The European Ink Report
The slowing European economy and higher raw material prices are serious concerns for ink manufacturers in 2012.
By Sean Milmo, European Editor
Ink producers and the rest of the European printing sector are facing a year in which the 17-nation euro zone and parts of the rest of the region will fall into a double-dip recession, only a few years after the sharp economic downturn following the 2008 financial crisis.
In addition to dealing with a new period of stagnation in demand, ink makers are also having to wrestle with a persistent rises in raw material costs, which is undermining sales margins and profitability. This is at a time when packaging appears to be the only major printing sector with prospects for growth, while commercial printing is static and publishing declining in key sectors like newspapers and magazines.
The gloomy outlook early in 2012 contrasted with the economic prospects a year ago, when there was a surge in demand and manufacturing output in the first quarter of 2011 in the expectation that the apparent recovery of the European economy would strengthen.
The chemicals industry was so optimistic that purchases by its downstream customers such as inks, coatings and packaging would remain buoyant, that at the beginning of the year its trade association, the European Chemical Industry Council (Cefic), was forecasting a 4.5% increase in chemicals output in 2011.
But by September, Cefic had reduced its predicted increase to 2.5%, with much of the rise taking place in the first half of the year. The actual rise in chemical output in 2011 has turned out to be only slightly above 1%.
Fears of a collapse of the euro triggered by the excessive national debts of several of its member countries have caused a slump in business confidence and a slowdown in growth of GDP across Europe.
As economic conditions worsened, the European Commission, the Brussels-based executive branch of the 27-member European Union, estimated late last year average GDP growth in 2011 of 1%, while predicting 0.5% growth in 2012.
Capacity utilization in the European printing sector dropped to a level well below the long-term average. Only 0.5% of UK printers were working at full capacity in the last quarter of 2011, according to an outlook survey just published by the British Printing Industries Federation (BPIF).
In November Manroland AG, the large German web and sheetfed offset press manufacturer, founded in 1844, which had been reported to have been in financial difficulties for several months, announced its was filing for bankruptcy. It was Germany’s biggest insolvency for two years.
The company blamed the bankruptcy petition on a “dramatic downturn in incoming orders” that began in the summer. Manroland’s two main shareholders Allianz SE, an insurance company, and MAN, a truck manufacturer which was its former parent, were not willing to provide any more financial support while the Swiss private equity firm Capvis pulled out of a potential takeover because of the state of Manroland’s finaces.
Nonetheless, doubts about the future of the company’s two main operations were soon lifted. In early February, L. Possehl & Co., a German manufacturing conglomerate, revealed it was acquiring the web offset business.
Soon afterwards, Langley Holdings plc, a UK privately-owned engineering group, emerged as the investor behind the 100-percent takeover of the sheetfed equipment business.
The takeovers were a vote of confidence in the future of conventional printing equipment manufacture. “We foresee very good economic prospects for Manroland sheetfed,” said Tony Langley, owner of Langley Holdings. “This is a world-class business with an excellent reputation and its production and research and development facilities are superb.”
Even before the rescue, Koenig & Bauer (KBA), one of Manroland’s main competitors, complained that its demise would do little to deal with overcapacity in the industry.
Heidelberg, the market leader in sheetfed press manufacturing, which has a heavy debt burden, could face fierce price competition from the financially strong Langley Holdings.
In the first nine months of its financial year to the end of December, Heidelberg also suffered a fall in orders for its presses in Europe. “The economic uncertainty and the resultant reluctance to invest have impacted (our) business as expected,” said Bernhard Scheier, Heidelberg’s chief executive, early in February this year.
The European Commission decided in February to downgrade its forecasts further. GDP growth in the EU as a whole would be zero this year and minus 0.3% in the euro area, it predicted. But it did offer hope of a slow revival in growth later in the year.
However, variations in growth rates were expected across Europe, with weak performances not just being confined to the fragile economies of southern Europe. Instead there would be downturns in the economically stronger northern European countries and in Eastern European, where growth has generally been robust over the last several years.
In the autumn, the European Commission was forecasting negative annual GDP growth in Greece and Portugal, both of which were grappling with huge national debts. But by February, it was predicting recessions in Spain, Italy and Cyprus in southern Europe, in Belgium and the Netherlands in the north, and in Slovenia and Hungary in eastern Europe.
On the other hand, the highest growth rates are expected to continue to be in Eastern European countries, with the only countries projected to grow more than 2% this year – Poland, Latvia and Lithuania – being in the east of the EU.
GDP in Germany – Europe’s biggest economy and biggest printing and ink market – is expected to rise by only 0.6% compared with around 3% in 2011, according to the European Commission. The region’s two other large economies and ink markets – France and the UK – are predicted to register GDP growth of 0.4% and 0.6% respectively in 2012, against 1.7% and 0.9% in 2011.
Nonetheless, print analysts believe that GDP is no longer the only indicator of existing and future trends in demand in the sector.
