European ink review: consolidation, higher raw material costs and lower margins remain major topics heading into 2006 and beyond.
The economies of most of the larger European countries should be better in 2006. The European Union's economic indicator for January, based both on economic activity and business and consumer expectation, was at its highest level since mid-2001.
Brighter economic prospects do not, however, necessarily translate into high printing sales, particularly in the publishing sector, where trends in advertising revenue have been diverging from growth rates in GDP.
Hence in some parts of the printing sector, higher ink sales will not be easy to achieve. The exception could be in Eastern European countries where consumption of printed products is still catching up to levels in Western Europe, particularly in areas such as packaging.
Lower Margins Hurting Ink Manufacturers, Printers
For ink producers in Europe, as well as many of their customers, the priority this year will not be the top line but the need to boost margins to offset the relentless rise in raw material costs. Most ink companies are pursuing a two-pronged strategy of reducing production and other costs and raising their selling prices.
Although oil prices, the main driver behind higher raw material costs, started to rise steeply around a year ago, the effects are still being felt through the supply chain.
"The issue of how to compensate for higher raw materials costs is continuing to overshadow everything," said a marketing director at one European ink business. "We've done a lot with our own costs through measures like reformulating products with substitutes for higher cost ingredients. But now all our efforts are being directed at gaining higher selling prices.
"Customers are generally showing an increased understanding about the need for ink manufacturers to put up their prices," he added. "But printers are also having to deal with price rises across a wide range of their own supplies. Not surprisingly, some are putting up a lot of resistance to rises in ink prices."
In some segments, the push by suppliers for higher prices is being assisted by shortages of production capacity, which has often stemmed from vigorous demand in the booming economies of China and India. Some ink makers are complaining about cumulative price increases in some chemicals of at least 40 percent within a year.
"Strong worldwide demand for specialty chemicals is causing a shortage of raw materials and therefore pushing up their value," said Felipe Mellado, Sun Chemical Europe's corporate vice president, marketing and technology. "Other industries outside of printing, particularly in the emerging Asian economies, are demanding more raw materials, such as benzene, acrylic acid-based derivatives, nitrocellulose resins and titanium dioxide, with some suppliers even re-directing their products away from the print industry into other more profitable markets."
Some of the larger ink companies announced late last year price increases of 5 to 10 percent to come into effect at the beginning of January 2006. But with printers likely to put up strong resistance, ink producers in Europe expect that the battle to pass on cost increases to customers will be intense over the next several months.
Although printers in many product sectors and European countries have been enjoying higher sales because of healthier economic conditions, their profits have still been flat or have even declined. The latest survey by the British Printing Industries Federation found that median net profit of its members as a proportion of sales had gone down over one percentage point to 3.62 percent last year, mainly due to higher input costs, particularly for electricity. Approximately 18 percent of UK printing companies had recorded a loss.
UK-based printers and ink producers alike have been dealing with some the highest hikes in energy prices in Europe, stemming from a decline in domestic supplies of natural gas from the North Sea. Instead, more gas is having to be piped from continental Europe at a higher cost.
Between the third quarters of 2004 and 2005, industrial gas prices in the UK rose 20 percent, equivalent to a 76 percent gain in five years, according to figures from the UK Department of Trade and Industry (DTI).
Electricity prices have also been increasing across Europe. In some northern European countries, industrial electricity costs were approximately 25 percent higher at the beginning of this year than they were a year ago.
Energy experts have complained that groups such as printers have concentrated too much on reducing their raw material costs rather than trying to raise energy efficiencies.
"While most print companies have focused on optimizing their use of paper and inks, only a small proportion of printers have focused on measuring and reducing their energy use," said Cedric Rodriques of CMR Consultants of the UK.
Consolidation and the Printing Ink Industry
Like European paper companies in recent years, ink companies also have been hoping that consolidation within its sector would put them in a stronger position to drive through price increases.
