The raw material report: as the price of oil derivatives and other key raw materials continues to increase and availability of some products remain a concern, ink manufacturers anticipate further challenges in the coming year.
The price of crude oil has been soaring in recent years. There was a time when industry executives looked at the higher prices and believed these costs were unsustainable. Back in February 2003, for example, crude oil hit $35 a barrel, and ink manufacturers were not sure how they would cope with those price increases.
When prices surged past $45 a barrel in August 2004, the ink industry again looked at the numbers with great concern.
Unfortunately, ink manufacturers and their suppliers find themselves looking back on those prices as the 'good old days.' A barrel of crude oil recently surpassed $66 per barrel, an increase of nearly 50 percent during the last year alone.
Even worse, there appears to be no end in sight for crude oil price increases.
"Earlier this year, discussion centered around crude oil breaking the $50/bbl threshold," said Rick Krause, marketing director, printing and packaging, Americas for Johnson Polymer. "This summer, crude oil broke the $60/bbl thresh-old. Suddenly, $80/bbl oil prices do not seem so unrealistic. Sustained oil pricing above $40/bbl to $50/bbl will no doubt force further cost increases through the chemical industry, formulating ink and coating companies and end-users."
Acrylic acid is another critical component for ink manufacturers, primarily for UV and water-based inks. The major market for acrylic acid is for super-absorbent diapers, and world-wide use is growing. There is simply not enough production of acrylic acid, and ink manufacturers and their suppliers are finding the going difficult.
All in all, it looks very likely that ink manufacturers and suppliers alike will find the coming year to be filled with even more challenges.
"Normally, market forces impact one or two segments at a time and though not welcome, we can absorb the effect," said Jack Benson, vice president, corporate procurement for Flint Ink. "The recent shift has been massive and has changed the dynamic of the chemical industry on a scale and with a speed that is impossible to absorb."
"Raw material prices have been increasing, in some cases dramatically," said Ed Dedman, business manager, narrow web and energy curable group for SICPA North America. "Overall, our biggest concern is twofold: how high will they go, and when will they stabilize."
The Past Year
The raw material market boils down to the basic law of supply and demand. For years, supply outpaced demand, and prices were favorable for buyers, to the point were some suppliers left the commodity side of the business. Now, demand has risen and excess capacity is no longer available, leading to pricing well above historic levels.
"Prices continue to rise, particularly with respect to crude oil and acrylic acid," said Mr. Benson. "Availability has not become an issue, although there is little room for negotiation with suppliers. The market is in balance, but favors the producers."
"The costs of specific chemical commodities continue to be very volatile due to supply and demand dynamics," said Mr. Krause. "However, underlying price increases in oil and natural gas continue to put feedstock cost pressures on all hydrocarbon and petrochemical derivatives. Styrene is available, yet remains hostage to benzene feedstock costs. Acrylic acid and acrylate monomers are available, but producers continue to push through price increases in what remains a tight marketplace; acrylic acid and acrylate prices have not yet stabilized in the marketplace."
There are many reasons why demand has increased for key raw materials.
"The upward world economic trend has led to an increased demand for raw materials," said Heinz Oestervoss, vice president, purchasing and logistics for Siegwerk Group. "The increasing demand of the Chinese market was predominant. This issue led to problems such as price increases and problems concerning availability, especially with regard to steel. A similar effect had the deconstruction/closure of chemical plants. This issue led to a reduced supply."
"Forced by the upward world economic trend, the suppliers have tried to pass on their raw material price increases to the customers," Mr. Oestervoss added. "The basic chemical-close markets have changed from buyers' to sellers' markets during the last 12 months."
For ink manufacturers, the largest concerns are oil derivatives and acrylic acid.
"Oil derivatives and acrylics continue to be our 'problem children,'" Mr. Benson said.
"Anything related to oil and its derivatives remains a chief concern. The closer the material is to crude oil, the bigger the effect," said Stuart Foster, chief procurement officer and corporate vice president, supply chain and pigment manufacturing excellence for Sun Chemical. "Ink oils, distillates and solvents have been hit very hard, as well as carbon black. Pigment intermediates are also facing pricing pressure. The supply/demand balance on acetic acid and acrylic acid derived raw materials has improved. However, this has had very little effect on elevated pricing levels to date."
