By David Savastano
Ink industry faces major consolidations,
price concerns as it heads into 2000
Without question, the printing ink industry had its most tumultuous year in 1999, and all signs point to more changes in 2000. The last six months signaled major changes, and a pair of major mergers, a series of other acquisitions, and a powerful strategic alliance clearly illustrate that the ink industry is coming to grips with the challenges that face practically all businesses.
If the concerns over consolidations were not enough, printing ink manufacturers, as well as their suppliers, are also finding that the costs of raw materials and operating plants are rising while profits are continuing to decline.
Having made as many cost savings as possible, ink makers are now seriously considering what they have to do to increase profitability, with an eye toward raising prices.
As we head into the new millennium, it appears that there is much at stake for the industry.
State of the Industry
“Third-quarter sales looked positive, but it seemed like it started as a slow year and it’s coming back,” said James Coleman, NAPIM executive director. “The industry continues to be paced by consolidations, and middle-sized and smaller companies are finding the things they need to do to compete.”
In particular, energy-cured inks and digital ink technologies continue to show double-digit growth, and flexo keeps making strong gains.
“Progressive’s had an excellent year, and I feel like everybody’s had a good sales year,” said Mitch Baker, Progressive Ink president.
“Nineteen ninety-nine started out a little bit slow, but it has recovered,” said Kathy Marx, vice president of marketing at Flint Ink Corporation. “Overall, digital, UV and packaging in particular are growing.”
“There has been steady growth across the board in 1999,” said Joe Bendowski, president of Van Son Holland Ink. “The large commercial segment of the industry is very strong, since it tends to stay in line with what is happening in the economy, and the economy is doing well.”
However, the decrease in profitability of the industry in general has led to many changes, including the shuffling of some top officials at a number of major ink companies. One industry CEO said that the consolidations of companies and changeovers that have affected many key executives at the large U.S. ink companies are a clear signal that profits are not what they should be.
“There seems to be a tremendous amount of corrections, and there have been a lot of firings,” the CEO said. “Why did this happen? They’re not making money. At some point, consolidation stops, and you start looking at performance. There are two ways to fix things: cut costs and raise prices.”
The first, and most significant, acquisition came on July 29, when Sun Chemical Corporation, the world’s largest printing ink manufacturer, and its parent corporation, Dainippon Ink & Chemicals (DIC), signed a letter of intent to purchase Coates, TotalFina’s printing ink division.
At the time, Coates was the world’s third-largest ink manufacturer, with 1998 sales of $890 million. Figuring in Coates’s sales with Sun Chemical’s $2.5 billion and DIC’s $1.4 billion, the conglomerate would account for $4.79 billion of the approximately $12 billion world market. Coates is particularly strong throughout Europe, Asia and Africa, and will strengthen the DIC/Sun Chemical operations.
The sale, which published reports say cost Sun Chemical $545 million, is expected to close Dec. 31, after all regulatory approvals and due diligence are completed.
That wasn’t DIC/Sun Chemical’s only acquisition this year. A memorandum of understanding with Colortron Pty. Ltd., Australia’s largest sheetfed ink manufacturer, gave DIC a much stronger presence in Australia. Meanwhile, Sun Chemical purchased a 50 percent interest in Tintas S.A., a subsidiary of Inversiones Mundial, which has ink production facilities in Colombia, Ecuador, Peru and Venezuela.
A major move occurred Nov. 15, when Toyo Ink Mfg. Co., Ltd. and Sakata Inx Corporation officials signed an agreement to form a strategic alliance. Toyo Ink is the world’s fourth-largest printing ink manufacturer, with $876 million in sales in 1998; Sakata Inx had estimated sales of $570 million in 1998. Combined, the two companies would form the second-largest ink manufacturer worldwide.
Company officials are working on a number of important areas, including global business, digital technologies, manufacturing, and logistics.
In the U.S., INX International, Sakata Inx’ subsidiary, is the third-largest printing ink manufacturer. According to Toyo Ink officials, the focus in the U.S will be on high-quality commercial heat set web offset inks, sheetfed inks, UV-cured inks and gravure and flexo packaging inks
“As a result of the consolidations which have taken place in the printing industry in North America, INX and other suppliers to that industry are experiencing greater demands from these large customers,” said Mitsuo Matsuzawa, INX chairman, in a statement after the agreement. “These customers are not only requiring that their suppliers be efficient producers, but also technological leaders. INX believes that this alliance will provide a platform to continue to meet and exceed these key customer expectations.”
Flint Ink Corporation, the world’s second-largest ink manufacturer, also had an active last half of 1999, culminating in the purchase of two of the 30 largest international ink manufacturers.
