“Security of supply remains a concern, with the situation changing on an almost daily basis,” said Jan Paul van der Velde, senior vice president procurement, Flint Group. “There are a number of key issues with several pigments, in particular blue, green and violets. In addition to these, supply stress has also placed increased pressure on several UV materials, while even mainstream solvents, carbon blacks and TiO2 are in short supply throughout certain parts of the world.”
“In the first half of 2011, we saw a continuation of many of the same raw materials supply issues and shortages that featured so prominently in 2010,” said Ed Pruitt, chief procurement officer, Sun Chemical. “Rosin, solvents (particularly in Europe), acrylics, energy cure resins, carbon black, titanium dioxide, nitrocellulose, phthalocyanine pigments and Violet 23 pigments were all in various stages of tight to very short supply. The drivers for these supply issues were the same factors we wrestled with in 2010, increased demand from developing markets, feedstock issues, supply limitations and environmental and regulatory constraints in India and China.
“As we look ahead to the balance of 2011 and into next year, we expect to see continuing improvement in the availability of some of the raw materials such as resins and solvents, but we also expect to see continuing pressure on carbon black, titanium dioxide, nitrocellulose, vegetable oils and certain pigments,” Mr. Pruitt said. “Relief for these products will not occur until fundamental improvements are seen in either supply or feedstock availability.”
“Although it changes frequently, weekly in some cases, availability of phenolic resins, phthalocyanine and carbazole pigments continues to concern us,” said Jim La Rocca, chief operating officer, Superior Printing Ink. “Company consolidations, demand and lack of domestic manufacturing/supply impact availability.”
“Wikoff Color continues to experience supply pressure with several pigment types,” said Ben Price, director of purchasing at Wikoff Color. “It has been reported that 15% of the world’s TiO2 capacity was removed over the past couple of years. This capacity reduction, combined with growing demand in developing countries, has created a supply imbalance that is not expected to improve in the near-term.
“Carbazole violet has been tight for over a year now, and what was once described as a temporary supply problem has shown no signs of easing,” Mr. Price said. “More recently, the supply of phthalocyanine pigments, particularly greens, has become concerning. India is a major player in the supply of these pigments, and new environmental regulations there have forced many manufacturers to limit production.
“The supply of rosin resin and nitrocellulose is still a concern for us,” Mr. Price added. “Rosin resin became a problem in 2010, when the price of Chinese gum rosin tripled over the course of the year. This drastic price escalation forced many buyers to switch to tall oil rosin, creating tightness in that market. In 2011, a major tall oil rosin resin producer announced plans to exit the ink market, further compounding the supply problem facing ink manufacturers. The supply of nitrocellulose also began to tighten up in 2010 and remains a problem today. Wood pulp production issues and poor cotton harvests are to blame.”
“Materials that are problematic include Ti02, with higher demand, limited capacity and ore deposit mines reaching the end of their life cycle,” said Rick Westrom, senior vice president of strategic sourcing for INX International Ink Co. “Both blue and green pigment production output is reduced due to environmental concerns in India. Resin supply also has been drastically affected by supplier plant consolidation, as well as due to product rationalization and raw material availability issues.”
Mr. Westrom noted that maintaining reliable supply continued to be a challenge in the last two years.
“The recent recession forced suppliers into closing or consolidating facilities, which lowered available capacity,” Mr. Westrom said. “However, the economy did turn around faster than expected and that caused shortages across many product lines. Asian markets have also experienced strong economic growth that places more pressure on an ever increasing demand for key raw materials.”
“Resin, Ti02, carbon black and pigments are our largest concerns,” said George Sickinger, president and CEO of Color Resolutions International. “The resin shortage in 2010 forced us to find second and third sources of material. That exercise has actually strengthened our position in 2011 and allowed us to expand our material supply significantly. We are working with current vendors in all other areas to first secure supply and then negotiate price. While securing supply, we are evaluating new products that are more in-line with our pricing expectations.”
Pressure on Pricing
Pricing is the other huge raw material concern. There is a tremendous amount of volatility and upward pressure on pricing, with numerous factors causing these increases.
