The Raw Material Report

By David Savastano, Ink World Editor | 10.21.05

While pricing of key ingredients remains a concern, availability is becoming a serious issue for the ink industry, as the supply of key raw materials such as acrylic acid is not keeping up with demand.

In recent years, ink industry purchasing executives have been particularly concerned with pricing issues in order to keep their own company’s costs down. Typically, availability was not an issue.

This year, however, much has changed. Key suppliers to the ink industry are being heavily impacted by both the dramatic increase in the price of crude oil and natural gas as well as availability of important raw materials. As a result, suppliers have been forced to pass on price increases, leaving the ink industry little room to negotiate.

Judging by oil prices and increasing demand for key raw materials, this situation is not likely to turn around soon, and ink companies are going to have to decide whether to raise their own prices or to further cut into already thin margins.

Crude Oil Costs
The most important of all the raw materials remains crude oil. A key building block for feedstocks, crude oil is used in a wide variety of essential products. Two years ago, there was deep concern that a barrel of crude oil was nearing $30. Recently, the price surged past $45 per barrel, which was unthinkable only a few years ago.

Tom Gwizdalski, general manager of Magie Bros. Oil Company, said his company has had to implement a 15 cents/gallon price increase across the board, and their customers understand why.

“Everyone sees it on a daily basis when they go to the gas pumps or look at their electricity bills,” Mr. Gwizdalski said. “It’s a fact of life.”

What is also a fact of life is that price stability is now a thing of the past. “The problem is that no one knows where prices are going,” Mr. Gwizdalski said. “We all want stability, but now it seems we have to change prices a few times a year.”

This is impacting everything from raw materials to transportation and production costs for ink companies, and leaders are working to cope with this challenge.

“Like the rest of the industry, we are managing this challenge with great difficulty,” said Jack Benson, vice president, corporate procurement for Flint Ink. “This affects not only raw material costs, but also distribution, energy and regulatory compliance costs. The overall cost of doing business has seen a dramatic increase in 2004. The possibility that it will reach $50/barrel is likely. This is a serious issue for the U.S. and global economies, not just our industry. We’ll all be feeling the effects.”

NYMEX crude oil prices from January 2001 through June 2004. Since then, prices have risen to more than $45 per barrel.

Greg Nelson, Sun Chemical vice president, global procurement and supply chain, said if oil climbs above $50 a barrel, it would place tremendous pressure on Sun Chemical’s business and profitability.

Crude oil and natural gas are essential for key feedstocks such as styrene, benzene and propylene, which are used as building blocks for raw materials such as resins, waxes, varnishes, solvents, acrylates, petroleum distillates and countless other products. The cost of crude oil and greater demand have created a very tight squeeze.

“Raw material costs are being driven upwards by both feedstock cost increases and by tightness in material availability,” said Rick Krause, marketing director, printing and packaging, Americas for Johnson Polymer. “Styrene costs have increased dramatically due to extremely high benzene costs, a major feedstock for styrene. Costs for acrylic acid and acrylate derivatives from acrylic acid have increased dramatically due to general tightness in the global marketplace. Both feedstock costs and the law of supply and demand are driving up raw material costs.

“In the first six months of 2004, styrene costs have increased more than 50 percent; acrylic acid and acrylates have increased more than 40 percent,” said Mr. Krause. “And based upon the ongoing uncertainty in feedstock costs and availability, it remains very difficult to forecast when and if things will stabilize.”

A look at the prices of key feedstocks shows the changes. In August 2003, styrene was selling for approximately 33 cents per pound in the U.S.; now it is approximately 56 cents per pound. The price of benzene has risen from $1.55 gallon to more than $3 per gallon; propylene has risen from nearly 19 cents per pound to approximately 29 cents per pound during the same period.

“Raw material costs have increased so much and so dramatically that suppliers have had no other choice than to raise prices to ink and coating customers,” Mr. Krause said. “We’re all familiar with raw material volatility and cycles within our industry, but we’re seeing significant and structural cost changes that go beyond historical experiences.

