For the ink industry, 2004 was another challenging year. On the one hand, sales were generally better compared to the past three years, but rising raw material costs and availability have ink manufacturers worried.
In terms of sales, statistics compiled by the National Association of Printing Ink Manufacturers (NAPIM) bear out the modest gains. In the third quarter of 2004, sales of litho inks rose 2.6 percent and volume increased 3.3 percent compared to 2003, and flexo ink sales improved 0.8 percent and volume 1.2 percent compared to the same quarter in 2003. Gravure remained disappointing, with sales down 13.2 percent and volume off 6.3 percent from 2003.
“I’d say the industry continues to show improvement, although there is still softness,” said Jim Leitch, CEO of Braden Sutphin Ink and a member of NAPIM’s Management Committee. “Generally speaking, our third and fourth quarters have shown further improvement.”
The litho and flexo ink volume statistics show that printing has rebounded, although pricing has not increased as much, which is a serious concern considering that the price of raw materials is skyrocketing.
In fact, raw material costs are the most critical concern facing ink manufacturers. Crude oil and natural gas prices have increased dramatically in 2004. That impacts practically every ingredient, particularly feedstocks such as styrene, benzene and propylene, the building blocks for key ingredients ranging from resins and waxes to varnishes, solvents and acrylates. There has been shortages of essential materials such as acrylic acid, leading to allocations and force majeure, with no end forecasted in the near future.
All in all, it is likely that 2005 will be another year loaded with challenges for the ink industry.
For the most part, 2004’s results offered a mixed bag for ink manufacturers. Sales increased as the year went on, but raw material price increases had a major impact on margins. Certain segments, such as flexible packaging, ink jet and energy curing, were strong, and the heatset and news ink markets showed improvement. Meanwhile, other areas such as commercial sheetfed and publication gravure were weaker.
“The U.S. ink industry has faced a combination of negative forces such as rising costs of raw materials, reduced availability of raw materials, rising fuel costs, customer overcapacity and a slow recovery in commercial and publication markets,” said Michael Murphy, Sun Chemical corporate senior vice president and president, North American Inks.
“This is hopefully being mitigated by some positive indicators in the economy such as a GDP growth forecast of 3.8 percent for 2005 and a slight upturn in ad pagination,” Mr. Murphy said. “Key growth areas for printing and ink use include new ink jet applications, packaging overall and the label market.”
“We have had a strong year and have seen our customers in the segments related to consumer products also have strong years,” said Rick Clendenning, president and CEO of INX International Ink Co. “We hope this trend continues in these segments and we hope the commercial side of the industry starts to improve.”
“We saw a very strong second half across all market segments,” added Bryce Kristo, CFO, vice president business development at INX International Ink Co. “The contribution of the higher demand was diluted somewhat by eroding prices and rising material costs. Currently we see growth but remain cautious.”
“Our level of business has definitely improved over the first six months of 2004, but we did get notification of price increases on a number of key raw materials which will impact margins going forward,” said Mr. Leitch. “In general, I feel better about 2004 than 2003, as it has seemed to firm up and business levels have improved.”
“We have seen pockets of strong growth as well as pockets of slow times,” said Kevin Yeazell, president of Handschy Industries. “All in all, 2004 is seeing an upswing from 2003.”
Financial pressures due to raw material prices remain a constant concern for ink companies.
“Those materials tied closely to crude oil and natural gas prices, such as commodity solvents and ink oils, had significant price increases during the year,” said Jack Benson, vice president, corporate procurement for Flint Ink. “The price of natural gas has doubled in the past two years, and we are all aware of what has happened to the price of oil. These cost increases, combined with decreased production capacity, are driving sharp price increases of eight to 30 percent on many critical raw materials and chemicals used in every ink.”
“In 2004 the industry saw a combination of shortages and cost increase for several categories of raw materials including nitrocellulose, TiO2 and resin systems that are acrylic acid-based,” said Chris Morrissey, Sun Chemical's corporate vice president of marketing. “Many solvents have risen between 30 percent and 100 percent in 2004.”
