Elimination of VAT Refunds Signals Higher Prices

By David Savastano, Ink World Editor | 09.11.07

For the past several years, the printing ink industry and its suppliers have been battling higher raw material prices, largely brought on by the increased cost of crude oil. The resulting higher prices of feedstocks has led to numerous price increases for raw materials, and ink manufacturers ultimately had to respond by initiating their own price increases.
However, the price of pigments remained reasonably stable, which helped keep ink prices from further skyrocketing. There are a few reasons for this, but the influx of less expensive offshore pigments, particularly from China, was a major factor. Production costs are lower in China, and there also was the VAT refund on export goods, in which the Chinese government offered rebates on exports to the manufacturers. For the pigment industry, the VAT refund was as high as 13 percent. This, of course, allowed Chinese pigment producers the ability to keep their prices low.
In June, this changed dramatically when the Chinese government eliminated or reduced the VAT refund in numerous sectors, including pigments and pigment intermediates. This was done with an eye toward reining in the overheating economy, as well as attempting to curb industries that are impacting China’s environment. 
There clearly has been an effect on the pigment industry.  According to industry leaders, Chinese pigment manufacturers typically rely on the VAT refund to boost their low margins, and these companies are not in the position to absorb most of these higher costs. This may lead to some plant closures, which will lead to a tightening of supply. As noted in The Raw Material Report, beginning on page 26, ink companies are already receiving notice of higher prices. Ink manufacturers will, in turn, have to determine whether they can pass along these increases.
For ink companies, the difficulty comes with explaining the economics to their customers. When crude oil prices rose dramatically, printing ink manufacturers could point to gas prices as a clear-cut example. The elimination of a refund in China is not as obvious, although its ultimate impact on costs is just as serious. How ink manufacturers respond to this critical challenge will determine their own financial viability and success in the coming years.

David Savastano
Ink World Editor