“Commodity and basic chemical manufacturers cut back significantly on available capacity during the recent economic downturn, trying to keep their utilization rates high,” Mr. Krause added. “Now with the global economic recovery and the significant growth in Asia, demand is outpacing supply faster in some cases than producers can add capacity. Any unplanned shutdowns or outages by basic chemical manufacturers have a dramatic ripple effect through the downstream users.”

As a result, ink companies have seen the prices for raw materials increase.

“In general, we are seeing many suppliers raising raw material prices, primarily as a result of crude oil prices being at record levels,” said Mr. Nelson.

“We are already seeing and/or are anticipating increases in all raw material segments by the end of the year,” said Jyoti Gidvani, Color Converting Inc.’s (CCI) materials manager. “The possible exception may be organic pigments, though the recent anti-dumping suit will likely increase costs for carbazoles here in the U.S.

“As natural gas and crude oil continue to spiral upward, we expect to see continued raw material increases for the rest of the year,” said Ms. Gidvani. “This is coupled with the continued price pressures fueled by continued consolidations in our customer base. In addition, suppliers to the ink industry are seeking markets with higher profits such that supplies of certain raw materials used in ink have become tight. This trend will likely continue.”

Transportation and energy costs are also a factor for companies. For example, Clariant Corporation recently implemented a 3 percent price increase on certain products. According to David Dugan, Clariant’s sales/key accounts manager, BU printing industries, that decision was driven by increased energy costs.

“It’s costing us a fortune to manufacture and ship our products,” Mr. Dugan said.

“If instability with crude oil prices continues along with higher energy cost, I would anticipate upward pricing pressures on other raw materials such as domestically produced photoinitiators and pigments simply because of the higher cost to manufacture and ship,” said Stephen Lazure, vice president of operations at Zeller+Gmelin Corporation, which specializes in the manufacture of UV printing ink.

Acrylic Acid
For UV and water-based ink manufacturers, the most serious shortage is occurring in acrylic acid. While its main use is in super-absorbent polymers used in diapers, acrylic acid is essential for monomers, oligomers and acrylates for UV and water-based inks. The use of acrylic acid has risen in virtually every segment it is used, creating a serious shortage.

Bill Bayer, Surface Specialties UCB’s business manager, radcure, Americas, said that the acrylic acid situation is likely to remain a major problem well into the future.

“This started at the end of the second quarter in 2003 when dramatic increases in demand began in all of the markets that use acrylic acid, and I think it is getting worse,” Mr. Bayer said. “There’s just not enough material to go around, and all of the regions in the world are using all they can get.”

While Surface Specialties UCB has contracts for acrylic acid, its suppliers have been unable to meet demand, forcing cutbacks and allocations, and in some cases, force majeures.

“On a major raw material such as acrylic acid, we are contractually protected in all regions of the world,” Mr. Bayer said. “Still, we have been placed on allocation. We are only getting 90 percent of our requirements in the U.S., and 70 percent in Europe and Asia. Atofina has issued three force majeures since May.”

The shortage of acrylic acid is definitely putting a crimp into the ink industry’s supply chain.

“The issue is shifting to availability followed by pricing,” said Ron Zavodny, director of corporate purchasing at Wikoff Color. “This is driven by supply and demand. Suppliers have told me that their suppliers have hit them hard. They have experienced some unprecedented increases. This started forming in November. I suspect some companies altered their purchasing approach this spring. Those who did made a wise decision.”

As has been the case with key feedstocks, styrene prices have escalated during the past year.

“Our acrylated material vendors continue to experience a worldwide shortage of acrylic acid which is creating pricing pressure in the radiation curable printing ink market, and it is having somewhat of an impact on our raw material prices,” said Mr. Lazure. “With rapid economic growth causing high demand in the Asian market, particularly China, and a lack of investment within this industry, the feedstock products used to manufacture acrylic acid are in shorter supply, causing price volatility. Our suppliers are saying if this shortage trend continues and demand remains high, they will institute an allocation status for non-contract buyers of these materials.”

Acrylic acid has some serious challenges. For one, it is difficult to transport for long periods, which virtually eliminates shipping from Europe and Asia, where there are even greater shortages.

