Charles Dickens opened his classic novel, A Tale of Two Cities, with the line, “It was the best of times, it was the worst of times.” If he were around today and describing the organic pigment industry in the U.S., he would undoubtedly say, “it is the worst of times, it is the best of times.”
The reason for being the worst times is that there are many negative factors impacting organic pigments today. In the 30 years that I have been in the business, I have never seen so many of them stacked against it at one time. In order for pigment companies to survive and prosper in these times, they have to be resourceful, creative and willing to change.
The reason for being the best of times is that there is enormous opportunity to transform during change. Change creates opportunities, and for those with vision and means, this is a terrific time to make the key strategic moves. Most industries emerge from tough times more focused, stronger, healthier, representing a better structure, and the slower demand has allowed companies to spend this additional time to focus on improvement initiatives.
In this article, the factors that have affected the organic pigment industry over the last year will be examined and a look will be taken at what’s in store for 2003.
Factors Affecting Organic Pigments in 2002
• Shrinking Markets: Normally, one can count on the industries that consume organic pigments to grow more or less at GNP rates. Unfortunately, the recent past does not fall into the category of “normal.” The largest consumer of organic pigments is the ink industry, accounting for approximately 65 percent of its consumption. No matter what source one taps, the ink industry has been on the decline for the last two years. The three major print formats, offset, gravure and flexo, declined in 2002.
The decline also is apparent in both of the major print mediums, publication and packaging. Making matters worse, the declines in dollars were higher than the declines in units, indicating a reduction in the price of ink (see the National Association of Printing Ink Manufacturers (NAPIM) statistics in Tables 1 and 2). This of course, put pressure on pigment pricing. The tag line here is that the head cold from which the ink industry suffered last year, resulted in a case of pneumonia for the organic pigment industry.
• Shifts in Style: Numerous style factors have had an impact on organic pigment usage. The trend in home furnishings toward hardwood floors has negatively impacted the fibers industry, where organic pigments are used in most polypropylene carpet fibers. On the positive side, the rise in popularity of “fake” hardwood flooring has increased the use of some high performance pigments in these printed laminate type products.
Over the last 10 years, the popularity of wallpaper has steadily declined in favor of paint. This has resulted in a drop in sales volume from $2 billion to $1 billion. The drop in organic pigment usage in the wallpaper inks was offset by an increase in the usage of inorganic pigments commonly used in the decorative paints that supplanted the wallpaper. On a positive note, interior decorators are predicting that wallpaper is making a comeback.
Across all the industries where organic pigments are used, the most frequently used “buzz” word over the last couple of years has been effect. Plastics automotive coatings and cosmetics have been the most anxious industries to incorporate new looks into their products. This style shift has resulted in a dramatic increase in the usage of titanated mica pearl pigments and a corresponding decrease in the usage of organic ones.
For the first time in memory, white is no longer the most popular color for automobiles in the U.S. White and black have been surpassed by silver, leaving them two and three respectively. The silver phenomenon has pushed green, blue and red cars down the popularity chain, with the resulting negative impact on organic pigment usage. The situation is made worse by virtue of the fact that interior colors that go best with silver exteriors are grays, beiges and other neutral colors, thus further reducing demand for organic pigments. The one positive facet to OEM automotive coatings is that blue is predicted to grow in popularity over the next several years.
• Loss of Manufacturing Base: The U.S. has long been an economic powerhouse, due in large part to its strong manufacturing base. Organic pigments have played a part in this strength and, in fact, made the U.S. a net exporter of pigments for many years. Unfortunately, like a lot of other North American industries, organic pigment production has experienced attrition in volume over the last 10 years. Figure 1 shows the world demographics of organic pigment plants as it stood in 1993. Figure 2 shows those same demographics today. A total of eight North American organic pigment plants have closed in the last 10 years. This decrease has been accompanied by an explosion in the number of plants in India and China, where the numbers have grown to 80 and 100, respectively.
•Global Overcapacity: The net result of the change in organic pigment plant demographics has been that the increase in global production capacity has far out-paced the growth of consumption. Table 3 shows the relationship of consumption versus capacity over the last five years. Today, the world market stands at 213K metric tons. The industry split of this consumption is shown in Table 4. Global capacity now stands at 288K tons, creating an excess of a “whopping” 35 percent.
It’s interesting to note that most of the major world producers of organic pigments have established manufacturing bases in China. Included in this list are Ciba, BASF, Clariant, European Color, DIC/Sun Chemical and Toyo.
