The European Ink Market

By Sean Milmo, Ink World European Editor | 09.02.05

While accepting that sales will rise, many ink makers believe they will struggle even to maintain what they perceive as existing low margins, let alone stop them from declining even further.

The ink sector should now enjoy a few years at least of a relatively strong growth in demand in Europe, mainly due to a pick-up in the region's economy.

The gross domestic product (GDP) of Western European countries is expected this year to expand by an average of around 3 percent, a rate which will be almost 50 percent higher than in 1998. "The clear message is that the European economy is moving into a period of solid and broadly-based growth, sustainable in 2000 and beyond," said Malcolm Mitchell, chairman of the economic outlook panel of the European Chemical Industry Council (CEFIC).

The market research organization Frost & Sullivan believes, in a report on the European printing ink market, that ink sales over the next five years will probably rise in excess of the GDP rate. It is forecasting an average increase of 3.4 percent annually to 2006, when total European ink sales will be $3.13 billion compared to $2.48 billion last year.

Yet many ink makers, particularly the smaller ones, are not very happy about prospects for the industry. While accepting that sales will rise, they believe they will struggle even to maintain what they perceive as existing low margins, let alone stop them from declining even further.

Raw Material Costs
This year, in particular, they expect that margins will come under severe pressure from increased raw material costs, as suppliers to ink companies try to pass on the impact of the effects of high oil prices.

"We are already getting indications of raw material price increases of over 5 percent, with suppliers claiming that their prices have been at an artificially low level for too long," said a sales director at one ink company.

"Many ink producers are operating on low margins. So if they do push prices up, some producers will be in trouble because of the difficulty of passing on higher costs to printers," he warned.

European pigment makers have been starting to raise their prices since the early part of this year, claiming that the rise in oil prices had been so steep that they can no longer withstand its impact.

Degussa-Huls announced that in February, it was increasing by 4 to 8 percent prices of its pigment blacks, of which it is the second largest producer worldwide. The company asserted that even though crude oil prices had gone up by 150 percent since early 1999, it had been able to absorb the resulting higher costs. But recently the "dramatic development" in crude oil prices had forced it to pass on part of the increased costs, it said.

Ink makers are also worried that as a result of increased consolidation among both suppliers and customers, particularly in the packaging sector, they are rapidly losing economic clout.

Many printers are expressing similar concerns. Their margins are also being squeezed both by suppliers and customers.

"Printers' paper prices are going up mainly due to increased concentration in the pulp and paper industry, while they do not have the same ability to push up prices for customers who are also getting larger," said David Ross, an economist at the British Printing Industries Federation (BPIF).

As with the ink sector, the printing industry across Europe is also suffering from overcapacity, especially among commercial printers which account for the bulk of print sales. This overcapacity is curbing their opportunity to push up prices, which in turn causes difficulties for ink makers in their desire to raise selling prices.

One major difference between the inks and printing sectors in Europe at the moment, however, is that while the printing industry is experiencing a certain amount of consolidation, it is much less than in the ink market.

Last year in a $530 million deal, Sun Chemicals, the market leader in Europe, took over Coates Lorilleux, the second largest manufacturer in the market.

TotalFina, Coates' parent company, claimed it was making the divestment because of the large investment required to turn Coates into a truly global player. But some observers believe that the real reason was that it was not achieving the return on sales and capital required by TotalFina for its businesses.

The acquisition gives Sun more than 40 percent of the total European printing inks market. But in some sectors like heatset printing, its share is estimated to be as high as 65 percent.

Regional Companies
Sun has now opened up a wide gap between itself and its main competitors. BASF, now the region's second-largest ink manufacturer, is believed to have a share of around 15 percent, followed by a cluster of mainly regional players with shares of 5 to 10 percent.

BASF, which now appears to have committed itself to the inks and printing products market after a period of uncertainty about its future in the sector, is thought to be likely to want to gain a stronger presence in inks.

There has also been continued speculation that Akzo Nobel, with a share of less than 10 percent, will also want to expand because its top management wants to stay only in sectors in which it is among the leaders. As a result, the company could instead decide to pull out of the printing inks market.

One or more of the three German middle-ranking players - Huber Group, Gebr. Schmidt and Siegwerk - may also want to gain firmer footholds in markets outside their domestic strongholds in Germany.

Flint, which now owns the U.K.-based Manders Premier, is also considered likely to be seeking to gain a broader position in mainland Europe.

Frost & Sullivan estimates that prior to the Sun/Coates merger, Sun, Coates and BASF accounted for around 60 percent of the European printing inks sales. Another group of six companies have a combined 30 percent share, meaning that now eight companies take up 90 percent of the total market.

Among ink companies as well as printers, it had been widely expected last year that the European Commission, which acts as the European Union's anti-trust authority, could block Sun's acquisition of Coates, or it would at least make Sun agree to divest part of the merged businesses before giving its approval.