“According to our suppliers, with the economy and global demand coming together, certain raw materials are in short supply and some of these products don’t have transportability, such as acrylic acid, which goes off spec during transport,” Mr. Zavodny said.

Acrylic acid is supplied by BASF, Dow Chemical, Rohm & Haas and Atofina in the Americas. Several recent occurrences have negatively impacted acid supply from these producers. BASF shut down some old capacity when prices were severely depressed. Atofina’s European facility has been having operating difficulties this year and is currently on 70 percent allocation. This has exacerbated an already heavily taxed supply chain, and there isn’t much relief in sight.

“For the future, BASF is bringing up a new plant in Asia. This will ease the current situation but will not correct the shortage,” Mr. Bayer said. “By 2008, it is estimated that the world will require an additional one million metric tons of acrylic acid annually. This equates to three world-scale plants. I am guessing that building an acrylic acid plant costs $500 million. This is a very significant investment considering the market price for this product was depressed for so many years.”

“It takes two years to build an acrylic acid plant, and no one is willing to make that investment yet,” Mr. Zavodny said. “Most people expect the current dilemma for key raw materials to continue into 2005.”

Fortunately for Wikoff Color and Zeller+Gmelin, they had a contract in place with their suppliers. Other companies that chose to do spot buying haven’t been so fortunate.

“Loyalty goes both ways,” Mr. Zavodny said. “People who jump from supplier to supplier for the lowest price are now paying the price. Suppliers are going to take care of their contracted customers first. The more aligned you are, the better off you are in today’s environment.”

“I have talked with other ink manufacturers who are realizing some shipment delays at this point,” Mr. Lazure said. “In terms of our customer base, some customers refused contractual position, preferring to be spot buy,” Mr. Bayer said. “Now they have no position when allocation occurs. Suppliers try to support them, but we have to support our contracted customers first.”

Understandably, as the key feedstocks have increased in price, pricing to ink makers has followed. For acrylic acid, propylene is the key feedstock, and that has risen 40 percent, since November, forcing suppliers to raise their prices as well.

“Prices are rapidly climbing, and we are having a hard time keeping up with them,” said Paul Elias, business manager, specialty products for Sartomer. “We have been operating on extremely tight margins the past few years, and we have no choice but to pass these increases through. In some cases, we are receiving two letters in one month from our suppliers notifying us of price increases.”

Acrylates are made up of acrylic acid and alcohol, TMP for example, which react to form esters. Mr. Elias said that the costs of both the acid and alcohol are rising. “We’re getting hit on both the acrylic acid and the alcohol,” Mr. Elias said.

“We’ve issued three price increases this year alone, ranging from 5 percent to 14 percent, and the truth is that we can’t get increases through fast enough,” Mr. Bayer said. “Our suppliers are no longer giving 30-day notice and negotiating; now we get immediate increases, and are forced to provide short notification to our customers.”

“Our suppliers’ prices have gone up upwards of 40 percent,” Mr. Zavodny said. “These are the feedstocks that supply our industry and their cost have gone up, and the suppliers are trying to pass along some of those increases with the expected difficulty. They have gotten fairly good increases and they are back at the door looking for more. It is a case of ‘that’s the price if you want it,’ and those who don’t have long-term relationships with suppliers are probably finding it hard to get products. Suppliers have some customers on sales control and extended lead times, which allows them to allocate production availability.”

As the global economy continues to improve, availability is likely to become even tighter. For example, Dow Chemical just reduced its allocation to its customers from 90 percent to 70 percent. That means that raw material manufacturers are facing shortages, which will impact ink companies.

“We’ve had to turn away business,” Mr. Elias said.

All in all, no help is coming soon. Mr. Bayer said that his customers realize what is happening in the market.

“I’ve noticed a change,” Mr. Bayer said. “Our customer base is starting to realize that there is little that we can do about it. We either pay the increases for our materials or we can’t supply anything ourselves. Ultimately, we are using every effort at our disposal to maintain supply to our customer base.”