“Many materials remain volatile,” Mr. van der Velde said. “Within print media inks, the primary issue remains the supply of phenolic resins. While gum rosin costs have actually reduced a little from the record costs we witnessed, they still remain at a very high point from a historical perspective. Tall oil-based phenolics also remain at a high point due in part to the additional demands being placed on the product as a replacement for gum rosin, while reduced supply has only served to compound the issue after the closure of many paper mills in the last few years.
“The additional (potential) demand for biofuel does not make the situation easier, and with all these elements, it is hard to guess where the market will move to,” Mr. van der Velde added. “Partially linked to the phenolic resin challenges (as partial replacement) but also due to increasing C5/C9/DCPD costs, hydrocarbon resin costs have increased. Due to demand, the recent cost reduction of crude had almost no effect on the underlying cost levels. The same is true for carbon black (high demand within tire manufacturing) and pigments (shortages of intermediates and an increasing challenge on environmental costs in India and interest charges in China).
“In the packaging sector, the increase we have seen in solvent costs continues to be our key cost driver, while TiO2, nitrocellulose and acrylics costs have also contributed to our challenges,” Mr. van der Velde noted.
Mr. Price noted that pricing is a function of supply and demand, and uses titanium dioxide and carbazole violet as examples.
“TiO2 pricing is increasing quarterly, with the largest increases coming in the second half of 2011,” Mr. Price said. “Prices in the fourth quarter of 2011 are expected to be more than 50% higher than they were in the fourth quarter of 2010. A significant portion of the world’s TiO2 capacity was removed over the past couple of years. This capacity reduction, combined with growing demand in developing countries, has created a supply shortage that is not expected to improve in the near-term.
“Carbazole violet prices seem to have stabilized recently, but they are as much as 80% higher today than they were in mid-2010,” Mr. Price added. “The primary reason for the carbazole violet increases is limited availability of two key raw materials, carbazole and chloranil.”
Phthalo pigments, rosin resin, tall oil and nitrocellulose are other areas of concern that Mr. Price noted.
“Phthalo green and blue prices have been increasing at a rapid pace recently,” Mr. Price said. “Rosin resin prices have finally started to stabilize, but they are 40% to 50% higher than they were a year ago. Prices for nitrocellulose are up 60% to 70% from a year ago.”
Mr. Sickinger said that Color Resolutions continues to see increased raw material prices and an overall tightness of supply.
“Key raw materials for resin increases include propylene, benzene, styrene, ethyl acrylates and methyl methacrylates,” Mr. Sickinger said. “Because these are petrochemical feedstock, they remain extremely volatile. The Ti02 market has increased three or four times throughout 2011 and is projected to continue through first quarter of 2012. Carbon black has increased 70% year-to-date and has been a focal point of the operation. Both pigment and wax supply has tightened and extended lead times while increasing prices.”
“Pricing is the other huge raw material concern,” Mr. Pruitt said. “Where are you seeing the most volatility and upward pressure on pricing, and what are the major factors behind some of these increases?
“Raw materials in 2011 experienced both a record level of volatility as well as unprecedented price increases,” Mr. Pruitt noted. “Oil prices reached a peak in early May of this year at a price level 45% higher than in January 2010. The gum rosin market exploded in the first part of the year, with prices as high as $3,400 a ton, more than 100% higher than in January 2010. Titanium dioxide also experienced steep price increases, reaching a level of more than 50% higher than in early 2010. In addition, there were very significant increases in nitrocellulose, energy cure resins, acrylics and other packaging resins, classical pigments, carbon black, vegetable oils, solvents and additives.
“In essence, our industry has experienced record levels of inflation in virtually every category of spending and in every part of the globe,” Mr. Pruitt added. “The factors causing this volatility and inflation include feedstock shortages, commodity inflation, supply constraints and continued growth in demand from both traditional markets as well as from alternative industries like adhesives, coatings and tires.”
Changes in the Marketplace
With consolidation on the upswing throughout the raw material supply chain and capacity being taken out of the market, ink manufacturers are facing plenty of challenges.
