Raw Material Report

By David Savastano, Ink World Editor | 09.09.05

As the economy continues to struggle, printing ink companies are looking toward their suppliers for support.

For ink manufacturers, 2002 has not offered much reason for cheer. At best, ink company executives have been reporting that their companies are having good months for sales, followed by slow periods. Suppliers have been reporting similar results.

If there was reason for optimism for the near future, the economic problems of the past two years could be looked at as being difficult times that were overcome by improving efficiency and trimming costs. However, there is little evidence of confidence that the U.S. economy is on the verge of turning around.

If anything, there are even more concerns that increasing pressures on raw material costs may ultimately lead to serious problems in the near future.

Printing Industry’s Woes
The problems being faced by ink manufacturers have been triggered by the economic downturn faced by their customers in the printing industry. According to the recently released Printing Industries of America (PIA) 2002 PIA Ratios Survey, the average printer’s profit on sales declined to 1 percent over this past year, down from the 1.9 percent from the 1990-91 recession. According to the PIA, this is the lowest average profit in more than 30 years.

The survey also found that profit leaders, those companies in the top 25 percent of profitability, averaged only 8 percent profit on sales, down from 2000’s figure of 10.5 percent and even lower than the 8.9 percent recorded during the 1990-91 recession.

As a result, the ink industry has taken a financial battering.

The 2001 State of the Industry Report compiled by the National Association of Printing Ink Manufacturers (NAPIM) determined that the industry’s sales declined 5.8 percent in value and 8.5 percent in volume from 2000. The first half of 2002 has shown further declines, which is leading companies to cut costs.

“The economy is dictating what is going on,” said Harvey Brice, president of Superior Printing Ink. “The smart thing to do is to make your company more efficient internally, and you’ve also got to look to your suppliers for help.”

The Cost of Crude Oil
Crude oil and petroleum-based feedstocks are critical to the ink industry. Resins, waxes, varnishes, solvents, petroleum distillates and countless other products rely on crude oil. For the most part, these costs have remained stable.

“There is presently an uncertainty in the raw material market being driven by a number of factors,” said Craig Foster, Flint Ink Corporation’s vice president, materials management. “Over the last two years there has been a rationalization of capacity and reduction in inventories which at the slightest increase in volume will provide a ‘tightness’ in the market, and suppliers will jump to attempt price increases. I believe the viability of increases is more realistic at the basic feedstock level, where large players have significantly restrained capacities. Further downstream there remains significant overcapacity which will hold increases off on selected products. Uncertainty on oil and the depressed global demand situation have everyone in a wait-and-see posture at this point.”

“Prices are fairly stable in the raw material market, but we do see some feedstocks inching up,” said Rick Westrom, vice president, strategic sourcing and liquid operations for INX International Ink Company. “We’ve noticed that some of the products that use these feedstocks are showing some pricing pressure.”

Of course, the present level of pricing depends ultimately on the cost of crude oil, which is by no means certain. The price of crude oil has been slowly rising since it was slightly above $24 per barrel in June, and the events in the Middle East are having a dramatic impact.

The announcement on Aug. 19 that OPEC had increased the price of crude oil to a 15-month high of $29.84 per barrel, uncomfortably close to the $30 per barrel mark, has people understandably nervous.

“We’re watching it very carefully,” said Tom Gwizdalski, general manager of Magie Bros., a leading supplier of specialty solvents and oils for paste inks. “Crude oil continues to inch up, and if it stays in the upper $20s per bbl., we’ll be looking to increase prices this fall. The major oil companies have all raised prices in recent months to keep up with rising feedstock costs and we’ll be forced to do the same unless crude costs drop significantly.”

Industry leaders are also keeping a wary eye on the violence and the possibility of war in the Middle East.

“The marketplace is too volatile right now and the instability in the Middle East isn’t helping the situation,” Mr. Gwizdalski said.

Pigment Industry Challenges
While the pigment industry is not as heavily dependent on the price of crude oil, it also has faced its own problems in the past years. The most critical concern has been the increased competition from India, China and other Pacific Rim nations, which have far less expensive costs for labor and construction. As a result, their pigment prices are lower, which have put U.S. and European-based suppliers at a major disadvantage.

“I’m hoping that business will continue to get better,” said David Dugan, marketing manager, ink pigments at Clariant Corporation. “Overall, we’re seeing business in colorants picking up in coatings and plastics, but printing ink is lagging behind.”

The cost of pigment is typically the most expensive part of an ink, and as China, India and other emerging nations expand their production, it is changing the way the rest of the world is doing business.

“On the pigment side, we see plenty of availability and declining prices,” said Kenneth C. Collins, senior vice president, corporate purchasing and supply chain management at Sun Chemical Corporation. “There’s a great deal of competition due to pigments from China and India.”

