Dave Savastano, Editor05.20.15
Declining crude oil costs are making people happier at the gas pumps, and are helping manufacturers who use oil and its derivatives as well. However, printing inks are a more complex product, and crude oil does not impact all varieties of ink.
Presently, crude oil is trading at approximately $60 per barrel. In July 2008, it hit its peak at more than $145 per barrel.
Ink World discussed the issue of crude oil costs and their relationship to ink making with ink industry leaders. Here are their thoughts as to the relationship between crude oil costs and ink prices.
Jan Paul van der Velde
SVP, Procurement, Sustainability, Regulatory and IT
Flint Group
From a global perspective, all other things equal, indeed crude oil prices have an effect on the costs of ink, predominantly in publication inks. The major challenge, however, is in the first words: “all other things equal.” Nothing at the moment is “equal” and or “normal.” First of all, currencies have moved quite significantly, specifically the Euro/AUD/BRL and many others against the USD. Further, the CNY continues to be strong and costs of environment in China continue to increase.
There is a major negative impact related to the lower crude price, and that is the shale oil/gas revolution in the U.S. We have been warning for years about the negative impact increased use of U.S. shale oil and gas will have on the industry. Many key oil derivatives, like DCPD, C5 and C9, will become less available (they are only available from heavy liquid – or naphta – crude cracking). This negative scenario is now fully coming through. In the U.S., 70% of the refineries have moved from liquid to (shale) gas optimizing ethylene delivery, which limits the supply of the crude fractions the ink industry need. Prices are increasing, despite the reduced crude oil costs. This impact is felt across the world. For example, in Europe, the largest refinery (Shell) will close down. This has a major negative impact on the hydrocarbon resin costs, as the entire world is now depending on Asian supply with demand exceeding the installed capacity.
In short, for the U.S., where the negative currency impact overall is less, we see negative impact from rising pigment prices, rising hydrocarbon pricing, offsetting the positive impact from crude oil.
In the rest of the world, costs are increasing fast. The positive impact from crude costs is more than offset by the currency impacts, the rising costs of pigments and the hydrocarbon costs. Due to the USD, also the phenolic resins (gum rosin- and tall oil-based) are again increasing fast as they are traded in CNY and USDs. The cost increases are quite extreme and customers should expect that the market will have to respond to this situation. EuPIA already sent out a general statement to inform customers of this effect.
For packaging inks, crude anyway has limited impact, but certainly for those packaging inks that use chemicals from China, also expect some more mild inflation. Specifically, UV materials are moving up, as well as a number of pigments, including TiO2 for the whites.
Edward Pruitt
Chief Procurement Officer
Sun Chemical
For the ink industry, crude oil itself is only an input into some of the raw materials that we buy. In fact, when you look across the many types of raw materials that are purchased in our industry, oil values only drive a minor share of our overall costs. Regarding the cost trend of oil, due to the normal lags in contractual pricing we have only very recently seen the impact of lower costs for those oil-related materials.
There is currently a supply bubble for crude oil that I believe will be only temporary. This supply bubble is largely a result of increased production out of North America against a background of fairly tepid global demand. If you look back at crude oil from 2004 until the summer of last year, you will see that prices more than doubled during that period of time, while global demand only grew around 1% a year. The reason for the surge in pricing was the growing costs for discovering and developing new sources of oil. This strongly suggests to us that if demand recovers a bit, or current supply is curtailed, the supply bubble will pop and we will quickly see a return to pricing above $70 a barrel.
Petrochemicals are the raw materials for many of the solvents, resins and intermediates that the ink industry buys. In North America, where natural gas liquids are the typical feedstock for petrochemicals, the development of natural gas from shale deposits should ultimately result in an important cost advantage compared to producing regions that depend upon naphtha, an oil-derived feedstock, to run their petrochemical crackers. Olefinic and aromatic petrochemicals have moderated recently in cost, but price levels had notably risen over the last five years.
Each petrochemical has its own unique supply and demand dynamics, which means that their pricing levels often move in directions completely independent of what the general oil or natural gas markets are doing.
Over the last 10 years, around 70% of the time ink producers have had to deal with rising oil and raw materials values. Today we are still typically at raw material price levels that are notably higher than in the past. Today’s moderation in oil prices is only a partial and temporary reprieve from many years of pressure on the ink industry’s cost base.
Another area of growing importance is the dramatic slide in the value of the Euro. One year ago the Euro was as high as $1.39 versus the dollar. In 2015 the Euro has been as low as $1.05, a 23% decrease. Because many commodities like oil, pigments and intermediates are denominated in US dollars, the fall in the Euro’s value has effectively resulted in a sharp increase in costs for the European ink industry.