As a result of acquisitions over the last year, the top five ink companies have a predominant share of the European ink market. Just how much this extra power will help to achieve price rises will be put to the test this year.
By far, the biggest of the takeovers was the merger of Stuttgart, Germany-based XSYS Printing Solutions and Flint Ink of Ann Arbor, MI. It created Flint Group, a trans-Atlantic operation with sales of C2.1 billion ($2.5 billion) less than a year after XSYS itself had been formed through the amalgamation of BASF Drucksysteme and ANI Printing Inks by the equity fund CVC Capital Partners.
The process of integrating the activities of XSYS and Flint-Schmidt, Flint Ink's European subsidiary, is not expected to be completed by Flint Group before the end of this year.
"It is an enormous job because it is effectively bringing together into a single unit three or four companies," said Bertil Ahlberg, Flint Group's marketing director. "Before the Flint acquisition, the integration of BASF and ANI was still not complete. One of the major tasks is the location and establishment of mother plants."
Siegwerk, the Frankfurt, Germany-based producer of packaging inks, has had an easier job assimilating the packaging business of SICPA, which it acquired in June. As a result, Siegwerk is now a much bigger player in packaging inks, which accounts for approximately 80 percent of its sales and places it second-largest globally behind Sun Chemical.
Less than 100 days after the completion of the acquisition in early September, Siegwerk was able to announce details of its new organization in Europe, Middle East and Africa, while it had also completed the rearrangement of customer-contact systems.
In Europe the company has switched from a country-based structure to one based on market segments and functional units such as supply chain management/production, global purchasing and strategic product innovation.
Herbert Forker, Siegwerk's president and chief executive, said that at a time when "the printing industry is going through a phase of change and consolidation, one of the essential factors for a successful acquisition is the integration speed."
For SICPA, the divestment allows it to concentrate on the rapidly-expanding and more profitable security inks market, which is thought previously to have accounted for less than 40 percent of its annual sales.
Huber Group, one of Europe's oldest ink companies which is still controlled by the German family which founded it 240 years ago, purchased a controlling share in Micro Inks of India in October. This gave it a new platform for growth in Europe, North America and Asia, where it becomes the leader in Micro Ink's domestic market.
The German company claims that the acquisition, which makes Huber the world's seventh largest's ink producer, improves its "ability to provide top quality ink products in any volume at competitive prices anywhere in the world." It stresses, however, that there will be no plant closures in Europe, North America or India following the takeover.
Huber's control of low-cost production facilities in India will help give it an extra edge in the European market, in which ink purchasers will be reorganizing their ink supplies following the recent spate of mergers. This will, particularly, be the case in the battle among the larger ink companies to become second suppliers to the big publishing and packaging groups.
Growth in the European Printing Market
These multi-pronged businesses could be well placed to take advantage of what should be an upswing in the European printing market. Early signs of a revival have been evident from rising sales and profits among makers of printing presses.
Heidelberg Group, now a slimmer company following the disposal of its activities in newspaper and digital presses, reported a 9 percent rise in sales in the first nine months of 2005 after recording a net loss of $840 million on sales of $4.5 billion in the whole of the previous year.
Incoming orders for the third quarter of last year were 17 percent higher than in the same period in 2004. At the end of last December, the company had an order backlog worth 1.3 billion [euro] ($1.5 billion), the firm reported.
Koenig & Bauer AG (KBA), which with Man Roland and Heidelberg makes up the Big Three Germany printing press manufacturers, reported a 26 percent increase in intake of orders to 1.3 billion [euro] at the end of the third quarter. Group sales during the quarter were 17 percent higher than a year ago. Sales of sheetfed presses jumped 21 percent, largely driven by demand for medium and superlarge-format machines.
A significant feature of KBA's third-quarter results was that demand in Germany pushed up domestic sales by 47 percent, underlining the surge in confidence of the country's printing sector, which has been stagnant or even in some sectors declining.
