The Raw Material Report
Led by crude oil, prices for key ink ingredients across the spectrum are rising dramatically, leading companies to wonder when, and if, prices will eventually stabilize.
By David Savastano
It is astonishing to think that just three years ago, ink executives were expressing serious concern that
At this point, experts say that the increased global demand for oil, coupled with the unstable global political situation, could push oil to above $85 per barrel in the near future.
For ink manufacturers, this is troubling. After all, petrochemicals are the basis for the key feedstocks used for resins, waxes, varnishes, solvents, carbon black and many other ingredients. Add to that the cost of manufacturing and transportation, and the impact of higher crude oil prices is clear to all. In the past, ink companies would do just about anything possible to offset these higher costs and not raise their own prices, but times have changed.
“Since about 97 percent of our raw materials depend on crude for either energy or actual usage, the impact has been enormous,” said Diane Parisi, vice president, procurement, for Flint Group North America. “While we have taken significant steps to offset these increases through inventory controls, plant consolidations, streamlined manufacturing and other measures, we have been forced to implement our own price increases in most markets over the past 18 months. There comes a point where we can’t continue to absorb cost increases; there has to be some relief.”
The rising price of crude oil continues to be a major concern, said Gregory Lawson, chief procurement officer, Sun Chemical. “Ink manufacturing people often talk about their costs in terms of crude oil because it is a major component either directly or indirectly. In 2005, we were looking at oil in the $50 per barrel range. This year it peaked near $80 a barrel.”
In addition, so many other key ingredients have risen dramatically. In this environment, it is no wonder that ink manufacturers, their suppliers and customers are wondering when, and if, prices will stabilize.
The State of Raw Materials
Aside from crude oil-based products, there is little good news for ink manufacturers. Even if there is enough supply, new uses for raw materials are causing tightness in the amount allocated for ink.
“Prices are going up and availability is going down,” said Ms. Parisi. “Actually, prices are going up because availability is going down. As an example, there are shortages in kaolin and hydrocarbon resins due to a lack of capacity to meet increasing demand. The increased demand is coming from developing regions like Asia (China), India and from nontraditional competitors.
“For example, organo clay is used in the drilling process,” Ms. Parisi said. “That’s not been much of an issue before, but with increased drilling to meet increased demand for petroleum, the demand for organo clay for this application means there is less available for traditional users. Additionally, crude tall oil, which is a feedstock for the resin we use in our inks, is short because it is being burned for fuel before it ever leaves the paper mill.”
Mr. Lawson also pointed out that more than oil is affecting ink raw material costs. Another concern is gum rosin, which was sold in a range from $450 to $650 per metric ton in 2005 but now sells in the $1,100 to $1,200 range. Gum rosin is used to make resins for many ink formulations, with its biggest impact on the heatset and sheetfed ink markets.
The pigment side has also seen major price increases. Copper, which is used in feedstocks for metallic inks and pththalo blue pigments, has increased in costs over five times, from $1,500 per metric ton in 2004 to $8,200. As a result, Sun Chemical Performance Pigments and Heubach recently announced increases on their phthalocyanine blue and green pigments. Aluminum has jumped from $1,600 per metric ton to about $2,800 in the same time period. In addition, major flushed color manufacturers implemented increases of approximately 5 percent.
Feedstock prices are of particular concern to ink manufacturers and their suppliers. These feedstock prices are not coming back down to their historical averages.
“There has been a fundamental shift in the price of key feedstocks,” said Scott Ravech, business director, Radcure, Americas at Cytec Industries Inc. “These prices are now the norm, and are likely not going back to historical averages.”
“Propylene remains tighter than normal and the current cost of benzene is making the manufacture of styrene unattractive to domestic producers,” said Rick Krause, marketing director, P&P, BASF Performance Chemicals, makers of Joncryl polymers. “Styrene costs are increasing as a result.”
“So far in 2006, the ink industry has seen continued price escalation in all categories of raw materials due to increases in global feedstocks,” said Mr. Lawson.
“This summer, we have seen industry-wide price increase announcements for styrene, a variety of acrylate monomers and acrylic polymers,” said Mr. Krause. “Oil exceeded $75 per barrel with OPEC publicly willing to defend prices above $65 per barrel. Solvent prices have increased. Surfactant prices have increased. Styrene is approaching a new two-year high. Prices have been going up quickly across several commodity groups. Specialty raw material suppliers, such as surfactants, additives and biocides, continue to recover cost increases over the last two to three years.”
