Raw materials and the ink industry - More challenging times ahead
People in the ink industry might ask themselves, will normal years of steady Raw Material supply and stable costs ever return? We all remember the “perfect storm” in 2008 when raw material prices were increasing fast on the back of the crude oil price surge, followed by the world wide economic collapse in 2009. But now, once again there are many challenges facing the key ink raw materials.
“I’ve been in procurement in a number of different industries for over 25 years, but the current raw material challenges, on such a wide front, I have never experienced before” says Jan Paul van der Velde, Senior Vice President Procurement and Executive Management Team member of Flint Group. “While the challenges in 2008 were clearly related to pricing of crude oil, the current challenges have quite a differentiated background. There are two key contributors. The first is a combination of a significant de-stocking of most raw material supply chains following the economic collapse at the end of 2008, with the current mild reverse in the industry and increased demands causing major shortages. The second one is caused by ongoing base chemical cost increases since early 2009, which could be due to demand weakness earlier in the value chain not being passed through, but now, in a climate of economic revival suddenly they are coming through quite hard. A contributing factor is a number of “force majeure” situations and key base raw material suppliers moving away from the ink industry.”
In quarter 3 of 2008 the world economy came to a hard stop. Materials were expensive and most producers had issues in keeping up to date with their pricing. Most buyers decided to “at least” do something about the ever increasing prices by taking forward contract positions. In July 2008 the discussion was not “if” oil would hit $200, the question was “when?” And then demand came to an abrupt halt. All buyers were sitting on high stocks with high costs, while demand had dropped by double digit percentages compared to just a few weeks earlier. As a consequence, the entire chain started to de-stock and while this was a logical step, it caused major issues further back in the chain. Many key suppliers had to close down or had to take drastic actions to limit capacity.
“This reduced capacity created the shortages to serve the growing demand in print” continues Jan Paul, “as a consequence many materials are now in short supply. Furthermore, it has made the industry quite vulnerable to speculative actions. A stark example of this is what is currently going on with Gum Rosin. While the crop is perhaps slightly lower than usual, and indeed demand has increased somewhat over last year, there is significant stock early in the chain, which a few key traders are sitting on, thus shortening the market. They are making very good returns on their “investment”, but causing chaos for all Phenolic resin manufacturers and the ink industry. It even has major replacement cost effects in tall-based Phenolics.”
Gum Rosin, together with tall oil is widely used as a key ingredient for Phenolic Resins, crucial in the base of any ink. Gum Rosin is mainly supplied from China, with some other significant volumes coming from Brazil. Since August 2009 the FOB China price has almost tripled reaching trade levels close to $ 2,400. This is causing major price pressure for all print media ink producers.
“Gum Rosin is a physical market, and there is only so much stock you can take. Hence buyers need to continue buying, despite the extreme pricing. While Gum Rosin has seen price spikes in the past 25 years, with the exception of a very few cases, these have not hit pricing above $ 1,200, and normally these periods lasted just a few months. While the current price is not sustainable long-term, certainly not with a new crop coming-up, we have no idea how long traders can sit on their stocks and shorten the market. They certainly make a lot of cash from the artificially created shortage.”
Nick Brannan, VP Product Management, Print Media Europe, Flint Group adds “We are seeing a general increase in most key raw materials now, but Gum Rosin is of major significance. It may not be feasible for Flint Group to absorb all these additional costs, however to minimise the effect on our customers we would probably look to cover the short term increases with surcharges, in order to ensure transparency.”
Another example of reduced capacity creating shortages to serve the growing market demand in print is the situation with materials for packaging & narrow web inks derived from acrylic acid, like acrylates or acrylic resins. Acrylic acid is facing a global shortage, which started in North America after the production incidents at Dow and Arkema, but has now spread around the world. Shortages have hit China and recently BASF announced it will take out capacity for maintenance. Many suppliers have put in allocations to customers. Clearly prices for acrylates and acrylic resins are under upward pressure as a consequence, later also because the prices for styrene, which is used as co-monomer in styrene acrylic resins, are back at almost the record levels they were in 2008.
“While acrylic resins are a key raw material for water based inks - acrylates are the material more commonly found in UV inks and the issues described above are now causing significant challenges for water-based and UV based packaging and narrow web ink markets”, explains Jens Zimmermann, Director Global Marketing Flint Group Packaging & Narrow Web. He continues: “To further compound this problem - the situation with the major raw materials for solvent-based inks is also worrying as solvents have also recently started to come under significant price pressure.”
Jan Paul van der Velde explains: “This is related to demand and increasing crude costs. A number of solvents have been on allocation, for example vinyl has become very short after Dow decided to exit the business. The recent announcement of Wacker on a capacity extension will not immediately help, and Wacker has made it clear that they will ask a “market plus price” for their products.”
Finally, the economic recovery, specifically in Asia, where many of the base materials originate from is also causing significant supply chain challenges. This is particularly evident with the demand from China, where economic recovery is still racing ahead with growth in Q1 2010 of over 12%** resulting in many material shortages. Following on from the impending situation with solvents it is very clear that most pigment intermediates will also see increased pricing particularly blue and red while, materials like TiO2 and many other speciality chemicals will also follow the same trend. Key raw materials the ink industry relies on such as Benzene, Toluene, Ethylene and Propylene have already witnessed a double digit growth in the first quarter 2010.
“This increase was happening quite invisibly to the general public”, says Jan Paul van der Velde, he continued, “while in 2008 everybody understood the increases as these were linked directly with the crude pricing, since then all key chemicals have shown remarkable recovery over and above the more recent crude price rise. These base price increases, combined with a number of specific challenges on some key pigment intermediates in China and India, specifically with Bona-acid, 4B acid (both for Red Pigments) and Copper and Orthoxylene (both for Blue Pigments) are causing major cost challenges for pigments. Add to that the ongoing crude increases, hitting black ink through the increasing costs of carbon black as well as all mineral oils and hydrocarbon resins for all inks, and we can all understand that we are hitting a time of major price inflation.”
Nick Brannon commented “We are conscious that our customers are not having an easy time at the moment and many raw materials together with energy and transport will continue to rise.” While Jens Zimmermann concluded: “We at Flint Group are not exempt from this phenomenon, and even though our technical team is constantly searching for ways to mitigate these effects, we ourselves are incurring tremendous increases despite our ongoing cost containment programmes. We intend to continue closely monitoring the situation, keeping our customers fully informed of developments.”
*Source: Internal Flint Group data
** Source: Financial Times Monday 12th April
** Source: Mintec Ltd
17 May 2010
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