November 19, 2008
by John R. Whalen
Twenty-five years ago, heatset web offset printing ink was being sold in the American market for an average of $7.00 per 4-color set. As recently as last year, the same market was paying about $4.00 for that same 4-color set of inks. In the passage of those 25 years, the cost index of raw materials used to make that 4-color set has risen approximately 250%. It doesn't take an economist to figure out what the trend has been in the American printing ink manufacturing industry, and where it's headed.
"We'll make it up on the volume!" has been the motto of every wunderkind that has graced himself (or herself) on our humble little industry. Of course, the truth is there was never much in the way of volume in the printing biz. There's far more small- and medium-sized orders accompanied by a steady breeze of hot air, complaints, and empty promises from publication printers than there have been truckload deliveries across our national market. But I digress.
I can only speak for the publication and commercial printing ink markets, because that's the area of Kerley's market knowledge and expertise. (I have reason to believe that the packaging ink market has not been as thoroughly gutted as its poor cousin.) The point of my sermon today is that the profit margin of publication and high-volume sheetfed inks has been emaciated to the point where there is no "fat" left in anyone's operating margins.
"What difference does that make?" you may wonder.
The difference lies in the fact that with the recent wild swings in price for crude oil and other commodities affected by the price of crude, an new survival strategy for American inkmakers has to emerge. We have to accept the fact that across the last 25 years, "high-volume" inks have been commoditized by the markets' downward direction in pricing and the concurrent failure to maintain a constant profit margin.
Timing is everything. The surge in prices of our raw materials this summer provided an almost unprecedented stimulus to increase our selling price. The only other period in American history where the market has seen such a rapid change in the pricing of commodities was during the Arab Oil Embargo of 1973-1974. At Kerley, we didn't respond by increasing our prices quickly enough, and we lost money on our operations during the summer and early fall of this year. The immediate and obvious conclusion is that the relative stability of commodity prices that we as Americans have enjoyed over the past few decades has come to an abrupt end. In our own case, Kerley Ink had to quickly develop new software to help tackle the daunting task of recalculating the prices of more than 1500 active formulas. We used to take a couple of weeks to perform this task, performing it by making judgement calls of each of the 1500 active formulas.
Right now, the trend in raw material cost is heading downwards, spearheaded by reductions in the price of the most basic commodities, crude oil (and it resultant distillates) and vegetable oils such as soya oil. The resin and colorant industries have yet to announce any significant price reductions, but we anticipate that this will start to happen during the month of December. We anticipate being able to announce some kind of price decreases in December of 2008.