In Europe's digital printing sector, there have been signs of accelerated growth. Agfa reported in the third quarter that its sales of large-format inkjet printers had exceeded that of previous quarters.
Domino, Cambridge, England, the inkjet and laser printing equipment manufacturer, confirmed the extent to which digital processes are penetrating the industrial sector by recording a 20 percent increase in commercial printing sales last year. Xaar, the inkjet printhead maker, also located in Cambridge, more than doubled its sales in 2005.
Packaging has been one sector which has been benefiting from higher levels of capital investment because of the higher profile it has been given by retailers and brand owners. They perceive packaging as being increasingly important as a vehicle for marketing products within stores by making their appearance more eye catching through high quality graphics.
Overall sales of packaging materials and components seem to be keeping pace with GDP growth, which is forecast to rise to 2 percent to 3 percent this year in the European Union.
Due to the extra emphasis on products having greater visual appeal on supermarket shelves, sales of packaging inks may increase even faster than the sector as a whole. There should be improved ink demand for litho and gravure applications because these processes are better than sheetfed offset at handling thicker layers of ink or film weights for stronger colors.
Sales of inks for narrow web machines are thought to be growing 3 to 5 percent annually because they have been extending their scope beyond self-adhesive labels into areas like shrink-sleeve printing.
Also, in order to provide more versatility, printers have been investing in narrow web equipment with combinations of different processes, such as flexo, gravure and/or screen.
"Narrow web has become much more adaptable," said Jonathan Sexton, narrow web product manager for Sun Chemical Europe. "It has also been able to take advantage of the trend to shorter runs in packaging which is shifting some work away from gravure. Shorter runs are becoming more prevalent because there are more brands on the market, and a lot more special offers and one-off promotions which require flexible printing processes."
In the publishing sector, newspaper companies in Europe have been spending large sums on new presses to enable them to boost revenue through sales of a higher quality product and more color advertising.
In the UK, Guardian Media Group invested 110 million [pounds sterling] ($190 million) in presses in 2004 and 2005 to change its Guardian and Observer national papers from a broadsheet to the smaller Berliner format with color on every page. After its relaunch in September, the daily Guardian's average circulation had gone up by 15 percent by the beginning of this year. Sales of the Observer, a Sunday paper, rose 26 percent in its first month in January in the new format.
Media analysts believe, however, moves by newspaper owners into full color will at best only slow down a steady decline in the share of print media of total advertising expenditure in Europe.
"The increase in total advertising expenditure is now back in line with GDP growth but the print media is losing share, particularly to online advertising, so its advertising growth is lagging behind GDP," explained Jonathan Barnard, knowledge management manager at the media agency ZenithOptimedia Group, London. "Northern Europe has been more affected than other parts of Europe because of its strong newspaper-reading tradition, which is now being undermined by a relatively high Internet penetration. In some Nordic countries, newspapers' share of advertising has dropped by 4 percent to 5 percent in recent years."
A major consolation for producers of newspaper color inks is that moves by publishers to finance more color capacity are bolstering sales of high value color inks. A feature of the European printing market at the moment is the mix of areas of growth and decline which can provide unexpected opportunities for many ink makers.
RELATED ARTICLE: Vertical integration is a key driver for recent consolidations.
A common theme among most of the acquisitions in the ink industry and related sectors in Europe last year was the desire among companies to extend their activities either downstream or upstream from their core activities.
XSYS' merger with Flint Ink continued to take the company along the path that had been pursued with the merger of BASF Drucksysteme and ANI, which included BASF's classical pigments plant in Shanghai. The enlarged company has an even bigger vertically integrated operation because of the incorporation of Flint Ink's pigments operation.
Huber has made clear that increased market share and additional production capacity in inks were a secondary consideration in its takeover of control of Micro Inks. Instead the priority was the Indian company's manufacturing strengths in ink raw materials.
