The first few months of 2005 will be a crunch period for ink makers in Europe, as they will be stepping up their drive to persuade customers to accept higher selling prices to offset hikes in raw material costs.
Ink producers are claiming that increases in input costs have been so massive that a sharp rise in ink prices is crucial to the future of the sector.
All ink companies have been suffering an unprecedented erosion in margins so none can escape the need to push up prices.
“Previously, printers and converters could find other ink producers willing to offer a lower price,” said a commercial manager at one ink company. “Now things are so bad that everyone is in the same boat. We all have to get our prices up. Printers will be no longer able to set one producer against another.”
The European Printing Ink Association (EuPIA), the newly formed group representing 75 ink producers in the European Council of the Paint, Printing Ink and Artists’ Colours Industry (CEPE), warned in the autumn that the sector was facing a “supply crisis” because of high raw material prices.
Ink companies were bearing these extra burdens while at the same time carrying costs previously borne by the printer, such as the provision of in-plant services, quality audits, color management and ink management equipment.
“I’m very concerned about the future development with even lower profitability for the industry, which ultimately will mean that investments for higher efficiency, qualified R&D and more environmentally friendly technology will be under threat,” said EuPIA chairman Peter Koivula.
The British Coatings Federation (BCF), which represents printing ink manufacturers as well as coatings producers, claimed at the same time that while struggling with rising input costs, ink makers were suffering from falling revenues, lower profits and declining investment.
Sun Chemical, the European market leader in printing inks, was among the first to move with a price increase when it announced a 3 percent to 7 percent rise for its packaging inks and coatings beginning Nov. 1.
“Petrochemicals are the key ingredients in many of our products and there has been a steady rise in the cost of all our raw materials, which have spiked in recent months with the run-up in oil prices,” said Michael Griem, Sun Chemical’s corporate vice president, Europe. “These price increases only partially offset the impact of rising costs. It has been four years since Sun Chemical has had any form of general price increase.”
The big push for higher ink prices is coming in January, particularly in the sheetfed offset segment. The medium- and small-sized ink makers now feel confident enough to follow the lead taken by the larger producers.
“January will be the key period, but I think we will have to press our customers to accept price increases throughout most of the first quarter of the year,” said Avon Joyce, technical director at Bousfield Ltd., Bristol, England. “The price increases we have just announced are our first for seven years, so this is something we have wanted to do for a long time.”
However, ink producers are facing stiff resistance from printers, publishers, packaging converters and other customers, who argue they are having to battle to deal with hikes in their own raw material costs.
The biggest of these is in paper costs, which can account for approximately half of a typical printer’s production bill, against an average 5 percent for ink. After three years of declining paper prices, UPM-Kymmene, one of Europe’s largest paper makers, said recently that it was aiming for “substantial” increases in its selling prices.
In the packaging sector, prices of resins for film-grade plastics have gone up by more than 40 percent since the beginning of 2004.
Furthermore, ink producers will be pressing for relatively big rises in their own prices at a time when general economic conditions will not be as favorable for prices increases as they were in 2004.
GDP growth in the euro zone of 12 Western European countries will still be below 2 percent in 2005, according to the latest forecasts by the Paris-based Organisation for Economic Co-operation and Development (OECD).
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Slowing Price Increases?
More significantly, world economic growth is likely to slow, which will negatively affect some of the large European export-oriented industries.
“We are expecting the level of price rises will start to slow down in the first two quarters of 2005 before slowing quite significantly in the second half,” said David Thomas, an analyst covering chemicals and related industries at Oxford Economic Forecasting, Oxford, England.
“It will be more difficult to push through increases in downstream markets because there has been a lot of stock building,” he said. “Ink and coatings manufacturers will be trying to raise their prices approximately three months after the increases in petrochemical and other raw material costs. The longer the time lag, the more difficult it will be to convince the customer of the necessity for an increase in your own prices.”
