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Packaging Report.

Raw material increases have squeezed margins and forced price hikes, but the outlook for packaging ink manufacturers appears stable

As far as reaching everyday consumers, no sector of the industry may be more effective than that of packaging inks. Virtually every consumer product on supermarket shelves bears the markings of these inks, and, as a result of this, packaging end-users stringently demand high quality from their suppliers. However, as heavy raw material pressures have begun to squeeze margins, quality issues have been joined in prominence by pricing concerns, shifting trends in the market and affecting the way business is being done.

Price Pressures

In the packaging sector, industry estimates show that raw materials have increased at a rate of 8 to 8.5 percent, with the largest increases relating to carbon black and acrylic resins. Freight has also been affected due to fuel prices, and indications are that pigment and colorant prices are on the rise as well. In order to prevent these factors from cutting too deeply into the bottom line, an industry-wide effort to stabilize margins through price increases is underway. This is evident in the 6 percent packaging ink price increases announced by Flint Ink and Sun Chemical, as well as the 6 to 7 percent increase in corrugated ink prices announced by Borden Chemical.

According to these industry leaders, the price increases were not implemented solely to sustain profit levels, but also to insure the industry as a whole continues to move forward.

"Ink suppliers must reinvest in product development and refinement of their processes," remarked Chris Morrissey, Sun Chemical's vice president, sales and marketing. "For Sun Chemical, this cannot happen unless we achieve a sustained level of profitability that provides acceptable levels of return on investment and allows for re-investment."

Raising prices, however, has resulted in some uneasiness, largely based on the fact that attempting to pass costs along to customers through price increases is new to many in the industry. This uneasiness is clearly visible in the hesitancy of many smaller ink companies to raise prices unilaterally. "Raw material increases have affected our business by squeezing our margins," said Shannon Barry, director of business development at Color Converting Industries (CCI). "Until very recently, however, we have not been able to pass that on through price increases."

"Because the ink industry is such a competitive industry, no one has a great deal of experience with raising prices," said George Sickinger, president and CEO of Color Resolutions International, a management buyout of the Borden printing ink business. "However, our margins are relatively thin and it doesn't take much to figure that when raw material costs rise the way they have, nobody can just stand still and absorb them. In situations like this you need a leader, and we are pleased to see Flint to step forward. We have also seen Sun do so to some degree. You really need support. If somebody is looking for a short-term gain by not raising prices, then everyone suffers."

Flint's efforts, while good for the industry as a whole, were also necessary in the eyes of the company. "We have no choice but to pass along all these increases to our customers, and it's safe to assume that some or all of the increases will be passed along to package buyers," said Steve D'Angelo, director of marketing, Flint Ink Corporation. "We expect all ink manufacturers to incur similar costs and would expect across the-board price increases to all buyers."

Customer Requirements

One reason for the trepidation on the part of ink makers when it comes to raising prices relates to the close relationships that often exist between packaging ink manufacturers and the converters they sell to. The closeness of this relationship is often necessitated by the fact that it is impossible to develop universal specs in the packaging market. Rather, packaging inks must be customized according to the needs of individual converters and their customers.

"Inks play a key role in helping a package portray an image to consumers," said Mr. Morrissey. "When formulating an ink, a thorough understanding of the requirements is essential. It's not just a matter of how it looks. The inks must help the package hold up to shipping and environment. To achieve this requires regular communications between ink suppliers, converters and end-users."

Such relationships have also become steadily more critical as ink makers have witnessed increasingly stringent quality demands from their customers. According to Ms. Barry, this type of working relationship is also beneficial to the ink makers. "Our relationship with converters is absolutely critical to understanding specific applications and to shortening the product development cycle," she said. "It makes our R&D efforts much more effective and efficient when we know what's going on at that level and can work with our customers to develop products more quickly."

Many ink makers have also found that along with supporting and nurturing these relationships, they must also invest heavily in R&D and manufacturing in order to maintain their market positions.

"Complete consistency of packaging ink products has become a given," said Mr. D'Angelo. "Those that do not consistently provide a designed quality level to customers will not maintain their position. We have conquered this challenge through significant capital investment in our manufacturing facilities. We continue to make such expenditures, and the results have been worth the millions spent."