Instead, it cleared the takeover without even asking for any disposals after concluding that the merger "neither creates nor strengthens a dominant position.

"The Commission decided that the combination of Sun and Coates would still face significant competition because of what it perceived as a relatively high number of both large and small ink producers in Europe. Because of the excess capacity in the sector and the flexibility of the ink manufacturing process, it considered that there are no major obstacles to these competitors expanding their market share.

There is a suspicion, however, that the Commission wants to avoid detailed investigations of deals in relatively small sectors like ink. The Commission's competition directorate has been complaining about its hefty work load and has been proposing that national competition authorities should assume the job of vetting some transactions.

Now some ink makers fear that the Commission's decision on the Sun/ Coates merger has given the green light to other acquisitions which will lead to more consolidation and further stifle competition within the sector.

"The Commission has given the impression that it will not oppose more concentration in the inks market," said Alex Stevenson, head of the inks division of Zeller+Gmelin of Germany and managing director of its U.K. subsidiary Intercolor.

"It appears not to be worried about what happens in the sector, perhaps because it is not considered to be glamorous as oil, aerospace or pharmaceuticals," he added. "But in the end, this lack of concern about the effects of consolidation will be bad for the whole printing industry in Europe because quality of service will eventually suffer."

On the other hand, increased consolidation is also regarded as having benefits, while at the same time presenting opportunities for expansion among nimble players.

"The picture is not all bad," said one marketing director in inks. "Larger producers can exercise more bargaining power with the big printing and packaging companies. This should lead, sooner or later, to higher prices, which is what the whole sector desperately needs."

Sun's acquisition of Coates and any other mergers are likely to result in a certain amount of restructuring with excess plants being closed.

Coates Lorilleux in Europe will continue to operate as a stand-alone business in sales, marketing and technical services. But many of Coates' production units in the region are expected to be closed with manufacturing being centered in Sun's system of mother plants.

Hence, concentration could help to reduce overcapacity, which in turn should at least put upward pressure on prices.

At the same time, some printers who previously have been using Sun or Coates as a second supplier may be seeking another alternative source for their inks, particularly in sectors like heatset and coldset inks.

In areas like southern Europe, the U.K. and Scandinavia, where Sun and Coates are major suppliers of heatset and newspaper inks, printers are thought likely to give a chance to smaller producers to bid for supply contracts.

The Commission's contention that there are no major barriers to independent companies competing against the large producers will be tested this year by the performance of Hunolt-Centurio. This is a Netherlands-based joint venture in heatset inks set up by Hunolt Tintas, a Spanish ink maker, and Albert Schuite and Adrian Heijnen, both former vice presidents at Manders Premier before it was acquired by Flint two years ago.

Hunolt is due to raise annual capacity at its plant at Alcala, near Madrid, from 10,000 tons to 30,000 tons this year to supply the new company, which aims to compete directly against Sun and Flint, particularly in northern Europe.

However, since the creation of the venture last year, its senior executives have been reluctant to reveal how well it has been doing in securing deals with large printing companies, which are its target customers.

"It will not be easy for Hunolt-Centurio because they are trying to get into a tough market which will require a lot of investment," said an executive at one competitor.

Niche Markets
With the bulk inks sectors now being dominated by a few players, medium- and small-sized ink makers are increasingly channeling their efforts into exploiting specialist or niche markets. They are seeking out sectors where they can achieve high margins in return for flexibility and quality service.

There are already well-established European companies in specialist sectors, such as Sericol in screen printing inks and Eckart and Wolstenholme in metallic inks, which have demonstrated that this route is a viable alternative to commodity-type inks.

Sericol, for example, has been achieving a 15 percent return on sales and a huge 33 percent return on capital employed, making it one of the most profitable ink makers in Europe.

At a time when Europe's economies are becoming more buoyant, there will be a wide variety of sectors with high growth rates over the next few years, providing a lot of scope for ink producers pursuing specialist or niche strategies.

"It is a question of identifying market sectors where it is not the amount of tons delivered which matters but the opportunities for a customized service," explained Mr. Stevenson, whose Zeller+Gmelin group is a UV inks specialist.

"With a customer, for example, who wants a UV cured ink which can be applied to a polypropylene tube and last for the whole life-cycle of the product, you can charge a considerably higher price than you would for a bulk-produced ink."

In the U.K., Intercolor increased its sales by 22 percent last year to around $7 million, after average growth of 11 percent over the previous three years.

"By being small, we can take quick decisions on issues like technical services and selling prices by having short communication lines," said Mr. Stevenson. "This should protect us against competition from the bigger ink producers for at least a few years. There is always a danger, however, that once the big players see how profitable niche sectors can be, they themselves will want to move into them."