Furthermore, ink companies will probably be confronted by the psychological effects of a slide in oil prices. Oil prices are predicted to drop to the mid to lower $30s per barrel, similar to their level in 2003.
“We are expecting oil prices to fall to around $35 per barrel in the second half of the year,” said Mr. Thomas. “When they are declining, it is that much harder to put up your own prices.”
Soaring oil prices have been having a major impact on the cost of organic chemicals such as solvents. Some of their prices in Europe have virtually doubled since late 2003. But once oil prices weaken significantly, solvent prices will inevitably come down.
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Supply and Demand
Nonetheless, spiraling oil prices have by no means been the sole reason for the rocketing cost of raw materials. The prices of some metals used in metallic inks, for example, have gone up even more steeply than oil prices. Copper prices have climbed by 30 percent this year and in late 2004 were rising to levels double those in 2003.
“In our bronze pigments, copper can account for 75 to 85 percent of the total costs, and in finished metallic inks, approximately 50 percent,” said Michael Yates, commercial manager at Wolstenholme International, Blackburn, England, a manufacturer of metallic pigments and inks. “This year is going to be critical for us, but I’m reasonably optimistic we can achieve higher prices among our customers because I think they recognize how severely we’ve been affected by higher raw material costs.”
A major cause of the strong rise in prices of metals and many other raw materials has been the huge demand in China, where industrial production has been growing at an annual rate of 15 percent to 17 percent.
The Chinese coatings sector, which uses similar raw materials to those in printing inks, has been expanding at nearly 20 percent, mainly because of rapidly increasing sales in the construction market. The BCF recently blamed the thriving Chinese economy for shortages and the resulting higher prices for raw materials.
Another factor behind the lack of supplies has been low investment by European producers in manufacturing plants, mainly because of poor margins.
Felipe Mellado, Sun Chemical’s corporate vice president, Europe, pinpointed “the current imbalance in the supply and demand of many of the raw materials” in inks as being the main reason why the company was raising its sheetfed inks prices by 4 percent to 8 percent in January.
He said that Sun Chemical was on allocation for some of its raw materials, while stressing the impact of the “poor profitability of the chemical industry and, as a consequence, a lack of investment in new capacity.”
Ink producers have been reporting scarcities and hence disproportionate price rises in products like acrylic acid, acrylic monomers, several solvents, silicone oils, benzene and propylene derivatives and some pigments.
A combination of surging oil prices and reductions in capacity has jacked up prices of isopropyl alcohol (IPA) to such high levels that printers have been seeking ways of sharply reducing its use.
European titanium dioxide producers are warning that there could be big rises in prices this year because of the extent to which demand is outstripping supplies. Since mid-2004, TiO2 prices have gone up by 5 percent to 6 percent in Europe, and are due to increase by a similar amount in January.
Currently, the balance between supply and demand is so tight that average utilization rates of TiO2 plants have risen to more than 90 percent. This is the highest they have been since the late 1980s, when prices of the pigment doubled.
The pressure on capacity is particularly acute in Europe, where the region has a disproportionate number of old plants using the long-established but costly sulphate process. Worldwide, the last greenfield TiO2 plants were built in the early 1990s in the U.S. and Asia, while the time since the construction of a new facility in Europe is even longer.
Despite European demand rising by 6 percent in 2004, TiO2 producers closed sulphate capacity during the year because it was no longer economical to keep it operating.
“There has been no investment in new capacity because the margins have not been high enough to justify putting money into new plants,” Gary Cianfichi, vice president marketing and sales at Millennium Chemicals, the world’s second largest TiO2 producer, told a recent press conference in Brussels.
“We reckon that prices will escalate sharply in 2005 because of the lower availability of supplies,” he said. “We believe in fact that there will not be enough supplies for the next few years.”
As a result, ink makers could experience shortages and consequently high prices for many of their key raw materials for much of the rest of the decade. The fight to gain compensatory rises in their own selling prices could be a lengthy one.