Link: The 2015 Raw Material Report via Ink World
By: Dave Savastano, Editor
Purchasing executives at ink companies have been finding procurement to be a challenge in recent years. Skyrocketing raw material prices, fluctuating supplies and consolidation have been just a few of the issues crossing their desk. While raw material prices have, for the most part, stabilized at a high level, uncertainty has made planning nearly impossible.
The stability of the costs and supply availability of most key ingredients during 2015 has come as a welcome relief for ink manufacturers.
“Putting currency factors aside for a moment, 2015 has been a favorable year for raw materials in terms of cost stability and supply performance,” said Ed Pruitt, chief procurement officer, Sun Chemical. “Raw materials prices have benefitted from the soft global economy and the continuation of the oversupplied oil market. Supply performance has reflected adequate supply/demand balances for most of the key raw material value chains.
“However, since many global commodities are priced based on the U.S. dollar, countries who have seen their currencies weaken over the last year have also experienced significant cost impacts for those globally priced feedstocks and raw materials,” Pruitt added. “The Euro zone is probably the most important region that has been impacted by the unfavorable currency movement.”
“The raw material supply and cost has been steady for the last year,” said George Varughese, VP of product development at Superior Printing Ink. “Declining oil prices and shrinking domestic print market are contributing factors for this situation.”
“The present state of raw materials is stable,” said John Copeland, president and COO for Toyo Ink America, LLC. “There are not availability issues for most materials.”
“The market has been fairly steady over the last three to six months,” said Marc Castillo, technical director for Braden Sutphin Ink. “We have seen the costs for oil-based ink vehicles and flushes holding at their mid-2014 prices.”
Ken Klug, director of purchasing for Wikoff Color, anticipates that the rest of 2015 will see further stability in terms of raw material costs, although he does see some potential for changes in key feedstocks.
“The direction of supplier inventory levels for feedstock materials could result in changes for early 2016,” said Klug. “Wikoff has been able to keep our raw material costs fairly stable; however, new and innovative materials that help improve the properties of our finished products drive increases but must be valued by our customers – otherwise a change is unjustified.”
Key Concerns for Ink Manufacturers
The concerns in recent years over raw materials can be broken down into two main areas: higher costs and short supply. Costs and supply concerns have mostly stabilized after a long period of volatility, giving ink purchasing executives an opportunity to catch their breath, but there remain ingredients that are an issue. Copeland pointed to intermediates for DPHA as a concern, as well as BASF’s decision to exit the dimer and polyamide resin business in North America.
“Availability of polyamide may become an issue,” Copeland said. “The announcement from BASF is a big concern.”
Changes in a previously stable situation can wreak havoc on ingredients. One example was the ethylene cracker outages throughout Europe, including Shell Chemicals’ steam cracker at Moerdijk, Netherlands, which knocked out more than 10% of capacity. Ink companies had to compensate for the higher costs.
“Over the recent period, most of the unfavorable raw material cost developments have been driven by specific operational issues,” Pruitt noted. “For example, ethylene cracker outages in Europe this year drove up the cost of solvents and other olefin derivatives. Pressure on environmental compliance in China has continued to affect the cost of producing some pigment intermediates and fine chemicals.”
Consolidation is another challenge. The titanium dioxide industry, as an example, saw Huntsman acquire Rockwood’s Sachtleben-brand TiO2 business in 2013, and merger activity in China, led by the May 2015 announcement of the merger between Henan Billions Chemicals Co. Ltd. and Sichuan Lomon Titanium Co. Ltd.
“Looking a little further out, we are concerned that the strategies of some raw materials suppliers to acquire their competition, or spin off existing operations, or exit certain product lines and markets will have a negative impact on future costs and availability,” Pruitt added. “There has been a number of these supply base rationalizations that have occurred over the last year in the titanium dioxide, resins and pigments marketplaces.”
Transportation is becoming more of a challenge for all manufacturers, and ink companies are being impacted. A truck driver shortage is becoming a concern as well. In 2014, the American Trucking Associations (ATA) estimated that the U.S. is short 30,000 truck drivers. Part of that is due to the turnover rates of more than 90%. This has led to changes in service.
“Over the past couple of years, freight companies have gone through a lot of changes in the services they are able to provide to us,” said John Hrdlick, COO for INX International Ink Co. “Our business has always been extremely service-oriented, requiring a lot of flexibility from our freight carriers. That flexibility involves late pickups and guaranteed next morning or next day delivery, as a significant portion of our orders have short lead times. Many customers have specific delivery windows as well which increases our challenges. Most of the additional freight costs INX incurs are absorbed by us to make sure our product arrives in a timely manner.”