Some medium-sized ink companies with both bulk and specialty ink operations now see their niche activities as providing coverage against their stronger competitors.

"We predicted some time ago that the high volume ink sectors would soon be dominated by three or four producers," said Bertil Ahlberg, marketing coordinator at Akzo Nobel Inks. "But we also forecast that this consolidation would create a lot of niches in the market."

It decided to specialize in supplying inks to narrow-web printers in the packaging sector with a broad product range. Crucially, it requires a distribution network to cover a large number of small customers, which has tended to frighten off big operators.

"This year we are expecting sales growth of 7 to 8 percent in this sector, while at the same time it still has a high entry barrier because the product range is enormous," said Mr. Ahlberg.

One way to detect potentially profitable niches is to focus on printing technology areas with high growth rates.

Frost & Sullivan forecasts that the printing technology with the slowest growth will be publication gravure with an average growth rate through to 2006 of less than 1 percent.

In some parts of Europe, gravure printing has been dwindling so rapidly as printers switch to competing processes that Koenig & Bauer-Albert Group (KBA), the second largest manufacturer in Europe of gravure presses, has voiced fears that the technology could itself become a niche sector.

The U.K.-based consultancy Pira International predicts that publication gravure's market share in Europe will decrease from around 18 percent to 15 percent over the next five years.

In the packaging sector, however, gravure has been doing better where, with flexographic printing, it has been helping to push up sales of liquid inks. Frost & Sullivan estimates that during the next five years, sales of liquid inks in Europe will go up by 3.7 percent on average.

Flexo is continuing to make inroads into the packaging sector at varying speeds across Europe. In the U.K., it accounts for around 60 percent of the packaging printing market, against 35 percent in the country's printing industry as a whole, according to the U.K. Flexographic Technical Association.

The technology's growth in U.K. packaging is around 7 to 8 percent a year, but in labels it has been as high as 25 percent, the association said.

Digital Printing
The most rapidly expanding printing technology in Europe is almost certainly digital printing. Its real growth rate in value terms is difficult to measure, however, because while volumes are increasing quickly, the price of digital printing is going down as it is more widely used.

"Digital printing will continue to grow at a fast pace in Europe this year because the costs are coming down," said Kelvin Tritton, a consultant at Pira.

In particular the declining price of consumables, especially toners and inks, has helped to maintain the momentum behind the advance of digital.

"The relative high cost of consumables has previously made the difference between a profit and a loss for a printing job using digital equipment," he explained.

Digital printing at the moment is grabbing market share from the lower end of the offset litho sector, particularly in the commercial centers of large cities where there is a demand for personalized material with a variable content.

But its biggest impact at the moment could be on the books sector, where publishers are taking advantage of its ability to match print runs to demand, according to Pira.

While printers have been expressing fears that the electronic revolution will lead to the long-term demise of the printing industry, the internet in Europe has been helping to bolster key parts of the sector by boosting advertising revenue in magazines and newspapers.

Service providers, search engines, portal owners, web sites and other dotcom businesses have been spending heavily on promoting themselves in the print media.

Ironically, this is at a time when growth in advertising on the internet itself has been sluggish in Europe, compared to that in the U.S.

Newspapers in the U.K. have been inundated with so much advertising from internet operations that dotcom companies have claimed they are being charged higher prices for space than ordinary advertisers.

The rise in magazine advertising expenditure across Europe, partly helped by the Internet, has pushed up the growth in sales of heatset inks. "The market is increasing by as much as 8 percent at the moment because magazine publishers want higher quality printing and are producing a large number of pages per issue," said Erwin de Keyser, a director at Trenal, the Belgian-based ink maker.

The increase in heatset demand has also been aided by increases in direct mail in many European countries. In the U.K. expenditure on direct mail was growing by an average 6 to 8 percent last year, while in October alone it went up by 41 percent compared with a year ago.

The rising popularity of home shopping has helped drive up printing volumes in direct mail. Often when initial direct mail literature triggers a positive response, it can generate follow-up brochures and catalogues.

European retailers are now moving into home shopping by combining e-tailing on the internet with buying from catalogues.Since these services need to be advertised in the press and promoted through direct mail, printers and their suppliers are for the moment benefitting from the trend.

While magazine and newspaper publishers are doing well because of the advertising of internet services, they are also busily moving onto the internet themselves by developing their own web sites. They are making sure that when the big switch to the internet takes place among the majority of the population, they do not lose out.

"Newspaper publishers are likely to be particularly hard hit by the internet because of its ability to provide instant news and classified adverts so they more than magazine publishers need to get well established on the medium," said Greg Stevenson, marketing manager at the International Federation of the Periodical Press (FIPP), London.

If the internet does become the dominant means of communication of the future, the big losers will be printing companies and their suppliers. For the moment, printers and ink makers see that outcome as being merely a distant possibility.