Changes in China's pigment industry impact ink manufacturers.

The decisions by China in 2007 to eliminate or significantly reduce VAT refunds on pigments and pigment intermediates as well as shut down smaller pigment operations for environmental reasons was critical for ink manufacturers. The end results, higher prices and a decrease in supply, have forced ink manufacturers to scramble. Further, the decline of the U.S. dollar is also creating pressures on U.S.-based ink companies.

"The elimination and/or reduction of VAT by China has had a significant effect on the cost of raw materials and finished goods, driving them up by as much as 8 percent and 13 percent, respectively," David Woolven, head, imaging & inks business line NAFTA, coating effects segment, Ciba Specialty Chemicals, said. "What's more, the prices for additives and pigments from India and China increased by approximately 5 to 10 percent due to appreciation of local currencies on top of VAT and EHS effects. VAT changes and an accelerated de-coupling of the currency, as well as more stringent regulatory compliance issues, will result in fewer suppliers to marginal industry segments. Having said this, Chinese market growth remains unprecedented and domestic demand for these products will continue at a high level."

"By eliminating the refund of VAT for exported pigments, the costs of pigments from China have risen by 13 percent. The vast majority of pigments come from China and India. Between the China export issues and the value of the Indian rupee continuing to rise, we expect cost pressures to continue," said Peter Carey-Yard, marketing director, coatings, high performance pigments, Sun Chemical.

The added emphasis on the environment is also playing an increased role in the Chinese pigment market.

"Not only changes in VAT but also the rigorous enforcemerit of environmental policies have caused supply/demand balances to shift from long to short, resulting in considerable price increases of raw materials," said Martin P. J. John, head of global marketing special printing for Clariant International AG.

With fewer pigment suppliers, both domestic and offshore, available, pigment prices are further in flux.

"Prices went up dramatically," said Andrew Grabacki, vice president of sales for General Press Colors. "The domestic suppliers are more price competitive. However, over the last several years there are less domestic suppliers in business."

"This started the wheels in motion for increased costs for many of the pigments used in the ink industry as well as other markets," said Don McBride, COO for Heucotech Ltd. "In some cases, companies were forced to look for new sourcing due to closures of plants due to government/environmental concerns."

Pigment manufacturers have had to reflect the situation within China in their own prices.

"Certainly, raw materials have become more expensive, and these costs need to be offset with price increases," said Thierry Chevrier, director, performance chemicals--coatings, plastics and specialties, for BASF in North America. "The VAT refund elimination represents a double-edge sword for BASF. On the one hand, because many of our intermediates are sourced in Asia, the VAT reduction adds increased raw materials costs to higher transportation costs, and we continue to investigate other options to maintain price competitiveness. On the other hand, pigments from China now are more competitively priced. We believe, though, that BASF can still demonstrate the best total cost of ownership."

Further consolidation is likely in China, according to Chris Weighill, vice president, general manager, ink industry, high performance pigments for Sun Chemical. "We expect consolidation to occur in the Chinese pigment market with smaller factories closing and larger volume plants emerging," said Mr. Weighill.

Edward daPonte, global marketing manager, Flint Group Pigments, said that even in light of the changes in China, he does not foresee an increase in the European or North American pigment businesses.

"We do not expect much in the way of structural changes," Mr. daPonte added. "Within the last decade, pigment and intermediate production has shifted away from Europe and North America to Asia. Asia has grown its end use markets over the last decade, shifting the consumption base. If you couple this with insufficient investment returns, we believe it is unlikely that there will be any investments into infrastructure in Europe or North America for pigments and intermediates. In fact, we believe there will be more rationalization in these areas out of the western markets."

Maurice Carruthers, vice president, merchant ink business unit, high performance pigments at Sun Chemical, noted that a key difference between China and the U.S. pigment industries is that China typically manufactures dry color pigments while the U.S. manufactures flush color pigments. With prices changing, there may be a shift back to the U.S. and flush colors.

"Flush color pigments are pre-dispersed when sold to customers while dry color pigments are not dispersed at all," Mr. Carruthers said. "Naturally, this means that flush color pigments cost more--a big reason why many North and South American customers turned to the less expensive alternative from China over the past decade.

"Now with dry pigment prices increasing, purchasing pigments from China is not as advantageous as it used to be," Mr. Carruthers added. "This means that there will likely be a slow trend of North and South American customers switching back to purchasing flush color pigments manufactured primarily in the U.S. Thanks to the strength of the euro, European customers will likely continue to purchase pigments from China and the U.S."