On Oct. 8, Flint Ink acquired all of the business and operating assets of The Ink Company, Sacramento, CA, which had estimated sales of $130 million in 1998. This gave Flint Ink added strength in heatset and news web offset, water-based news, flexo, sheetfed, metal decorating inks and top lacquers.
Flint Ink Latin America Corporation also acquired Companhia Quimica Industrial Brasileira (CQIB), a Brazilian-based ink manufacturer of inks for news, packaging, publication and commercial printing applications. CQIB reported sales of $54 million in 1998, and the purchase strengthens Flint Ink Latin America’s operations.
These acquisitions capped off a very strong year for H. Howard Flint II, chairman and CEO of Flint Ink Corporation. In addition to Flint Ink’s breaking the $1 billion mark in annual sales in 1998, Mr. Flint earned NAPIM’s prestigious Ault Award, the highest honor in the industry, for his outstanding contributions to the progress of the industry.
Consolidations are not just a phenomenon in the printing ink industry. In the last few years, the industry has witnessed an array of mergers and acquisitions among suppliers.
Rosin-based suppliers saw the most change, with the following companies finalizing deals: Union Camp and Arizona; Akzo and Ascona; Lawter and Hercules; and Lawter and Kraemer Resins.
There was only one acquisition among specialty chemicals manufacturers – Eastman Chemical Company’s nearly $500 million purchase of Lawter International, which was announced April 28.
Acrylic polymers were another sector where changes were plentiful. Rohm & Haas acquired Morton, and there was a Zeneca Resins spin-off.
Exxon and Mobil, and BP and Amoco, completed deals in the petrochemicals market. Crompton & Knowles acquired Witco in the performance chemicals market.
In the pigments market, a deal was completed between Hoechst, Cookson and Clariant. In the TiO2 market, Tioxide and Huntsman completed a merger/acquisition as well.
Prinking ink manufacturers are also watching their customers consolidate. For example, in the last few months, Quebecor Printing acquired World Color Press, forming the world’s largest printing company, with $6.2 billion in sales worldwide and $4.7 billion in U.S. sales.
“Consolidation in the printing industry creates demand for ink suppliers who have national, or in some cases, global coverage,” Mr. Flint said. “That is why Flint has expanded geographically, first in North America, followed by overseas expansion. This prepares us to service all customers.”
“The consolidation of printing in every area has been tremendous,” said Harvey Brice, Superior Printing Ink president. “The trend is to move to more efficient printing.”
Raw Material Costs
As of Jan. 1, crude oil was $12.14 per barrel. On Nov. 18, the price had more than doubled, to $27 per barrel.
“Crude oil is as high today as it was during the Gulf War,” said Ken Collins, senior vice president of corporate purchasing and supply chain management at Sun Chemical Corporation. “It’s no different for our suppliers than it is for customers at the gas pumps.”
The gas pumps also have an impact on prices, as transportation costs rise. “As fuel prices go up, transportation prices are going up too, which is costing more on both ends, to deliver the raw materials and to ship the finished products out,” Mr. Collins said. “There are also energy costs; if you are running a plant on fuel oil, you’re paying more money.”
Mr. Collins also said that the prices of feedstocks such as ethylene, styrene, propane, ethane and polypropylene are dependent on oil. For the suppliers of these and other oil-related products, the impact of crude oil price increases is felt instantly. “Our suppliers pay the higher price immediately,” Mr. Collins noted.
To date, prices have risen 5 cents a pound for titanium dioxide, and acrylic and carbon black manufacturers have announced price increases of 5 percent and 6 percent, respectively. Prices of hydrocarbon resins and polyethylene waxes are also impacted by crude oil, and may be forced to rise. Experts see increases ahead for such diverse products as alkali blue, pigment dispersions, varnishes, hydrocarbon and heatset solvents.
Pigments are the most expensive ingredients in inks, and prices there are holding steady, at least for the moment. “Pigment intermediates are going up, which has an effect on pigment costs,” Mr. Collins said. “Whether the pigment industry will be able to increase its prices remains to be seen. There’s a lot of pressure being put on finished pigments, and something’s got to give.”
For ink manufacturers, making the most efficient use of materials and manufacturing methods is critical to their company’s survival.
“Ink is about materials management; 20 years ago, we didn’t look at that,” said Mr. Flint. “We’ve enjoyed pretty stable pricing recently, and we’ve worked on getting our cost efficiencies in line by improving our processes and rationalizing capacity in order to maintain a reasonable return.”
“Raw material costs have been pretty stable,” said Mr. Brice. “I think we’ll see a flurry of price increases in the year 2000. There are some products that have gone up.”
