Access to raw materials by ink manufacturers in Africa remains a major challenge for companies operating in the market because nearly the entire demand is met through imports.
The impact of importation of ink making raw materials is closely tied to the efficiency of Africa’s supply logistics and the volatility of local currencies, which have dictated the performance of the ink industry in recent years and are also likely to influence outcomes of ink companies’ investments both in the short and medium term.
“The majority of raw materials required for ink manufacturing is imported from outside Africa,” said Pieter Jordaan – Flint Group VP and GM, Africa in an email response.
He said the reliance on raw material imports “provides unique challenges to the ink manufacturer as we have to consider the impact of the distance from the supply lines and volatility in currencies.”
Flint Group launched a joint venture with South Africa’s Continental Printing Inks and Eagle Ink Systems as part of its strategy to grow in emerging markets. The company said the JV combined two of the leading ink and coatings suppliers to the Packaging and Print Media markets in South Africa and the Sub-Saharan region “Distance from the suppliers increases the cost of transport and necessitates higher levels of stockholding,” Jordaan said.
To mitigate the likely raw material supply crisis just in case a shipping company or transport networks within a given market are disrupted, Jordaan said, “Stock levels must be sufficient to ensure continued supply. The recent suspension of services by one of the largest shipping lines, as it had to file for receivership, shows the importance of sufficient stocks,” said Jordaan.
Although he did not name the shipping line, South Korea’s biggest container shipping line, Hanjin Shipping Co., applied for court receivership on Aug. 30 after its financial backers withdrew their credit facilities at time when the company grappled with a $5.4 billion debt and a four-year period of not making any profit.
Hanjin had announced in 2014 it was expanding its service network in South Africa by participating in the existing SF1 (South Africa Express 1 Central) and SF2 (South Africa Express 2 South) services. They were at the time operated by a line of shipping carriers – including Evergreen Line, COSCO, Pacific International Lines, “K” LINE, and Mitsui O.S.K. Lines – covering South Africa, South East Asia and the Far East, according to Hanjin.
The company said up to 15 of 4,000 TEU to 4,500 TEU class vessels were ready to offer a transit time of 24 days and 28 days from Shanghai to Durban and from Kaohsiung to Cape Town.
South Africa ink manufacturers, who rely on raw material imports, including supplies from Asia, were excited by Hanjin’s declaration two years ago that “the introduction of this new service will contribute to satisfying various needs of their customers in South Africa.”
Apart from the raw material shipping challenges, Jordaan said currency volatility, which has been noted in many of the African markets and its trading partners, “creates high levels of uncertainty and can add substantial cost to the procurement process.”
In Nigeria, for example, the local currency, the naira, was devalued by as much as 36% in June when the country’s Central Bank approved a new policy allowing the currency’s exchange rate to be market driven. In South Africa, a major shift in raw material supply has been expected after China, its largest trading partner, devalued its currency. China’s slow growth has impacted several other African markets because of the declining demand for commodities in the Asian economic giant.
The International Monetary Fund says the recent drop of China’s imports after the country rebalanced its growth model had direct spillovers on some of its trading partners in Sub-Saharan Africa, where “metal and non-fuel commodity exporters may experience the largest negative impact.”
In its March 2016 Working Paper, “China’s Imports Slowdown: Spillovers, Spillins, and Spillbacks,” the IMF says “the impact on Sub-Saharan Africa would be also noticeable because of its small economic size and growing trade with China,” and singles out non-fuel and metal exporting countries of Mauritania, Zambia, Sierra Leone and Democratic Republic of Congo, where there is likely to be “the strongest negative spillovers in terms of the impact on their gross domestic product.”
Elsewhere, in Kenya, the currency has been under pressure for several months with a unit exchanging for $104, a rate that at one time last year hit $107, leading to a shortage of foreign currency to purchase raw materials for the manufacturing sector. The currency fluctuation was blamed on the country’s deficit, which stood at $6.1 billion by 2015. The volatility of currencies could mean expensive raw material imports.
The Impact of Crude Oil Prices
The 2008/09 financial crisis and high crude oil prices may have had a huge impact on the cost of raw materials for ink manufacturing and hence the cost of the final product. But circumstances may have changed over time, according to Jordaan. Crude oil prices may have dropped sharply to below $50/barrel, but the cost of raw materials for ink making may not have fallen in tandem.
Previously, Jan Paul van der Velde, Flint Group’s SVP procurement, sustainability, regulatory and IT, said in a presentation that although the raw material prices in 2008 “were clearly related to pricing of crude oil,” the low crude oil era of the post-2008/09 financial crisis were “quite a differentiated background.”
He said the increase in raw material costs despite the falling global oil prices could be linked to two contributing factors, the first being “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,” he said.
Other analysts say oil prices have little impact, if any, on the pricing of specialty chemicals used in the formulation of printing inks, and therefore a drop in crude prices may not be reflected along the ink industry’s value chain.
For example, Jordaan says the Flint Group has “seen a limited correlation between the crude oil price and the cost of our raw materials,” especially in the current pricing trends.
“Increase in environmental and labor costs has eroded much of the potential benefits emanating from the (current) lower crude oil price,” said Jordaan.
Earlier, in its Sustainability Report for 2015, Flint Group says it has heavily invested in environmentally responsible practices and deployed new technology that utilizes energy efficiently in addition to “optimizing current processes and implementing programs that focus on improvements in reducing our operational use of fossil fuels and electricity.”
The company said it is “implementing many projects and process improvements that have resulted in direct reduction of carbon dioxide equivalent emissions.”
Flint Group lists some of the energy saving initiatives and projects that have resulted in resource savings, including energy monitoring control systems work to manage consumption as well as peaks in demand, reducing overall electricity consumption.
Flint Group says it has invested in the upgrading of lighting and ballasts, upgrading equipment to higher efficiency units that consume less power, motion sensing lighting systems, boiler upgrades, installation of economizers that preheat water for steam generation, elimination of condensed air and steam leaks, production processing optimization, reducing per-unit energy consumption, and installation of transient voltage surge suppressors to stabilize voltage, which have produced “sustainable results.”
However, the strategy of ink manufacturing companies in Africa will mainly be driven by growth of printing companies, according to Jordaan.
“This is especially in the fast-moving consumer goods (FMCG) segments as many of these companies pursue opportunities to manufacture closer to the source as opposed to importing finished products,” he said, adding that “the current raw material situation will have a limited impact on this strategy.”
He said that global economic growth has slowed down over the recent past and Africa has also been affected by this, especially given the slowdown in demand for commodities.
“We have seen limited activity from raw material suppliers to invest in projects to manufacture in Africa, and we foresee that our procurement model will not change much for the short to medium term,” he said.