"Backward integration ensuring uninterrupted supply of vital raw materials like pigments and resins at competitive price levels and in the volumes required are the main and most important motivation," Huber officials said. "These raw materials are major components for the manufacturing of printing inks with an increasing share of its production moving to countries in Asia."
After the disposal of its packaging inks business, SICPA quickly indicated a new strategy of backwards expansion in its core security inks operation by taking over the liquid-crystal pigment business of Munich, Germany-based Wacker-Chemie, enabling it to develop new optical effect and color shifting technologies.
Altana AG of Germany has shown a desire among manufacturers of ink ingredients to expand downstream. It acquired last year Eckart, a leading German producer of metallic effect pigments and metallic inks.
A year after Fujifilm, the Japanese imaging and printing equipment manufacturer, took over Sericol of the UK, one of the world's biggest makers of screenprinting inks but also a digital inks producer, it acquired the inkjet ink and electrographic businesses of Avecia. The move is in line with Fujifilm's objective of becoming a top-ranking vertically-integrated player in the worldwide digital imaging sector.
Thus makers of inks and their ingredients, equipment manufacturers and other operators in the printing industry are now increasingly becoming active across several stages of the value chain.
RELATED ARTICLE: Ink industry faces continuing price increases in key raw materials.
In recent years, some the biggest increases in raw materials costs for ink makers in Europe have been for solvents, which in some cases have been exacerbated by supply shortages linked to robust demand in Asia.
However, during much of 2005, prices of some of the major solvents softened as more ink and coatings producers switched to low solvent or solvent-free formulations. By the beginning of the fourth quarter, prices of isopropanol were nearly a quarter lower than they were in early 2005.
Prices of butyl acetate, of which there have been shortages over the last few years, started rising again toward the end of the year after a summer of decline.
In other raw material segments, not all suppliers have been successful in pushing through the price increases they have wanted. Resin producers have been complaining bitterly about their falling margins in the face of increased petrochemical feedstock costs.
Akzo Nobel is pulling out of the ink resins sector altogether after agreeing to sell its graphics and adhesives resins operation to Hexion Specialty Chemicals. Despite being the global leader in ink resins and the world's largest producer of thermoset inks, Hexion itself has been trying to reduce production costs.
On the other hand, some of the highest price increases for ink raw materials--around 50 percent since the second half of 2004--have been for rosins, as a result of a range of factors putting upward pressure on their costs.
Supplies of crude tallow oil (CTO) as a feedstock for tallow oil rosin (TOR) have been cut because high oil prices have made it a viable replacement for fuel oil as an energy source. In Europe there is an extra incentive to burn CTO since it reduces C[O.sub.2] emissions, on which there are EU restrictions.
At the same time, demand for TOR has gone up because more expensive hydrocarbon resins are no longer lower-cost alternatives. Demand for TOR has also increased in the adhesives and paper chemicals sectors. Furthermore, there has been a big rise in use of rosins in China, a gum rosin producer and exporter, where ink volume has doubled in the past few years, according to Hexion, which is also a major rosin supplier.
Among suppliers to printers, paper makers have been even less effective than ink producers in obtaining the prices increases they want over the last few years. At the beginning of this year, the benchmark price for light-weighted coated paper in Europe was still approximately 20 percent below its peak in 2001.
Investment in paper production equipment after an advertising boom in the late 1990s and the early 2000s caused overcapacity which dragged down prices.
Even a summer strike among paper workers in Finland, Europe's main center for paper manufacturing, failed to have a significant impact on paper prices in 2005.
However, in the first quarter of 2006, prices have started to move up at a single digit rate as the supply/ demand balance tightens after a number of plant closures in Europe. But the rise in paper prices has been a long time coming, despite greater concentration among paper makers.
European Editor Sean Milmo is an Essex, UK-based writer specializing in coverage of the chemical industry.
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|Date:||Mar 1, 2006|
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