The European Ink Report
By Sean Milmo, European Editor
Some sectors, like publishing, look unlikely to regain the level of sales before the recession for several years, if at all.
Ink makers are having to adapt to the probability that the segments they supply will have been transformed by the time normal economic conditions return.
“The recession has been a wake-up call,” said Felipe Mellado, Sun Chemical’s chief marketing officer. “It has made all of us realize how the world is changing.”
Currently, low prices and an unwillingness of banks to lend money to hard-pressed printers is making it difficult for ink producers and other operators in the printing sector to prepare themselves for the new market conditions after the downturn.
“Pricing is a big issue for the whole industry, as well as availability of investment money,” complained one senior ink company executive. “All of us in the sector are suffering. Margins are too thin to finance projects for new products and applications and banks won’t lend money.”
Printing ink demand in Europe dropped by 12 percent in 2009, according to estimates by the European trade association for coatings and inks (CEPE). This was mainly due to a sharp fall in demand for publications and advertising, which was offset partially by sales in a more resilient packaging sector.
This year demand for printing inks may continue to decline or at best remain static. The European recovery from the financial crisis of 2008 is expected by economists to be a slow one. The ground lost due to the recession may not be fully regained in terms of industrial output until 2012 or even 2013.
For the publishing sector in Western Europe, a full recovery is expected to take even longer. The print media will not only have to cope with only a gradual revival in demand but also will have to compete with the relentless growth of the internet.
Last year in Western Europe, advertising in magazines fell by 20 percent and newspapers by 14 percent, according to figures from ZenithOptimedia, a London-based media buying agency. Outdoor advertising went down by 14 percent.
The agency believes that the decrease in demand for print media advertising will continue this year with advertising in magazines dropping by 4 percent, in newspapers by 3 percent and on outdoor sites by 1.7 percent.
After registering 17 percent growth in 2008, the rise in advertising expenditure on the internet slowed to 1.4 percent last year and will register only 3.5 percent in 2010. But it will accelerate to an average of 7.5 percent annually over the next two years, ZenithOptimedia predicts.
By 2012 the agency is forecasting that the internet will have gained 17 percent of Western Europe’s total advertising expenditure against 12.6 percent in 2008. Meanwhile, the newspapers’ share will have dropped from 25 percent in 2008 to 20 percent and that of magazines from 12 percent to 9 percent. Outdoor advertising will hold on to a share of 6.7 percent, slightly higher than that of 2008.
In the UK, Sweden and Denmark, the internet already has shares of advertising spend of above 15 percent. By 2012 its shares in Finland, France, Spain, Germany and Norway will also be above that level, while in Denmark it will soar to more than 15 percent.
“The levels of advertising expenditure in the print media in Western Europe will not return to the 2007 peak until around 2014-2015,” said Jonathan Barnard, ZenithOptimedia’s head of publications. “This is on the assumption there will not be any economic shocks between now and then – like a double dip in economic growth.”
The print media in Central and Eastern Europe, which includes Russia and the former countries of the Soviet Union, has also been hit hard by the recession. Advertising spend in newspapers plummeted by 33 percent and in magazines by 19 percent in 2009.
“But advertising in Central and Eastern Europe will bounce back much more quickly than in Western Europe,” said Mr. Barnard. “There have been huge drops in advertising in Russia and the Ukraine in recent months. But in Russia it already seems to be staging a fast recovery.”
Eastern Europe’s print media also has the advantage of an internet advertising segment which, although expanding quickly, is taking up a smaller share of the total market than in Western Europe. ZenithOptimedia expects its share to reach only 6.6 percent in Central and Eastern Europe in 2012.
Nonetheless, even in the eastern part of Europe publishing will be losing its share of advertising expenditure because of more rapid growth among rival media.
“Newspapers and magazines will attract more advertising because of improvements in printing and logistics in the distribution of newspapers and magazines,” said Mr. Barnard. “But the amounts of advertising gained by TV and radio as well as the internet will be increasing more quickly.”
Packaging Offers Growth Potential
While the publications sector in Western Europe in particular is floundering, the packaging market is generally considered to be offering the best prospects for growth. Demand for packaging dropped last year but far less than that for publications or commercial work.
Over the next few years packaging is forecast to grow by 4 to 5 percent annually, at least twice as fast as publications and commercial printing.
Furthermore it will offer to ink producers far better margins, particularly in more specialist areas like brand enhancement and packaging security. Even during the current economic downturn the difference between publications and packaging prices for inks per kilo has been as much as fivefold.
“Packaging will definitely be the growth area of the future while the publications sector will remain flat,” said Mr. Mellado. ”Packaging will become more intelligent, smarter and interactive. Inks will provide not only better graphics but also more functions in the packaging
Sales of packaging are being boosted by the rising expenditure by brand owners and retailer chains on in-store marketing, including the use of visually appealing packaging to catch the attention of shoppers.
