E&P Technical: Ink On the Brink


“I think the newspaper industry better be prepared,” warned John R. Whalen. Within a year, he predicted, the price of ink may rise 50 cents per pound. “There’s nothing we will be able to do.” Already, “the price of a gallon of news ink oil has gone from $1.50 to $2.50 in less than six months,” the R.A. Kerley Ink Engineers Inc. vice president told E&P on Nexpo’s opening day. “This presents a crisis.”

The oil that is the main ingredient in most lithographic news inks is derived from petroleum. And while not all grades of crude are equally valued, their prices generally move up or down together. On the first day of America East, in April, the price of fuel-makers’ preferred “light, sweet crude” hit $60 a barrel. By the last day of America East, Flint Ink Corp. had announced 6% price increases on a variety of products, including color news inks of every type, with prices for UV inks also rising by 6% a month later.

Ink giant Sun Chemical, which declined to comment for this story, made comparable price increases.

By summer, the price of petroleum was more than 60% higher than it was a year earlier ? an increase that roughly corresponds to the rise in the price of ink oil cited by Whalen.

“We knew this was coming. It’s not a surprise,” said Flint Ink Business and Technical Development Vice President Norm Harbin. A week later, on July 7, having just been “hit with another price increase,” he added that he “would not be surprised to see additional increases.” Early that day, trading in crude futures surpassed $62 before falling upon news of the London bomb attacks.

Squeezed for years by rising costs and competitive price pressures, ink manufacturers have looked to services and higher-value products to boost bottom lines. With their costs already on the rise, the year began with signs of change, and they just kept coming.

New names at Nexpo

In January, the world’s No. 2 ink maker, privately owned Flint Ink Corp., of Ann Arbor, Mich., announced several top management changes, not the least of which was that its chairman, H. Howard Flint II, was stepping down as chief executive.

Two months later, Nexpo came and went without its traditional Fun Run. Flint Ink, the event’s sponsor of many years, was represented at the trade show and conference, but it did not exhibit. Nor did a younger competitor, Micro Inks Corp., which had set up at Nexpos since arriving in 2000.

Another established vendor and another new vendor, however, made Nexpo debuts. Founded by a pressroom superintendent, 73-year-old Kerley Ink reversed its mid-1960s decision to stop selling directly to printers. While usually at the Ifra and drupa trade shows in Europe, “we decided to be more visible and promote ourselves” at home, said Senior Account Executive Charles de la Rock. “All you need is [one] new customer,” he added, to justify the time and cost of exhibiting.

Kerley’s capacity exceeds 20 million pounds per year at its two Broadview, Ill., facilities, and it plans a 50-million-pound plant. Besides its own tanker fleet serving sites within a day’s drive of Chicago, it supplies drums, buckets, and cans, and will send tanks by rail to more distant customers. Now, said Whalen, “we are devising a system of disposable tote bins.” The recyclable skid-mounted bulk tote will hold 265 gallons (weighing a metric ton and roughly the size of a newsprint roll) and is low enough to easily check ink levels, he said.

Founded the same year as Micro Inks, Impression Inks Ltd. made the short drive from its Ft. Worth headquarters to the Dallas show. (Representatives of neither company could be reached for this report.) Unlike Micro Inks, a subsidiary of India’s Micro Inks Ltd., Impression is homegrown. “We were with The Ink Co., all of us,” Vice President Ronald Henderson said in spring, referring to his three partners and the West Sacramento, Calif., company acquired by Flint Ink in 1999. Though attending past Nexpos, this was Impression’s first year as an exhibitor. “We’re a little more of a national company than we were in the past,” said partner Jesse Samaniego.

Big ink gets bigger

In June, Flint Ink acknowledged it was mulling merger and acquisition options but denied an earlier published report that it would be auctioned through Banc of America Securities. By mid-month, H. Howard Flint II, representing the third generation of family ownership, died, leaving David B. Flint as executive vice president and non-family members Dave Frescoln as chief executive and vice chairman (with no new chair named) and Linda Welty as chief operating officer and president.

Soon after, however, Agence France-Presse’s financial news subsidiary carried a Financial Times Deutschland report that Britain’s CVC Capital Partners was negotiating a Flint takeover. The paper said its sources expected an agreement ? for up to $1 billion ? to be reached in late July.

Flint managers won’t discuss the reports. “I cannot comment on rumor, as a matter of corporate policy,” said Flint Corporate Communications Vice President Rita Conrad.

