Pigment and dye prices continue their upward march as global producers try to stay afloat amid rising raw materials and energy costs. But buyers say the rates of price increase have slackened somewhat in the past year due to the downturn in two giant end-use pigment markets, architectural paints and automotive coatings.

The past few months, most of the major pigment and dye producers have stepped up their contract prices anywhere from 3-7%, typically blaming surging hydrocarbons for the rises. But other factors are also pushing up prices of imported dyes and pigments, most notably the drop in the U.S. dollar against foreign currencies. This is a serious issue for the many U.S. pigment buyers who source overseas. In fact, about two-thirds of organic colored pigments consumed in the U.S. are imported, notes Frank Lavieri, general manager of Lansco Colors, a Montvale, N.J. company that is both a buyer and reseller of pigments. As the dollar sinks against foreign currencies, he says, U.S. pigment buyers and importers have to shell out proportionately more dollars to their overseas suppliers.

Also adding to inflationary pressures on pigments are the soaring prices of the base metals that go into some high-end pigments, says Scott Detiveaux, an analyst with Orr & Boss, a Plymouth, Mich.-based management consulting firm for the specialty chemicals industry. He cites vanadium and cadmium as prime examples.

Then there is the recent removal of waivers on tariffs for pigments exported from China. The tariff exemptions were “substantial,” Detiveaux says, adding that their removal has contributed to more expensive pigment imports.

Another economic drawback for dyes and pigment importers is an ongoing crackdown by the Chinese government on pigment manufacturers that do not comply with the country’s tighter environmental regulations. (Most critics say the regulations are laudable, but have been implemented in a clumsy way.) According to Sun Chemical, a major manufacturer that sources pigments in China, the crackdown has led to shortages and higher prices of some pigments from China. Lavieri has noticed that when factories in China suddenly clean up their act, in accordance with government environmental rules, “the quality of their product suffers,” or at least deviates more than normal from specifications.

On the whole, however, the quality of pigments imported from China and other Asian countries has improved greatly. “Ten or twelve years ago, the common view was that you could get excellent prices in China, but the quality wasn’t that good,” says Charles Bangert, a partner at Orr & Boss in Plymouth, Mich. “That’s all changed,” he adds, “and today the quality is much better.”

Beyond quality, availability of dyes and pigments on the global market may emerge as an issue over the next few months as China tries to put its best foot forward for the upcoming Olympics in Beijing. Lavieri reports that some pigment factories in China are being closed by the government for environmental reasons, while others are being relocated away from Olympics-related venues. Such developments “are likely to lead to shortages” of pigments from China through at least the summer period, Lavieri predicts. But the problem may be short-lived. “We’re hoping things will return to normal” after the Olympics, Lavieri says.

In the short-term, however, buyers should have few problems obtaining the pigments and colorants they want. “I’m not aware of a situation where an order [for pigments] can’t be filled,” says Lavieri. “Six months ago, there were certain raw materials that couldn’t be purchased at any price.”

Among U.S. pigment buyers who look overseas for raw materials there are diverse strategies. “Some companies are just whole-hog sourcing from Asia,” says Detiveaux. “Others are getting a minority of their product overseas and using that as leverage to offset prices of their domestic suppliers.” Pigment suppliers that are able to compete successfully in the U.S. usually offer “some sort of value-added service,” Detiveaux continues. They may actually buy their raw materials in Asia, he notes, but still produce custom colorant formulations for their U.S. market. Buyers of colorants in the U.S. often choose domestic suppliers of pigments when they have very tight specifications, which allow little or no variation in color.

Regardless of where they source their raw materials, pigment and colorant suppliers are finding business conditions strained in certain areas. Two of the largest end-use sectors for pigments are decorative coatings (notably house paint), and automotive coatings. With the current slump in the U.S. economy, “neither of these markets is doing great right now,” Detiveaux says.

Another problem for domestic colorant suppliers is that the manufacturing for many of their end-use applications for their pigments are moving offshore, particularly to Asia. This trend has particularly affected coatings for furniture and some metal products. But for several years, says Detiveaux, that decline for coatings and pigments in U.S. demand was offset by a strong domestic construction sector—until recently when the housing market crashed.

Now, with the chilling U.S. economy and the continuing exodus of some end-use markets to Asia, U.S. pigments suppliers are hurting, particularly the smaller ones that are not global players. Some of them, says Bangert, are being forced to re-invent themselves. He cites the case of a U.S. pigment producer with under $30 million in annual sales that has just built a manufacturing plant in China. The firm’s aim, he says, is not to send back material to its U.S. customers, but to sell into the domestic Chinese market. That company’s U.S. customers continue to be serviced by its existing U.S. plants.

Another way U.S. pigment firms are dealing with the economic downturn is to put their idle capacity to good use. For example, some of them are turning to toll manufacturing, says Bangert.

For buyers of formulated pigment products, a slower demand means that the prices they pay, while still going up, are not climbing as fast as a few years ago. During the 2005 through early-2006 period in the U.S., says Detiveaux, there was peak demand and cost growth in pigments, so prices of finished pigment products “went through the roof.” Now, he says, demand is down, but basic pigment tags are still inflating due to rising oil, currency shifts and other factors. So in balance, buyers are still seeing increases for finished pigment products, but not at the rate they saw about two years ago.

Looking ahead about three years, Detiveaux sees demand for pigments picking up again with an improving economy. But as U.S. pigment suppliers continue to import cheaper raw materials in Asia, their costs will go down. Therefore, he expects the current pace of increases in finished pigment products to be maintained for the next few years, even though the underlying demand and cost dynamics will shift.