The packaging ink report: as the packaging market continues to expand globally, packaging ink manufacturers are enjoying growth, although higher raw material prices and consolidation remain concerns.
This growth is confirmed by the National Association of Printing Ink Manufacturers (NAPIM), which reported in its 2007 State of the Industry Report that overall, U.S. packaging ink sales rose 5.8 percent in value while remaining flat in terms of volume. According to NAPIM, flexo solvent and gravure solvent were the highlights, with volume growth of 8.3 and 4.2 percent, respectively.
The higher prices, of course, are a reaction to the price increases of key petro-chemical-based raw materials, including resins, solvents and energy-curable ingredients. Now, with the elimination of the VAT refunds in China on pigments and intermediates, further price increases are already being announced.
Richard Pettifor, Sun Chemical North America Packaging's president, noted the growth in packaging, with the Asian market being particularly strong.
"We see the packaging market globally and in North America growing, spurred primarily by growth in the flexible packaging market segment. Because, however, imports are outpacing exports and because business is being moved off shore to Asia and South America, the packaging ink market in North America is relatively flat," said Mr. Pettifor.
"We expect the majority of the growth in packaging inks to occur primarily in the Asian market," Mr. Pettifor noted. "We see more and more global converters moving into Asia and South America by building a presence to support the needs of global consumer packaged goods (CPG) companies."
Mr. Pettifor said that the paper and board and corrugated segments will also experience some growth.
"We expect increased sales in the flexible, paper and board and corrugated segments will come at the expense of rigid plastic and metal packaging," Mr. Pettifor added.
The North American packaging industry consists of a wide variety of segments, each of which has its own challenges with which to contend.
"The packaging market in North America is not a monolithic industry," said Mike Impastato, vice president market development, Packaging Inks, Flint Group North America. "Packaging adds value to the products that it protects, and in general is an industry that grows at about GDP. Packaging is made of many different segments, each one very different from the others and impacted by many different variables. Some variables favor some types of packaging and some others. As a result, there are individual market segments that have had a good year, while other segments have experienced difficulties. There is constant change as technology changes and the market's needs and desires change.
"As an example, flexible packaging continues to be a dynamic packaging segment that is in constant technological change and has seen growth at higher than GDP rates," Mr. Impastato said. "This growth has not come without struggles: raw material costs are the key concern among flexible packaging producers. In contrast, multi-wall bag packaging is a segment that is experiencing some difficulties. In the last few years there has been a very high growth in imported bags. There is a belief that bags coming in from Asia are being unfairly dumped in the North American market. The industry is following this closely and is prepared to pursue relief if necessary to level the competitive field."
Siegwerk and INX International Ink Co. officials agreed that the packaging market is strong.
"The overall packaging market fare is following GDP growth," noted Gilles Faure, global marketing director Paper, Plastics & Label (PPL) for Siegwerk.
"The North American packaging market has responded favorably to the 'New Siegwerk,'" added Jim Ross, head of flexible packaging--NAFTA for Siegwerk. "Our expanded geographic presence and product portfolio has positioned Siegwerk to capitalize on new market opportunities."
"The packaging market remains a stable segment with steady volume growth," said Bryce Kristo, senior vice president and CFO, INX International Ink Co. "Prices have been stable since last year's increases."
Consolidation in the Packaging Industry
Consolidation is occurring at a rapid rate throughout industry, and the packaging field is no exception. While 2006 was slightly less active than usual, 2007 has already seen one major merger, as Altivity was acquired by Graphic Packaging for $750 million.
"Over the last 10 years the number of mergers or acquisitions in packaging has averaged around 15 per year," Mr. Impastato said. "In 2006 there were 16 M&A, but the value of these was under $1 billion, a lower total value than we had seen in previous years. Key M&A activity this last year has included Alcan's acquisition of Recubrimientos in Mexico; Constantia's acquisition of Huech Foils; Hood Packaging's acquisition of Glopak; plus several acquisitions on the rigid container side of the industry. Driving the M&A activities is a real need to consolidate the industry and reduce the overcapacity we see in many of the market segments. Fueling the M&A has been the relatively easy access to financing."
"In general there are more and more private equity firms executing roll-up strategies," Mr. Kristo noted. "These strategies take out excess capacity and create more efficient organizations. We have benefited by capturing new share from our customers' acquisitions, as it has been an opportunity to expand our business into new locations for the most part. These activities also increase pricing pressure as they seek synergies and purchasing power."
The 2007 acquisition of Altivity by Graphic Packaging and the potential spin-off of Alcan's packaging business by Rio Tinto could make 2007 a major year for consolidation in the packaging business. Graphic Packaging's purchase of Altivity merges the two largest folding carton printers, who combined have one-third of the estimated $10 billion North American folding carton market.
According to Mr. Pettifor, the Graphic Packaging/Altivity merger and the pending sale of Alcan come to mind as key industry moves, and the industry continues to see major companies such as Printpack, Inc., Sealed Air Corporation and Sonoco Products Company make acquisitions to expand their offerings in the marketplace. The merger and acquisition activity in North America, however, is down significantly compared to 2005. The key will be to watch this activity in the global market as companies look to extend their footprint into the Asian, South American and Middle Eastern markets."
Ink industry leaders anticipate more consolidation in the coming years, although concerns in the financial markets may slow down some activity.
"This trend will continue until the packaging industry reaches a point where there are only large strategic companies left," Mr. Kristo said.
"It's likely there will be additional merger and acquisition activity in the coming years, but the activities in the packaging market will be constrained by the same challenges facing any other industry," Mr. Pettifor said. "With the expected tightening of cheap and available debt, we look for the amount and size of consolidations to be slow."