“The major brand owners and the retail chains in Europe are spending less on advertising but are spending more on packaging and narrow-web as a means of in-store marketing,” explained Niklas Olsson, global brands manager at Flint Group. “They see the supermarket as the place where buying decisions are made so they want their packs to stand out visually.
“More effort is also going into the design of packaging and more importance is as a result being placed on the quality of printing,” he continued. “We have recently being doing a lot of work on printing of narrow web packaging with high definition flexo which requires sensitive designs and a finer resolution than other processes. We are seeing a lot of interest in this kind of high-end printing.”
Eastern European converters have become more competitive as packaging printers because of the quality of their printing. In the recent Flint Group Narrow Web Print Awards held at Labelexpo Europe, four of the top awards went to Eastern European converters – three in Russia and one in Poland.
“The quality of packaging printing in Eastern Europe is improving considerably,” said Mr. Olsson. “Printers in the region have invested a lot in state-of-the-art equipment over the last two to three years. So they have more modern equipment than their counterparts in Western Europe.”
During the recession when cutting costs have become crucial, packaging converters across Europe are also taking a broader attitude to the role of inks in increasing efficiency in the whole printing process.
“Customers in packaging and labels are looking at ink prices not just in terms of prices per kilo or per square meter but also in terms of up-times or down-times,” stated Mr. Olsson. “They are considering inks in terms of the extra mileage the inks might give because of their durability and other properties. Some customers are in this way being more open to the added value of inks and may be more flexible on pricing. But there are others which want both the better performance and the cheapest price.”
With the prospects for publications looking gloomy and those for packaging and other segments much brighter, some ink producers are having to reorganize themselves to ensure they are better placed to achieve growth.
“We will have to adjust our capacity to demand and explore opportunities in new markets,” said Mr. Mellado. “It will mean the transformation of product portfolios. The sort of products being demanded in the future will not be same as those on the market today.”
Inevitably the repositioning of ink businesses will lead to an increase in mergers and acquisitions as companies seek to gain bigger footholds in certain geographical markets or in promising product categories.
In February, Flint Group, the second-largest company in the European inks market, agreed to take over Torda, a Swedish-based ink manufacturer with annual sales of €23 million ($31 million), whose main attraction was its substantial presence in Eastern Europe.
Even Sun Chemical, which as European market leader is already a dominant force in the region’s ink sector, is not ruling out acquisitions.
“Sun will be looking for opportunities as long as they add value,” said Mr. Mellado. “It will not be about increasing in size because we already have sufficient critical mass. There may be openings in niches in which we want to be stronger or do not have a presence. There may be a need for geographical expansions in certain areas in which businesses with a services capacity will be important. There may be also be technologies we want to acquire because of their importance for the future.”
Over the next few years, takeovers are likely be a major feature of restructuring taking place in the whole supply chain of the printing industry.
The biggest shake-out could be among Europe’s printing press manufacturers, in which the three biggest players are the German-based Heidelberg, the market leader, Koenig & Bauer Group (KBA) and MAN Roland.
Since the financial crisis of 2008, sales of printing presses and equipment in Europe have dropped by around 40 percent. The decreases in demand for types of presses have been much the same in Europe as that worldwide, where sales of commercial printing presses have gone down by around 70 percent and newspaper and sheet-fed machines by around 50 percent, according to KBA.
Production capacity among the leading press manufacturers in Europe has been cut by as much as 30 percent while staff levels have been reduced by up to 20 percent.
Heidelberg found itself facing liquidation last year when it was having difficulties refinancing debts totalling around €1.5 billion because of a reluctance among banks to support such a depressed sector.
Fortunately for the company, it was able to take advantage of a new policy of the German government to offer state-backed loans and credit to companies having problems raising money from banks.
Germany’s Reconstruction Loan Corporation (KfW) provided a €300 million loan, while a €550 million loan was backed by 90 percent guarantees by the federal and state governments. In addition, Heidelberg was also able to arrange a syndicated banks credit line of €550 million, giving it total financial support of €1.4 billion.
Around the time Heidelberg was saving itself from bankruptcy, it was reported to be negotiating a merger with MAN Roland, but these talks collapsed.
KBA has recently complained bitterly about Heidelberg taking advantage of state aid to offer massive discounts to potential buyers of its unsold stocks of machinery.
“The decline in prices of new presses is undermining the market value of existing equipment, which is often offered by printers as security when seeking a loan for new investments,” says Helge Hansen, KBA’s president and chief executive. “As if securing funds were not difficult enough already, many a printer’s pleasure at obtaining a bargain price for a new press is wiped out upon finding that his bank or accountant has valued his assets at bargain prices as well.”
Heidelberg has retorted that instead of undercutting prices, it has merely been taking advantage of its technical superiority to clinch sales.
“We have won during the past months many orders with which we did not offer the lowest price but –from the point of view of the customers—the better and more innovative machine,” said Bernhard Schreier, Heidelberg’s chief executive.
With the limited growth prospects for the print media, KBA has been diversifying into printed electronics and solar energy. “It makes sound business sense to establish a firm foothold in a different sector,” said Mr. Hansen.
