Financial, Regulatory and Supply Issues In China Impact Pigment Industry

By Sean Milmo, Ink World European Editor | 06.04.08

It is a nervous time for ink producers and distributors in Europe due to the impact of the policies of China's government on the production of organic pigments and raw materials.

It is a nervous time for ink producers and distributors in Europe due to the impact of the policies
of China’s government on the production of organic pigments and their raw materials in the country. The European ink sector is experiencing for the first time the dangers of over-dependence on a single source of supplies for most of its classical organic pigments.

Since the middle of last year, the Chinese government has been taking a number of long-term and short-term decisions to consolidate production of pigment raw materials in the country, while tightening up environmental regulations to reduce water and air pollution. In addition, it abolished an exemption of sales tax (VAT) on exports of pigments and other products.

As a result, there have been unprecedented scarcities of key intermediates, particularly for azo reds and yellows and naphthol reds.

Large pigment makers and their ink producing customers began to anticipate likely shortages of raw materials late last year, which triggered a first wave of stockpiling.

Over the last few months, there has been evidence of panic buying as small- and medium-sized players as well as distributors and traders realized the threat of being left without any supplies of crucial products.

“We cautioned that the change in VAT rules last year would look small compared to the raw material costs in 2008,” said Craig Foster, president of Flint Group Pigments.

Volatility in the pigments market is expected to continue after the end of the Beijing Olympics in late August as the squeeze on supplies begins to unravel.

Nonetheless, the anxieties caused by the scarcities and the resulting price increases have raised speculation about a possible reorganization of the manufacture of organic pigments and their raw materials in order to decrease reliance on China.

China’s trade in organic pigments, a large proportion of which are used in printing inks, is continuing to show double-digit growth. Last year, exports and imports went up 11 percent to 192,700 tons, while in value terms they increased by 26 percent to around $1 billion, according to official Chinese statistics.

The Chinese share of the commodity organic pigments market in Europe is now well over 50 percent. The share of Chinese-produced pigments is thought to be even higher because of the large proportion of the sales of classical pigments by Western multinationals which are made in China.

“Chinese producers now have such a strong position in Europe that they are able to ask for payment in renminbi, the Chinese currency, so that they can protect themselves against the weakening of the U.S. dollar in foreign exchange markets,” said Fritz Brenzikofer, chief executive of IQ Chem, a Swiss-based consultancy and marketing organization in pigments.

Confidence in China as a center for pigments production was dented last year in Europe when the lifting of the VAT tax exemption on exports meant that importers of Chinese products had to try to make up for an additional cost of as much as 13 percent.

At the same time, the Chinese government started to be more serious about enforcing its Cleaner Production Promotion Law. This provides not only for closer monitoring of industrial plants so they clean up their production processes, but also for the consolidation of manufacturing within production centers, particularly industrial parks.

As a result, a number of plants making intermediates for pigments were closed down because they were considered to be causing too much pollution or were outside areas designated for the manufacture of particular categories of chemicals.

The production of key intermediate for azo and naphthol pigments – such as 6-amino-4-chloro-m-toluene sulphonic acid (2B acid), 4-amino-m-toluene sulphonic acid (4B acid) and dichlorobenzidine (DCB) – has been concentrated in and around Tianjin, 125 kilometers south of Beijing. It has a large chemical industrial park – the Tianjin Economic and Technological Development Zone (TEDA).

In preparation for the Olympics, the Chinese government has ordered industrial plants within a kilometer radius of Beijing to halt production in an effort to drastically reduce the level of air pollution for the event.

“There is a sharp imbalance between supply and demand in China on intermediates and also on azo pigments,” said Hans-Joachim Kleinsorg, Sun Chemical’s global leader for purchasing of organic pigments. “These restrictions/stops on production because of the Beijing Olympics will be in place from July until September 2008, so a pigments producer needs stock available for at least four months.”

Large Chinese and international pigment makers seem to be the most protected against the inadequacy of supplies because they have established reliable sources of raw materials while creating sufficient inventories.