Currency rates are also a concern. One huge change, particularly for European ink manufacturers, has been the decline of the euro as opposed to the dollar. As of Sept. 10, 2015, one euro was worth $1.122. Just one year earlier, on Sept. 10, 2014, one euro was worth $1.29.
“The majority of global commodities are priced based on the U.S. dollar, which means that countries that have seen their currencies weaken against the dollar over the last year have experienced significant cost impacts for globally priced feedstocks and raw materials,” Pruitt said.
Crude Oil Prices
Crude oil prices have been the big story in terms of raw material costs. As of Sept. 10, 2015, a barrel of WTI crude oil was approximately $45; one year ago, it was nearly $90.
Still, the significantly lower cost of crude oil does not necessarily lead to lower ink prices. Natural gas is more of an indicator, as it is the precursor to packaging ink feedstocks. For publication inks, the shift to shale oil and gas production is leading to higher prices, as companies are refining shale gas rather than crude oil, whose derivatives are key to the ink industry.
“Although crude oil prices have dropped considerably, we have not seen as significant a reduction in the ink grade oils that we purchase,” Castillo noted. “This is due mainly to more crude oil being converted to light oils rather than the heavy crude we used to use. The slight reduction seen has helped to cover increased transportation cost of our web heatset products. Most of our sheetfed inks today use little if any petroleum-based oils; rather, they are using primarily linseed and/or soya oil, so crude oil prices have virtually no impact.”
Where crude oil prices will go next is anyone’s guess.
“Predicting future crude oil direction is no easier than guessing where the stock market will be one year from now,” Pruitt noted. “Having said that, the lower crude prices that began in late 2014 have created a more stable and supportive cost base particularly for the publication inks market, which has been under extraordinary pressure over the last six years.
“While current market trends would suggest that oil prices will remain at lower than historic averages for the near term, it is important to remember that this market has shown itself to be quite volatile and may be only one major event away from a return to higher pricing levels,” Pruitt added.
Toyo Ink and Wikoff Color anticipate some price reductions due to lower energy prices.
“Our expectations is that we will see lower prices in the fourth quarter reflecting the change,” Copeland said. “However we still see this as a volatile market considering the political and economical issues in the world at this moment. Prices can always rise without a moment’s notice.”
“Suppliers that realized feedstock price decreases this spring encountered an upswing this summer and are now anticipating slight price reductions as a result of the low crude oil pricing,” Klug said.
Environmental Regulations and Raw Materials
Environmental issues are impacting ink ingredients. For example, due to increasing levels of air pollution in China, officials have targeted a number of industries, including the pigment and intermediate industries. There have been a number of pigment and intermediate operations that have been shut down or have gone out of business. Meanwhile, the cost of doing business has risen, thus cutting profitability, which leads some companies to decide to leave the market. For ink manufacturers, this means tighter supply and higher costs.
“Environmental regulations impact Sun Chemical’s purchasing efforts in several ways,” Pruitt said. “As a company strongly committed to corporate social responsibility, we want to preferentially do business with producers that are compliant with environmental regulations and are also committed to the ideals of corporate social responsibility. Secondly, the drive in developing countries, such as China and India, to enforce tighter environmental regulations has resulted in periodic disruptions and dislocations for suppliers and we have had to develop contingencies to deal with this sourcing challenge.”
“As regulations of certain materials gain momentum, it has been challenging for manufactures to locate replacement items that maintain properties and performance without impacting cost,” said Klug.
“We continue to see a reduction in vendors as some of the smaller companies close as a result of not being able to afford the price to achieve regulatory compliance,” Castillo said.
“Environmental regulations help buyers to ask the right questions and buy the right materials,” Copeland added.
“There are certain additives that are being taken out or replaced from the finished products within our industry.”
Expectations for The Near Term
While raw material costs are doing fairly well today, ink industry purchasing executives know that changes can occur quickly. “Wikoff expects materials to remain relatively stable, but could change depending on supplier inventory levels and capacities,” Klug said.
“We believe the price of oil will fluctuate but still at levels lower than in the past years,” Castillo added.
“We anticipate no availability issues and a slight decline in raw material costs,” Copeland noted.
“From Sun Chemical’s perspective, we do not anticipate any major changes in the raw material marketplace over the next six months,” Pruitt concluded. “Undoubtedly there will be some unexpected pressures that emerge due to supply issues we are not aware of today. However, key raw materials are in generally good supply, global growth continues to be at a modest pace, and the oil market is expected to be stable.”
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