Latin America Struggles to Hold Market Gains

By Charles Thurston, Ink World Correspondent | 10.25.05

As regional growth slows to 4.2 percent and raw material costs rise, ink executives anticipate mixed results for the coming year.

The Latin American ink market is struggling to hold on to the gains registered in 2004, when the regional economy expanded by a robust 5.5 percent and ink sales expanded by an estimated 6 percent to 7 percent.

This year, with regional economic growth decelerating to approximately 4.2 percent, with oil-driven cost increases and with ongoing foreign exchange variations around the hemisphere, industry executives caution against projecting an overall growth prediction and are reluctant to place a dollar value on the entire market.

Still, the roughly estimated 145,000 metric ton Latin American ink market, perhaps worth $600 million overall, is expected by some industry officials to grow by 3 percent to 4 percent this year, while segment leaders like packaging could expand more rapidly.

Among formidable challenges to the growth of the market are generally increasing costs, ultimately due in large part to the rising price of oil. Other limits to growth include recent monetary policy changes, like those in Brazil, which were aimed at limiting inflation but which also have limited economic growth. Credit is another problem which still persists in countries like Mexico. And finally, some key raw material supplies - like titanium dioxide and nitrocellulose - have become tighter, even at higher costs, industry executives say.

Among factors that should help the Latin American ink market continue to grow in 2005 are a region-wide reduction in inflation, coupled with relatively unchanged foreign exchange rate outlooks for the major currencies. Indeed, inflation is forecast to drop by a percentage point to 5.7 percent region-wide, from 6.7 percent in 2004, according to the latest analysis by the Latin American economic research team at UBS Warburg, led by director Michael Gavin, in Stamford, CT. Currency stability is also an encouraging factor in the region, particularly in Brazil, but also in Argentina, Chile and Mexico.

By segment, packaging - particularly flexible packaging - is expected to present the strongest regional growth this year, perhaps at 5.5 percent, suggests Ademur Pilar, the president of Associacao Brasileiro das Industrias de Tintas Para Impressao, or ABITIM, the printing ink association, in Sao Paulo. Publishing could grow at 3.5 percent, he also suggested.

Sheetfed offset ink could grow at 3 percent, according to Alfonso Paredes, vice president of marketing for Sun Chemical Latin America Ink, in Fort Lauderdale, FL. Heatset inks also may grow at 3 percent, he suggested.

Brazilian Growth Leads the Region

Brazil's stunning economic recovery last year helped domestic consumption of ink grow by 23 percent to 81,000 metric tons, said Mr. Pilar. At the same time, production value for the 75,500 metric tons of material produced in 2004 rose to $264 million from $209 million in 2003, said Mr. Pilar, who is also the commercial director of Flint Ink do Brasil Ltda., in Cotia, Sao Paulo State.

This year the Brazilian market has had a slow start, in part due to the government's tight monetary policy, but the ink market should grow by 4.5 percent overall, with segments like packaging contributing to that average with expansion of close to 8 percent, while other segments like publication may rise at 3.5 percent, Mr. Pilar suggested.

Other Brazilian executives see the publications segment rising much faster.

"The Brazilian market for heatset inks could grow at 6 to 7 percent, and the rotogravure ink market by 2 to 3 percent," said Fernando Ribeiro, the general manager of Siegwerk Tintas Graficas Ltda. in Sao Paulo.

Although Brazil's industrial production has slowed to 5.8 percent this year, it is expected to lead gross domestic product growth of 4.3 percent. With the Brazilian real holding at about 2.86-to-1 U.S. dollar, Brazilian exports also should rise, ABITIM predicted.

The policy-induced slowdown in Brazil this year has been more disappointing to others.

"The positive results of the Brazilian economy in 2004 gave us the erroneous idea that we would have a great 2005, but that did not take place during the first quarter of this year," said Jacques Aubry, the CEO of Cromos S.A. Tintas Graficas, in Rio De Janeiro. "Instead, the potential possibility of high inflation rates in 2005, because of high consumption in 2004, led the government to adopt several corrective measures including higher interest rates, which have ended the warming of the market and brought recession back to the ink market."

