Instability of Raw Material Prices, Supply is a Major Concern for Ink Manufacturers
Although ink companies appear likely to be able to pass along higher prices to their customers, there remain serious concerns about supply and pricing.
By Sean Milmo
Ink makers in Europe are beginning to push for higher prices for their products after being hit by a
There is concern, however, among ink producers that the latest series of surges in prices could herald the start of a period of instability in prices because of changing patterns in sourcing of raw materials and the growing influence of China on the printing industry’s supply chains.
In contrast to current market conditions, there could soon be a time when producers have to cope with frequent increases in raw material costs themselves because of their inability to pass them on to cash-strapped printers.
The petrochemical and oleochemical sectors, whose derivatives are major sources of raw materials for inks, are also facing phases of sharp fluctuations in prices.
Persistent imbalances in supply and demand for oil, stemming from shifts in global energy needs, will cause uncertainties in future trends in petrochemical-based products. The need for energy from biofuels will also cause disruptions in supplies of materials from agricultural crops. Already the sudden rise in demand for biodiesel, and to a lesser extent bioethanol, is being partly blamed for swings in vegetable oil prices in Europe.
Another source of unpredictability is China, which is now a production center for a number of key raw materials for inks production in Europe. Such is the extent of the Chinese presence in European segments like pigments that events in China can have an immediate impact on the European inks market.
Ink companies are having to keep a close eye on the policies of the Chinese government in order to gauge likely trends in pigment prices.
At times when global shortages are becoming the norm, they are also becoming increasingly conscious of their vulnerability to other larger, stronger sectors, which are able to exercise more buying power when chasing scarce materials.
“There are some materials where we are having to compete with other industries and where we are at a disadvantage because of the size of our sector,” explained Markus Kaiser, Flint Group’s European market director. “This competition is getting worse. At the same time we are having to contend with increasing demand for materials from Asia.”
With binders, the rivalry between sectors is centered on the raw materials for the resins rather than the resins themselves, which tend to be tailored to the requirements of specific groups of end-users.
The competition for supplies has been intensified by lack of adequate production capacity for certain resin components whose producers are unlikely to invest in plant expansions for the sake of serving the needs of the inks or even coatings segment. Instead, upstream players are much more likely to respond to the requirements of large sectors like plastics.
Some basic chemical suppliers have been decreasing capacity in some sectors by closing down unprofitable plants.
“They have been struggling to get reasonable returns from the plants so they’ve shut them down and pulled out of the sector altogether,” explained Mats Olofsson, vice president basic polyols at Perstorp, Sweden, which has just announced an average 5 percent increase in prices for intermediates for inks and coatings resins.
“Plant closures across the world have been putting up the costs of some raw materials because supplies have become tight,” he continued. “We’ve also been experiencing historically high prices for the olefins propylene and ethylene and for methanol. At one point earlier this year, methanol prices almost doubled over what they were in the second half of 2006.”
In fact, over the last few months methanol prices have been softening in the wake of falling demand and the introduction of new capacity. Analysts are predicting a continued slide in prices next year as demand remains flat at a time when global methanol capacity is scheduled to rise by 5-10 percent.
The olefins sector is also heading toward global overcapacity. Over the next few years, steam crackers with a capacity of approximately 20 million tons of ethylene are due to come on stream in the Middle East, most of it destined for Asia, especially China.
However, China itself is also due to bring six to 10 million tons of new ethylene capacity into operation, which could double the country’s total capacity to approximately 14-18 million tons.
“The current petrochemicals cycle has peaked so that supplies will exceed demand for a while,” said Paul Hodges, chairman of the London-based consultancy International eChem. “But because of sharp fluctuations in crude oil prices, petrochemical feedstock prices will be highly volatile, the effects of which will be felt down the petrochemicals value chain.”
With raw material suppliers facing a period of uncertainty about their ability to maintain margins, they will be seeking secure but undemanding outlets for their products.
Asia, particularly China, has, for example, started to become an unreliable source for rosin resins for inks, not so much because of shortages but because rosin producers in the region are finding the ink sector to be too challenging as well as less profitable.
“They are finding that they can gain a better margin by selling to other industries,” said Paul Walden, a director at Langley-Smith & Co., London, a distributor specializing in rosin, rosin derivatives and other resins, a growing proportion of which come from the Far East, especially China.
“Chinese producers are finding it easier to supply the adhesives sector because the rosin resins are simpler to make,” Mr. Walden added. “Making rosin for ink production is a lot more complex and requires higher levels of consistency in the standard of the resins.”
Most Chinese rosin producers will probably need both time and extra investment to reach the quality necessary to establish themselves in exports markets like that for resins for European printing inks.
“There are only a few Chinese producers supplying the inks sector with rosin at the moment,” said Mr. Walden.
A key objective behind the Chinese government’s recent abolition of the VAT tax refunds on exports of nearly 2,800 product categories, including pigments and other ink raw materials, has been to encourage Chinese exporters to move into higher quality goods.
At the same time as it abolished the refunds, the Chinese authorities clamped down on production plants causing serious pollution by withdrawing their operating permits.
“This latest move against dirty factories appears to have led to shortages of some intermediates for inks and coatings raw materials,” said one European trader. “They will probably get their permits back soon but the message from the Chinese government seems to be that these and other businesses have got to improve their production standards and rely less on incentives like tax refunds.”
Chinese as well as Western producers of pigments in China have been hit by both the elimination of the refunds and a scarcity of certain raw materials. Ink businesses across Europe will inevitably be affected because classic pigments made in China have such a big share of the printing pigments sales in the Europe.
“It looks like most pigments suppliers will be putting their prices up for the first time for a long while and it’s likely they will stay up,” said Tony Gill, sales manager at Union Colours Ltd., Stalybridge, England, the UK-based distribution and marketing subsidiary of Chinese pigments producer Longyu Pigments & Chemicals Corp, Changzhou, China.
There could be further increases in the prices of Chinese pigments and other materials following complaints by the U.S. and Mexico that Chinese tax breaks, tax refunds and other subsidies for exports breach the rules of the World Trade Organization. The WTO has set up a disputes panel to investigate the claims.
For the moment, however, ink companies are fortunate to be in a position to transfer higher raw material prices to their customers in Europe, where there is currently relatively strong demand for printing products.
“Prices along the chain are going up because everyone is doing well at the moment,” said Mr. Olofsson. “When business is bad prices go down.”
Western Europe’s publications sector is estimated to be growing at around 2 to 3 percent this year – at about the same level as GDP. But parts of the packaging sector are expanding at 3 to 4 percent, according to industry sources.
In Eastern Europe, particularly Russia and neighboring states, demand is much higher with double-digit growth rates being reported, especially in segments like packaging.
Flint Group, which is one of the first of the large ink producers in Europe to reveal it is aiming to put up its ink prices, has been careful not to reveal the size of its planned price increases.
“The level of the increases will be a matter of individual discussion with our customers,” said Mr. Kaiser. “Although there are differences in growth rates in parts of Europe, the amounts of the rises will be depend on applications rather than geographical area.”
There are signs in some local printing markets that business has started to decline. The British Printing Industries Federation (BPIF) reported a 25 percent increase in printing companies working below capacity in the second quarter.
“Business is still slightly better than it was last year but profitability is below that of even a few years ago, and one-fifth of printing companies are loss-making,” said Kyle Jardine, BPIF’s information manager.
The slowdown in the UK printing sector in the early summer coincided with an abortive attempt by paper makers to push through a second rise in prices in the country after achieving a successful increase at the beginning of the year. This could be evidence that in certain areas of Europe printers are beginning to resist price increases.