripple effect on the price of a variety of derivatives, particularly in the ink and coatings markets.
Sparse capital expenditure in the European titanium dioxide sector, which has considerably tightened supplies, has triggered forecasts of a big hike in TiO2 prices this year.
For the ink and most other downstream sectors, raw material costs started to climb in the summer of last year and then gathered momentum in the fourth quarter.
Because many ingredients in ink formulations are several production steps from crude oil, there has tended to be a time lag before they show up in the cost of chemicals further down the value chain.
Consequently, economic forecasters are predicting that not only will the rises in raw material costs continue well into this year, but that overall, they could be more than twice as high as in 2004.
Raw material suppliers have compounded the financial stress on ink makers by shortening the length of contracts or by inserting clauses which allow them to quickly raise their prices in response to increases in their own raw material costs.
Because of their high petrochemical content, solvents recorded some of the biggest prices increases among ink materials. The extra cost was a heavy burden to producers of solvent-based inks, in which solvents can account for two-thirds of the content.
For metallic ink makers, a doubling of the price of copper between late 2004 and 2005 had a severe impact since copper can make up as much as half the total cost of their finished products.
Plummeting Profits And Price Increases
Even before the recent climb in raw material price, many ink producers were operating on razor thin margins.
The Printing World survey of UK ink suppliers found that before the big increase in crude oil prices last year, net margins ranged between 1.5 percent and 5 percent. The study also estimated that raw materials accounted for 63.5 percent of the total costs of a unit of ink, including a gross margin of 9.5 percent.
Statistics released late last year by the British Coatings Federation (BCF), whose members include both coatings and ink manufacturers, showed margins being cut by a 35 percent jump in solvent prices and by a 26 percent leap in other petrochemical-based intermediates.
The association pointed out that costs were also being pushed up by environmental regulations, such as limits on emissions of volatile organic compounds (VOC).
As a result, it warned that profits in 2004 could plummet after an average 16 percent drop in operating profit in the previous year, when raw material costs went up by a relatively low 7 percent.
In their effort to offset escalating costs, ink producers face the difficult task of persuading their customers that they will now have to pay more for their inks after a long period of static or declining prices.
Sun Chemical, the leader in the European ink market with an estimated 35 percent share, announced price increases of 3 percent to 7 percent in packaging inks and coatings in November, stating they were the first rises for four years.
Ink makers are effectively having to compete against other suppliers to printers to gain price rises. The biggest of these are the manufacturers of paper, which can take up approximately half of a printer’s total production costs.
They are able to exercise a lot of clout in the European printing sector. UPM-Kymmene, a leading Finnish pulp and paper company, announced in February a four-fold rise in net profit in the fourth quarter of last year and predicted even higher profits in 2005 than in 2004.
So far this year, the company has been able to put up its newsprint prices by close to 10 percent, and for magazine and coated fine papers, by nearly 5 percent.
A widespread strategy among all sizes of ink producers is to try to secure more pricing power by broadening portfolios into more consumables and services. These are often provided in packages which give more flexibility with margins and opportunities for price rises.
This trend to greater diversification has been reflected in recent mergers and takeovers in which the objective has been to strengthen ink activities by placing them within an enlarged graphics products business.
For example, the merger of BASF and ANI involved both a horizontal and vertical integration so that the new company is more than just an ink producer.
CVC’s acquisition of BASF included the company’s global plant for standard ink pigments in Shanghai, China, and an alkali blue unit in Huntington, WV.
The deal also brought into the BASF/ANI combination BASF’s printing plates business, which is the only worldwide supplier of photopolymer plates and a leading player in flexo plates. As a result, it is able to offer a comprehensive ink and plate system in the narrow web flexo segment.
BASF/ANI is aiming to expand into auxiliary product areas, such as the supply of color management software and equipment.
Sun Chemical seemed to be going against the tendency to diversification when it recently sold its 50 percent share in the joint venture Kodak Polychrome Graphics (KPG) to its partner Eastman Kodak. KPG is a leading provider of plates, computer-to-plate solutions and proofing products.
With help from the proceeds from the $800 million sale, Sun Chemical’s leaders stress that the company will continue its growth in areas like consumables and color control products, so that it can offer total pressroom and color solutions.
Sericol’s acquisition by Fuji brings the maker of screen printing inks into a large imaging products and services group with total annual sales of $24 billion.
In Europe, Fuji’s main activities are in film, pressroom chemicals and pre-press products, in particular computer-to-press equipment and image processing software.
The takeover is the Japanese company’s first major move into screen printing. But it also wants to develop Sericol’s business in the industrial digital sector, in which it is a producer of ink and a distributor of printing machines.
Fuji is one of a number of large international imaging and graphics companies which are seeking a stronger presence in digital printing, including ink jet inks. These are seen to have huge potential as added-value and high margin products.
A big takeover battle could erupt this year over the leading digital inks operation of UK-based Avecia, which the company’s equity fund owners are reported to be planning to sell.
Ink jet inks, especially in large-format printing, remain one of the fastest growing segments in the European inks market as printers start to step up their investment in digital printing machines.
When the ink category is extended to embrace both conventional and digital inks, its prospects look much brighter. After all, inks are currently one of the biggest money earners in the digital printing sector.