The Raw Material Report
In recent years, stable pigment prices have helped ink manufacturers weather surging crude oil prices. The elimination of the VAT refunds on pigments in China is changing all of that.
By David Savastano
Pigments are the most expensive ingredient in a printing ink. In recent years, prices have been
Photo courtesy of Ink Systems.
However, the recent decision by China to eliminate or significantly reduce VAT refunds on pigments, pigment intermediates and other key raw materials poses a real challenge to ink companies. Chinese pigment producers tend to work on low margins, meaning that there is little room to take in that 13 percent. That means higher prices.
The impact can be seen throughout the pigment industry, as Clariant, Ciba Specialty Chemicals, BASF and Sun Chemical are among the manufacturers that have initiated price increases.
“Everything coming from China is increasing by 13 percent or some portion thereof,” said Diane Parisi, vice president, supply chain, Flint Group. “We’re already seeing it.”
“The reduction of the VAT is in the very early time period of implementation, but already we are seeing significant increases in new quotations,” said Ed Pruitt, chief procurement officer for Sun Chemical. “As the next few months progress we will more clearly understand how the entire value chain for the raw materials will be impacted. It is fair to say, however, that any business segment in China that has been operating under minimal profitability will be compelled to recover through higher prices a large amount of the lost benefit from the VAT refund.”
“VAT reduction from China has caused many raw materials to increase in cost,” added Jyoti Gidvani, director of materials NAFTA for Siegwerk.
“The reduction of VAT by China on raw materials and finished goods imported from China has had a significant effect on the cost of those raw materials and finished goods by as much as 8 percent and 13 percent, respectively,” said David Woolven, head, Imaging & Inks Business Line NAFTA, Coating Effects Segment, Ciba Specialty Chemicals.
There are a number of key areas that are being affected. For example, Ms. Parisi pointed to pigments, pigment intermediates, specialty chemicals such as photoinitiators used in UV inks, and a variety of resins, waxes and clays.
“The availability of azo reds and yellows is a concern, along with the price of all pigments produced in China or produced elsewhere with chemicals from China,” noted Ms. Gidvani.
“The new policy affects 2831 classifications of products,” Mr. Pruitt noted. “Significant for ink manufacturers are pigments, pigment intermediates, and resins such as rosin resin and hydrocarbon resin. Other products that may also have an impact include vegetable oils and various organic and inorganic chemicals.”
“For pigments, the 13 percent VAT refund that manufacturers in China had been enjoying has been completely eliminated,” Mr. Pruitt added. “For pigment intermediates and rosin resins, the 13 percent VAT refund that manufacturers had been enjoying has been reduced to 5 percent.”
It is clear that pigment producers will have to pass along at least some, if not all, of the higher prices. Ink manufacturers, already stretched thin by higher raw material costs of recent years, will most likely have to follow suit.
Explaining the nuances of Chinese economic policy to customers is completely different than when everyone faced higher crude oil prices, and pigment and ink makers are busy explaining the challenges they are facing.
“Although Ciba Specialty Chemicals’ processes allow for some absorption of incremental costs, cost increases of this magnitude will have to be shared with our customers,” Mr. Woolven said. “We have seen higher prices for most raw materials involved in the manufacture of classical pigments and certain other additives. We have advised our customers in writing of ongoing developments and continue to keep them abreast of the situation as it develops.”
“We are already seeing the initial impacts of the reduction in VAT in the form of higher pigment prices, although the full impact will be clearer to everyone in a few months,” Mr. Pruitt said.
“There have been several announcements of increases by pigment manufacturers, agents and distributors,” Daniel McDowell, president NAFTA region for Siegwerk, said. “Customers are being made aware of China’s no refund policy and availability issues of chemicals to make reds and yellows. It is still unclear as to the effect related to pigment prices, but it is quite certain that prices will be very volatile in the short term.”
“We are trying to be proactive in informing our customers of the changes that are occurring,” Ms. Parisi noted. “However, the actual impact of these changes is still unknown. There is still product in the pipeline – inventories on the floor, ships on the water – that is based on the old pricing. We don’t know what those volumes are or how long it will take for them to clear.”
Ms. Parisi and Mr. Pruitt both pointed to environmental concerns and pricing as also having a major impact on pricing.
“The two are interrelated,” Ms. Parisi said. “Over the past few weeks we have received notices of increases from 5 to 30 percent on raw materials, and a lot of that is being driven by environmental factors.”
“Several issues raise real concerns for ink manufacturers today,” Mr. Pruitt said. “The first is the crackdown by the government of China on certain manufacturers who they believe are contributing to serious pollution issues. Among these manufacturers are a number of pigment intermediates producers, notably of C-amine and beta naphthol. We have seen immediate and dramatic cost impacts in sourcing pigments or pigment intermediates that rely on these products as raw materials. Lake Red C is an example of a pigment that has generated very significant price increases from suppliers in China and elsewhere due to the shortage of key raw materials.”
One of the problems facing ink manufacturers is that the growth of the offshore pigment industry came at the expense of domestic pigment companies, many of which have closed down. As China’s pigment prices rise, the question then becomes who the next major source of low-cost pigments will be.