“The shortage are going to get worse because smaller producers and traders will now be desperately stocking up,” warned Philip Myles, operations director at Union Colours, Stalybridge, England, the European distribution and product development arm of Longyu Pigments & Chemicals Corp, Changzhou.

IQ Chem estimates that between January and May of this year, prices of 4B acid went up by 90 percent, 2B acid by 50 percent, beta naphthol by 30 percent and DCB by 15 percent.

Raising Prices

In addition to the extra costs of energy, transport and other raw materials, these increases have led to rises in organic pigment prices in Europe averaging 5 to 10 percent over the last few months. Some price increases of individual organic pigments are reported to be have reached 20 percent.

Growing awareness down the printing chain of raw material shortages in China as well as measures like the elimination of the VAT exemption have helped pigment producers to persuade their customers to accept the full price increases.

“As margins have come under significant pressure throughout the industry, price increases are required to allow us to remain a reliable and competitive supplier to the ink industry,” said Mike Mordente, head of the inks and printing business line at Ciba Specialty Chemicals. “We will continue to monitor raw material cost developments in all areas and respond appropriately on both the procurement and the sales side.”

Pigment producers are warning that pressure on their raw material costs will not disappear after the end of the Olympics.

“We must not believe that all will be back in line after the Olympics as the basics – oil, energy, currency, capacity and global demand – are unaffected by them,” said Mr. Foster. “I expect that material volatility will continue.”

Still, some executives are pointing out the possibility of a sharp fall in pigment prices later in the year as a result of the stockpiling of both raw materials and the pigments themselves in the months before the Games in Beijing.

“With raw materials plants back in full stream and not much buying taking place, there is going to be an excess of product on the market,” one European marketing executive warned.

The price increases in bulk organic pigments have tended to be higher than those for specialty and high performance pigments (HPP), which is helping them to expand their share of the printing inks sector. A lot of the HPPs at the lower end of the segment are made in China.

However, as HP pigments become less expensive in relation to classical organic pigments, they will tend to become commoditized. Approximately 40 percent of the high performance pigments sector for printing inks is declining in value, while 30 percent of it is growing in value, according to Mr. Brenzikofer.

With the objective of pushing down the production costs of HP pigments, the multinational producers are continuing to set up production projects in China. Clariant announced in March that in an expansion of Hangzhou Baihe Clariant Pigments Co. Ltd., its joint venture with Zhejiang Baihe Chemical Holding of China, it is building a plant at Hang Zhou City to make quinacridone specialty pigments for printing and other applications.

“Printers are now willing to pay a premium price for high performance pigments if they meet specific needs in areas like packaging and the requirement for weather fastness in printing products for outdoor use,” said Thomas Heber, technical manager in the printing inks business of Clariant.

Effect pigments are also now increasing their price competitiveness as a result of the steep rises in costs of organic pigments, which has made them a more attractive proposition in sectors like packaging.

“The packaging industry is one of the main trendsetters for effect inks,” said Ana Perroni, Ciba’s marketing manager for industry inks. “Companies are using packaging not only for its functional properties but also more and more to enhance brand identity and to add appeal to their goods.”

Sun Chemical has set up a joint venture in effect pigments in China. Through its parent, Dainippon Ink & Chemicals (DIC), it has reached a deal to commercialize the aluminum pigments of Nantong Shangjing of China.

However the current steep rises in raw material costs, the expense of adhering to environment regulations and increases in labor costs are all making Chinese pigments less price competitive.

Looming on the horizon for Chinese exporters of pigments to Europe is the cost of complying with REACH, the European Union’s legislation on the registration, evaluation and authorization of chemicals. The gathering of safety data for the registration of pigments like the azo class which has a long history of safety problems is likely to be particularly expensive.

Consequently, some Chinese pigment producers could pull out of the export market raising further doubts about the reliability of supplies from the country.

“I sense that our customers realize that given the instability in the current markets, they would like to work with a pigment company with a strong global presence, world scale and a strong financial basis,” said Mr. Foster.

The current turbulence in the pigment market due to events in China is helping to reinforce the position of established players in the market. Pigment users will inevitably be giving priority to security of supplies.

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