Ink Industry Hopeful, Despite Adversities
INK IS THE colorful part of the package-printing process. Metallics, phosphorescents, pearlescents, fluorescents—ink is often the most eye-catching component of packaging. That may be why, even in the face of rising production and product prices, the ink industry saw growth in 2005.
For the last two years, ink manufacturers have had to boost the price of their products between 5-15 percent, with some offerings soaring as much as 30 percent. While some of the price hikes appear to be exorbitant, it's what ink companies have had to do to sustain margins and survive.
At the root of this problem is the escalating cost of raw materials used to make inks. In the recent past, ink manufacturers were able to absorb the price increases. However, today, ink makers aren't so lucky.
The bad news
The price of petroleum, natural gas, and acrylic acid—three ingredients that make up many feedstocks used in the production of inks—continues to rise and Mother Nature isn't helping. Oil and natural gas prices were upward bound before hurricanes Katrina and Rita rocked the Gulf of Mexico and shut down production facilities this past summer. Since then, prices have been further affected by lost production.
As of Dec. 29, 2005, almost 20 percent of the yearly production of oil (approximately 547.5 million barrels) and more than 15 percent of the yearly production of gas (approximately 3.65 Tcf—trillion cubic feet) in the Gulf was shut-in, according to the Mineral Management Service, an agency of the U.S. Department of the Interior.
Making matters worse is the soaring cost of acrylic acid. The chemical is used in the making of acrylic resins, solutions, and emulsions for water-based acrylic inks, and is also a component used by makers of energy-curable monomers and oligomers. Back in 2003, the problem with acrylic acid wasn't price but a shortage, which forced some distributors into allotments and force majeures. However, according to Don Duncan, director of research, Wikoff Color Corp., "the acrylic acid shortage was largely an non-issue by the end of the first quarter of 2005. While there was plenty of anxiety, yelling, and screaming, the 'shortage' was primarily just a substantial price increase. There was plenty if you anted up."
Corey Soeldner, purchasing director, Sun Chemical North American Inks, echoed that thought, adding that the cost of other materials have also hurt ink manufacturers' pocketbooks. He said, "Although the market for acrylic acid has been fairly tight, there is no shortage as the market saw in 2004-2005. Acrylic acid prices increased over 100 percent since January 2004 … (and furthermore) in the last year there have been double-digit price increases on resins that are used to manufacture printing inks. Even though acrylic acid availability is improving, there is still pressure being exerted from elevated propylene prices. Propylene reached unprecedented highs at the end of 2005 as a result of curtailed refinery capacity from the hurricanes."
This summer's hurricanes also hurt the availability of titanium dioxide, another ink raw material, Soeldner said. One Louisiana-based manufacturer of titanium dioxide, a company that produces about 7 percent of the chemical's global supply, remains shut down because of hurricane damage. "The plant manufactures primarily chloride grades for the paint industry, but this is forcing some customers to convert over to sulphate grades typically used in inks," Soeldner said. "This exerts additional pressure on the ink grades, where the market is already snug and capacity has been eliminated."
Add to this alarming equation the overall rising costs of energy, transportation, and employee health care, and it's plain to see why ink manufacturers have had to raise the price of their products.
"No business can absorb the type of cost increases we've seen in 2005 without adjusting its prices," said Richard Pettifor, president, Sun Chemical North American Packaging Inks. "This year's spiraling costs have placed enormous pressure on margins. Sun Chemical has worked hard to control costs and improve its efficiency so we could continue to offer outstanding value, but this could not be sustained without price increases."
Higher product prices have helped soften the blow of ink makers' climbing expenditures, but because companies are trying to limit the financial burden they transfer to customers, price increases aren't enough to stop the bleeding.
"We implemented a minor increase in selling prices earlier this year, and are just now passing along another increase," said Ed Dedman, business development manager of Siegwerk Inks Packaging's Paper, Plastic & Label Business Unit. "Even with those increases, our margins have suffered."
Ink makers have applied different strategies to help ease the issue of shrinking margins, like introducing waste-saving manufacturing procedures such as UVitec Printing Ink. With the company's 5 percent price increase across its entire product line in January 2005, this additional tactic has helped recoup some of the loss, according to Bob Waddington, marketing director, UVitec.
