Latin Ink Market Begins Recovery

By Charles Thurston, Ink World Correspondent | 09.12.05

The troubled Latin American ink market is showing signs of improvements in some segments and in some countries.

The troubled Latin American ink market is showing signs of improvements in some segments and in some countries, following a region-wide contraction in the industry overall, officials from several manufacturing companies said.

“Last year was a difficult time for the ink industry, but this year I’m starting to see signs that things are turning up,” said Gregory Lawson, president of Sun Chemical Latin America, based in Sao Paulo, Brazil. Sun Chemical serves South America with its Latin American unit and serves Mexico as part of its NAFTA, or North American Free Trade, unit.

Given the volatility of growth in Latin America, most large players are positioned for the long-term, and are willing to wait for mid-term recovery. “We were used to 6 percent per year growth in the region, but see good prospects for the next four to five years of 3 percent to 4 percent growth, even though it might be slow for a few years,” said Jerko Rendic, president of Flint Ink Latin America, based in Ft. Lauderdale, FL.

The positive signs of general economic growth for 2003 in the region are not as bright now as they were earlier this year, when expectations for the U.S. economic recovery were more optimistic. Michael Gavin, the chief Latin America economist for UBS Warburg, Greenwich, CT, has revised down his projection of gross domestic product growth in the region – including Mexico – to 1.5 percent from an earlier 2.4 percent. The revision was driven largely by the outlook in Mexico, where GDP growth is expected to rise more slowly, at 1.9 percent this year, compared to an earlier projection of 3.0 percent.

Next year, nonetheless, Mr. Gavin projects that GDP growth will rise to 4.1 percent for the region. This set of projections suggests that Latin American GDP will grow 1 percent faster than U.S. GDP in 2004, compared with 1 percent slower growth than U.S. GDP this year.

In Latin America, Mexico now has the largest gross domestic product, estimated at $637 billion, followed by Brazil with $447 billion and Argentina with $102 billion. Venezuela, Colombia, Chile and Peru follow with $95 billion, $82 billion, $66 billion and $57 billion, respectively.

Flexible Packaging Segment Stands Out
While some manufacturers suggest that all segments are suffering, perhaps the one suffering least is flexible packaging, which is being driven by rising disposable income at the consumer level and by more sophisticated tastes in food, cosmetics and other products.

“Flexible food packaging growth is an irreversible trend, although it might be slower in some countries than others,” said Mr. Rendic. “The food packaging base grows at an average of 3 or 4 percent a year, based on population growth and improving education. But some flexible packaging is growing at 10 percent or more.”

In contrast, other segments are in firm retreat, including publishing inks, due to a declining demand for newspapers and magazines, the manufacturers agree. Declining advertising in the print media further is exacerbating this trend, statistics from countries like Brazil show.

“Without looking at a country-by-country analysis, you likely could say that over the past year, the regional demand side for sheetfed products may have been down by 8 percent to 10 percent, demand for magazines and newspapers may have shrunk 4 percent to 6 percent, and demand for packaging may have been down 3 percent to 4 percent,” said Mr. Lawson.

Mexico Dependent on Exports
Mexico’s estimated $150 million ink market is projected to grow by only $2 million to $3 million this year, keeping pace with GDP expansion. But inflation of more than 4 percent is eroding profitability for many companies, with most dependent on imported raw materials.

“The Mexican ink segments that are growing faster than the GDP are those related to packaging, flexo being the most active; it is even taking some share from gravure,” said Ernesto Sanchez, director general of Sanchez S.A. de C.V., in Mexico City, the second-largest manufacturer in the country, with ink sales topping 16 million kilograms, or more than 35 million pounds, in 2002.

“Fortunately, even in this slow economic period, printers and packers have not stopped investing in new equipment,” Mr. Sanchez said. “Although this does not necessarily mean there is more market available, it may at least mean that our costumers need to stay efficient and cost effective to compete in the open economy.”

To help meet this demand, the company also is investing in new equipment and technology. “We are half-way done at building a 20,000 square foot site to expand our water-based ink plant in Mexico City. Next year we will expand our offset plant to around 50,000 square feet,” Mr. Sanchez said.