“This is probably the bigger issue,” Ms. Parisi said. “For many years, the Chinese have had sufficient advantage that non-Chinese producers have basically closed up shop. They’re not producing any more. Now we have the change in VAT along with other moves by the Chinese government to reduce environmental impact by forcing production facilities to close. That evens the playing field, but a lot of former producers aren’t going to re-enter the market. It may re-open opportunities for producers in India and others. We’ll have to wait and see.”
Still, it is likely that ink manufacturers will see little relief.
“There are alternate sources for a number of these products, and serious buyers like Sun are taking a hard look at making a shift away from sourcing in China in order to mitigate the cost impacts, and provide more stability in economics and supply,” Mr. Pruitt said. “However, other suppliers are also taking this opportunity to raise prices, so there may not be much chance to avoid higher prices.
“It is also true, however, that China has become a very important source of many of the key raw materials for the ink business and will continue to be a highly influential region,” Mr. Pruitt added. “Sun continues to explore opportunities in China as well as India and other parts of Asia in order to deliver to our customers the best value in the inks we manufacture. Of course, any change of raw material will require cost and time to qualify in a safe manner.”
“In some cases, there are alternative low-cost regions where some of the raw materials may be sourced,” Mr. Woolven said. “However, they are now impacted by the higher demand as supply becomes tight out of China and India. This effect, coupled with the sustained weakness of the dollar, mitigates any cost advantages.”
Pigments aren’t the only challenge for ink manufacturers.
“In North America, the supply of styrene-acrylic resins and polymers looks solid, yet the industry remains vulnerable to feedstock shortages or petrochemical shocks,” said Rick Krause, business manager for BASF Resins. “As the U.S. dollar continues to weaken, the cost of imported raw materials (e.g. pigments) for the ink manufacturers increased. While globalization has provided cost efficiencies for many companies in our industry, the risk and cost of offshore sourcing seems to have increased.”
“We have not faced any ongoing issues with specific raw materials; rather, there have been ongoing cost pressures slowly building across several commodity groups,” Mr. Krause noted. “Some of these pressures have been driven by feedstock costs; others have been driven by supply-demand relationships. We see these pressures continuing to build into and throughout 2008. An unforeseen petrochemical shock, however, could dramatically change our outlook.”
“Another area of concern is the continuing high price of oil, whose impact is not only felt in primary oil-derived products, but also in petrochemicals, intermediates and in polymers,” Mr. Pruitt said. “These derivatives of oil have their own supply/demand dynamics that inject additional pressures on top of the record crude oil pricing we have seen over the last 12 months.
“We also see this year a strain on the acetyls chain and products derived from it such as solvents,” Mr. Pruitt added. “Force majeure events are largely to blame; however, the very unreliable nature of this critical supply chain is raising real concerns for consumers.”
“Sun Chemical has invested a great deal of time and focus on trying to understand and manage these difficult raw materials markets,” Mr. Pruitt said. “Our commodity analysis shows that the most impacted products are first those most directly affected by oil pricing. This group includes the ink oils and distillate solvents that are popularly used as diluents, as well as the colorant carbon black.
“Another group of products that have seen significant run-ups in pricing are industrial solvents like ethanol and ethyl acetate,” Mr. Pruitt continued. “These products are influenced by the oil market as well as their own unique supply and demand factors. Finally, rosin resin is another area that has seen dramatic cost increases driven by global supply/demand dynamics. The supply of gum rosin and toll oil rosin came under pressure over the last two to three years because of supply constraints and due to alternate uses and values.”
All things considered, the coming year looks to be challenging for ink manufacturers.
“Ink manufacturers and graphic arts suppliers will continue to face higher raw material costs and profitability-related pressure,” Mr. Krause noted. “We expect to see steady growth while we collectively manage increased raw material, transportation and energy costs.”
“It’s difficult to say at the moment,” Mr. Woolven said. “There is a reasonable amount of instability in this area of the market, which inevitably leads to a supply and demand scenario that will drive cost development, although Ciba Specialty Chemicals fosters long-term relationships with reliable suppliers, the volatility in the market affects us all.”
“The first quarter of 2007 gave only temporary respite to oil-driven cost escalations; the oil and chemical markets have been rebounding in pricing since then,” Mr. Pruitt said. “We expect to see a continuation of this climate next year because fundamentally nothing has changed in the overall supply/demand outlook. World inventories are tight, supply is being stretched to keep up with healthy demand, and the geo-political threats continue to add a significant risk premium. We believe that oil price volatility will continue to be an issue for us during all of 2008.
“We also believe that Asia, notably China, will continue to generate uncertainty in supply and economics due to the actions that have recently been taken to eliminate or reduce VAT refunds, and to crackdown on sources of pollution,” Mr. Pruitt added.
“We see 2008 as being a very challenging year with regards to raw material prices,” Ms. Parisi concluded. “The continued upward trend in energy costs, the move toward other, more profitable industries by the supply base, consolidation of the supply base, along with the Chinese VAT and environmental situation, are all issues that concern us for the rest of 2007 and 2008.”