For ink manufacturers, continued volatility in crude oil prices and supply concerns remain serious challenges.
In terms of raw material pricing, the past few years have been brutal for the printing ink industry. Led by the dramatic surge of crude oil prices, a critical ingredient for key feedstocks as well as waxes, resins and other ingredients, raw material costs for inks skyrocketed. Pent-up prices also played a role, as companies long stymied by pressure from ink manufacturers to keep costs down finally pushed through increases.
The elimination of the VAT as well as some shutdowns in the Chinese pigment industry compouned the ink industry’s supply problems. In adddition, some key raw materials – notably naphthenic oil and acrylic acid – are in demand from much larger industries, such as tires and diapers, respectively.
The global recession has led to a decrease in demand for products, leaving inventories of higher-priced materials in its wake. Consolidation is also playing a part in pricing, as some key manufacturers have left the ink field.
Today, crude oil prices have declined sharply, although no one really knows what to expect next. This leaves ink companies with the challenge of formulating their own prices and planning for an uncertain future.
Raw Material Pricing
When discussing overall raw material costs, one has to start at crude oil prices. In July 2008, the price of crude oil topped out at $145 per barrel. Today, prices have fallen below $75 per barrel.
The questions are how has the decline in the cost of crude oil impacted raw material pricing, and whether ink manufacturers seeing any retreat in prices from their suppliers.
“Although crude oil prices have lowered significantly since last year’s peak in July, the pace of reductions in our raw materials has been significantly impacted by the high levels of older and more costly feedstocks and raw materials in our suppliers’ systems,” said Ed Pruitt, chief procurement officer, Sun Chemical. “The rapid decline in demand starting in the fourth quarter of last year eclipsed many of our pigments, intermediates and resin suppliers’ abilities to respond. True year over year improvement in average prices will not be achieved until all of these inventory effects completely work their way through the supply chain.”
Mr. Pruitt noted that Sun Chemical continues to work on controlling its own costs closely with its supply chain partners, to improve internal operations and to develop new value-oriented products that can help customers grow their business.
“We will continue to invest in those areas that provide our customers with innovative products and services, allowing them to be more competitive and present the best value propositions in the market,” Mr. Pruitt noted.
“Pricing for most of our raw materials peaked around September/October of 2008, about two to three months after the price of crude oil peaked,” said Ben Price, director of purchasing at Wikoff Color. “There was an even longer lag between the subsequent decline in crude oil prices and our raw material price relief. The lag was reportedly a result of demand coming to a screeching halt, leaving many of our suppliers with excessive amounts of higher cost inventory on their floors.”
Mr. Price added that Wikoff Color has recently experienced price relief across a wide range of raw materials, and expects that relief to continue in many areas.
“During the first three quarters of 2008, we experienced dramatic price increases in raw materials,” said George Sickinger, president and CEO of Color Resolutions International (CRI). “However, in September, with the price of oil dropping, prices stabilized. In November we set up meetings with all current and new vendors to meet with us to discuss how to reduce our cost of materials and offer savings opportunities.”
“Until the first quarter of 2009, raw material prices had been declining,” said Yu Adachi, corporate communications for Toyo Ink Mfg. Co., Ltd. “Recently, however, prices have started to rise again gradually. As part of Toyo’s SCM program, we’ve consistently evaluated suppliers not only from a pricing standpoint, but also by the quality of materials offered.”
Volatility in The Marketplace
As a result of unstable oil prices, raw material costs have been volatile. For example, Mr. Adachi pointed to various solvents and olefin compounds as being most volatile in terms of pricing and supply.
“Despite a recent respite in the pace of volatility, there are a number of areas of concern,” Mr. Pruitt said. “First, oil industry experts would say that the crude market will continue to be highly volatile, with an expectation that prices will eventually return to the very high levels of recent years due to the inability of new production to offset the gradual depletion of existing supply and the growth of demand in developing nations. Secondly, the petrochemicals market has risen sharply recently due to actions taken by producers to shut down high cost production. Third, there are individual products today in a variety of categories including pigments, base chemicals and resins that are still at very high levels and are not expected to decline to 2008 average price levels.
“As a general rule, raw materials suppliers are actively shuttering plants, rationalizing product lines and taking the steps that companies must take in extraordinarily difficult times, but steps that could lead to interruptions or tightening supply despite the overall weakness of the global markets,” Mr. Pruitt added.