“As a result of the many supplier consolidations, we have seen product rationalization, higher prices and reduced available supply,” Mr. Westrom said.
“Due to these market conditions CRI has opened our doors to new vendors in all area of supply,” Mr. Sickinger noted. “We have asked them to come forward with both same as products as well as offering a step into product development. This has allowed us to make several changes across the board on most ink production. This has also caused long-term suppliers to step forward with new products or more aggressive pricing.”
“The pace of merger and acquisitions has increased markedly in the chemical industry,” Mr. Pruitt said. “We have seen consolidations and ownership changes in almost all major industry segments. The impact to the raw materials market is in many ways a mixed one. On the one hand, some of the acquired companies have been able to find a renewed level of support and strategic direction as a result of their ownership change. On the other hand, we have also felt the negative impacts of reduced competition, redirection of products to other industries, and a focus on short term commercial thinking.
“From Sun Chemical’s perspective, it is very important that as our supplying industries continue to go through these structural changes, they do not allow themselves to become too internally focused, but return again to partnering with the graphic arts industry to help us better serve the technical and economic needs of our customers,” Mr. Pruitt added.
“Supplier consolidation has had minimal impact on Wikoff Color’s ability to procure raw materials,” Mr. Price noted. “The supply challenges we have experienced are primarily the result of capacity reductions further up the supply chain.”
“We believe that the period we saw of extreme low cost raw materials has now gone,” Mr. van der Velde noted. “The market forces that drove those low cost sources (predominantly within China) no longer apply. We see an increased emphasis being placed on China’s domestic supply rather than export. As a consequence, availability or over supply has in general been taken out of the market. Ink raw materials have historically been seen as a volume filler for many industries – but we can no longer say this. Industries now look for the best return on their capacity which, more often than not, lies outside of the ink industry.”
Despite these challenges, leading ink manufacturers are confident they can handle the supply issues they face, thanks to experienced purchasing teams, long-term relationships with suppliers and, in some cases, backward-integration into key ingredients.
“Flint Group is backward-integrated in pigments and a number of key resins,” Mr. van der Velde said. “This obviously provides significant advantage to us in the supply chain, as does our global footprint and experienced purchasing team, which gives us increased flexibility and knowledge to react to market conditions quickly. Finally, we enjoy a proven track record of effective reformulation to assure supply. While Flint Group can never be truly immune to market conditions, we believe we are in a good position to assure uninterrupted supply of high quality products to our customers in the future.”
“Sun Chemical is well positioned to manage the challenges of this dynamic and volatile period for raw materials,” Mr. Pruitt said. “Sun Chemical gets significant benefits from its ownership through a strong parent company in DIC, a broad global reach and market insights, and our partnership between our supply base and technology teams. We intend to continue to be at the forefront of our industry as an advocate for new growth as well as strong commercial relationships.”
“Due to our global reach, strong technical expertise and our vast supplier partnerships, we are able to manage today’s supply challenges,” Mr. Westrom said.
Mr. Price said that Wikoff Color is positioned about as well as it can be during this difficult time, having developed strong partnerships as well as alternate sources of products.
“Strategic partnerships with key suppliers become even more important during periods of economic uncertainty and widespread raw material shortages,” Mr. Price noted. “Wikoff has developed long-term relationships with many of our suppliers that have served us well when facing challenges such as sales control programs and extended lead times. In addition, Wikoff buys from multiple sources in each of our critical raw material areas. If there is a disruption in supply with one of our primary sources, we have backup options in place.”
“Superior has purchased many of the products in question for many years from reputable suppliers,” Mr. La Rocca noted. “We have cultivated very good working relationships with them. We continue to work together and they are doing a good job of keeping us supplied.”
Mr. Sickinger said that Color Resolutions is positioned very well to handle these challenges
“We have a very strong materials management group that works closely with our product development group to try to counter any price increases, although we have been forced to take increases as others have,” Mr. Sickinger said. “We are not opposed to giving our suppliers needed price relief, but this is a very unstable market with customers pushing back hard on any price increases. Some customers are actually putting their business out for bid, leaving the door open for competitors to pursue an incremental volume strategy. Having said all this, the best overall strategy is to be proactive and provide customers with the best products and services you can so you truly stand out among competitors.”