Ken Klug
Director of Purchasing
Wikoff Color
Declining crude cost will result in price relief for a limited group of ink raw materials. Price relief will depend on the geographic location of the ink manufacturing plant and the amount of crude bi-product in a formula. Not all inks are crude-based and some of the chemistries will see more relief than others. All the major feedstocks (propylene, ethylene and benzene) have seen some price reductions as well as their downstream materials (styrene, acrylic acid, IPA etc.). The degree to which these reductions are showing up in ink raw materials varied greatly.
Natural gas and crude oil are the two bases which feed the refinery, gas separation and steam cracker processes. Propylene, benzene and ethylene are the downstream feedstocks that drive the raw material costs for inks and coatings.
Feedstock pricing became stable once crude oil pricing leveled out. The outlook appears to be stable throughout the second and most of the third quarter, barring any unforeseen issues that may occur.
While some raw material feedstock costs have decreased in North America, the same is not uniformly true for Europe and other geographies. Both production volumes (increased U.S. crude oil output) and currency valuation (i.e. Euro vs. USD) have impacted raw material costs differently.
Dr. Martin Kanert
Executive Manager
EuPIA
Crucial raw materials for printing inks have become more expensive for European-based ink manufacturers due to currency exchange effects. The reduction in purchasing power of the Euro is the critical driver behind the increased costs of almost all raw materials, with the U.S. Dollar, the global currency for trade, gaining more than 15% over the Euro in the last year.
The prevailing low price of crude oil can only compensate for part of these exchange rate losses. In fact, many ink formulations have only a limited direct relationship to oil, whereas increasingly higher prices are now being paid for other raw materials. Some of these, such as gum rosin and nitrocellulose, have increased significantly in USD terms over the past 12 months. In EUR-terms the impact is even more dramatic, leading to higher cost for vegetable oils as well.
The latest drop in crude oil prices has no significant impact on pigment production either. One might suppose that the oil price would influence the price of primary raw materials used in pigment manufacture. However, the direct crude oil cost component in pigments is relatively low, with speciality chemicals, environmental costs, increasing labor costs in China and India and unfavorable currency exchange rates as key cost drivers. Furthermore, the market for titanium dioxide is becoming smaller as suppliers consolidate and take out capacity.
Therefore, in the context of persistent upward trends of the majority of their costs, compensation for this squeeze on margins is becoming increasingly difficult for the European ink manufacturers.
Presently, crude oil is trading at approximately $60 per barrel. In July 2008, it hit its peak at more than $145 per barrel.
Ink World discussed the issue of crude oil costs and their relationship to ink making with ink industry leaders. Here are their thoughts as to the relationship between crude oil costs and ink prices.
Jan Paul van der Velde
SVP, Procurement, Sustainability, Regulatory and IT
Flint Group
From a global perspective, all other things equal, indeed crude oil prices have an effect on the costs of ink, predominantly in publication inks. The major challenge, however, is in the first words: “all other things equal.” Nothing at the moment is “equal” and or “normal.” First of all, currencies have moved quite significantly, specifically the Euro/AUD/BRL and many others against the USD. Further, the CNY continues to be strong and costs of environment in China continue to increase.
There is a major negative impact related to the lower crude price, and that is the shale oil/gas revolution in the U.S. We have been warning for years about the negative impact increased use of U.S. shale oil and gas will have on the industry. Many key oil derivatives, like DCPD, C5 and C9, will become less available (they are only available from heavy liquid – or naphta – crude cracking). This negative scenario is now fully coming through. In the U.S., 70% of the refineries have moved from liquid to (shale) gas optimizing ethylene delivery, which limits the supply of the crude fractions the ink industry need. Prices are increasing, despite the reduced crude oil costs. This impact is felt across the world. For example, in Europe, the largest refinery (Shell) will close down. This has a major negative impact on the hydrocarbon resin costs, as the entire world is now depending on Asian supply with demand exceeding the installed capacity.
In short, for the U.S., where the negative currency impact overall is less, we see negative impact from rising pigment prices, rising hydrocarbon pricing, offsetting the positive impact from crude oil.
In the rest of the world, costs are increasing fast. The positive impact from crude costs is more than offset by the currency impacts, the rising costs of pigments and the hydrocarbon costs. Due to the USD, also the phenolic resins (gum rosin- and tall oil-based) are again increasing fast as they are traded in CNY and USDs. The cost increases are quite extreme and customers should expect that the market will have to respond to this situation. EuPIA already sent out a general statement to inform customers of this effect.
