The Raw Material Report

By David Savastano, Ink World Editor | 09.02.05

Rising crude oil prices have led to cost increases that practically span the raw material spectrum.

Last summer, when oil prices nearly doubled to $21 per barrel, many industry leaders felt that price increases for products dependent upon crude oil may indeed have to happen. However, for the most part, they held out hope that prices for oil, which is a critical component for numerous key supplies to the printing ink industry, would come down.

One year later, it has become clear that crude oil prices are not coming down. Rather, prices for crude oil have soared past $30 a barrel. As a result, manufacturers across the raw material spectrum, including resins, waxes, carbon black, titanium dioxide, oxygenated solvents, a wide range of petroleum distillates, solution resinates, petroleum resins and rosin resins are increasing their prices. Pigment manufacturers are also looking closely at their costs, and may have to seek a price increase.

It is clear that there will be more increases on the way, as a combination of higher crude oil prices and years of holding prices collide.

Oil Costs
The rising cost of crude oil directly affects day-to-day operations of ink manufacturers, as well as their suppliers.

“The price for the different raw materials coming directly from a barrel of crude oil are the most volatile,” said Kenneth C. Collins, Sun Chemical senior vice president, corporate purchasing and supply chain management. “More than half of the raw material components that go into a typical printing ink are crude oil or petroleum derivatives, therefore our costs are extremely sensitive to the almost daily fluctuations in the price of a barrel of crude oil at the well head.”

As crude oil prices remain high, the costs of feedstocks will also be on the rise. This is a situation that does not look to be changing in the near future.

“We’re going to announce a price increase for Oct.1,” said Tom Gwizdalski, general manager of Magie Bros. Oil Company. “Crude oil costs are way up, as are distillates. The problem is that the alternative market for these distillates in the fall and winter is heating oil. As these prices increase, so do our feedstock costs.

“We’ve looked at the futures market and see crude oil staying at about $30 per barrel for the rest of the year. That puts us in a very difficult situation. Our raw material costs are more than 50 percent higher than our plan for this year. The October price increase will not even come close to covering the costs we’ve been absorbing,” Mr. Gwizdalski said.

“It’s extremely competitive,” said Jack Eberly, director of sales and marketing special products for San Joaquin Refining, one of the largest independent naphthenic refiners in North America. “We have a lot of difficulty convincing major news ink manufacturers that independent refiners need increases. Since January 1999, everyone’s crude oil costs have tripled or quadrupled, depending on crude oil source, and these product price increases are warranted. We’re just trying to stay even.”

As the producers nearest the oil pipeline react to the higher oil prices, companies that use these feedstocks have to face their own challenges. There doesn’t seem to be much help coming for the prices of oil-based feedstocks, as the market remains tight.

“We don’t see any relief in sight through the third quarter, and probably through the end of the year,” said Holly Hartschuh, worldwide market manger for printing and paper technology at Rohm & Haas. “Methanol is very tight with its price escalating due to high demand and natural gas costs. Acetone remains tight and while there is improving capacity in benzene, pricing remains relatively unaffected. Propylene demand is softening a bit but uncertainty over OPEC energy pricing continues to drive the market.”

For Atofina, which requires styrene for many of its products, the past year has been daunting.

“We hope the worst is over,” said Chuck Mateer, market manager for Atofina. “The price of our building block materials doubled in the last year. It shot up beyond the estimates of even the most pessimistic forecasters.”

“Crude oil prices strongly influence the prices of petrochemical feedstock such as ethylene and propylene,” said Steve Awadalla, market manager of the industrial coatings business unit for UCB Chemicals, which recently announced a 6 percent across-the-board increase. “Many of our major raw materials are either directly or indirectly dependent on propylene, which has experienced a major increase in the last 18 months.”

“Raw material price increases are continuing to be announced almost on a monthly basis,” said Mr. Awadalla. “Several of our major suppliers are trying very hard to take cost out of the system through restructuring or by mergers and acquisitions, but it does not appear that these efforts are sufficient to improve their performance, and therefore they are pushing for more increases.

“We are trying our best to ensure that any increases we absorb are justifiable,” Mr. Awadalla said. “We are also trying to take any unnecessary cost out of the supply chain as well, but if raw material continue to escalate, we will not have any other alternative than to pass it on.”

Even in areas where crude oil is not king, costs are rising in other aspects.

The gilsonite market is also facing increasing costs. Bill Britton, manager of global sales and technical support for the ink sector for American Gilsonite, said his company is examining its position.

“We have not put in price increases for a long time, and we’re still evaluating where we’ll go,” said Mr. Britton, whose company mines its own products. “All of our costs are increasing, and our biggest cost is labor. Our environmental compliance costs have also been continually increasing and have become a significant portion of our expenses.”

However, there are factors working against price increases. Alan Kalmikoff, vice president of sales and marketing with Carroll Scientific and global manager of ink additive sales for Lubrizol, said that oversupply is making it difficult to pass along costs.

“There is more supply than demand,” Mr. Kalmikoff said. “We have sustained raw material price hikes of between 5 and 10 percent so far this year, and we have been unable to recoup all of that in the market place. We’ve not seen price increases like this in a very long time. Customers just don’t want to see price increases, and the price increase we have sought this year has been justified.”

Pigment Prices
Organic pigments are the single most expensive ingredient of a printing ink formula, and where prices for this raw material have remained relatively stable over the last year when compared to other ink ingredients, a general pigment price increase is long overdue. “There continues to be upward price pressure on pigment manufacturers because of the concern pigment intermediate suppliers have expressed for their own profitability,” Mr. Collins said. “Naturally, any increase in the price of pigment intermediates will have an immediate impact on the price of the finished pigments.”

“There is a growing pressure on raw materials within the pigment chain which indicates that pigment pricing is reaching a period of upward pressure,” said Craig Foster, vice president, materials management at Flint Ink Corporation.

At the same time, pigment manufacturers are in a bit of a quandary. Demand for their products is high, but pricing levels are currently too low for them to invest in expanding their capacity.

“Two of the major organic pigment manufacturers have publicly stated that they would not invest additional capital to increase production capacity in traditional azo pigments,” Mr. Collins indicated. “And, while an ink manufacturer might consider a cheaper source of pigments, such as those from India or China, there is the matter of quality and consistency to deal with. If ink manufacturers came to rely on pigments from these sources, then the finished products might not meet printers needs in the same way inks made with pigments from North America, Europe and Japan have in the past,” he added.

“There have been price increases in resins, vehicles, ink oils and various specialty chemicals, including surfactants, solvents and additives,” said Dave Klebine, vice president of Apollo Colors, which has yet to announce a price increase. “At this point, it’s cutting into our profitability. It would be reasonable to contemplate price increases.”

Ink Companies React
All of this has not been lost on printing ink manufacturers, who also are in need of price relief. Sun Chemical Corporation recently announced a 6 percent increase for its heatset and gravure inks, and Flint Ink Corporation has announced an 8 percent increase in news ink prices.

Ink companies are looking for ways to keep their costs down as much as possible by working with suppliers.

“We have been working with suppliers in every way conceivable to mitigate increases and will continue to,” Mr. Foster said. “Our success rate to mitigate these increase has not been nearly as effective as we would like given the underlying stress on basic feedstocks, capacity, energy and transportation. I do not see the trend reversing anytime soon.”

For printing ink manufacturers, their suppliers and their customers, rising costs are quickly becoming a fact of life that is increasingly harder to avoid.