Early last fall, CVC acquired BASF’s printing inks and plates operations in Germany and Sweden’s ANI Printing Inks, later merging them as Stuttgart-based Xsys, the world’s No. 3 ink maker behind Flint, which posted almost $1.5 billion in 2004 sales.

While the addition of Flint to Xsys would create a much stronger No. 2 to Dainippon Ink and Chemicals’ Sun Chemical (parent of US Ink), which had more than $2 billion in 2004 sales, the acquisition would not necessarily change the competition for the U.S. news ink business. Kerley’s Whalen said he doesn’t think any supposed European partners can offer anything Flint has not already taken advantage of, because the industry already was forced to become very efficient. As for Sun Chemical, he said, “I don’t believe the Japanese will trade market share for profitability.” Whalen added that he expects consolidation to continue.

It’s happened to some extent in all areas affecting newspapers, from publishing software to printing and packaging equipment, and to a greater extent in plates and platesetting.

Among ink suppliers, Sun and Flint kept getting bigger, the latter making most of its 20 acquisitions in recent years, including The Ink Company (which had acquired three companies itself) in 1999. The year before, Sun bought Heritage Inks, which until 1995 had been J.M. Huber Corp.’s Printing Ink Division. A few years earlier, Sun acquired United States Printing Ink and merged it with its own General Printing Ink to create US Ink. Within five years, five news ink competitors had become two.

With the world’s two biggest ink makers left to supply U.S. newspapers, Kerley reconsidered sales to high-volume printers and newspapers, the Ink Co. veterans regrouped, and two new players entered the arena: India’s Micro Inks and Rieger Printing Ink Ltd., in Canada.

Costs and competition characterized by “desperate price cutting,” according to Kerley, led to consolidation that knocked out the “middlemen” ? resellers such as graphic arts distributors and small to mid-sized ink companies. The situation was aggravated, said Whalen, by the arrival of foreign suppliers like Micro Inks, to which some printers and surviving resellers have turned. Micro Inks has large facilities in India, where it is a big pigment producer.

Whalen calls Micro Inks, now with locations in Schaumburg and Kankakee, Ill., an “interloper entering the U.S. market … with the stated aim of taking over the market through price cutting.”

‘It just keeps going up’

As the field of players had changed, so, too, would the environment in which they sought to keep or capture market share. The new constellation of competitors appeared just as the dot-com bubble was bursting. By the time the effects were fully felt, fallout from 9-11 steepened the economic decline. Fewer ads meant fewer pages to print. And what appears to have been an uneven and gradual improvement for newspapers since then now faces the further financial challenge wrought by soaring oil prices.

Those prices, which have pressured ink makers for years ? especially in the new century ? have been felt most in the past 12 months. “The price of these news inks has increased dramatically since the middle of 2004,” said Flint Ink Procurement Vice President Jack Benson.

Ink suppliers “are probably losing money with every pound they sell,” and their suppliers are finally starting to charge what they need to cover their costs, said Whalen. Staying in business, he added, amounts to “who can hold their breath the longest.”

“In my 27 years in the industry, I’ve never seen it so bad,” Whalen said, and some in the business closer to 50 years tell him they have “never seen profitability as a percentage of sale prices so low or even negative.”

After multiple price increases, and with crude oil hovering at $60 per barrel, Flint’s Harbin said that unlike gasoline prices, “we never had anything go down; it just keeps going up.” Suppliers customarily gave notice of increases, he added. They don’t anymore.

Whalen recalls that offset litho news ink listed at 34 cents/lb. in 1974, then rose all of 15 cents over the next 30 years. Adjusted for inflation, that 44% increase turns into a 63% decrease ? in ’74, 34 cents had the buying power of $1.34 today. He called it printers’ “free ride from the ink industry.”

For purposes of comparison, list prices for newsprint have steadily and gradually climbed, growing by the same unadjusted 44% over only five years, 1974-79. And although transaction prices can differ substantially from list prices, and bounced up and down since the early ’90s, they, too, rose an unadjusted 44% between 1975 and 1980. Newsprint transaction prices for 2005 ? almost double those of 1975 ? are 46% lower when adjusted for inflation.

Pricing and pigments

The most costly component of news inks is their petroleum-derived pigments ? actually the flush or base (ground) pigment dispersions with resin. Yet costs for these synthetic organic compounds have declined as their production moved from the United States to less expensive labor markets.