Prices are on the Rise for Other Key Raw Materials
Outside of acrylic acid, there have been numerous other areas of concern for ink manufacturers.

One of the challenges that are being faced is that demand in China is increasing. That is causing shortages in products such as sodium molybdate, which is used for methyl violet, victoria blue and rhodamine pigments, but is also used in stainless steel to prevent pitting. As China builds up, sodium molybdate is required for steel, and becomes scarcer for pigments and other uses. The problem is that the low prices from China led to other companies going out of business. The end result is that shortages in key raw materials may occur, as happened a few years ago with naphthalene for intermediates.

According to Metals Week, molybdenum price averages rose from an average of $3.73 per pound in 2002 to $5.25 per pound in 2003, and is presently averaging $15.74 per pound.

“It’s really hard, because there are only a few suppliers,” said Evan Weissglass, vice president of sales for Magruder Color. “China is growing so fast, and there’s so much usage for steel, so supply is getting very tight. It’s hard to get shipments when we want and at a reasonable price. I used to pay $2.50 a pound for sodium molybdate, and my next purchase will be more than $7.50 per pound. As a result, I’ve had to put on a surcharge to my customers.”

CCI’s toughest raw material challenges this year have centered around titanium dioxide (TiO2) and nitrocellulose shortages and price increases.

“As occurred with the Huntsman Tioxide pull out of the U.S. market, the dollar to euro currency rates have made the U.S. market increasingly less attractive to European importers over the past year,” said Mr. McDowell.

Aside from TiO2, the nitrocellulose market has been particularly hard hit due to the lack of domestic supply.

“This situation is aggravated further by the anti-dumping tariffs on nitro which remain in place even though it is no longer produced domestically,” said Ms. Gidvani.

Acrylic acid, nitrocellulose, TiO2 and some other raw materials are in very short supply as a result of increased demand, closures for plant maintenance and unplanned shutdowns, Mr. Nelson said. “This is putting extreme pressure on ink prices,” he said.

Impact on Ink Prices
Ink manufacturers are ultimately going to have to decide whether to pass along these increased costs, either immediately or as contracts permit, or try to further cut into margins.

“It’s causing everyone to become even more cost conscious,” Mr. Zavodny said.

“Competition is fierce these days,” said Dan McDowell CCI’s president. “Costs continue to rise. Prices continue to drop. We must figure out ways to continue to take costs out. Otherwise, current profit margins are unsustainable.”

Mr. McDowell said that the increase in crude oil cost is leading CCI to further develop cost efficiencies.

“Certainly the rapidly rising crude oil and natural gas prices have had a major impact on raw material suppliers to our industry,” Mr. McDowell said. “On the other side of the equation, however, we continue to face price pressures from our customers. This has shifted pressure to cost savings efforts in our organization.”

Toward this end, Mr. McDowell and Ms. Gidvani said that CCI is taking a variety of measures. First off, CCI is using creative ways to further streamline supply chains. “We are buying in bulk wherever possible and have made several capital investments to facilitate this, such as solvent and resin tanks and pumping equipment for tank trucks, and we have worked diligently to maximize consigned inventories at nearby but offsite warehouses,” said Ms. Gidvani.

CCI is also optimizing manufacturing processes to reduce waste and to achieve the maximum benefit of the raw materials it uses. The closed manufacturing process at its Des Moines South plant allows CCI to produce ink at loss levels far below industry averages, and the company has undertaken programs to optimize color development through better grinding and milling practices.

CCI is rationalizing facilities towards the mother plant concept. While CCI’s mother plant concept has been in place since 1997-98, cost pressures have led CCI to close some of its outlying facilities more rapidly than the company might have otherwise.

“Developing a leaner manufacturing network has taken us out of our comfort zone. It has forced us to make decisions on a compressed timeline, but it has proved to be the right thing to do,” said Mr. McDowell.

Still, pricing remains a major concern, and ink companies are working with their suppliers and customers.

“Sun Chemical maintains constant contact with our suppliers and continues to discuss this information with our customers so they can understand the effect the high crude prices is having on the ink and pigment businesses,” Mr. Nelson said.

