Rough Road for Inks

According to one printing ink industry leader, 2001 was the worst business year in recent memory, shaken first by the economic downturn that started in January and continued though August, then followed by the even more drastic drop in the economy after the terrorist attacks on September 11. He says it was like the "perfect wave," a result of several recessionary forces unfortunately coming together at the same time.

As a reflection of declines in overall printing activity of more than 3% for the past year, few ink companies, if any, met their 2001 sales projections, and almost all saw their profit margins severely cut. Adding to the problem was the pressure on accounts receivables, as many ink suppliers saw some of their printing company customers—especially among smaller commercial printers—filing for bankruptcy, while others arbitrarily extended payments for already-delivered ink shipments.

To some ink companies, this has meant reduced cash flow that, in turn, has affected plans for investment in research and development (R&D), process and plant improvements, and proposed internal growth.

An executive for Flint Ink Corporation, the second-largest domestic ink company, sees the current economic downturn as a definite concern for the industry. He says, however, that he does not believe it will have a long-term effect, even though in the short run it creates disruptions along the entire supply chain as everyone adjusts production, buying patterns, and inventories.

For the past year, almost all segments of the ink industry, with the possible exceptions of inks for flexible packaging and digital inks, were affected negatively. This caused overall annual revenues from domestic ink operations, at a record $4.5 billion in 2000, to fall about 5% last year to $4.3 billion as a result of reduced production volume in the range of 7% to 8%.

Most affected among major consumers of ink has been the publishing industry, where demand for magazine and catalog printing has declined sharply. This sector was hit with a double whammy: first, the plummeting of new and renewal magazine subscriptions as a result of the anthrax scare's effect on the mail; second, the subsequent post-September 11 precipitous 11.7% drop in advertising lineage, the largest since 1977, according to the Publishers Information Bureau.

The advertising fall-off also has significantly affected newspaper revenues. As a side effect, several advertising agencies, from New York to San Francisco, have been forced to close.

Major publishing printers—including giants like Cadmus Communications, Quebecor World, and R.R. Donnelley & Sons—have been adjusting their U.S. operations through internal consolidations, plant closures, hiring freezes, and layoffs.

A record number of magazines also have folded, ranging from the glossy Talk to specialized publications such as Institutional Investor, Family PC, Walking, and the many that had been serving Internet-related interests or relatively small niche markets. A sharp decline in heatset ink sales in 2001, in the range of 6% to 7%, was an obvious result of this cut in print production.

Among the other losing segments, corrugated ink sales suffered from a reduction in durable goods shipments. The roto-gravure market was relatively stable, but the demand for flexographic inks softened. Overall, packaging inks as a class were down slightly, the decline held in check by growth in those inks used for flexible packaging and on other non-porous substrates.

Declines in news ink sales were a direct result of the aforementioned drop in advertising.

For the ink industry, the economic climate has cooled the recent trend toward consolidation. Major domestic mergers and acquisitions were virtually non-existent in 2001, the one exception being finalization of the acquisition of Kroma USA by SICPA (the combined companies are to be called SICPA North America).

A strong U.S. dollar and weak international economies have shifted the acquisition focus from domestic ink companies to those in European and Latin American markets. There was one divestiture, the sale by Akzo Nobel Coatings of its successful printing inks business to its management and a private equity company, in which inks were no longer considered a strategic fit by the parent company.

However, despite a shortfall in funds and future uncertainties, several U.S. ink companies continued to seek and acquire smaller regional ink operations that permit them to either strengthen their presence in a particular geographic area, or to expand into new market areas altogether.

"It would be shortsighted to stop activities altogether," says one executive, whose company is financially strong and sees itself in a buyer's market.

As well as adding to market share, these smaller acquisitions often are consolidated with existing branches to provide a region with better customer service and technical support. Other effective and defensive strategies include opening new high-tech manufacturing facilities, upgrading manufacturing processes, making distribution schemes more efficient, and establishing satellite blending sites in new areas.

Cost cutting, a practice that ink manufacturers have been engaged in for several years, continues as a means of conserving resources but is getting even more emphasis in light of the current decline in business. Some actions include reducing branches through consolidation, limiting capital investments, cutting inventories, closing outdated plants, and laying off workers.