While others moved production overseas, said Harbin, “we continue to manufacture [pigments] here, and [so does] Sun Chemical.” But Whalen said whatever advantage that may have offered disappeared “with the advent of low-cost pigment suppliers from Asia,” from whom he said they, too, buy. (Benson said Flint not only buys from competitors, but also supplies them with some products that they do not make for themselves.) Harbin agreed that much is produced there, and with Asian industries still growing, North America remains a big buyer. But, he added, “we’re seeing the dynamics change” in raw-materials markets, with other regions “competing for the same base materials we use.”

When the cost of pigment rises, however, some users are better positioned than others. Paint makers, which produce huge volumes that require smaller amounts of a different pigment type, have more success passing along pigment price increases because their end user is the consumer, whereas the industrial customers for inks and pigments prepared for inks “are much, much tough buyers,” said Whalen.

In any event, “there is an adequate supply of pigment” worldwide that is balanced with demand, said Tom Rogers, president and CEO of Apollo/Allegheny Colors Inc., Rockdale, Ill., and Ridgway, Pa. Apollo, Sun Chemical and others two years ago asked the federal government to investigate Micro Inks for hurting the U.S. industry by selling imported pigment dispersions at less than fair value. The matter went no further than a preliminary investigation.

While Whalen sees Micro Inks discounting its way into the U.S. market, Rogers sees the government surrendering the U.S. pigments industry to unfair competition. China and India, he said, “subsidize their pigment industries to capture market in the United States.” With duties on Indian exports to the United States averaging 3% to 4% but U.S. exports to India facing 25% duties, “it’s tough to compete,” Rogers said. Those high duties are meant to “promote internal production,” and India’s government supports incentives for exporting, said Flint’s Benson.

Whalen puts the duties affecting his business at 6.5%, noting that they mainly effect its imports from Asia. While European sales are possible, “we have given up trying to sell into Asia,” he said. Calling it more a cultural matter than anything else, he said that selling into Japan without a Japanese representative “is a joke.”

Manufacture of intermediate chemicals used to produce pigments began leaving the United States in the late 1970s and continued through the 1990s. “It started phasing out when American Cyanimid left the business,” said Rogers. About 80% of those chemicals were made in this country at one time, he said, but today only 20% are domestically sourced.

For all the differences in compensation and other labor costs, said Rogers, his complaint isn’t so much about wages as about subsidization. Rogers insists he’s all for free trade and not erecting barriers to business with China or other Asian countries. But by not leveling the playing field, he said, the U.S. government is “committing economic treason” at the expense of “future generations of Americans.”

On a much smaller scale, tariff troubles continued into the new century. Just two years ago, the Miscellaneous Trade and Technical Corrections Act, which eased import duties, was held up by Alabama’s senators, who sought an amendment to protect their state’s sock knitters from Caribbean competitors said to be able to avoid tariffs.

When the act was signed into law in December 2003, it brought relief to those needing an intermediate chemical ? one not produced in the United States since the 1990s ? used to make a yellow pigment. At the time, Rucker Wickline, president of Flint subsidiary CDR Pigment in Elizabethtown, Ky., told The News-Enterprise there that U.S. pigment makers should not be made to pay duties on materials when there is no domestic supplier to protect.

In the end, while “there was some relief on that particular product,”recalls Rogers, “the total impact on the industry was minimal.” A dozen companies that together had paid $1.2 million yearly (on $30 million worth of the chemical, according to Rogers) now pay only $500,000 total.

Picky about their petroleum

So, big or small, foreign or domestic, family-owned or publicly traded, all ink manufacturers must cope with the cost of crude oil. But beyond that commodity figure, oil pricing affects ink pricing in two ways, according to Harbin.

Of the naphthenic, aromatic, and paraffinic compounds found in different oils, the “big crunch” is on the naphthenic oils used in news inks. Refineries are inadequately supplied with this type. What’s more, said Harbin, “the tire industry is looking to switch” to naphthenic oil from carcinogenic aromatic oil after a Swedish study suggested dust from tire wear may be hazardous. Governments in Europe and Asia have mandated a complete changeover to naphthenic oils by 2009, he said. (Paraffins, or alkanes, are saturated open-chain hydrocarbons, such as propane and butane. Naphthenic and aromatic oils have, respectively, saturated and unsaturated hydrocarbon rings with paraffinic branches.)

The second reason oil prices affect ink prices is simply that most, often all, ink ingredients ? not just the carrier oil ? are derived from petroleum.

