The Latin American market for ink – roughly estimated to be worth some $400 million – has been under pressure over the past year as client companies and consuming industrial sectors have struggled to follow the slow U.S. economic recovery. While gains have been recorded in sales by value and volume in a number of markets, like Brazil, sales in dollar equivalents elsewhere, like Mexico, have slipped due to foreign exchange losses.
“The ink market in Mexico was stable last year, but price erosion has been substantial, so there has been a negative effect on selling prices, even though tons are up,” said Enrique Perez Cirera, general manager of Sun Chemical Ink (GPI) in Mexico City.
The region’s ink market growth still seems to correlate with gross domestic product growth, with several segments typically leading GDP by a margin of at least several percentage points, while others trail the figure. Last year, regional GDP growth was 1.1 percent, according to a year-end analysis by UBS Securities’ economic analysis team in Greenwich, CT, led by Michael Gavin.
Anecdotal evidence from industry officials suggest that last year, the overall Latin ink market grew by at least 3.0 if not 4.0 percent.
This year, the region is projected to grow at a much healthier 3.9 percent, according to the UBS team. If the extrapolation holds, the ink market could expand between 5.0 and 6.0 percent this year. With regional inflation continuing to drop, gains should occur both in domestic currencies and dollar equivalents. Regional inflation last year led GDP at 6.7 percent, but is forecast to drop to 6.1 percent this year and to continue declining in 2005. In addition, foreign exchange rates are expected to be more stable this year, thanks to economic expansion.
Challenges to Growth
Still, as loan and bankruptcy default rates remain high in some areas of Latin America, consolidation within the ink market and among customer industries is continuing.
“We’ve seen a lot of our customers open or acquire companies in Mexico, especially in printing, so it’s nice to be able to have our affiliate in Mexico offer the same world-class technology there as we do in the states,” said Michael Murphy, director of Mexico business for Sun Chemical Ink in Northlake, IL.
At the same time, pressure has increased on large ink vendors to extend open-ended short-term credit to buyers, to the detriment of letter-of-credit-based transactions that smaller international vendors or traders might prefer.
“We are seeing the same phenomenon of collections difficulties in the industry this year as last year,” said Ernesto Sanchez, director general of Sanchez S.A. de C.V., Mexico City. “These problems have included companies that have been growing steadily, but even in packaging, some like Masterpak were paying very, very slowly. But Masterpak was sold to Bemis last week, so Bemis will correct that.”
Bemis Co., Minneapolis, MN, purchased the flexible packaging assets of Masterpak S.A. de C.V., in late May, including a converting facility in Tultitlan, Mexico. Masterpak reported annual sales of approximately $35 million.
“The large international companies are turning themselves into banks, which is dangerous, both because local country units become heavily indebted, and as interest rates rise, it will cost more to finance their customers,” said one U.S. ink company executive, who asked not to be named.
With fuzzy credit terms prevalent in the market, the offer of product is exceeding demand, the unnamed U.S. executive suggested. “With too much product in the market, the larger companies get engaged in price wars. I have seen what amounts to craziness in some companies’ sales forces,” he said.
Growth in each of the five largest economies of the region – Mexico, Brazil, Argentina, Colombia and Chile – is different, in part because of the free trade blocs to which the countries belong. Mexico, through the North American Free Trade Agreement (NAFTA), has free access to the U.S. market. Brazil, Argentina and Chile as a group, through Mercosul, have more favored access to the European Union than to the United States. And Colombia, through the Andean Pact, enjoys good access to both Europe and North America. Bilateral agreements also affect growth variations, since some countries, like Mexico, have signed dozens of bilateral free trade agreements.
The estimated $155 million ink market in Mexico continues to grow at low multiples to gross domestic product – at least for now, industry executives say.
“In 2003, we produced 7,234 metric tons of ink, which was up 3.0 percent over 2002. Since GDP last year was 1.3 percent, we are still growing at more than double GDP,” Mr. Sanchez said. Expectations for more rapid growth this year are strong. “Growth was up 8.8 percent up at the end of May this year versus the same prior-year period, so we are starting to feel the pull from the economic recovery in the states,” he added.
Mexican GDP, a heavy indicator of regional growth, could rise to 3.9 percent this year, compared with only 1.3 percent last year. Inflation is expected to drop to 3.5 percent this year from 3.7 percent in 2003. However, the exchange rate is expected to slide from the 164 Mexican pesos to $1 level last year to about a 175-to-1 rate this year.
With a GDP value of $680 billion, Mexico is the largest and most important economy in Latin America. By segment, the Mexican ink market shows strong variation in growth rates. “Packaging is recovering best,” said Sun Chemical’s Mr. Perez.
Others agree. “Flexo packaging last year was a star, and it still is more active than publications,” said Mr. Sanchez. “Last year, our company’s growth in gravure inks was up 14.0 percent, while sheetfed offset was up 2.6 percent and coldset was down 6.0 percent. So an average growth rate of 3.0 percent for all segments combined looks quite good.”