For packaging inks, crude anyway has limited impact, but certainly for those packaging inks that use chemicals from China, also expect some more mild inflation. Specifically, UV materials are moving up, as well as a number of pigments, including TiO2 for the whites.
Edward Pruitt
Chief Procurement Officer
Sun Chemical
For the ink industry, crude oil itself is only an input into some of the raw materials that we buy. In fact, when you look across the many types of raw materials that are purchased in our industry, oil values only drive a minor share of our overall costs. Regarding the cost trend of oil, due to the normal lags in contractual pricing we have only very recently seen the impact of lower costs for those oil-related materials.
There is currently a supply bubble for crude oil that I believe will be only temporary. This supply bubble is largely a result of increased production out of North America against a background of fairly tepid global demand. If you look back at crude oil from 2004 until the summer of last year, you will see that prices more than doubled during that period of time, while global demand only grew around 1% a year. The reason for the surge in pricing was the growing costs for discovering and developing new sources of oil. This strongly suggests to us that if demand recovers a bit, or current supply is curtailed, the supply bubble will pop and we will quickly see a return to pricing above $70 a barrel.
Petrochemicals are the raw materials for many of the solvents, resins and intermediates that the ink industry buys. In North America, where natural gas liquids are the typical feedstock for petrochemicals, the development of natural gas from shale deposits should ultimately result in an important cost advantage compared to producing regions that depend upon naphtha, an oil-derived feedstock, to run their petrochemical crackers. Olefinic and aromatic petrochemicals have moderated recently in cost, but price levels had notably risen over the last five years.
Each petrochemical has its own unique supply and demand dynamics, which means that their pricing levels often move in directions completely independent of what the general oil or natural gas markets are doing.
Over the last 10 years, around 70% of the time ink producers have had to deal with rising oil and raw materials values. Today we are still typically at raw material price levels that are notably higher than in the past. Today’s moderation in oil prices is only a partial and temporary reprieve from many years of pressure on the ink industry’s cost base.
Another area of growing importance is the dramatic slide in the value of the Euro. One year ago the Euro was as high as $1.39 versus the dollar. In 2015 the Euro has been as low as $1.05, a 23% decrease. Because many commodities like oil, pigments and intermediates are denominated in US dollars, the fall in the Euro’s value has effectively resulted in a sharp increase in costs for the European ink industry.
Ken Klug
Director of Purchasing
Wikoff Color
Declining crude cost will result in price relief for a limited group of ink raw materials. Price relief will depend on the geographic location of the ink manufacturing plant and the amount of crude bi-product in a formula. Not all inks are crude-based and some of the chemistries will see more relief than others. All the major feedstocks (propylene, ethylene and benzene) have seen some price reductions as well as their downstream materials (styrene, acrylic acid, IPA etc.). The degree to which these reductions are showing up in ink raw materials varied greatly.
Natural gas and crude oil are the two bases which feed the refinery, gas separation and steam cracker processes. Propylene, benzene and ethylene are the downstream feedstocks that drive the raw material costs for inks and coatings.
Feedstock pricing became stable once crude oil pricing leveled out. The outlook appears to be stable throughout the second and most of the third quarter, barring any unforeseen issues that may occur.
While some raw material feedstock costs have decreased in North America, the same is not uniformly true for Europe and other geographies. Both production volumes (increased U.S. crude oil output) and currency valuation (i.e. Euro vs. USD) have impacted raw material costs differently.
Dr. Martin Kanert
Executive Manager
EuPIA
Crucial raw materials for printing inks have become more expensive for European-based ink manufacturers due to currency exchange effects. The reduction in purchasing power of the Euro is the critical driver behind the increased costs of almost all raw materials, with the U.S. Dollar, the global currency for trade, gaining more than 15% over the Euro in the last year.
The prevailing low price of crude oil can only compensate for part of these exchange rate losses. In fact, many ink formulations have only a limited direct relationship to oil, whereas increasingly higher prices are now being paid for other raw materials. Some of these, such as gum rosin and nitrocellulose, have increased significantly in USD terms over the past 12 months. In EUR-terms the impact is even more dramatic, leading to higher cost for vegetable oils as well.
The latest drop in crude oil prices has no significant impact on pigment production either. One might suppose that the oil price would influence the price of primary raw materials used in pigment manufacture. However, the direct crude oil cost component in pigments is relatively low, with speciality chemicals, environmental costs, increasing labor costs in China and India and unfavorable currency exchange rates as key cost drivers. Furthermore, the market for titanium dioxide is becoming smaller as suppliers consolidate and take out capacity.
Therefore, in the context of persistent upward trends of the majority of their costs, compensation for this squeeze on margins is becoming increasingly difficult for the European ink manufacturers.