Steel resolve: Production of steel remains strong with high domestic demand and new export markets

Even as global steel output hit a new record, Turkey clocked the world’s fastest growth in steel production in 2011. Now consumption worldwide is set to decrease due to continued economic strains in Europe and a slowdown in China. In spite of these challenges, however, Turkish steel should still see robust growth in the coming years as domestic demand remains strong.

Turkey ranked as Europe’s second- and the world’s 10th-largest producer of steel in 2011, with output hitting 34.1m tonnes, according to data from the World Steel Association – a year-on-year jump of 17%, far outstripping global growth of 6.8%. Capacity utilisation was nearly 80%, Veysel Yayan, head of the Turkish Iron and Steel Producers’ Association (DÇÜD), told a steel conference in November 2011.

DOMESTIC DEMAND: Much of the demand has been at home, as Turkey’s economy expanded more than 8%. Consumption rose 10% to 375 kg per capita in 2011 and could reach 380 kg in 2012 – 70% higher than the global average, the Istanbul-based Steel Exporters’ Association (C B) said. Preliminary figures from DÇÜD show total finished steel consumption in Turkey probably climbed 15% to 27m tonnes, of which long products accounted for 13m tonnes, a 10% year-on-year rise. The trade group sees long products hitting 30m tonnes in 2012 and predicts flat steel will rise 15%, to 14m tonnes.

Exports remain the bigger business. Iron and steel have become Turkey’s third-largest export sector, accounting for about 10% of all products shipped overseas. Steel sold on international markets reached 18.4m tonnes in 2011, generating revenue of $15.4bn, a 25% increase compared with 2010, according to the C B. Neighbouring Iraq, which is rebuilding its oil and gas industry and other infrastructure after decades of war and sanctions, is the biggest market for Turkish steel, buying 1.5m tonnes in 2011, a 24% year-on-year rise. The UAE and Italy followed, with $1bn and $890m in purchases, respectively.

Those markets illustrate Turkey’s geographic advantage, having easy access to markets in the Middle East and North Africa. “Even without Europe, the recovery in places that underwent the Arab Spring, such as Libya, has created pent-up demand that will be supportive, compensating for Europe,” said Koray Pamir, a steel analyst at Finansinvest in Istanbul. Arab neighbours now developing their own industries will only become competitive in the long term, though Turkish producers are already beginning to look at emerging markets in Africa and Latin America.

CONVERSION: Turkey is the world’s leading manufacturer of rebar, or reinforced bars. In fact, around 75% of Turkish steel production is rebar and other long products, like wire rod and billet, used in construction, while just a quarter is flat steel products, used to make cars and white goods. With overcapacity in the global long steel market, Turkish producers are switching their production facilities to make higher-margin flat steel. Capacity for slab production is expected to hit 20m tonnes a year by 2015, according to the DÇÜD. Investment has also boosted melting production capacity to 45.5m tonnes at the end of 2011, more than doubling since 2000. A final draft of the National Restructuring Plan, a blueprint for Turkey’s steel industry, was submitted to the European Commission in 2010. This plan allows subsidies for steelmakers to convert facilities, which should help sustain steel production in the long term.

The steel industry meets most of its raw material requirements through imports. Turkey is now the world’s biggest importer of scrap, a key ingredient in crude steel production. Overall scrap consumption rose 22% to 30.1m tonnes in 2011, the DÇÜD said. Even though the domestic supply rose 54% to 9.33m tonnes, two-thirds of this as imported. Of the $12bn worth of raw material that Turkey imports to make steel, $9bn is scrap, it said. In 2011, Turkish producers have complained about low quality and impurities in imports. Now the government is devising a quality-certification process on sellers and traders of imported steel scrap.

INCENTIVE SCHEME: More critically, incentives to encourage greater local production of input materials are planned. “Strategic investments are needed in the iron and steel sector, which accounts for one of the main trade imbalances. We are planning special incentives for this,” the economy minister, Zafer Çağlayan, said in December 2011. Though a final law has yet to be passed, the incentives will aim to boost local production of scrap, coal, iron ore and ferroalloy, the DÇÜD’s Yayan told SteelOrbis. He said such mechanisms would not violate the European Coal and Steel Community (ECSC) Treaty, which Turkey joined in 1996. It bars direct aid to the steel industry. Instead, the government will target input supply for automotive and machinery production, which will boost overall steel consumption.