Mr. Aubry suggested that the flexographic segment of the market may have retracted 20 percent this year, as demand for newspapers, design, advertising and packaging have stagnated, if not dropped.

Current supplier credits to customers in Brazil frequently carry terms of 120 to 150 days for payment, said Mr. Ribeiro. "But we have no problem with customer credit in Brazil because we deal with larger clients," he added. Credit problems are not generally a problem in Brazil, Mr. Pilar said.

Mexico Follows U.S. Lead

Mexico's estimated $170 million ink market is the second largest in the region. Mexico's ink market should expand from 5 to 6 percent this year, compared with GDP expansion of 4.4 percent, said Jorge Ramos, the technical and statistical analyst for Asociacion Nacional de Fabricantes de Pinturas y Tintas, or ANAFAPYT, the national ink manufacturers' association in Mexico City. Among factors contributing to the growth are a rise in exports to Central America, and the rising North American demand for text books printed in Mexico, he said.

"We at Sanchez S.A. have been growing at around twice GDP for the last few years, and our projection for 2005 tells us we will do it again," said Ernesto Sanchez, the director general of the company, in Mexico City. "Inks for packaging again are leading the way, although our heatset division had an excellent year in 2004."

In the past year, Sanchez has reformulated inks and created a sales department for the narrow web flexible inks market, Mr. Sanchez noted.

For packaging ink supplier Color Converting, which is opening a new facility in Mexico, the outlook also is good, albeit a recovery from a prior peak.

"While 2005 appears to be a year of growth, it is considered to be a recuperation period from the previous two years during which there was substantial market contraction," said Tulio Poblete, Color Converting de Mexico's general manager, in Mexico City. "On the bright side, we have begun to see investment in new equipment this year: several customers in Mexico are installing or have installed new presses. We expect this trend to continue but still need another year or so of similar growth to get back to zero," he said.

Others opening new facilities in Mexico agree. "The best we can tell, growth in Mexico is twice what it is in the U.S., so margins at the customer level are probably similar," said George Sickinger, chairman, president and CEO of Color Resolutions, Fairfield, OH. "We see a lot of opportunity there and are adding people."

Sun Chemical recently combined its Mexico operations with the rest of the region under a single corporate division, Sun Chemical Latin America Inks.

"There are a lot of pluses folding Mexico into Latin America; among the obvious benefits is the commonality of the language in Spanish-speaking countries," said Greg Lawson, now president of the division. "But Mexico still has strong ties to North America in products and technology. So we think it will be easier to implement best practice solutions in the region when it is being done in the same language."

Exports a Rising Contributor to Growth

Although domestic demand in Brazil and Mexico may not be as robust this year as last, the export market for producers in these countries is improving, several executives say.

"In Brazil, exports hit $23 million last year, up from about $18 million in 2003, because of investments made by major manufacturers like Sun and Flint, which have made the country an export center, principally for sales into Mercosul and the rest of Latin America," said Mr. Pilar. Mercosul is the Southern Cone trade block comprising Argentina, Brazil, Chile, Uruguay, Paraguay and Bolivia. Flint Ink now has the largest production plant in the region, at Cotia, with a monthly capacity of 4,000 metric tons.

Mexico's Sanchez recently opened a warehouse in Costa Rica, and is increasing its overall sales into Central America, Mr. Sanchez noted.

In all Latin American markets, the customer's perception of the need for greater technical support is rising, vendors agree.

"In terms of technology, we are successful because we have consultative services that go with the product to provide what may be lacking - somebody has too much down time, whether ink related or not, and we have people that can go in and apply diagnostic tools to pinpoint the problem," said Mr. Sickinger.

Charles W. Thurston writes on Latin American finance, technology and trade.