Thanks to tariff-free trade between Mexico and the U.S., box printing also is expected to rise between 3.0 and 5.0 percent, according to a December report by the U.S. Commerce Department in Mexico City.
Ink companies are working to keep Mexico’s ink market at the leading edge of global technology standards. “One product launch we have done was with our sheetfed World Series in packaging,” Mr. Perez said. The company also is augmenting its offering of inks that can run at 600 meters per minute.
The volume and value of ink sales in Brazil increased last year, with volume up to 61,500 metric tons from 58,000 metric tons, and sales value up to $208.6 million from $195.7 million, according to the industry group Associacao Brasileira da Industria Grafica (ABIGRAF), in Sao Paulo.
Brazilian GDP growth for 2004 is projected at 3.1 percent, a marked recovery from 0.5 percent growth in 2003. Isolated economic indicators are even more promising: industrial production was up 5.8 percent in the first quarter compared to the prior year period, and retail sales were up 7.5 percent in the first quarter compared with the prior year period.
At the same time, Brazilian inflation is expected to drop to 6.0 percent from a 9.6 percent level in 2003. Counter-balancing that trend, the foreign exchange rate for the Brazilian real is expected to erode from 2.98 to 1 dollar to a 3.15-to-1 rate this year, further impacting imports.
With a GDP value of $551 billion, Brazil is the most important economy in South America, even if its current dollar value is eclipsed by Mexico. The largest segment in the country’s ink market is publishing, which was up 5.0 percent to $1.1 billion last year, ABIGRAF reported. Packaging was up 16.0 percent to $920 million, business forms were up 17.1 percent to $750 million, and stationary was up 19.5 percent to $460 million last year.
The growth of Argentina’s GDP is forecast to end this year at 4.9 percent, a more sustainable rate than the 6.5 percent rate logged in 2003 – a reaction to the 10.9 percent contraction in 2002. Although inflation sky-dived last year from 41.0 percent in 2002 to 2.6 percent, it is expected to bounce back to 9.3 percent this year. Nonetheless, the once-fixed exchange rate is expected to hold constant at 2.75 Argentine pesos to 1 dollar this year, as in 2003.
With a GDP value of $184 billion, Argentina is a key market in the global ink industry. The Buenos Aires industry group Federacion Argentina de la Industria Grafica y Afines (FAIGA) reported that overall economic activity during the first half of this year is up 6.1 percent over the same period last year. As the economy continues to warm, the ink market will re-approach the estimated 2001 sales value of $120 million.
GDP growth in Colombia this year is projected at 3.5 percent, up nearly a point on the 2.6 percent rate reported last year. First-quarter 2004 numbers were even more robust: industrial production was up 4.6 percent, compared with the prior year period, and retail sales were up 7.3 percent compared with the prior year period. Inflation for 2004 is pegged at 5.7 percent, down from the 6.1 percent level last year. And the peso is expected to remain stable this year at a 2.845-to-1 dollar level as in 2003.
With a GDP value of $93 billion, Colombia is still an important economy for the global ink market. The country’s printing and graphic arts industry expanded by 4.6 percent last year, and typically averages $1.2 billion in sales, according to the Bogota trade group Asociacion Colombiana de la Industria de la Comunicacion Grafica, boding well for ink companies active in the market.
“We are doing very well in Colombia. Because of the relatively higher cost of labor there, the consumer industries are doing better work, so now more European companies are outsourcing packaging services to Colombia,” said Charles De La Rock, the Latin America sales representative for Kerley Ink, in New York.
Full year growth in Chile this year is projected at 4.6 percent, a step up from the 3.3 percent level achieved in 2003. Inflation, in keeping with the last several years, is expected to hold between 2.0 and 3.0 percent. And the exchange rate is expected to improve from 625 Chilean pesos per dollar in 2003 to 623.6-to-1 this year.
With a GDP value of $89 billion, Chile has been an important market for companies like market leader Sun Chemical Chile, which manufactures at two sites in Santiago.
Chile, long known for its transparent business climate in Latin America, is an important member of the Mercosul, or Common Market of the South trade bloc which encompasses most of the southern cone countries. Mercosul has a free trade agreement in place with the European Union, while the Free Trade Agreement for the Americas initiative, led by the United States, is in a late stage of negotiation.
Other Economies Show Promise
Smaller country economies in the region also show promise for increased ink market growth. The growth of GDP in Ecuador, for example, should rise to 3.0 percent this year from 2.0 percent last year, as more investment in oil and other infrastructure boosts the economy, now based on the U.S. dollar.
With falling inflation expected to drop to 4.5 percent this year from 6.5 percent last year, government sales of state companies and bank portfolios are expected to warm the demand for form printing. Leveraging a GDP of some $30 billion, Ecuador also will take advantage of Andean Pact trade preferences to increase exports, supporting growth in packaging and other ink market segments.
Charles W. Thurston writes on Latin American finance, technology and trade.