"The recent market concerns we have seen related to subprime lending may make it more difficult to access future financing, which could slow down some M&A activity in the next year or so," Mr. Impastato said. "But more M&A is likely. There is still overcapacity in the market, which will drive larger participants to take action to further consolidate the industry."
For ink companies, the consolidation of customers is impacting business, but it also provides opportunities.
"Consolidation always makes suppliers nervous because it usually produces some winners and some losers within the supply chain," Mr. Impastato said. "Certainly, acquiring companies look very hard to find opportunities to leverage their new size. The only protection suppliers have are the results they can document. Relationships are very important and can't be overlooked. But eventually you have to answer the question, "What have you done for me lately?' You have to be focused on adding value to your customers' operations. By that I mean either reducing your customers' costs or helping your customers grow their businesses. Anything that doesn't address one of these two activities does not add real value. We focus on adding real value; it's the only real protection we have."
"There has indeed been consolidation in the converting market," Mr. Faure said, noting as an example the sheetfed offset market, with tens of thousands of printers on each continent. "The need for mergers is a given and pushes for standardization," he continued. "Siegwerk, with global presence and brands such as Tempo in conventional offset and Sicura for UV, is ready to support the process at new emerging regional and global printers."
"Sun Chemical is uniquely positioned to meet the expanded needs of the converter as consolidation in the marketplace and expansion into new markets continues to take place," Mr. Pettifor said. "As packaging converters continue to make acquisitions and to merge, they are looking to partner with suppliers, such as Sun Chemical. This has shown our ability to bring them new technologies to address the issues that are most important to them, including supporting their growth globally, printing on and delivering consistent color and a high level of print fidelity on multiple substrates, reducing their impact on the environment by reducing the output of volatile organic compounds (VOCs), and addressing product safety."
Overall, the packaging market is enjoying growth throughout its segments. Mr. Pettifor said that Sun Chemical has experienced solid growth in all markets, especially the flexible packaging and the corrugated segments. In North America, the company continues to see growth in flexographic printing and expects digital printing to play a more significant role in packaging.
"Inkjet has been a very high growth market, but the base is relatively small compared to the other parts of the packaging market," Mr. Impastato said. "The highest growth area for main-line packaging segments continues to be flexible packaging. Flexible packaging will likely continue to grow at higher rates than most of the rest of the packaging market because it provides benefits which are valuable to both consumers and consumer products companies."
"Letterpress continues to slow down in labels to the advantage of UV flexo and UV offset," Mr. Faure said. "Generally speaking, the environmental pressure is pushing growth in waterborne and in UV technologies."
"Our flexible packaging business continues to grow, added by some of the consolidation in the marketplace," Mr. Kristo said. "On the process side, our heatset, flexo and digital business are also very robust. We are very excited about integration of digital applications into the packaging market."
Rising Raw Material Prices
Higher raw material prices have been a fact of life for ink manufacturers in recent years, and the past year has brought more of the same.
"Rising raw material costs are the greatest concern for both ink suppliers and printers," Mr. Impastato noted. "We have been in a market with rising raw material prices for the last several years. At the beginning of this period of rising prices the ink industry worked hard to offset these costs by cutting all costs and consolidating. Although we are continuing to drive cost reductions through all operations and functions, we have reached a point where these efficiencies cannot offset raw material price increases, and eventually, these rising costs must be passed through to our printing customers. We are certainly at a point where it is incumbent upon us to explain this situation to our customers so they can plan accordingly."
Despite the rising costs of materials, Sun Chemical is striving to control costs by working closely with its supply chain partners and by improving internal operations to minimize the impact of this trend.
"Though we continue to pursue new value-oriented products, improve our efficiencies and reduce internal costs, we do not anticipate these measures will totally compensate for what we see as the continued current rising raw material costs," said Mr. Pettifor.
"Our expectation is another wave of price increases from our supply side, of which we will have to pass through in order to remain healthy," Mr. Kristo noted. "It is yet to be seen how much we can absorb and how much will have to pass through."
Opportunities in The Coming Years
There are plenty of opportunities for growth in packaging, whether it is in digital and flexible packaging or centered in rapidly-expanding regions.
"The overall packaging market fare is following GDP growth," Mr. Faure noted. "This is why from a global perspective, Siegwerk sees many opportunities in the BRIC countries (Brazil, Russia, India and China)."
All in all, ink manufacturers have opportunities to make gains.
"There are several exciting growth areas for the coming years," Mr. Pettifor noted. "We see continued opportunities in the flexible packaging market. We also see the need for introducing new technologies that offers the converter improved productivity. The benefits seen in cure time coupled with the improved runnability with energy curable (EC) inks, specifically electron-beam cured inks, place these inks in the opportunity window. Offering the converter the ability to improve its color matching capabilities with new tools is another opportunity for growth--including the areas of printable coatings technology that either enhances packaging barrier properties, actively helps to maintain the original quality of packaged food, or intelligently provides information on the quality of packaged food. We also see opportunities as brand owners seek and converters deliver packaging designed to meet the demand for environmentally friendly packaging with sustainability in mind."
"As consolidation and globalization continue, significant opportunities will come to those who can position themselves to provide high value-added products and service to the large global acquiring companies," Mr. Impastato said. "To do so, they will have to have a well developed and sophisticated communication capability coupled with superior local service and a broad product portfolio. Having the right product, at the right place, at the right time, at the right price will be invaluable to large global printers."
By David Savastano
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|Date:||Oct 1, 2007|
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