• Increased Foreign Competition: The closing of eight pigment plants in North America, coupled with the zeal of the Indian and Chinese manufacturers to fill their newly constructed factories, have opened the proverbial floodgates of organic pigment imports to the U.S. Graph 1 shows the FTC import statistics of organic pigments from India, which have gone from 500 tons in 1993 to 5,500 tons in 2002. Even more dramatic are the imports from China, shown in Graph 2. These grew from 1,000 tons to 10,000 tons in the same ten-year period. So, today the imports from these two countries account for 22 percent of the total North American consumption of 71K tons. Even more startling are the statistics from the World Trade Atlas showing that 2001 Chinese production of organic pigments was 70K tons, accounting for 30 percent of the world’s total.
The cost to produce a kilo of organic pigment is lower in India and China than North America as the costs of capital, construction, labor and environmental controls are lower. In addition to these factors, foreign competitors in India and China receive government subsidies which creates an uneven playing field. These subsidies and advantages have enabled China and India to significantly increase their market shares at the expense of U.S. businesses.
• Price Erosion: The “bottom line” stemming from the loss of the North American manufacturing base, global over-capacity and the increase in low cost imports is lower prices. The price erosion in the mid-nineties has continued and has significantly impacted overall prices up to today. Lower priced imports have largely only affected the classical azo and phthalo pigments, and not high performance pigments.
• Higher Costs: As if the factors already mentioned weren’t enough, the organic pigment industry in North America has been caught in a squeeze between lower prices and increased costs. As strange as it may sound, the U.S. government tariff action implemented to protect the domestic steel industry has had a negative side effect on the cost of organic pigment production in the U.S. The action slowed down the production of steel in China, which caused an accompanying reduction in the production of naphthalene. This resulted in a rise in the price for naphthalene, which is the building block for tobias acid, beta napthol and BONA. Tobias acid and beta napthol make up the two halves of the Red 49 molecule. Beta napthol and BONA make up one-half of the molecule for the other important azo reds – Red 48, Red 52, Red 53 and Red 57.
The recent spike in the price of crude oil has also taken its toll on the cost to produce organic pigments. Many of the intermediates used to produce the wide range of azo pigments and those used in the manufacture of high performance types are derived from petroleum and have been negatively impacted by the rise in oil prices. The two key intermediates used in phthalocyanines, phthalic anhydride and urea, are both based on natural gas, whose prices have followed those of crude oil. This again has boosted the cost of organic pigment manufacture.
Finally, with respect to increased costs, the higher oil prices have not only affected raw material costs, but have also dented processing costs for organic pigments. In an organic pigment plant, utility costs are essentially equal to those of direct labor and make-up about 12 percent of the manufacturing costs (raw materials excluded). So, the jump in oil prices has had a “double whammy” on the cost of producing organic pigments.
The Future of the North American Organic Pigment Industry
Where is Jean Dixon when she’s needed!? My crystal ball is always a little cloudy and it’s even more so today. The current events being played out on the world stage have caused individuals and companies alike to put things on hold, waiting to see where the economy will go next. This uncertainty makes it difficult to make any predictions for the future, but the following things are likely to happen.
While there doesn’t appear to be any signs that the factors negatively impacting the business will suddenly change, there do appear to be some indications that the situation may have “bottomed out” and that the light at the end of the tunnel is not the proverbial freight train coming the other way.
• Market Conditions: The fourth quarter of 2002 shows signs of improvement in the printing industry. Overall advertising rates were up over the first three quarters and both publication and packaging ink show improvement in pounds over the same period in 2001. Unfortunately, publication ink prices continued to erode. Tables 5 and 6 show the specifics of these ink trends. Indications are the first quarter of 2003 showed a continuation of the volume improvements. This is very good news for the organic pigment industry based on the fact that approximately 65 percent of the industry’s production is consumed in ink.
There do not seem to be any signs that the Federal Reserve plans to increase interest rates any time soon. The current low levels should continue to be a significant factor in underpinning the sale of houses and automobiles, two very important end use markets for organic pigments.
• Capacity Utilization: There are no significant capacity expansions in development for 2003. The leveling out of global capacity coupled with a modest increase in consumption will serve to shrink slightly the tremendous over capacity that has plagued the industry for a number of years. Table 7 shows what is, hopefully, the beginning of a re-balancing of the capacity/demand ratio for organic pigments on a global basis.
• Prices: Some increases in price are already in the market place. These increases are not necessitated by the increase in raw material prices, but on the need to start down a path that will return the North American organic pigment industry to a point of acceptable profitability and a proper return on the capital invested in the business.
• Opportunities: The current situation has created several opportunities. North American pigment producers have the opportunity to take a deep breath and make some strategic moves not normally available to them during busy periods.
The North American organic pigment industry has suffered through some very hard times over the last two years. There are many negative factors, such as shrinking markets, negative style shifts, higher costs, overcapacity and an abundance of low cost competition.
While this may sound like an exaggeration, there is no doubt that the industry must make some significant changes in its cost and price structures to assure its future viability and provide an acceptable return to its share holders. The improvement in market demand for pigments and the recent price increases are first steps on the road to the future that will truly be the best of times.