"So many commodity groups are being affected by global supply /demand dynamics and increasing feedstock costs that it's difficult for any purchasing organization to highlight just a specific few problem areas--certainly anything based upon petrochemicals is an ongoing issue," Mr. Krause said.
"The biggest concerns in terms of pricing and availability had been with products that contain acrylic acid, which was in short supply globally," said Ron Zavodny, director of corporate purchasing for Wikoff Color. "The availability situation seems to have subsided, but at the expense of higher prices."
There has been some improvement in availability, although that hasn't necessarily translated into reduced prices.
"In general terms, raw material pricing has continued to rise over the past few months, although availability has improved in areas that were problematic earlier in the year," said Mr. Foster.
"A number of raw materials have stabilized in recent months from a pricing standpoint, and availability has been improving throughout the year," said Bill Bayer, business director, radcure--Americas at Cytec Surface Specialties. "Prices have not declined as was predicted because of the continued ramp-up of the price of oil. There are still some materials which are tight, but in general, the playing field has improved dramatically compared to last year."
"The major issue facing the industry in 2004 was the shortage of raw materials, particularly acrylic acid, and the concomitant escalation of raw material and finished product costs," said Paul Elias, business director of specialty products for Sartomer Company. "The shortages and cost escalation have continued into 2005. More recently, the tightness in supply has abated and the raw material markets are a little more balanced in the U.S. As a result, the rapid escalation in raw material costs has diminished. This is a clear indication of the market forces at work. The higher costs were passed through and demand slackened."
Aside from oil derivatives and acrylic acid, the ink industry has been hit with plenty of other increases, and not just related to raw materials.
"Ink raw materials are just one area affected by the changes in the chemicals market," Mr. Benson noted. "Rising fuel prices are driving increased distribution costs. For the past 18 months, our transport suppliers have been adding surcharges to cover their diesel costs. Natural gas is twice as high as it was two years ago, which affects utility costs. The cost of steel has risen which affects our container prices--totes, drums, cans. The rise in polyethylene and polypropylene prices has driven up pricing on our plastic containers. Linseed oil pricing has soared due to a crop failure in Canada. The list goes on."
Still, even though the prices for some key materials have stabilized, ink companies have yet to be able to fully recover their costs.
"In recent months, the frequency and amount of supplier price increases has subsided," said Mr. Zavodny. "The term used by suppliers is that prices have 'stabilized.' Most of the increases imposed on the ink industry have yet to be recovered in price increases to customers."
Working with Suppliers
These are difficult times for purchasing agents all along the supply chain. Prices continue to rise on many key ingredients, and ink executives are trying with mixed results to work with suppliers on pricing issues.
"Suppliers are working with us in some cases, but it is 'take it or leave it' in many cases," Mr. Foster said. "Suppliers who held off with increases due to forward positions are now increasing pricing on a 'take it, or leave it' basis as the favorable forward contracts unwind."
"The favored partners show the dependency of their products concerning the preliminary products and try hard to optimize the supply chain by common efforts and to alleviate the effects," said Mr. Oestervoss.
Meanwhile, ink companies have not been able to fully recoup their own increased costs.
"Suppliers have done what they could until recently," Mr. Benson said. "Some are continuing to work with us, others aren't. I'm not sure customers really understand the magnitude of what's happening."
"Our suppliers have been less willing, they claim less able, to work with us on price increases," Mr. Zavodny said. "This has caused our margins to shrink because we have been able to pass along only a portion of the significant increases we have received to our customers."
"Our suppliers, for the most part, have been working with us as well as they're able," Mr. Dedman said. "Many of our customers have been understanding and accepting of the need to increase selling prices, while others have been reluctant to accept an increase."
For key vendors, maintaining supply lines despite higher costs was absolutely critical.
"Our supply chain personnel and our suppliers have been very diligent in keeping us from having a stock out situation," Mr. Elias said. "As a result, we have kept our customers supplied without interruption. Unfortunately, this has occurred at higher costs. For the most part, our customers understand the situation but they certainly don't like it. They face competition from other technologies (other than UV/EB) as well as imports. Fortunately, they saw the foreign supplier disappear when products became very short last year. That was a clear indication of their lack of commitment to the American market."