Ink industry leaders would greatly appreciate knowing what will happen in terms of raw materials for the coming year, but the reality is that it is extremely difficult to predict what the future holds. Volatility has essentially become the new norm.
“Forecasting future prices for raw materials is difficult to gauge due to global volatility and uncertainty over economic growth and business conditions,” Mr. Pruitt said. “It is probably safe to say that although prices have risen at record levels over the last 18 months, they will not decline significantly until the supply and demand balances are in better alignment. We also believe that volatility has become a way of life, and that responding and adapting to these conditions are in many ways our biggest challenge as an industry.
“Looking forward into 2012, we believe that the availability issues that have plagued our industry over the last 18 months will continue to improve, although there will be important raw materials like titanium dioxide, nitrocellulose and some others that will continue to be under pressure until feedstock and capacity issues are resolved,” Mr. Pruitt said. “We also believe that the overall supply chain for the chemical industry will remain taut and subject to sudden directional shifts due to the new dynamics of emerging market demand and lagging supply responses.”
“We are hopeful for some stability for the remainder of 2011, but today’s economic environment makes it uncertain,” Mr. Westrom said.
“A few weeks ago I heard we were to see some price stability,” Mr. La Rocca said. “It didn’t happen. Things change week to week. I expect more of the same volatility with price and availability during the remainder of this year.”
Mr. Price noted that there has been some relief in feedstock pricing, but even if this continues, other raw materials are on the rise.
“As we have seen over the past couple of years, so much can quickly change in the global economic environment that predicting what is going to happen with raw materials is next to impossible,” Mr. Price said. “If key feedstock pricing is any indication, there appears to be price stabilization, and in some cases, price relief occurring in some raw material categories.
“For example, crude oil has been priced in the mid $80s for most of August, down from $114 in May of this year,” Mr. Price continued. “During the same time period, propylene prices dropped as much as 20%. Propylene is a significant driver for acrylic acid, and acrylic acid is used in a wide range of printing ink raw materials. If these price trends trickle down the supply chain, we could see relief in some raw materials used in energy cure and water-based inks in the near-term. However, there are other significant raw materials like TiO2, phthalo greens and blues, carbazole violet and rosin resin whose prices are being driven more by supply shortages than feedstock costs, and we do not see any signs of price relief for these materials in the near-term.”
Mr. van der Velde emphasized the importance of working closely with suppliers.
“It is difficult to say at this time if current conditions are a new phase resulting from the shortages – nd which will begin to balance out – or whether this is just a short period of stabilization before we see further supply challenges,” Mr. van der Velde said. “It does, however, remain vitally important for us to continue to work together with suppliers to ensure security of supply throughout the chain.”
If the world economy slows, that would have an impact of raw material pricing, but as Mr. Sickinger and Mr. van der Velde noted, that would bring its own more serious problems.
“I think the slowing of the global economy will force many raw material prices to recede,” Mr. Sickinger said. “The overall packaging market is not robust and is off a bit in some markets. Unemployment has dampened consumer spending and, of course, is affecting our business in many ways. We have tried to align ourselves with customers who know how to respond to these market conditions with innovations that stimulate consumer demand. Reaching higher levels of graphics plays a part in this, and I believe CRI is especially good at partnering with such people. We can’t change market conditions, but we can change how we respond to them. Complaining doesn’t help much.”
“While predictions can never be truly accurate, we do believe that we will continue to see cost increases in selected areas such as pigments (due to intermediates cost increases and costs of adhering to environmental regulations) and a number of key raw materials,” Mr. van der Velde concluded. “At this stage, there seems to be little opportunity for any significant cost decreases in the market, unless we see a major slowdown in the world economies. However, this could result in not only reductions in raw material costs but reduced demand for inks overall – which could be the worst scenario for everyone.”