“Almost all raw materials for printing inks have been volatile over the last 12 months, but in general, pricing of raw materials that are most closely linked to crude oil have been the most volatile,” Mr. Price noted. “Examples include many of our solvents, energy cure raw materials and carbon black. “On the other hand, we have also seen significant price swings in some raw material areas that are not directly linked to crude oil,” Mr. Price added. “In most of these situations, the pricing volatility we have experienced is more the result of changes in supply and demand than changes in feedstock costs.”
Mr. Sickinger noted that for the most part, pricing has stabilized.
“We have experienced little volatility in pricing and supply this year,” he said. “We are seeing price increases in plastic, polypropylene, butadiene and some acrylic resin products.”
Supply has also been an issue, as some firms are closing plants or shutting down altogether in order to better weather the economic storm.
“The biggest concern we have during this economic downturn is that some suppliers will not survive and others may choose to exit unprofitable businesses that have an impact on ink makers,” Mr. Price said. “In either scenario, the result is fewer choices for the buyer and upward pressure on pricing. Another concern is that if demand picks up sooner than expected, some suppliers will not be prepared to meet it. In an effort to cut costs, many of our suppliers have had to lay off employees and close production facilities. If we experience a sudden spike in demand in markets these suppliers serve, raw material shortages are likely.”
“To date, we have not had any major issues with supply,” said John Edelbrock, vice president of operations for CRI. “Improved forecasting has become a key component to supply. We are seeing suppliers reducing inventories and some asking for more lead time.”
“Our supply concerns are largely focused on three areas of risk,” Mr. Pruitt said. “The first area is the financial health of some of our supply base, whose operations have seen dramatic reductions in both demand and profitability. The second area is actions by upstream producers of feedstocks to temporarily or permanently close operations may have the unintended consequence of creating a shortage in downstream intermediates, resins or functional chemicals. Finally, reductions in inventories and hours of operations by our suppliers in response to the economic crisis may leave the supply chain too taut to respond to a favorable upturn in demand.”
According to Mr. Pruitt, Sun Chemical’s response to these risks is to tap its strong sources of market intelligence and to work closely with supplier partners to “fully understand the risks in our supply chain and to develop the appropriate contingencies and actions to assure supply continuity.”
Consolidation Among Suppliers
Consolidation has changed the face of the business world, and the ink industry suply chain is no exception. In the past 12 months, major acquisitions have occurred, most notably Dow Chemical acquiring Rohm & Haas and BASF taking over Ciba. In the case of Rohm & Haas, the company divested its graphic arts resin business to Hydrite Chemical.
“Supplier consolidation has not had a significant effect on our raw material supply,” Mr. Price said. “What has been more significant is suppliers electing to exit certain markets. This is particularly noticeable in the resin area where Rohm & Haas, Dow and Hexion have all discontinued the production of some product lines.”
“One major resin manufacturer has left the market and sold the rights to manufacture the majority of their resin products,” Mr. Edelbrock said. “We have worked through those changes. Another resin manufacturer is adding capacity, which will offer more supply stability.”
“Due to consolidation and production optimization among suppliers, it has become increasingly more difficult for manufacturers to buy materials in small lots or customized,” Mr. Adachi reported. “At Toyo, we’ve had to standardize or decrease the number of raw materials used in our products, leveraging higher volumes to reduce prices. We’ve also worked to find new supply sources.”
Expectations for The Coming Year
The important question, then, is what is in store of the next year. The answer is that no one really knows, as oil prices and further consolidation may inpact markets further.
“There are many indications that the economy is starting to improve, but most agree that this will be a slow process,” Mr. Price said. “There may be suppliers who attempt to increase prices, but unless demand in our industry picks up, prices will remain relatively stable or decrease further in most raw material areas. Of course, this could all change if we see another drastic increase in crude oil pricing. It would not be surprising to see a reduction in suppliers resulting from consolidation, exiting markets or going out of business.”
“We expect raw material prices to continue to rise over the next year,” Mr. Adachi said. “Toyo will undertake further initiatives to strengthen our supply chain.”
“We have seen material prices decrease an average of 6 percent the first two quarters of 2009,” Mr. Sickinger said. “Economic activity in the manufacturing sector failed to grow in June for the 17th consecutive month. Aggressive inventory reduction continues and indications are that we are near the end of de-stocking. I believe real demand has reappeared according to an increase in July customer orders. I would expect raw material prices to stay relatively flat with some price increases due to suspected oil increases later in 2009.”
“Sun Chemical expects to continue seeing a gradual reversal of many of the cost impacts from 2008,” Mr. Pruitt said. “First, we’ll see cost reductions in the most directly oil sensitive raw materials followed by the gradual unwinding of prices for raw materials further down the value chain. High inventory levels and long supply chains also contribute to the pace of change.”