“Tightness in propylene, ethylene, EO (ethylene oxide) and PO (propylene oxide), and record crude price are resulting in higher than expected prices,” said Doina Liebreich, manager, corporate procurement, Sartomer Company. “Acetone is at a record high as well, while phenol is taking 40 percent. BPA (bisphenal A) and epichloridrine are starting to be extremely short worldwide, affecting the epoxy supply and its price.”
“We’ve experienced increased cost and supply pressures driven by rising prices and availability of feedstocks and key raw materials, especially those that are propylene-based,” added Mr. Ravech. “Other contributing factors are the global availability of TPG; tight supplies of epichlorohydrin and its impact on epoxy resins; and increasing prices for benzene driving the cost of styrene.”
As a result, ink companies and suppliers faced higher costs in the past year and expect more of the same in the coming year.
“2006 has seen raw material inflation and we expect a similar trend for 2007,” said Daan Rademaker, global purchasing director for Siegwerk Group. “Inflation is seen predominantly in solvents and resins categories. There is tightness and shortages currently in the marketplace for ethanol due to biofuel use and ethyl acetate due to cracker force majeures in Europe. Future concerns surround naptha (crude oil) pricing and impact on downstream derivatives such as ethylene, propylene, etc.; base oils and gas oils; and also natural gum rosin pricing, as well as commodity metals like copper, zinc and aluminum.”
“Prices are up and supply is tight depending on the product line,” said Rick Westrom, INX International Ink Company’s vice president, strategic global sourcing.
“In recent months, raw material pricing has continued to increase, albeit at a slower rate and at a lower amount,” said Ron Zavodny, director of purchasing for Wikoff Color. “Current availability is not an issue, although some suppliers have officially put their customers on 100 percent of past purchases allocation.”
In recent months, availability of materials has not been the issue it was late in 2005 and earlier this year, when some suppliers had production facilities shuttered due to natural disasters.
“At the end of last year, Hurricane Katrina did cause some availability challenges, but we never ran out of materials,” Mr. Lawson said. “Then, as it is now, you could get what was needed but you had to pay escalated prices,” he said, adding that many prices which have been run up during the last year show no sign of coming down and are likely to continue rising.
“In general, the availability of raw materials appears reliable across the industry,” Mr. Krause said. “Companies located in the Gulf Coast area learned the importance of maintaining necessary inventory and having hurricane contingency plans. Specific supply and demand issues can affect certain materials and cause some tightness. In addition, intermittent transportation issues and offshore sourcing continue to increase lead times. Absent a natural disaster, geopolitical event or major unanticipated production outage, raw material availability looks stable in the near future.”
Essentially, almost all of the key products needed to manufacture inks are going up in price.
“Most all of our high-volume products, like naphthenic oils, hydrocarbon resins, solvents and certain grades of wax, are derived from petroleum,” Ms. Parisi said. “ Even rosin resin, a derivative of trees that was previously impervious to the price of crude oil, now has its value based in the price of crude. Recently we have also received substantial increases in copper and BON acid, materials used in the manufacture of blue, green and red pigments.”
“The most volatile products have been those associated with commodity market trading, such as copper, and products like molybdenum being consumed at high rates by developing countries like China,” Mr. Zavodny said.
In talking with industry leaders about the ingredients that are most volatile in terms of pricing and supply, the answers are wide-ranging, a sign as to just how dire the raw material situation has become. For example, Mr. Westrom pointed to hydrocarbon resins, ink oils and copper-containing pigments, while Mr. Krause noted that surfactants and styrene-containing materials have been much more volatile in recent months.
Mr. Ravech mentioned petroleum-based feedstocks, especially propylene, ethylene, benzene, and epichlorohydrin, and Ms. Leibrich pointed to propylene glycols, ethylene glycols, epoxies, propylene oxide and ethylene oxide.
Crude Oil Prices Soar
Above all, crude oil is the major bellwether to watch. As oil prices rose, the initial reaction was to try to hold costs, whether it was through process improvements, cost reductions or cutting down margins.