Growth in the Mexican ink market will necessitate more exports, according to a recent industry analysis by the national association La Camara Nacional de la Industria de las Artes Graficas, or Canagraf. “One of the ways to increase productivity is by exporting print products, but Mexico has not yet learned to export,” the association determined recently. The association recommendations included the formation of more strategic alliances with both domestic and international partners in order to lower the total cost of printing and to operate business units in markets like the U.S.

Brazilian Growth Limited
Brazil’s ink market, the larges in Latin America, shrank 14 percent in 2002. This was due in large part to the devaluation of the national currency, the real from 2.3-to-one-dollar in 2001, to 3.5 last year. The currency has been stable this year, but is expected to continue its slide next year to 3.7-to-one-dollar.

Latin American GDP Growth Volatility
  2001 2002 2003* 2004*
Argentina -4.4 -10.9 4.3 5.0
Brazil 1.5 1.5 2.0 3.1
Chile 3.1 2.1 3.4 4.4
Colombia 1.4 1.5 2.0 3.5
Ecuador 5.6 3.4 2.0 3.0
Mexico -0.3 0.9 1.9 3.9
Peru 0.6 5.2 4.5 4.9
Venezuela 2.8 -8.9 -15.0 10.0
*Projections as of May 2003
Source: UBS Warburg

“Following a retraction of the market by 14 percent during first quarter 2003, we expect a year-end retraction of between 5 percent and 10 percent,” estimated Francisco Veloso, director of marketing at Cromos Tintas Graficas, Sao Paulo. The foreign exchange deterioration was aggravated by inflation, which rose from 7.7 percent in 2001 to 12.5 percent last year; inflation is projected to rise more slowly to 13 percent this year before reversing to about 8 percent next year.

The Brazilian industry association, Associacao Brasileira Da Industria Grafica, or Abigraf, noted that increased raw material costs last year were not necessarily passed on to customers: “In the majority of cases, the cost pass-on was partial, with the companies absorbing part of the increase so as not to lose sales.”

Among segments in Brazil that have shown potential for growth is flexible packaging, for which end-user demand increased 5 percent in 2002, according to Abigraf. Within the segments of flexible packaging, the greatest consumers were companies producing adhesives, agricultural chemicals, lubricants, animal feeds, paints and other products.

At Cromos, an industry leader in water-based flexible printing on paper cartons, the company’s fifth factory will be online in Guarulhos, Sao Paulo state, during the third quarter of this year, said Mr. Veloso. The new factory will help take advantage of the potential growth in this segment, particularly for food products, which represents two-thirds or more of the flexible printing market, he said. Also active in offset press and metal coatings for cans, Cromos is honing its just-in-time services to clients with a six-hour turnaround on requests at three specialized mixing centers in Sao Paulo, Rio de Janeiro and Curitiba, he noted.

Argentina Reverses Decline
The ink market in Argentina – estimated at close to $120 million in 2001 -- should begin to recover this year from the downturn in GDP during 2002, which resulted in a 10.9 percent shrinking of the economy. Based on early 2003 results, the economy is expected to grow by 4.3 percent this year, and 5.0 percent in 2004, according to UBS Warburg economists. “The economy continues to improve more quickly than had been expected,” noted the analyst.

Argentina suffered a major swing in the foreign exchange rate of the peso relative to the U.S. dollar, moving from parity in 2001 to 3.4-to-one-dollar in 2002. This year, the peso is expected to continue recovering to a 2.8 ratio, permitting some recovery in import volumes, which were down more than 50 percent last year.

One driver of the ink market recovery has been in packaging, which has become more domestically produced within the national drive to curb imports. According to research by the national industry association Federacion Argentina de la Industria Grafica y Afines, or Faiga, the increased export of packaged goods has helped counter-balance the decline in imported paper products for the publishing industry.

“The packaging industry is driven by local production, of which 60 percent is connected with the food industry, cleaning products and household maintenance products,” according to a January analysis by Liliana Paz, a packaging sector specialist at the U.S. Commerce Department in Buenos Aires. “In 2000, the packaging industry generated a little bit more than 1.5 percent of the country’s GDP with total receipts of $4.1 billion.”

Among steps the government is taking to help the ink industry is an elimination of import tax on capital equipment for the sector, even when it is sourced outside of the Mercosur free-trade region, which includes the countries of the southern cone of South America.