“Printing turnover is not so closely linked to GDP as it used to be,” said one printing sector forecaster. “Consumer expenditure and private consumption are also important because so much of printing demand is influenced by what is happening in various retail sectors.”
In fact, current private consumption data in Europe looks even more gloomy than that for GDP. Figures from the European Commission show average private consumption levels being lower than GDP, with retail sales volumes falling last year while GDP was marginally increasing.
People have been curbing their expenditure because of a squeeze on disposable incomes stemming from higher unemployment and increasing inflation driven by higher food and energy prices. Even in Germany, one of Europe’s healthiest economies, there was a fall in disposable income in 2011.
Private consumption, however, does not necessarily reflect what is happening with advertising and marketing expenditure which are key factors behind publishing sales. Marketing spend can also have an influence on packaging sales because of the tendency among brand owners to use packaging as a marketing tool.
In some sectors, advertising and marketing expenditures are being boosted by a strategy among consumer product companies to increase or at least maintain their promotional budgets because economic downturns can provide opportunities for gaining market share.
In addition, special sporting events this year in Europe, in particular the London Olympics and the Euro 2012 national soccer tournament held this time in Poland and Ukraine, could spark a lot of promotional activity.
Mainly because of the two big sporting occasions, Western Europe advertising expenditure will grow by 2% this year, well ahead of GDP levels, according to forecasts by ZenithOptimedia, a London-based media agency.
But it warns that in the event of a debt default by two eurozone countries, such as Greece and Portugal, coupled with a deeper recession in the eurozone and the rest of Western Europe, advertising spending would tumble by 4%.
Any rise in advertising expenditure would not necessarily benefit the European print media because the growing proportion of it which is continuing to go onto the internet in the form of display and classified ads, online video or social media.
The Internet accounts for more than 25% of total ad spending in the UK, Denmark, Norway and Sweden, which, with the exception of Denmark, will have risen to more than 30% by 2014, according to Zenith Optimedia..
The agency expects ad expenditure in both newspapers and magazines will continue to shrink through to at least 2014, with that in newspapers contracting at a faster rate, although this will differ between countries.
While there will continue to be national variations in demand for advertising and other print media, differences in lending rates has become evident across Europe. Because of disparities in the availability of credit, printers in some countries are able to invest more easily than those in other countries in new printing equipment. This leads to a divergence in demand for new or improved inks for new presses or in the introduction of additional printing processes like inkjet.
Increases in lending and credit facilities slowed down generally across the EU in the second half of last year but the rate of deceleration varied.
In the UK and Ireland bank lending went down by around 10%, and in Spain and Portugal, by 2-3%. But in Germany, it rose by around 2.5%, in France and the Netherlands by around 5% and in Finland by close to 8%.
In addition to having worries about flat or declining demand, ink producers in Europe continue to have major concerns about rising raw materials costs.
Since the aftermath of the 2008 financial crisis, which resulted in raw material shortages due to commodity chemical companies quickly closing plants, availability and costs of raw materials have been a constant anxiety for ink makers in Europe.
Costs increases have been easing over the last six months, but analysts are warning that scarcities and volatile prices will persist throughout the year. This will particularly be the case if Iran’s nuclear ambitions trigger a Middle East crisis, which causes sharp hikes in crude oil prices.
Since the beginning of the year, oil prices have been increasing steadily, with North Sea Brent oil reaching more than $120 per barrel by mid-February. Traders predicted that in the event of an international eruption over Iran, oil prices would soar above $150 per barrel, higher than what they reached in the second half of 2008.
In its latest analysis of raw material costs, issued to customers in Europe last year, Flint Group said that by the end of 2011, it expected its current raw material costs as a whole to be double the peak of 2008. Although the worse of the increases had passed, the outlook until the end of this year was still be upwards, according to Jan Paul van der Velde, Flint Group’s senior vice president and executive management team member.
Raw material costs have been going up not just in mineral oil-based petrochemical derivatives like solvents, hydrocarbon resins and organic pigments, including carbon black. The prices of inorganics, especially titanium dioxide, vegetable oils and gum rosin, were also continuing to go up.
Flint Group believes that in addition to crude oil prices, China is having a considerable impact on raw material costs, both as a user and supplier of chemicals and materials. It holds the key to many critical ink chemicals like certain base chemicals, pigments, gum rosin and an increasing number of specialties, such as additives for UV curing.
The country’s role as the world’s major supplier of classical pigments for inks is vulnerable to shortages of certain Chinese-produced intermediates, often caused by closures of plants following the implementation of environmental regulations at the local level.
Plant closures have also contributed to the rise in prices of blue pigments, of which India is the major producer. The costs of their two raw materials – copper and urea – have also been rising steeply, with prices of one being determined by the London Metal Exchange and the other by agricultural costs in India.
