The European Ink Report
European ink manufacturers are bracing for a challenging year, although there are opportunities for growth in some regions and markets.
By Sean Milmo
Ink makers and their customers in Europe are bracing themselves for a tough year in 2008 as
However, the impact of a fall in economic growth could be less harsh than expected. Continued buoyancy in the economies of many Eastern European countries, many of them members of the European Union, could cushion the effects of a downturn in business in much of Western Europe.
Russia, whose printing sector is supplied by ink companies in Western Europe, is, for example, expected to enjoy high growth this year, making it one of the most vigorous of the world’s emerging economies along with those of China, India and other newly industrialized Asian countries.
Within Western Europe, a credit squeeze, stemming from the sub-prime financial crisis in the U.S. last autumn, will increase pressure on the already stretched cash resources of many printing companies at a time when there will be fewer opportunities for boosting sales and profits.
Curbs on bank lending could also result in less investment in new or upgraded printing equipment which can often trigger demand for higher quality inks.
“It is going to be quite a volatile year and one of the most unpredictable for some time,” said Felipe Mellado, corporate vice president at Sun Chemical Europe. “Every year has its uncertainties but the outlook for this one is much more insecure than usual.
“We saw the first signs of the effects of a drop in consumer demand in the fourth quarter of last year and this has now continued into January and February,” Mr. Mellado added.
Last year, volume sales of printing inks in Europe as a whole went up by around 2 percent. But in 2008, Sun Chemical is expecting growth to be relatively static.
Official forecasts for average GDP growth in the EU’s 15 Western European member states have had to be revised downwards since the financial turbulence of last autumn.
In November, the European Commission, the EU executive, was predicting 2.2 percent growth in the 15 countries in the zone of the euro currency in 2008, compared with 2.7 percent in 2007. Now economists are predicting growth rates as low as 1.5 percent amidst signs of a sharp downturn in consumption in the key economies of France and Germany.
In the UK, which is the largest EU country outside the euro zone, consumer confidence has been undermined by slumping house prices while some segments of its financial services sector have been struggling.
A major concern with the EU, especially within its euro area, is the inflation rate which is beginning to rise steeply, partly because of high prices for energy, food and other basic needs.
Inflation in the euro zone has surged from below 2 percent in mid-2007 to 3.2 percent in January this year. This has raised fears about a period of relatively high inflation which would depress economic activity even more.
“Much of the printing industry and its suppliers have been able to keep the value of their sales at above that of inflation,” explained one analyst. “But that will be much more difficult if inflation stays well above 2 percent.”
Nonetheless, despite worsening economic conditions, there are likely to be pockets of healthy economic growth in Western Europe this year. Three of the four Nordic countries of Sweden, Denmark, Finland (all EU member states) and Norway (a non-EU country) are expected to record growth rates averaging 2.5 percent, a decrease from the level in 2007 but well above the predicted average for this year in the euro zone.
Meanwhile, some Eastern European countries are likely to continue to achieve growth rates at least two to three times higher than even comparatively fast expanding Western European economies. In late 2007, Slovakia has a year-on-year growth rate of 14 percent and Latvia almost 10 percent, while with Poland and the Czech Republic, it was more than 6 percent.
The Russian economy, bolstered by high global oil and gas prices, is forecast to grow by 7 percent this year against 8 percent in 2007.
The dynamism of the Eastern European economies is important to ink producers and other printing industry suppliers in Western Europe because of Eastern Europe’s relatively high dependency on imports of consumables and other printing materials.
On the other hand, within Western Europe itself, some parts of the printing industry are likely to be more resilient than others in response to the downturns in their local or regional economies, particularly if they have been able to restructure their businesses over the last few years.
A survey by the British Printing Industries Federation (BPIF) of its member companies published at the beginning of this year found a surprisingly high level of optimism among the majority of them despite prospects of a deteriorating UK economy.
“(This) is based on their belief that over the last couple of years they have taken measures to ensure that their companies are robust enough to face any downturn and that, as insignificant players in the macro-economy, if they look after themselves, there should be a market for them,” said a report on the study.
The Impact of the Internet
Throughout Western Europe, many printers are continuing to have to cope with intense competition from electronic communications technologies. The plight of the print media has become so serious that organizations representing printers and their suppliers have come together to make advertisers, marketing executives and other media users more aware of the benefits of printing.
Last autumn, the European Association of Fine Paper Manufacturers (Cepifine), backed by printer and other trade associations, launched a €5 million ($7.5 million) campaign in Western Europe based on the slogan Print Sells. It was aimed at around 500,000 people in marketing and advertising, with the main targets being marketing and communications managers, account managers in advertising agencies and media planners in media purchasing agencies.
The emphasis in the campaign was on the physical advantages of print with the message “Print. Your brand is in their hands.” The focus on “touch and feel” was a way of highlighting its effectiveness, according to Intergraf, the international confederation of printing and allied industries.