“The increasing cost of crude oil has made raw materials derived from crude oil more costly,” Mr. Zavodny said. “We have responded to these increases by absorbing as much of the increases as possible and accelerating our efforts to find equivalent, lower cost raw material substitutes. In spite of these actions, we have had to raise our prices.”
“The continued escalation of crude oil pricing ultimately has an effect on chemical feedstocks, energy and transportation costs,” Mr. Krause noted. “However, specific supply and demand issues continue to play an important role in specific commodity groups and chemical value chains.”
As raw material prices continued upward, prices had to give. With the cost of crude oil surpassing $70 per barrel, companies have had no recourse but to move their prices up as well.
“For the most part, we’ve been able to absorb the increased costs for the first half of the year because of our continued business focus on efficiency, productivity and cost savings,” Mr. Ravech said. “However, because costs are escalating, we’ve had no choice but to move forward with price increases on certain products.”
“After seeing record high pricing for raw materials and energy bills over the last two years, major companies are looking to reestablish their margins,” Ms. Liebreich noted. “The ripple effect could impact pricing for many suppliers.”
The obvious question is what will happen next with oil, considering the present world situation, and industry leaders are understandably concerned.
“One thing we can expect is a continued upward trend on oil prices,” Mr. Lawson said. “We live in a world where the limited supply of oil, increasing consumption in other countries and geopolitical instability will all combine to push oil prices higher.” This will continue to impact ink raw material costs, he said, noting that Sun Chemical will have no choice but to raise prices to cover any escalation in material prices.
What the Future Holds
Higher oil prices and other key raw materials, combined with potential supply issues created by consolidations and companies leaving the ink market, are most likely the norm in the coming years, and there is a belief that more trouble lies ahead.
“We’re expecting crude oil to reach $85 per barrel, which could have a significant impact across the entire industry,” Ms. Liebreich said.
“In 2007, we can expect pricing pressure similar to what we’ve experienced in 2006,” Mr. Lawson said, adding that the magnitude of the change will depend on many factors, such as global demand of chemical feedstocks, unforeseen natural disasters, growing inflation and global political unrest.
“As long as geopolitical risks exist, we will continue to see volatility and price pressures,” Mr. Ravech said. “Major events could have significant impact. Because of these factors, we see sustainable pressure on raw material pricing for the next nine to 12 months.”
“We have all enjoyed volume and sales growth but greatly reduced margins due to ongoing raw material, transportation and energy cost increases this past year,” Mr. Krause said. “The last quarter of 2006 will continue to be stressful in this respect. We anticipate continued growth in 2007, albeit at a slower pace, and hope for some stability in costs. The industry will continue to face pressure to improve profitability or risk further consolidation or disruption.”
“A major concern is that there doesn’t appear to be an end in sight to the cycle of supply and demand, which means prices could continue to go up for the foreseeable future,” Ms. Parisi said. “In addition, as a result of extreme margin compression, we expect to see further consolidation of our supply base. This consolidation will further exacerbate the supply and demand issue by reducing capacity.”
“I think there will be a lot of changes,” said Harvey Brice, managing director of Superior Printing Ink. “There will be consolidation on the supply side, and companies will streamline their product lines to become more efficient.”
Mr. Lawson agreed that there is likely to be continued consolidation among suppliers, with some companies abandoning supply to the ink industry or selling their products in other market segments they deem more profitable.
“Over the last several years, ink companies have been able to find some substitute materials or take advantage of new product sources from India and China,” Mr. Lawson said. “However, there no longer are any great deals anywhere in the world on these commodities.”
“Over the past four years, a huge consolidation has occurred in the raw materials industry, resulting in fewer, larger companies having more global reach and influence,” Mr. Ravech added. “As a result, impacts in pricing and availability from other regions of the world are felt globally in days rather than in weeks or months as in the past.”
“Our biggest pricing concern is that unexpected shortages will cause sharp increases in some raw materials,” added Mr. Zavodny said. “Supply/demand imbalances and higher-value alternate-use outlets for the raw material intermediates drove these shortages.”
Only time will tell what changes are ultimately in store. For now, it seems these challenges will remain, and higher prices will be the norm. How ink manufacturers and their suppliers adapt to these challenges will go a long way in determining their success in the future.