Ink companies also aren't foregoing new product launches. They are working on new and improved products, many of which will offer increased capabilities and are made possible, ironically enough, by the very raw materials that are raising prices.
"Certainly the raw material situation will have an impact on the market, from two perspectives—increased cost for existing materials and increased performance for new materials that should help compensate for those increased costs," Dedman said.
The good news
Despite the startling outlook, the packaging ink industry has reasons to be optimistic. According to Jim Coleman, executive director of the North American Printing Ink Manufacturers (NAPIM), while packaging ink volume decreased in 2004 vs. 2003 by more than 2 percent, there was a rebound in the first three-quarters of 2005. "The 1.7 percent nine-month sales volume gain in 2005 vs. 2004 speaks to growth, which is returning to 2003 levels," Coleman said.
While this doesn't reflect the costs issue, it says that printers are buying more ink—regardless of price. Specifically, the increasing use of combination printing on narrow-web label presses has spurred growth in screen, flexo, and offset inks over the last year, Waddington said. NAPIM, based on a survey of the first three-quarters of 2005, reported that both gravure and flexo solvent inks saw volume growth greater than 5 percent, indicating that the flexible packaging sector was expanding, Coleman said.
On the other hand, letterpress inks saw decreased sales. "Letterpress was the ink to use when a label printer needed to make a high-quality label," Waddington said. "Now, flexo equipment meets or exceeds letterpress with faster speeds and quicker changeovers." Offset and water flexo packaging inks also demonstrated declines, according to NAPIM. "The offset reflects either folding carton or label work, while the water flexo is probably corrugated," Coleman explained.
Overall, however, a glimmer of hope for better times in the ink industry stems from a recent upswing. "The whole printing industry in the United States has been in a state of flux over the last couple of years with only a few segments experiencing growth," Waddington said. "The ink market is a reflection of this. (But) in the last quarter of [2005], we have noticed some signs of growth and expansion."
The condition of the ink industry is related to the packaging industry's prospects and performance. There are downsides and upsides to this. Brand owners are always requiring more from their printers—shorter lead times, faster turnarounds, higher quality, more effective packaging. With increasing demands has come a variety of new equipment from industry suppliers with new presses, finishing systems, substrates, consumables, and more. The new equipment is enhanced more by new and improved inks that further augment the effectiveness of a printer's equipment and the brand owner's finished package.
"Inks play a key role in many of the new technology developments that are emerging in the packaging industry," Pettifor said. "Sun Chemical is offering new products in RFID, color management, and product security. These developments are being pushed by brand owners who want to increase and protect their brand equity. New developments in prepress separating and screening are being combined with new plate technology and ink innovations to produce an expanded color gamut that adds to printers' capabilities and efficiency. All of these are positive developments for the ink industry."
Further motivation for new inks are new technologies. The emergence of radio frequency identification (RFID) and security technologies as newer sources of revenue for printers calls for innovation on the part of ink makers. "These new technologies, as in years past, always push us, as ink suppliers, to constantly work to develop better products, new technologies, all at a controllable cost," Dedman said.
Tomorrow's outlook
"Commoditization" and consolidation are two of the biggest challenges the ink industry will have to face in the coming years. Fending off commoditization will not be an easy feat, but making the development of customer relations and value-added products a main directive will help ink makers cope. "Adding value to a customer is typcially done by exchanging knowledge and experience to help solve problems and improve processes," said Bryce Kristo, chief financial officer and senior vice president General Affairs, INX International Ink Co. "INX actively opens its resources to our customer base. Easy access to the right mix of people adds the greatest value."
With consolidation, one problem working against ink makers is that the rising cost of feedstocks will only further shrink the industry. "Because the other product streams that flow from a barrel of oil can garner a higher price, the competitive pressure will remain strong on that small portion that finds its way into printing inks," Coleman said. "With profit margins already well below acceptable levels, the only viable strategy is to recover those cost increases. Continual erosion of profit margins will jeopardize the existence of some companies and fuel the consolidation within the industry."
Still, between new technologies and new markets, the ink industry has good prospects for 2006. These prospects will come, however, with a fair-share of trials that make predicting the future state of the ink industry a rocky subject. "The next five years?," Waddington said. "Let's get through 2006 and see! I honestly can't say. The industry is totally different today than it was just five years ago. Time will tell."
by Kate Sharon
Managing Editor