But while seeking ways to reduce overhead costs is a continuing process, some ink executives say that their infrastructures may be at a point where any further cuts may affect the retention of experienced people, the scope of R&D, and the ability to adequately service customers.

In-plant operations have not been affected appreciably by the current economic climate, although those that oversee this activity voice concern that price-cutting competitors continues as a problem. But they point out that in-plant equipment belongs to the ink supplier and not the customer, and thus printers hesitate to change suppliers because of reduced service during the two- to three-month transition while the plant and its press crews adjust to different ink technologies.

One somewhat welcome result of the downturn in the economy has been, with a few exceptions, the overall stabilization in the cost of the raw materials employed in ink production. The word "somewhat" is used because the cost of many key ink raw materials had gone up in the last half of 2000 and during the first half of 2001, and that even though prices have since leveled off, they did so at the elevated levels.

Among those still pricey are carbon black and some pigments and solvents. But these have been balanced by major price reductions in titanium dioxide, heatset offset solvents, and tall oil rosins, the latter caused by less demand for paper products from whose production they are a derivative.

Still high in price are those raw materials that are energy intensive.

As for R&D, though funding may be curtailed for economic reasons, there still is pressure on ink company laboratories and their scientific staffs to develop new high-performance inks, more efficient production techniques, and technologies that will further cut manufacturing costs.

Much ongoing research is a direct result of ink makers partnering with their raw materials suppliers, equipment manufacturers, and ink end-users to develop inks that meet current and future needs.

The entry of non-impact digital inks as a recognized and fast-growing part of the ink industry has made them an important addition to the R&D agenda. The ink industry's established expertise with pigmented inks is being applied to this burgeoning segment, with the expectation that new developments will permit the extension of digital inks to large-scale industrial printing.

Last April, ink giant Sun Chemical launched a new business unit, SunJet, based in the United Kingdom, specifically to focus on ink-jet technology and applications involving graphics, packaging, industrial marking, and textiles, in cooperation with OEMs, if appropriate.

Then, in September, in a classic example of a blending of consumables and equipment, Sun sold its share in Colour Valid Group to Eltromat, a manufacturer of press control systems based in Germany, then agreed to jointly sell on-press color management solutions.

Meanwhile, new generations of radiation-cured inks, both ultraviolet (UV) and electron beam, as well as waterless and water-washable offset products, are finding novel markets as they better meet customer needs.

In particular, hybrid inks, which combine the properties of conventional inks with UV inks, are being developed by many more suppliers these days, typically in ventures with makers of radiation hardware. The systems are attracting more printers to sheetfed, packaging, and folding carton applications.

On another front, concerns exist within the domestic ink industry about imports of inks and raw materials, particularly those coming from Asia. U.S. ink executives point out that the strength of the U.S. dollar versus foreign currencies makes it nearly impossible to export American inks, but considerably eases the way into this country for foreign ink importers.

Domestic ink manufacturers may seek relief from what they see as unfair importation practices. They note that subsidies to exporters by their governments—in the case of India, a substantial 17%—gives foreign importing companies a decided competitive advantage.

Further, U.S.-based ink makers question domestic customs classifications, which allow imported ink bases to be classified as finished inks, the latter commanding a much lower duty rate, which may add another 10% in cost reduction. These, say some domestic companies, are practices that afford importers major price advantages that U.S. manufacturers cannot meet.

Given the events of the past year, what do the ink industry's leaders see for the remainder of 2002 and the foreseeable future?

Most express the belief that the economic downturn is close to bottoming out, or already has done so. They base this optimism on the fact that economists, including those with the Federal Reserve, reported at the end of January that early signs of a recovery were emerging, and that the deepest part of the recession should prove to be brief and mild.

If consumer spending increases, stock market performance strengthens, and inflation remains under control, the more optimistic economists forecast a strong comeback as early as this summer. The less optimistic say that recovery may be delayed until late in the fourth quarter of this year or early in 2003, but that it will come.

For those in the ink industry, their customers, and their suppliers, it can't come too soon.