"Some suppliers have been very understanding in recent months relative to the difficulty of passing through additional increases versus the situation last year," Mr. Bayer said. "As demand has weakened in our downstream markets, increases have been especially difficult to pass through to the customer base."
"Producers have little purchasing power over commodity products and it is very difficult for suppliers to work with us to mitigate the impact on our business," a Hexion Specialty Chemicals official said. "Some suppliers are taking the opportunity to grow share. Our customers have been understanding, but it is difficult for them as well to pass along the increases. We continue to work with our customers to attempt to reduce costs were possible."
Lead times for price increases are also a concern. For example, Hexion Specialty Chemical officials said raw material suppliers are no longer giving 30 days notice to price changes, which is making it very difficult to pass on increases at the pace Hexion is receiving them.
The best that a supplier can do is to keep customers informed about the evolving situation and try to help reduce the impact of price increases, whether it is to develop cost savings or even to create new products.
"As a supplier to the industry, we continue to work with our customers in dealing with these harsh realities," Mr. Krause said. "We continually update our customers on the raw material situation and have been sharing the pain of increased costs. We have also been working with our customers to look at supply chain cost savings, raw material consolidation cost savings and, most importantly, new products to lower in-use cost. Water-based printing and coating remains the most cost-effective, environmentally compliant, technology for printers and converters."
Higher raw material prices are a reality, and for ink manufacturers and suppliers alike, it is essential to raise their own prices and manage costs as best as possible.
"The increased costs of crude oil and feedstock are the cause of much of the price increases and availability issues," Mr. Zavodny said. "We deal with those impacts by utilizing multiple suppliers and carefully controlling our inventories to take advantage of buying opportunities."
"We are controlling our production costs and making sure our inventories are kept in line," Mr. Bayer said.
"We look at material usage and work to rationalize manufacturing facilities and take advantage of synergies of scale," Mr. Benson said. "We have also announced price increases on most of our product lines."
"As raw material costs continue to increase, we are constantly working to seek alternatives to limit the impact," Mr. Dedman said. "However, if costs don't stabilize soon, we will be forced to consider additional price increases."
Ultimately, demand will continue to be high for commodity products, and that will drive pricing on all levels.
"We expect the raw material supply situation to improve through the remainder of 2005," Mr. Elias said. "However, 2006 could be a repeat of 2004. Oil prices are still at record levels and show no sign of dropping to anywhere near historical pricing."
"The slowdown in demand is expected to continue for the remainder of 2005 with somewhat stable raw material cost," Mr. Bayer said. "However, if the price of oil continues to escalate, there will be little recourse but to pass through the higher cost."
"It continues to be a basic commodity suppliers' market--materials are available, but sometimes at prices significantly above historical levels," Mr. Krause said. "This is forcing everyone to pass on portions of these cost increases to their customers, in what remains an extremely competitive marketplace."
Ink industry leaders are not optimistic about the market.
"I have no expectation that oil-derived raw material pricing will moderate in the near future," Mr. Foster said. "Some raw material categories have softened due to poor general demand, but in other areas suppliers are working hard to maintain their improved margins."
"The strain/nervousness of the crude oil market will remain and will lead to further increases," said Mr. Oestervoss. "An increase of the development capacities is not within sight. In addition to that, there are considerable speculations concerning raw materials. Furthermore, one presumes that strategic acquisitions will occur in order to stabilize the market."
"In the near future, we do not expect to see any significant price reductions; and we hope to see few and small additional increases," Mr. Zavodny said. "Unfortunately, many of the increases were based on causes that are not projected to change until well into 2006."
In the end, it comes down to supply and demand setting the prices, and industry officials have to wait and see what the market will bear.
"We expect ongoing raw material cost volatility with continued upward pressure--at least until fundamental petrochemical feedstock costs reduce and/or until supply and demand price equilibriums are reached at basic capital reinvestment levels," Mr. Krause said.
"We have had no choice but to pass our increased costs to the formulators who must pass them on to the end user," Mr. Elias noted. "Only when these increased costs hit the end user and demand slackens will we see some abatement in raw material costs. This is the very basic law of economics."
David Savastano Editor
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|Date:||Sep 1, 2005|
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