It is not surprising the government feels compelled to take such measures; it must redress a ballooning current account deficit, which soared 64% to hit a record $77bn at the end of 2011, or one tenth of total economic output. “In order to address the current account deficit, it is vital for Turkish businesses to increase value-added and the margins on exported goods and services,” Erdal Karamercan, the CEO of Eczacıbaşı Group, told OBG. Iron and steel is the nation’s third-most imported product. A boom in the construction of homes and businesses, massive highway projects and industrial growth led by automakers, shipbuilders and white goods producers mean domestic steel production cannot cover demand. In December 2011, Turkey imported $1.73bn of iron and steel, compared with exports of $1.08bn.

To help meet Turkey’s appetite for steel, foreign investment is lining up. Turkish steelmaker Tosyalı and Japan’s Toyo Koha, announced in February 2011, to make steel in Osmaniye in southern Turkey. Korean steelmaker Posco is building a stainless plant in Kocaeli that will have annual capacity of 200,000 tonnes when it opens in 2013, according to SteelGuru. Stainless steel is seen reaching 430,000 tonnes by 2015, still far below expected demand of 900,000 tonnes. Turkey’s advantageous location may lure other investors, but the lack of plentiful iron ore and quality coal, used in blast-furnace systems, softens the industry’s competitive edge.

Meanwhile, Turkish companies are looking to expand overseas. Istanbul-based pipemaker Borusan Mannesmann has said it wants to acquire a company in the Middle East. Karabük-based Kardemir, which makes ingot steel, won a 2011 tender to provide 30,000 tonnes of rail to the Iraqi Republic Railways and a €27m contract in 2012 with the Turkish Republic Railways to supply 41,500 tonnes of rail. Kardemir’s rail and beam-rolling mill has a capacity of 450,000 tonnes a year. Net income in 2011 soared 780% to TL185m (€78.6m) on sales of TL1.59bn (€676m), according to a company financial statement.

MAIN STEELMAKER: Turkey’s biggest steelmaker is the formerly state-run Erdemir, which is now controlled by OYAK, the Turkish military’s pension fund. About 47% is publicly traded, and 60% of those shares are foreign-owned. The company posted a 31% rise in profit to TL1.01bn (€429m) in 2011 on sales of TL8.92bn (€3.79bn), its balance sheet showed.

Erdemir now has capacity to produce 4m tonnes of crude steel and 5m tonnes of finished product a year, according to its annual report. Hot rolled flat products account for 71% of the company’s product mix. It controls a quarter of the local market and owns 80% of Turkish iron ore reserves. However, increased capacity has dented some of that dominance. “Erdemir has enjoyed a premium on prices because of its dominance in the flat-steel market. With rising capacity, we are seeing more competition in the domestic market and a trend towards lower prices,” Pamir said.

NEW INVESMENTS: Recent private-sector investments include the world’s largest electric arc furnace, owned by Çolakoğlu Metalurji, which it uses to produce flat-steel products from scrap at its Kocaeli plant. Bursa-based Borçelik Çelik is boosting capacity at its cold-rolling mill, including a new reversing mill and galvanising line, to raise output nearly 80% to 1.6m tonnes a year, according to the C B.

As global steel consumption falters because of the slowdown in Europe and China, a strong domestic market will continue to fire the Turkish industry. Turkish production will likely increase by 10% in 2012, thanks to the construction boom. On the global front, Arab countries rebuilding after revolution against decades of economic and political stagnation will also spur growth. The silver lining in Europe is that fiscally ailing nations are likely to rely more on lower-cost imports from Turkey. ArcelorMittal is idling a number of its European plants, creating an opening for Turkish steel. In the last 20 years, Western Europe ceded about a third of production to other regions. Now Turkey is set to take the lead and may eventually become Europe’s biggest producer.