TiO2 prices have been going up the most sharply among major ink raw materials – over 50% in the past year as demand outstrips supplies. Despite being considered a specialty by TiO2 producers, ink TiO2 does not have attractive enough margins to be given preference over coatings companies by suppliers of the pigment. Instead, ink companies have tended to be pushed to the periphery of the market by their coatings counterparts.
Mr. van der Velde warned that with raw materials, the ink sector is “certainly not a favorite industry anymore to sell to” because other industries are willing to pay more for “the relatively low added-value raw materials we require.” Among these industries are the tire, adhesive, coatings, construction and oil exploration industries.
Raw material suppliers point out that they need to raise their prices to maintain margins in the face of their own rising raw material costs.
Even BASF, which is both a major supplier of raw materials for inks such as dispersions and a producer of inkjet inks, stresses the pressures it faces from rising raw material prices. Last year its chemicals division making base chemicals, petrochemicals and inorganics recorded a sales increase of 14% after volumes fell by 1%, but its prices went up by 14%.
“Our customers complain when we tell them we intend to put up prices,” Kurt Bock, BASF’s chairman, told the company’s annual press conference at Ludwigshafen, Germany, in February. “Oil prices have gone up dramatically compared with what they were in 2010. We have to adjust our own prices. We have no choice if we are to protect our own margins.”
Some analysts believe that at the moment the main determinant behind raw material prices is the necessity to preserve margins. This explains why resin prices have been going up in Europe although there is excess production capacity.
“The price of resins is not really determined by the supply/demand balance,” explains Robert Peels of Flostock, a demand forecasting consultancy at Eindhoven, Netherlands. “Resin prices are based on raw material prices, which form a substantial part of it, and on margin expectations to cover fixed costs.”
Raw material costs are likely to remain a big issue in the inks and other downstream sectors for the medium to long term. Currently, raw materials producers are not investing much in new capacity.
“Companies are hoarding cash,” noted Giorgio Squinzi, Cefic president. Because of increased business uncertainty they are reducing inventories and curbing output growth, he added.
With raw material producers giving greater priority to margins and cash reserves than to raising production, shortages are likely to remain a big challenge for ink makers.
“Security of supply has increased on the agenda of many (raw material) buyers, and is likely to stay there for a while,” said Mr. van der Velde. “This will have consequences on the ink industry as a whole.”
In fact, it could have an impact on the sector for many years because of the time it will take to return supply/demand balances to what they were before the 2008 crisis.
“Due to the long lead times for building installations, the new (post-2008) supply/demand imbalance introduced by first closing factories and then building new ones will be visible for a long time – 10 years at least, I expect,” said Mr. Peels.
Meanwhile leading ink producers in Europe have been persisting with a strategy of trying to offset higher raw material costs with rises in their selling prices. This was occurring in hard pressed segments like publishing but the biggest increases were mostly targeted at the faster growing and more resilient packaging sector.
Flint Group has announced a further 5% increase in prices of its packaging inks from Jan. 1 this year. The company said that the latest rises in raw material costs could not be fully absorbed by more efficiencies in its supply chain, manufacturing and formulations.
Siegwerk revealed last summer that the company found it no longer possible to offset growing costs with more production efficiencies, so it would have to pass on cost rises to its customers.
Late last year, the company announced that with immediate effect it would be raising by an average 6% the prices of its packaging inks after indications of further price hikes for some critical raw materials.
Siegwerk admitted that 2011 had been a “very difficult year so far because of dramatic margin pressure,” especially as a result of rises in costs of materials like TiO2, nitrocellulose and other resins like acrylics.
“TiO2 has increased between 50% and 60% during 2011, and the signs for 2012 are that this trend will continue,” said Hugo Noordhoek Hegt, the company’s president of packaging in Europe, Middle East and Africa (EMEA). “This kind of drastic increase cannot be fully compensated by internal efficiency measures anymore, so we will have to ask our customers to plan for further increases in their budgets for 2012.”
In mid-2011 Sun Chemical, the European market leader in printing inks, disclosed price increases for its publication inks, including a 6% increases in sheetfed conventional inks. At the same time, it put up prices for its packaging inks by 8-12%. In both sectors, prices of inks containing the scarce pigment Violet 23 were hiked by 20%.
Felipe Mellado, Sun Chemical’s chief marketing officer, blamed a rise in costs of a range of raw materials. “This unrelenting situation unfortunately necessitates continuous price reviews in order to ensure profitability and efficiency,” he said.
However, printers are signaling a growing reluctance to accept price increasses by their suppliers, mainly because they themselves are having great difficulties in pushing up their own selling prices.
In its latest survey of the outlook for printing in the UK, the BPIF found that few printing companies in the country were able to increase their prices. Many more were having to decrease their prices.
In the final months of last year, around a third of the companies wanted to increase their prices. Only 5% were actually able to do so. In fact, 28% had to cut prices in order to compete for business.
Over the next year, tensions over prices between ink producers and printers seem likely to rise as both struggle to maintain margins at a time of, at best, sluggish economic conditions.