“In general there has been an increase in raw material costs,” Mr. Bendowski said. “We’ve incurred increased prices and expenses in just about every area. Consequently, as all ink manufacturers face an increase in raw materials expenses, the price of ink will increase as well. However, as Van Son continues to expand and remain on the cutting edge, we understand it is necessary to continue to provide the industry with the best products and services available.”
“Raw material prices have been going up for 10 years, and ink companies have been taking out cost at the operating levels,” said Mr. Baker. “Companies have absorbed raw material costs because the market won’t support a price increase.”
Suppliers say that with the rise in oil prices, there is very little choice but to raise costs. “We are clearly seeing that any products derived from oil are facing price pressures,” said Alan Kalmikoff, vice president of business development for Carroll Scientific.
“We believe we should keep our company up with the costs passed on by our suppliers and by the economy,” said a raw material company CEO. “You try to delay passing on cost increases, and be very vigilant of your own costs. After that, you have to raise costs. If not, you go out of business.”
Other Costs on the Rise
As a result, ink industry leaders are examining their own prices, and the need to improve their own margins. Michael S. Murphy, senior vice president and general manager, ink operations, for Sun Chemical and NAPIM president, spoke of the concerns he sees as the industry heads into 2000 and beyond.
“Sun Chemical’s reaction to this is that we have begun to notify our customers about price increases, because we can’t continue to absorb cost increases by hoping to offset them with efficiencies in manufacturing,” Mr. Murphy said.
“I’m motivated by the concern about our industry’s and our suppliers’ abilities to record a reasonable return,” Mr. Murphy said. “I’ve looked at how raw material suppliers are increasing their prices, and I’ve looked at other issues like wages, insurance and environmental issues that are involved in running a plant.
“My message is that I think all ink companies need to review not only their raw material costs but their related costs,” Mr. Murphy said. “We try to economize and standardize, and through new manufacturing techniques, reduce our costs, but there’s only so much you can do. Working with our raw material suppliers, we try to develop more cost-effective alternatives without sacrificing quality, but there’s only so much of that you can do. Now I see some pent-up activity on the part of our raw material suppliers, resulting in some price increases coming through.”
The trend toward consolidation gave a brief respite to many major companies, as they were able to increase purchasing power and create economies of scale, but that can only go so far.
“Everybody talks about consolidation of ink companies, but our customers are also merging, and when you look at our supplier base, the same thing is happening,” Mr. Murphy said. “Consolidations are upstream and downstream. I’m asking what’s causing that. I think it’s the unacceptable returns on investment and the effects of the globalization of business whereby companies must be able to compete around the world on price and quality.
“By consolidating, raw material suppliers can create synergies that can reduce their costs and increase their purchasing power, and increase their ability to invest in their business. As an industry, we have continued to work with our suppliers to lower costs through the 1990s, and the result of that has been the move toward consolidation.”
“I think 1999 was very flat for all of us,” said Mr. Brice. “It’s a major industry, but many companies don’t have a handle on their costs. There’s been a loss of perspective on profits, which they give to their customers. Printers just sit back and wait to see who has the lowest price.”
“I think that pricing has stabilized,” said Mr. Flint. “I think the customers have been able to differentiate between ink companies, and are willing to pay for value-added services for a full-service ink company that helps them with pressroom service, logistics and solving the problems that they face. I think that the printers are seeing that there’s value there, and are willing to pay something for it.
“We have gotten to the point where the formulations can’t be reduced without hurting performance,” Mr. Flint said. “The pricing has to move. The industry is not earning its cost of capital.”
“Our customers are consolidating very rapidly, and the ink companies are consolidating also,” Mr. Baker said. “Whatever the market dictates, you do. It’s been a buyer’s market for a long time. You have to have the discipline to increase prices, even if you lose some market share. I think the whole industry is at that point. The strong will survive.”
“Van Son has made a lot of significant changes over the past year or two, as we are always looking forward and preparing for tomorrow,” Mr. Bendowski said, noting the company’s expansion efforts with its new commercial and digital divisions.
“I think 2000 is going to be a strong year,” said Ms. Marx. “We’re really excited about Drupa. We’re exhibiting there for the first time, and now that we have our Manders Division and other global operations, it’s really critical to our growth to increase awareness worldwide of our capabilities. It’s the largest trade show in the world, plus we’re making some really big announcements as far as new products and services.”
“We expect the year 2000 to start out slowly because of customers’ excess inventories built up in late 1999 as a hedge for Y2K issues,” Mr. Flint said. “The remainder of the year should show continued stability but not exceptional growth.”
Will there be more changes in store for the industry? “I think the year 2000 will see more consolidations in the ink industry,” Mr. Brice said.
Whatever will occur in the printing ink industry in 2000, it is certain that the seeds of change that have been planted in 1999 will have a major impact in the years to come.