Jan Paul van der Velde, SVP of Procurement, Flint Group Provides Insight into Expected Raw Material Cost Developments in 2012

“There is a misplaced view that raw material costs for the graphic art industry are coming down” said Jan Paul van der Velde, senior vice president of procurement for Flint Group. “After more than 1.5 years of costs constantly increasing, people have clearly been looking for good news, and the fact that we witnessed prices generally stabilize in Q4 2011 caused a sensing that things were actually improving. The fact that people were hearing on an almost daily basis about the economic crisis prompted them to also assume that these difficult times would contribute to raw material costs going down.
“The reality is that, with the exception of gum rosin, which dropped a bit in Q4 and Q1 but is now already on the way back up, hardly any materials dropped significantly in price,” Mr. van der Velde said. “In fact most materials stabilized at high levels or with very minor reductions, but when compared to the increases we have seen, they are still at near record levels. Overall costs for the ink industry will be higher in 2012 than they were in 2011, which had itself been a record high year.
“Crude oil in 2011 was on average higher than in 2008, when we all spoke about the crude oil crisis. We have already witnessed 2012 prices creep almost silently past 2011 figures. Crude is the single largest cost driver for the ink industry with many materials linked to this such as mineral oils, hydrocarbon resins, carbon black and solvents in addition to many other chemicals that are also indirectly linked to crude.
“Crude is also a good example of how raw materials have resisted the current economic conditions to remain at record high prices. Of course there is the tension in the Middle East, but it is demand and speculation that has driven the prices and unfortunately this situation has also been replicated in the costs of many of our own base chemicals, such as benzene, toluene, styrene, propylene etc.,” Mr. van der Velde said.
“The crude oil costing has a significant knock on effect and is a good example of the challenges that the ink producers have these days,” he explained. “Due to the high costs of phenolic resins, many ink producers introduced hybrids in 2011, which are based on a combination of phenolic and hydrocarbon resins. However, due to the crude increases, this cost effective alternative is gone. Unfortunately, I believe we are running out of alternatives to protect our customers fully for the inevitable; costs will continue to rise in the next few years due to the trend of increasing raw material costs caused by the global increased shortages and the better cost/price management of the chemical giants. Further speculation on major commodities will only further serve to compound the negative price effect.
“The ink industry is somewhat dependent on materials coming from China. Actually, if you produce pigments, in China, India, Europe or the U.S., many of the intermediates are only available from China. Also for key intermediates for UV materials and other specialty materials China has the key for the costs. Further, 70% of the world production of gum rosin is Chinese origin. With the strength of the Chinese currency (yuan) versus the U.S. dollar and the ongoing 5% revaluation annually, pigments and all other Chinese origin materials will continue to increase in cost. Add to that the increased costs of environment in China and India, the container transport costs and for those based in Europe, the weakness of the euro, and you already have quite a difficult cost scenario.”
“Specific materials also have their own issues,” Mr. van der Velde reported. “Yellow pigments are expected to increase sharply in price in Q2, driven by the sharp increases of benzene in China. Blue pigments are under pressure due to copper and PA. The story of TiO2 is even more frightening, with all producers again announcing major price increases, which will be the sixth quarter in a row. Further due to the increases in styrene and propylene, we will also see water-based resins and UV resins increase.
“What surprises me is that the graphic arts industry seems to deny the facts,” Mr. van der Velde concluded. “Of course nobody likes to talk about cost increases, but the customer has the right to know. We understand that our customers commit themselves to forward contracts with their customers based on their knowledge of cost developments. Flint Group has been a leader in sharing information with our customers about issues affecting the worldwide supply of critical raw materials."