Cepifine acknowledges that relatively sluggish growth in parts of the print media has been due to the success of the electronics media, in particular the Internet.
This has been demonstrated by the rapid penetration of the Internet in the Western European advertising market. Last year it achieved a 9 percent share of the region’s total advertising sales, a fourfold rise in five years, according to figures from London-based media agency ZenithOptimedia.
In the UK, Western Europe’s largest national advertising market in terms of total expenditure, the Internet’s share rose to 19 percent in 2007. Its share was also high in the Nordic countries, accounting for 18 percent of advertising sales in Sweden and 17 percent in Denmark.
“The Internet now has a bigger share of total advertising expenditure in Western Europe than outdoors advertising and radio,” said Jonathan Bernard, ZenithOptimedia’s head of publications.
“Advertisers had previously been exploiting the Internet’s direct response and interactive mechanisms,” he explained. “But now they are using it as a branding vehicle because of the larger numbers of people using the Internet and especially due to the scope for eye-catching visuals like videos provided by the widespread access to broadband.”
The Internet has also been the main driver behind the comparatively high increases in advertising expenditure in Western Europe. ZenithOptimedia is forecasting growth of nearly 5 percent this year, similar to the increase in 2007.
Magazines have been losing revenue as advertisers switch to the Internet for brand building. In 2007, advertising expenditures on magazines was static although this year it is expected to recover with a rise of 1.8 percent.
Newspaper publishers in Western Europe managed to keep their newspaper sales roughly in line with inflation in 2007, with an increase of around 2 percent, which is forecast to be repeated this year.
Revenues from outdoor advertising sales in Western Europe, which expanded by 4.5 percent last year, is forecast to go up by 4.2 percent in 2008. But it is no longer an exclusively print media sector because of the arrival of digital displays which advertisers are regarding as an effective alternative to printed large-format advertisements because they can be produced far more quickly.
Gains in Eastern Europe
The advertising market in Central and Eastern Europe (CEE), which excludes Russia, was the fastest growing in the world last year with an average rise of 7.6 percent, according to ZenithOptimedia. This even surpassed that of the rapidly expanding advertising market in Asia Pacific. Despite a slight dip to 7.2 percent, CEE is predicted to record the top growth rate again this year.
In the CEE, newspaper advertising is forecast to rise by 8 percent this year against 5.4 percent in 2007, while magazine advertising should go up by 7.5 percent against just under 9 percent last year. In Russia, growth in advertising in the print media will slow to 24 percent after soaring by 28 percent in 2007.
While publication printing in Eastern Europe has been benefiting from the fast rise in expenditure by local advertisers, it has also been attracting investment from Western European publishers setting up printing centers in the CEE.
There has been a similar trend in the packaging sector, which is likely to gather pace this year because of the need to offset increasing production costs in Western Europe.
The average earnings of a worker in the manufacturing sectors of Poland, Hungary, Czech Republic and Slovakia are approximately 5 to 6 times lower than those in Germany, UK and other northern European countries. In Romania and Bulgaria, the newest Eastern European entrants to the EU, they are 10 to 20 times lower.
However, the transfer of packaging plants to Eastern Europe can in fact result in consumer product companies, particularly those in the food and drinks sector, cutting back on their packaging volume.
The UK-based confectionery manufacturer Cadbury faced accusations of environmental irresponsibility when it transferred production from England to Poland. Critics of the move claimed that it would mean 12 million miles of additional transportation of its branded products as they were shipped to their main markets in Western Europe.
The company then revealed that it had adopted a strategy of aimed at reducing its packaging per metric ton of product by 10 percent and cutting its highly packaged and gift items by 25 percent.
Concerns And Packaging
Ecological issues are affecting the entire food and drink sector in Europe because of consumer concerns about global warming. Retailers are, as a result, instructing their suppliers to decrease as much as possible amounts of packaging.
Environmentalists have started a drive to eliminate bottled mineral water because they claim it uses unnecessary petrochemical-derived packaging materials and transportation fuels when good drinking water is available from the tap.
Ink producers are having to adapt to the increased preference for thinner packaging films because the films need less material and hence lower transport costs. They also tend to require more complex inks.
While packaging is being subjected to new environmental pressures, it is also becoming an early victim of the economic slowdown. Over the last few months, packaging output has been reduced in the face of a softening in consumer confidence.
“Demand for packaging has been looking pretty weak,” said Mr. Mellado of Sun Chemical. “In the UK, where a lot of packaging production has been transferred to Eastern Europe, it is difficult to ascertain how much the fall in demand is due to a downturn in the domestic economy and how much due to displacement of capacity. But the decreases seems to be general throughout Europe, with corrugated packaging being affected more than flexible packaging.”
With consumers tending to spend less, manufacturers are making more special offers and more one-off price cuts which require more short runs in the printing of packaging. This can favor the greater use of digital printing equipment.
Competition between makers of inkjet and electrophotographic presses has been intensifying in the packaging sector as a result of improvements in the color reproduction of toners used in laser printing.