“Our toughest raw material challenges this year have centered around TiO2 and nitrocellulose shortages as well as overall price increases, including solvents and resins,” said Jyoti Gidvani, Color Converting Inc.’s (CCI) materials manager.
“Meanwhile, other struggles have included shortages in certain resins such as vinyls and increases in solvents and other resins, which are directly tied to the exploding crude oil and natural gas prices,” said Dan McDowell, CCI’s president. “In 2005, we expect the increases to reach over into organic pigments and additives. Several increases here have already been announced for January and we expect more. We have also heard rumors of certain solvent allocations caused by force majeure in Europe. It remains to be seen if this will affect us in the U.S.”
As a result, the ink industry has felt tremendous pressure on its margins.
“The ink industry has not fared well in 2004,” said Kathy Marx, vice president, marketing and strategic planning for Flint Ink. “Continued increases in raw material and energy costs have placed the ink industry in a situation of declining margins, with industry average profit down 40 percent from 2000. These cost increases have also resulted in decreased availability of capital for investment in R&D, and threatened the viability of some ink suppliers and the industry as a whole. Printers’ profits are increasing, but ink suppliers’ profits are not. This presents a serious problem.”
“As with the last few years, 2004 has been a somewhat tough year for many North American ink manufacturers,” said Ed Dedman, business manager narrow web and energy curing group, SICPA North America. “With the cost of many raw materials rising, while customers are resistant to price increases and even pursuing new bids to reduce ink costs, the financial pressure on us to deliver both sales and profitability is growing.”
“On the revenue side, it’s been a decent year,” said Jeff Koppelman, NAPIM president and president of Gans Ink & Supply. “This year has rebounded somewhat from the prior three, and we are realizing increased purchasing from mainstream commercial sheetfed customers, as well as our specialty divisions. I sense we are coming out of the doldrums.
“That being said, though, raw material and operating costs are going up and our margins continue to be thin,” Mr. Koppelman said. “As the domino effect of increased pricing from our suppliers and providers of services continues, we will need to follow suit, just as many of the other ink companies undoubtedly will.”
Certain segments continue to fare well, while other markets remain tighter.
“As in years past, some segments did much better than others,” Ms. Marx said. “Flexible packaging continues to show growth, as do digital and energy-cure. The rebound that was expected, particularly because it was a presidential election year, did not occur. Marketing budgets continue to be carefully scrutinized and pressured, while at the same time there is an ever-increasing number of new marketing opportunities. These factors combine to continue to put print under pressure to perform. As the number of slices in the marketing pie increase, with options that have a demonstrated return on investment, print results will continue to be measured and future expenditures will depend more upon performance.”
“Our big gains have been in prime label and flexible packaging accounts, and we expect that trend to continue in 2005,” Mr. Dedman said.
Even packaging in general showed some financial weakness.
“2004 appears to have been a marginal year for packaging,” said Mr. McDowell. “The first quarter was relatively strong while the second and third quarters tapered off somewhat. Overall, we believe the market to be flat year to date, if not slightly contracted. CCI’s growth continues to hover around 7 percent for the year.”
Tak O’Haru, president of Toyo Ink America, has noticed that printers are split between developing new technologies for the future or pulling back. Toyo’s ink sales have grown 5 percent in 2004 due to new technology implementation.
“The printing industry is picking up, and some printers are busier,” said Mr. O’Haru. “However, there are two distinct and opposite directions printers are heading, as some printers are investing in new technologies and value added services, while others are reducing prices and operational costs.” Globalization remains a critical aspect. The acquisition by CVC Capital Partners, a leading European private equity firm, of BASF Drucksysteme GmbH and ANI Printing Inks has created a $1.03 billion global ink and printing systems manufacturer.
“Actually, the fastest growth is not occurring in the U.S.,” Ms. Marx said. “Globalization has caused production, particularly that of less time-sensitive material, to shift overseas. For Flint Ink, the most growth in 2004 has occurred internationally. We predict that this growth pattern will continue in 2005.”
“The developments having the most impact are the continuing profit squeeze caused by pricing pressure from customers and offshore competitors, and the growing opportunities for business in developing parts of the world,” said Dr. Joseph Raksis, senior vice president, research and new market development at Flint Ink. “Our responses have been to rationalize our raw materials and product and service offerings, taking more cost out of our business, and to develop joint ventures in areas like China and India.”