Calling the ink business “completely, utterly oil dependent,” Whalen said black inks are 100% oil-based and color inks 75-80% oil-based, with “the pigments completely dependent on petrochemicals.” In fact, he continued, “with the exception of filler clay, all the other components are, or contain enough materials to make them, petroleum derived.” Even tree-based rosin, Whalen explained, must be further processed using petroleum-based intermediates to make the rosin usable as a resin in [an ink] vehicle.

The costs of ink components other than the oil respond to crude oil price hikes to almost the same degree that ink oil’s cost does. But nothing escapes the need for petroleum products ? not even the filler clay, and not even the alternative to petroleum.

Because it is the basis for most fuels, lubricants, and pesticides, petroleum’s price affects the quarrying and grinding of mineral clay for filler and the cultivation and processing of soy beans for vegetable oil, as well as the delivery of both finished products. Still, soy may be amendable to alternative pest/disease management, and soybean oil is the principal raw material for biodiesel fuel and various lubricants, with work under way on engine oil, according to Iowa Soybean Association Marketing Director Karen Andersen.

While the oil in most of the news ink sold is a mineral oil, suitable formulas relying on a vegetable oil have been around since the late 1980s, after the Newspaper Association of America and manufacturers came up with an ink using soybean oil. At about the same time, newspaper flexography, using water-based inks, began catching on. Both were developed in response to the same thing: the previous decade’s oil shortages.

In fact, while flexo’s share of the U.S. newspaper market leveled off at under 3% of dailies after 12 years, soy’s fortunes kept rising in offset pressrooms, more than quadrupling its under-5% 1989 U.S. market share over the next decade, according to figures supplied by the Iowa Soybean Association’s National Soy Ink Information Center. The success of inks containing soybean oil instead of petroleum, said Harbin, partly contributed to “stunting flexo’s growth.”

Priced by the barrel or bushel?

“Probably in the last 10 years we’ve had the most growth in [soy ink] usage,” said Cate Newberg, the Urbandale-based information center’s manager of bio-based materials. With 103 million pounds of soybean oil used annually in printing ink, “we’ve still got room to grow,” the center’s Web site proclaims. “When soy ink reaches its full potential, it will consume 457 million pounds of soybean oil a year.”

A non-toxic, renewable domestic product, soy oil makes ink that prints well ? some say better than petroleum-based inks. But soy’s most important attribute for most papers most of the time will be price. And it’s not there yet.

A bushel of beans yields 11 pounds of oil selling for about 25 cents per pound, or just under $2 per gallon. At $60 per 42-gallon barrel, crude petroleum is still, by comparison, almost a bargain at $1.43 per gallon.

Prices of soy- and petroleum-based ink oils rise and fall with the prices of crude oil and soybeans. Soy, however, “doesn’t fluctuate as wildly,” said Newberg.

“Soy is more expensive, but we can always make the switch,” said Harbin. “Once the [cost] curves cross,” he forecasts, the industry will shift from petroleum to soy.

It’s a credible outcome, given soy’s proven performance and promotional potential. Owing to cost, most papers have used only black soy ink, said Newberg. “But now I think the cost is very comparable,” she said, for color inks.

All suppliers except Impression Inks advertise soy-based inks. At Flint, where Harbin said “a sizeable amount of our production now is in soy,” a range of inks using each oil is available. The price of its low-end soy-based product is roughly comparable to that of its high-end petroleum-based product. Priced 20% higher than its high-end petroleum-based ink, “our highest-end ink is what we call ‘rub-free soy,'” said Harbin.

Prices of both petroleum and soybeans are subject to the whims of nature. A hot, dry early summer threatened the size of the Midwest soybean crop, pushing up prices. It was hoped that remnants of Hurricane Dennis, which threatened oil production in the Gulf of Mexico and briefly drove up crude prices, would cool and quench the crop. At the same time, however, those rains risked carrying soybean rust fungus spores.

Nevertheless, with a harvest of as much as 2.9 billion bushels expected from the Atlantic seaboard to the Great Plains, Harbin calls the United States “the Saudi Arabia of soybean oil.” And in a choice between Mideast oil fields or Midwest farm fields, he points out, dollars spent on soybean oil stay in this market ? unless they are spent on South America’s beans, which isn’t a bad thing. Led by Brazil, the continent is the second-largest producer, and its growing season is North America’s winter, making for a constant supply.

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