“The raw material market is very competitive now,” said Judith Zuckerman, corporate director of purchasing for Superior Printing Ink. “There is strong competition from India and China, particularly in the pigment market. American companies are taking up the challenge and fighting back.”

Mr. Westrom agreed that U.S. pigment manufacturers are working to meet the price of imports, but he added that they face decisions in the future. “The U.S. manufacturers are competing harder with Third World companies, but there are going to be hard choices down the road,” Mr. Westrom said.

Pigment intermediates are following the same course as pigments.

“The same trend is occurring with pigment intermediates,” Mr. Collins said. “The imports are becoming better in quality. We’ve noticed that several companies have exited the market in Japan and are forming joint ventures in China and India, and they are bringing their technology with them.”

It’s difficult for U.S. and European companies to compete with exports from China, India and other emerging economies. For one, the cost of labor is extremely inexpensive, as low as $100 for a full-time employee per month, and there are savings in other areas as well.

“These nations have low construction costs,” said Mr. Collins. “When I was in China recently, I saw a state-of-the-art water treatment plant that is being built at a cost of $2 million. That same plant would cost $15 million here.”

While imports continue to affect pigment pricing, the weakening dollar may slow that trend.

“We continue to see materials coming in from traditional and non-traditional overseas suppliers,” Mr. Dugan said. “It will be interesting to see how the falling value of the U.S. dollar against the euro and many of the Asian currencies will affect pigment prices. That could possibly impact the downward pressure on pigment prices.”

Other Key Components
Aside from pigments, prices for other key ink components are, for the most part, fairly stable. “Hydrocarbon and rosin resins are stable, but we’re seeing pressure on styrene acrylics,” Mr. Collins said. “We’re seeing pressure on phthalic anhydride and packaging ink solvents, i.e. ethyl alcohols and ethyl acetates. The aliphatic side is also seeing some pressure.”

There are areas where there have been price increases. In particular, the price of titanium dioxide has been rising in recent months.

“There have been two price increases in the last three months, primarily due to increased demand in coatings, and I think some of the increases will stick,” Mr. Collins said. “There have been two increases in high density polyethylene, and that can be a substantial increase in packaging, i.e. plastic pails, etc.”

Ultimately, excess capacity, whether it is among printers, ink companies, pigment and other suppliers further upstream, creates its own pressures.

“There is pressure due to too much capacity on every level,” Mr. Collins said. “It comes down to supply and demand. I believe we will be seeing a lot of pressure for companies to receive a respectable return on investments and recover the rising costs of insurance, wages and other expenses.”

Support from Suppliers
Throughout the ink industry, companies are being asked by printers to make sacrifices, and vendors are also being called upon to share the pain.

“It goes right down the line,” said Mr. Collins. “We’ve been getting pressure from printers for the past five years, and there’s another round coming up as there are presses standing idle with no turnaround in sight. I don’t see any light at the end of the tunnel. I haven’t spoken to anyone who has high hopes for the fourth quarter. Consequently, we’ll be talking to our suppliers, who are our partners.”

“Suppliers are being asked to support the industries that they serve,” said Mr. Foster. “They realize the significant price erosion in the ink area is a real issue, based both on a weak market and the importation of incentivized and subsidized products from offshore.

“In essence, the support of this market by suppliers is less an attitude to support ink companies and more the realization that they are facing competition that our duty structure has not addressed to date, and that is at present essentially subsidized by foreign governments and a weak trade policy,” Mr. Foster said. “We are a globally positioned company and will support our customers so we are prepared to react as needed. Our suppliers see that they must do the same.”

“There’s only three ways to make money,” Mr. Westrom said. “The first, increasing prices, won’t happen in this economy. The second way is operating more efficiently, which we have been working on. The third is through reducing raw material costs, and that is something INX is doing aggressively.”

Cooperation with Suppliers
Leading ink companies have been meeting with their suppliers to develop ways to work together.

“We held supplier conferences in Europe and North America and explained the situation in our markets to our suppliers, including the subsidized import issue, regional pricing issues and the global supply/demand reality,” Mr. Foster said. “Our suppliers realize we are not a regionally focused buyer; we are here to serve our customers globally and we require them to view their competitiveness both regionally and at a global level. Our suppliers realize that the benefit does not end up in either side’s pockets, so we must be cost and quality focused together.”

Mr. Collins said that suppliers have been working with Sun Chemical to help meet price reductions for printers. However, there is only so far companies can go, and there is always the concern that some suppliers may exit certain markets.

“I have to say that our suppliers have been cooperating, but they have to survive too,” Mr. Collins said. “If they leave the market, the industry will have problems.”

What does the near future hold for the industry? After the experiences of the past two years, no one is certain. All a company can do is prepare itself as best it can.

“We see signs of moderate recovery, but it is recovery from a low point so we are nowhere back to a healthy volume position,” Mr. Foster said. “Flint Ink reacted quickly to the market downturn so we can be competitive for our customers during the slow time.”