Because of their ability to offer high quality color printing, electrophotography equipment makers have been extending their activities beyond their stronghold of the shared office printer market into the commercial printing area. Consequently, a marketing battle is taking place in the lower end of the commercial sector, not only between the digital press makers but also between the digital equipment companies and those making conventional equipment.
However, the slackening of the economy is reinforcing the general reluctance among printers to invest in new equipment, not only digital but also conventional machinery as well.
Among the leading European manufacturers of printing presses, Heidelberg reported static sales in the first nine months of its fiscal year to the end of December, with a slight decrease in revenue from its press division. Incoming orders for its offset printing presses were down 2.6 percent to €2.5 billion. On the other hand, sales in Eastern Europe were “significantly up” on the previous year.
MAN Roland recorded a 6 percent decrease in both sales and orders last year. Sales of web-fed presses dropped by 9 percent while orders for them plummeted by 21 percent.
The order backlog of Koenig & Bauer Group (KBA) shrank by 18 percent during the first three quarters of last year, mainly because of a dip in demand for large gravure and newspaper web presses. In September, KBA agreed to sell its gravure operation to its main competitor, Cerutti of Italy.
Of Major Printers
A major reason for the fall in order for large printing presses has been the financial problems of the some of the big publication printers in Europe.
Quebecor World Inc of Canada announced in November that it would be effectively divesting all of its printing activities in Europe, comprising 18 printing and finishing facilities with more than 4,000 staff, by putting it into a joint venture with RSDB of the Netherlands.
However, a few weeks later it revealed that the deal had collapsed because of a lack of support from RSDB shareholders.
In January Quebecor declared that its UK subsidiary, Quebecor World PLC, based in Corby, England, in which it had made substantial investment in web offset facilities, had been placed in administration. The operation, one of the company’s largest in Europe, had been generating losses for the last three years.
“Restructuring at the top end of the printing sector in Western Europe would appear to be inevitable, but it is difficult to know where the funds are going to come from at a time when banks are unwilling to lend money,” said one printing industry analyst.
Doubts have been raised about the future of Polestar, a UK-based printer one of the top five printing companies in Europe in terms of capacity. At the end of last year, it had total debts of £257 million ($504 million). Polestar announced in January that it would be closing its gravure printing works at Scarborough, England, in order to consolidate its gravure activities in two instead of three sites in the UK.
“This action recognizes that there is too much print capacity in Europe and Polestar has been prepared to take a lead on this,” said Barry Hibbert, Polestar’s chief executive. “For the sake of the market I hope other printers will do the same.”
Financial constraints and a hesitations about investing in new technologies have been a major factor behind the slow takeoff of the fledgling printed electronics sector in Europe.
Growth in demand for radio frequency identification (RFID) tags has so far not lived up to expectations in Europe, having reached levels less than half that previously forecast. This has raised doubts among ink producers and other suppliers about the length of time the emerging sector will need to become a sizeable market, although analysts are still predicting that the printed electronic sector will reach its long-term target of global sales of $300 billion by the mid-2020s.
Nonetheless, PolyIC GmbH & Co of Germany, a joint venture between Leonard Kurz & Co., a hot stamping and coatings producer, and Siemens AG, the electronics and engineering company, opened two commercial production lines in September for printed RFID for use in the areas of brand protection, voucher systems, marketing and logistics.
“The PolyIC facility is a start, but generally with printed RFID, a lot of research and development work still needs to be done,” said Raghu Das, chief executive of IDTechEx, a market research organization at Cambridge, England.
The vast majority of the $570 million in RFID tag sales in Europe last year were for theidentification of pallets and cases in transportation and in smart cards, like those used for personal ID systems, according to IDTechEx. The only printed parts of the tags, in most cases, were the metallic antennae.
For many companies, their priority in R&D over the next few years could be the development of reformulations of their products to comply with the EU’s REACH project, under which 30,000 chemicals will have to be registered and possibly further evaluated and authorized.
Due to the cost of registration, which could require the provision of detailed safety data or the necessity for as many as 1,500 or more substances to go through an expensive authorization process, some key ingredients in inks could be removed from the market.
Ink companies will have some idea of the first withdrawals by the end of this year when a six-month pre-registration period starting in June will end. Chemical manufacturers and importers will have to pre-register chemicals which they intend to fully register.
Over the next 10 years, there are various deadlines for registration depending on the total tonnage of the chemicals, with those chemicals with the lowest volumes being given the longest time.
If a chemical is not registered, its producer or importer will almost certainly be planning to take it off the market because without registration its sale will soon be illegal.
Among chemicals which may have to be authorized are some organic pigments because of their insolubility and hence bioaccumulation in the environment. Authorization may only be granted on the condition that safer alternatives are developed.
The current unpredictable economic climate is only temporary. But the uncertainties generated by REACH will be dogging ink producers and other downstream users of chemicals for a long time.