New Technologies

Ink makers have also sought to stay on top by keeping a watchful eye on the technologies that will be the future not only of the packaging sector, but the industry in general. While at this time its effects on packaging ink production have been negligible outside of coding applications, the technology that may have the greatest long-term impact on this market appears to be ink jet and other digital processes, which offer the advantages of shorter runs and increased flexibility.

"Technology is moving faster than typical expectations, and I think it is safe to assume that a day will come when ink jet printed packaging is commonplace in grocery stores," remarked Mr. D'Angelo. "Within five to eight years, we will see many forms of packaging being produced with digital processes. It will take much longer than that to become commonplace, but one cannot discount the speed of technological advancement and the benefits digital printing will bring consumer product companies."

The proliferation of digital technology, however, is hindered by the fact that converters have already made substantial capital investments in equipment for use with standard processes. There are some technologies, however, which are currently making inroads into the packaging sector, including energy-cured products.

"Energy-cure is a technology that has been in other markets for a long time, but is new in wide-web flexo," said Ms. Barry. "It has certainly affected the market and has the potential to have an even bigger impact in the future. With this technology you get benefits such as excellent barrier properties, high gloss and, most importantly, no VOCs. The question is whether we can adjust it to fit food packaging. While we are making excellent progress, the odor issues are still somewhat of an unknown. FDA approval is still pending."

Solvent Usage

One technology that has already had an extremely visible effect on the packaging ink market is that of water-based inks. "Most growth in the sales volume of packaging inks recently has been in water-based inks," said Mr. Morrissey.

This growth, however, has not resulted in a dramatic shrinkage in solvent-based packaging inks (see chart below). Rather, because of rapid growth in flexible packaging, the primary packaging user of solvent-based inks, it has continued to increase.

"According to industry figures, the largest growth area has been in solvent-based inks," said Mr. Sickinger. "That's because solvent-based inks continue to be used in flexible packaging and that market has been growing more than some of the other segments in the packaging industry."

As a result of shifting trends in flexible packaging, including shorter print runs, many in the industry expect this trend to continue.

"The use of solvent inks is virtually unnecessary in every segment, except flexible packaging," said Mr. D'Angelo. "When you look at flexible packaging, you see it growing at rates about 50 percent faster than the overall packaging ink market. For this reason, we expect a decrease in solvent-based inks in all segments other than flexo for flexible packaging."

Market Performance

One development that ink makers believe has the potential to help grow certain segments of the packaging market, most notably flexible packaging, comes in the form of stand-up pouches. Recent advances in polyester substrate quality and availability, combined with E-coli contamination concerns in canned goods, have made growth in this area extremely feasible.

According to Ms. Barry, better ink systems that work on these substrates and structures have made this form of packaging a more viable option for ink manufacturers to target.

"Traditionally, things that were in cans were not a market for the flexible packaging industry," she said. "In the near future, anything that was in a can on a shelf may be sold in these plastic containers. It's a lot cheaper to ship and better addresses E-coli concerns."

As a result of the presence of new substrates, combined with efforts by ink manufacturers to grow business, the market has performed very well during the past year. Ms. Barry believes that this, along with other process and substrate changes, will help this trend continue.

"The market has increased over the past year," remarked Ms. Barry. "When people seek out higher quality in their packaging, it is more profitable for us. For these reasons, I see the trend of growth in packaging continuing into the foreseeable future."

According to Mr. Sickinger, Color Resolutions International has also witnessed significant growth in each of the past two years. "Some of the consolidation in the industry has been a help to us," he said. "We would like to believe that our sharp focus on a couple of segments of the market rather than being generalists with many ink lines has also been an asset."

The Future

When asked about what he sees in store for the future, Mr. D'Angelo predicts that while the packaging sector may experience some slowdown, it should continue to grow regardless of whether the overall economy declines.

"A very experienced ink industry professional taught me long ago about the beauty of the packaging ink business," recounted Mr. D'Angelo. "He basically said it will always be secure and will grow at modest rates (3 to 5 percent). When the economy is strong, consumers will buy everything they can get their hands on and the packaging ink business is strong. When the economy struggles, people dine out less, and thus, they rely more upon grocery store purchases for meals and spend less on outside entertainment, thus the demand for staples and snack foods is strong. Either way, the packaging ink market will grow at similar rates as the population."
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Author:Williams, Tom
Publication:Ink World
Date:Dec 1, 2000
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