Areas of Concern
While there are areas that are showing growth, other segments are continuing to struggle, particularly from overseas competition, with commercial and corrugated facing the most pressure.
“In the U.S., the commercial print sector probably faces the most severe challenge with the Internet, distributed print and the SOHO market,” Ms. Marx said. “Materials that are not time-sensitive have seen a shift to overseas print and production, and even packaging, though mostly consumer goods, has seen a shift in production to low-cost markets there as well. Unfortunately, any hope for a rebound in these segments at this stage is unlikely.”
“Corrugated flexo has faced hard times with business moving to China,” Mr. Yeazell said. “However, we are seeing a shift to more colorful products which will reflect in a high level of ink requirements in the U.S.”
Mr. McDowell said that the lamination market is under pressure. “We have begun to see more competitive pressure in lamination markets,” he said. “Margins are being driven down by the presence of more players in the market.”
Expectations for 2005
With all that has occurred in the industry, it is understandable that ink industry leaders are watching raw material developments carefully, and hoping the economy more than offsets these increases.
“I’m hoping for a more robust 2005 but I’m not expecting miracles,” said Harvey Brice, managing director of Superior Printing Ink. “To what degree is always a mystery, but the graphic arts industry seems to be on the right track, and we hope to be pulled along with it. The negative is that raw material prices are on the rise and will hinder overall expansion.”
“In 2005, customer and industry demands and expectations are obviously not going to soften. Overall costs will increase, especially raw material costs,” Mr. Clendenning said. “Customer consolidation and globalization will continue to create problems for some companies, and 2005 will be extremely difficult, especially for those with limited resources. At INX International, we will be ready.”
“If the continued economic growth continues into 2005, we should see the same for the printing industry,” Mr. Yeazell said. “We have planned for and are positioned for significant growth in 2005.”
Strong competition from overseas will continue to have an impact, and Ms. Marx said that 2005 is going to be another tough year.
“Continued globalization and consolidation will force the U.S. printing and ink industries to look at alternatives to their current business models, and either cause a rapid shift or deployment of resources elsewhere,” Ms. Marx said. “Continued pressure on pricing and costs will further push some weak suppliers out of business. In the U.S., the market will continue to decline, although hopefully reach some stable point in the not too distant future. Growth will continue to occur in the developing markets and production will continue to shift.”
Mr. Morrissey added that offshore sourcing of raw materials, inks and printed materials, primarily from Asia, is likely to continue.
Meanwhile, more raw material price increases are likely.
“As natural gas and crude oil continue to spiral upward, we expect to see continued raw material increases for the rest of the year,” Mr. McDowell said. “This is coupled with the price pressures fueled by continued consolidations in our customer base.”
There are also concerns that some suppliers seeking higher profit margins will pull out of the ink market altogether. “This trend will likely continue,” said Ms. Gidvani.
On the positive side, new technologies will help to spur growth. Mr. Morrissey expects that growth in packaging-related areas such as retort, shrink sleeves, pouches and labels, stochastic screening on the publication/commercial side and new applications of ink jet printing on larger formats will continue.
“I expect that we’ll continue to realize gains in technology and performance, given some of the new projects we’re working on,” Mr. Dedman said. “Hopefully, these advances will allow us to continue to offer added value to our customers, which will help justify both price increases and additional sales growth.”
“We continue to see tremendous interest in specialty, brand protection and RFID technologies,” Mr. McDowell said. “Though most of these projects are still developmental for many of our customers, we are starting to see signs that they may become more commercial in the near future. Another growth area worth mentioning is expanded gamut process printing, Opaltone in particular. Two of our customers are already commercial with these applications while several more are in development.”
Overall, economic growth and raw material prices are expected to be critical going into 2005.
“In 2005, we expect the U.S. economy to grow modestly with some slight improvement in print volumes,” Mr. Morrissey said. “However, we expect continued raw material cost pressures. This will likely lead to further industry consolidation, such as the recent BASF/ANI combination.”
“Competition is fierce these days,” said Mr. McDowell. “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.”