Smaller Countries Offer Opportunity
Among the many smaller economies in Latin America where the ink industry may recover more rapidly, if only in some segments, is Peru, which has standout growth this year. While Peru’s GDP growth in 2003 is expected to slow to 4.5 percent from 5.2 percent last year, the slower rate still will lead economic performance among the region’s larger countries. Among manufacturers in Peru is Tintas S.A - Sun Chemical, part of Sun’s Andean countries business unit.

Chile, too, is undergoing accelerating economic growth. “Chile is doing very well, transitioning the pool of consumers from the lower class to the middle class, with more discretionary spending,” said Mr. Rendic.

This year Chile will grow 3.4 percent, compared with 2.1 percent last year; the projection for 2004 growth is 4.4 percent. Chile is one of the locations where Sun also is transferring technology to upgrade the quality and local content of its local manufacturing capacity. With two manufacturing plants in Santiago, Sun Chemical Chile has spent some $7 million over the past few years in such technology upgrades, the company reports.

In Central America and the Caribbean, growth also is bright in places. The U.S. Department of Commerce has profiled the printing for food packaging markets in Costa Rica, the Dominican Republic, Guatemala and Puerto Rico, among other countries, over the past few years.

In Costa Rica, for example, a consular report in August 2002 notes that “printing companies from Colombia, Mexico and Chile are offering printing services to the local industrial sector, thus augmenting printing capacity and lowering prices.” Still, the agency analyst believe that the Costa Rican market for printing and graphic arts equipment was $29.6 million in 2000 and $21.8 million in 2001.

More ink manufacturers are following this growth among smaller countries with new investments. “At the end of 2002, we opened our branch in El Salvador, where we expect to have a good future servicing the packaging market,” said Mr. Sanchez.

Acquisitions on Hold
So what are ink companies in Latin America doing while the market languishes? International and domestic companies are looking at strategic alliances, joint ventures and acquisitions during the lull. “We’re studying an acquisition of technology in the area of flexible printing,” said Mr. Veloso.

The bulge bracket of the large companies seems to be getting larger in Latin America, where domestically-owned manufacturers are unable to balance foreign exchange variations across regions.

“Flint now is a strong number 2 in the Latin American market after Sun among the international companies; then there is a big gap to the size of the local companies, which represent 50 percent or more of the market,” said Mr. Rendic. “If those local companies can’t manufacture more of their raw materials, they will suffer and over the mid-term, there will be consolidation. The consolidation will happen quicker with the Latin American free trade associations expanding more rapidly. For example, Mercosur is inviting Mexico to join.”

Acquisitions of other ink companies have slowed, Mr. Lawson suggests. “You’ll continue to see some consolidation in the market, but when demand is on the waning side, people who want to sell companies are unrealistic about the price; they want to talk about multiples of sales rather than multiples of earnings,” he said. Rather than make an acquisition over the past year, Sun has worked at transferring the latest technology from around the world to its Latin American units, he said.

Producers also are seeking to transfer manufacturing technology to minimize foreign exchange pressures.

“International companies like ours in the past imported 80 percent of finished ink demand that is dollar or euro based. So one of the big things we recognize is we have to try to manufacture more locally,” said Mr. Lawson. “For example, we used to import 80 of our heatset ink demand. That level now is only 15 percent,” he said. We still import more than 50 percent of the raw materials in this example, but it is a positive step to minimize currency exchange increasing costs.”

Improving Efficiency and Services are Also Essential
Companies also are honing efficiency and helping customers more, manufacturers agree. “We come out of these times a better company than going in because you really focus on your business to make it healthier, and on your customers and their processes,” said Mr. Lawson. “In Latin America, we’re now doing the same thing Sun is doing worldwide, focusing on four key initiatives: Safety, People Development, Six Sigma and Productivity, and Customer Value Systems. For example, in Latin America this year our Six Sigma Initiative has trained 26 champions, six black belts and 11 green belts. They are currently focused on process improvement and on projects that range from making sure we stay the lowest cost producer to working with customers in driving process improvement in their facilities,” he said.

Mr. Sanchez agrees: “We can now say that technical support is our core product; it’s not just ink anymore.”