“We continue to see pricing pressures and have been unable to pass along increases,” Mr. McDowell said. “Meanwhile, our partner-suppliers have worked diligently with us to minimize the effects of the raw material increases. On the other hand, we – as has everyone –have sweated through some of the shortages, nitrocellulose in particular.”

Unfortunately, relief does not appear to be coming soon. The price of a barrel of oil remains in the mid-$40s, and experts believe it is likely to climb to $50. Availability concerns for acrylic acid are going to continue.

“Our view is that crude oil prices will remain high for the foreseeable future, and that raw material availability will be tight at least through the first quarter of 2005,” Mr. Nelson said.

“The market developments in crude and chemical intermediate pricing have occurred so rapidly that most suppliers are just reacting to cost increases, and are trying to pass them on to customers,” Mr. Benson said. “There’s a question as to whether suppliers fully comprehend the potential impact of their current pricing on the ink and printing industries. In conjunction with this, I don’t think our customers understand completely the seriousness of the current market situation. We certainly need to get some relief in this environment.”

Raw Material Supply Crisis for UV and Water-Based Inks
By David Helsby, ANI Printing Inks
A drastic shortage of acrylic acid – one of the key base raw-materials used to produce binders for UV and water-based inks – has affected both supply capabilities as well as prices.

This is the conclusion that ANI Printing Inks is making based on recent negotiations with its key suppliers. “Ongoing negotiations are affecting us across the complete range of components used in printing inks,” said Leif Svensson, corporate purchasing director of ANI Printing Inks. “Metal prices are affecting some key raw materials, oil prices are affecting in principle every single organic component used, energy and transportation costs are another part directly affected by the oil price, and styrene costs are affecting cost of acrylic resins. The acrylic acid situation throws everything on the binder side in to a historical situation of potential turmoil. I’ve never experienced a crisis of this magnitude that is soon to hit our market.”

Oil Prices Development
To only concentrate one’s efforts to limit price increases, is irresponsible over securing the supply chain situation. Of course we are exploring the routes of sourcing suitable substitutes, but their costs are similarly and equally restricted in supply as they originate from same base chemicals that are subjective to the shortage.

While being active on a global scale, we’ve been alerted to the potential shortage of supply for some time, and see it as our responsibility to pro-actively secure our supply chain. This is managed through a number of activities, such as:

• Long term partnership with leading suppliers.
• Full utilization of global network.
• Technical innovations & process enhancement.
• Competitive sourcing of alternative solutions.

But even so, it is very difficult to withstand the pressure and need to increase prices from our suppliers when reviewing the facts:

• The world’s capacity of acrylic acid is down due to industrial problems.
• Suppliers are talking allocation/rationing of supply.
• Oil prices continues to be on a high level.
• Energy and shipping costs are all affected.

We feel it is our responsibility to ensure the continuity, consistency and quality of supply. At ANI Printing Inks we are doing our utmost to focus our work on the balance between the need for a secure supply chain while still minimizing the impact of price increases.

But with ink prices being at a highly competitive level for quite some time, this will badly affect the ink makers, unless it is faced at an industry level in our marketplace. The whole supply chain of “printed goods” has to address this as one industry. Although ink is one part of the supply and cost chain in printed goods, we’ve seen that printers understand that the cost of the ink per unit is not necessarily proportional to the cost of printed goods. Many printers understand that at the end of the day, it’s the cost of printed goods that matters most and therefore value the overall package including service and uptime that a responsible ink maker can deliver.

David Helsby has more than 30 years experience in the printing ink industry and has had the opportunity to work in various locations around the world, including the U.S., Belgium, Germany, Sweden, China and Japan. Currently, Mr. Helsby is the global technical director for ANI Printing Inks, responsible for the R&D organizations for ANI in Europe, China and the U.S.

Mr. Helsby has been involved in the development of electron beam technology and in the advancement of UV flexo technologies; he served an integral part in building a dedicated UV factory in Belgium and has been fully responsible for a technical research center in Germany. Having a number of patents under his name for various UV technologies, Mr. Helsby has also written various technical papers and is highly involved in CEPE.