REACH and Sustainability
For printing sector companies, including ink makers, the scope for new and expanding activities seems to be anything to do with sustainability.
“Sustainability will be the main driver behind change in all markets, including publications,” said Mr. Mellado. “Products will have to use less energy and be based more on renewable raw materials.”
Companies are also being forced to take more notice of sustainability because of the increasingly tight legislation in Europe on human health and the environment and because of government policies on climate change and energy efficiency.
Ink producers will be having to deal with challenges on a number of fronts in the area of European health and safety regulations this year.
The biggest will be posed by the European Union’s massive REACH scheme for the registration and authorization of all chemicals produced or imported in the EU with an output of one ton or more. Both the registration and authorization procedure cover not only the chemical but also its use by downstream customers, such as ink makers.
Deadlines for registrations, based mainly on the total production tonnages of substances, will occur in stages through to 2018. The first is set for Nov. 30 this year, when all chemicals with an output of 1,000 ton or more will have to registered.
Also, all substances over a one-ton output which are classified as being in categories one and two of being carcinogenic, mutagenic and toxic to reproduction (CMR), will have to be registered by Nov. 30. By that date as well, chemicals above 100 tons annual production which are classed as being persistent, bioaccumulative and toxic (PBT) or very persistent and very bioaccumulative (vPvB), will have to be registered.
Altogether around 9,000 substances covered by the Nov. 30 deadline will have to be registered by producers and importers upstream from ink manufacturers.
A minority of ink makers may have to make their own registrations for substances they produce themselves or import directly. The main involvement of ink manufacturers in the registration procedure is the provision of information to the chemical producers or importers about their use.
The registration process is proving to be highly complex and cumbersome. Officials in the European Commission, the EU executive, the European Chemicals Agency (ECHA), responsible for handling the registration and within the chemical industry, now seem to concede that many companies have fallen so far behind schedule with the registration process that they may not be able to make the deadline.
“There is a sense of panic within the EU and the industry,” said Jo Lloyd, technical director of the London-based consultancy ReachReady. “Officials and industry representatives now seem to be resigned to the likelihood that many companies will not do their registrations on time. Instead, they are trying to work out a fall-back position to prevent a severe disruption of the market.”
Ink producers now fear that suppliers of key substances who have missed the registration deadline will have to take the chemicals off the market on Dec. 1. REACH operates under the rule ‘No data, No market’.
“The main problem is going to be with the drawing up of registration dossiers on the CMR, PBT and vPvB substances because of the amount of safety data required,” explained one consultant. “But the average product portfolio of an ink makers does not contain these sort of dangerous substances. So ink producers may be less badly affected than other chemical users.”
The European Printing Inks Association (EuPIA), which is part of Cepe, has warned its members to make provision for the possible loss of supplies of essential chemicals by finding alternative sources.
Ultimately, however, the sustainability policies of brand owners, retailers and corporate end-users of printed products, especially packaging, may have more influence on the choice of chemicals in inks than legislation like REACH.
“Now we have to watch the corporate codes on use of chemicals as closely as EU regulations,” said an ink business health and safety executive.
Innovations, Service Are Driving Growth
The main impetus behind changes in ink formulations will be innovations which, for many companies, will provide the future platform for higher sales and profitability.
“Development of ideas and solutions in the pipeline will now be accelerated because of the economic crisis,” said Mr. Mellado. “More innovation is absolutely necessary. Those companies which have the ability to innovate will emerge from the recession stronger than they were before.”
Sun Chemical is seeking to use innovation to diversify its product portfolio with more inks with functional properties but also with formulations and materials outside printing altogether.
“We are exploring areas of expansion outside graphics,” said Mr. Mellado. “There will definitely be opportunities in packaging coatings for laminates in food packaging, which can reduce the amounts of layers and cut waste. In industrial coatings there will be openings for expansions in consumer electronics such as coatings for DVDsand greater use of UV and EB curing in which we already have technologies. We have a program for developing processes and materials for photovoltaic solar cells.”
Services are likely to be strengthened in parallel with innovation capabilities. The two tend to be closely linked because close contact with customers enables companies to develop innovative concepts which meet specific customer needs.
For many SMEs in the printing inks sector in Europe, there is now no alternative but to compete on service.
The UK-based startup Colorgen, a specialist in UV packaging inks, is typical of SMEs which have been doing well during the economic downturn by putting a lot of effort into services.
“Our sales revenue amounted to £3.5 million ($5.4 million) in 2009, our first year in business, which is not bad for a staff or 10,” said Alex Stevenson, Colorgen’s chairman. “We’re now increasing our workforce by 50 percent by recruiting five more people.”
“An SME in the inks business cannot survive by competing on volume and price,” he explained. “Small companies can provide top class services because they are flexible and can respond quickly to the requirements of customers. Generally services are now making up a higher proportion of the sales of ink companies. The future of the sector lies in a combination of innovation and understanding the needs of customers.”