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Challenges for Turkish steel

Jun 01, 2018 | 08:00 AM |


The Turkish steel industry had quite a positive year in 2017, but 2018 started with several challenges, including the US Section 232 trade investigation, a sharp decline in the country’s local currency, a trade investigation from Europe and the surprise of early elections.While Turkish steel output has been increasing in 2018, the market worries about the loss of export markets persist.

LONG PRODUCTS

Turkish rebar and billet markets have been heavily affected so far this year by political and economic problems within and around the country, in addition to the Section 232 tariffs against Turkish exports into the US.

Many of the internal political issues in Turkey caused sharp decreases of the Turkish lira against the US dollar, which constantly increased raw material costs for the mills selling finished steel into local markets in lira but buying scrap and billet in dollars.

The major issues that caused the lira to weaken were the state of emergency declared in 2016, off-border operations in Syria, and the decision to run elections early.

On July 15, 2016, some members of the Turkish army attempted a military coup but failed to take control of the country’s government. Following this attempt, the Turkish government declared a state of emergency, which is still in force.

Market participants have been surprised by the decision to run early elections, announced on April 18. The ruling Justice and Development Party and the Nationalist Movement Party have agreed to hold parliamentary and presidential elections on June 24, 2018, which is 17 months earlier than the scheduled date.

Following these political issues, which has been taking place since the beginning of the year, the lira constantly lost weight. The currency was trading at TRY1 to $0.2630 on January 1, and had fallen to TRY1 to $0.2222 by May 21.

As mills’ raw material costs increased, local rebar and wire rod prices have also increased persistently since the beginning of the year. Domestic rebar prices in Turkey were around TRY2,200 ($490) per tonne ex-works levels, including 18% VAT, at the beginning of the year, which reached to around TRY3,000 ($669) per tonne in late May. Increasing long steel prices started to impact the construction sector in the country and Turkey’s ministry of economy first reduced the import tax on rebar and then completely removed it.

The ministry of economy had decreased the country’s import duty on rebar to 10%, from a previous 30%, with immediate effect in July 2017. The ministry subsequently removed the country’s import duty on January 1.

The Turkish Steel Exporters’ Association (ÇIB) did not expect the removal of the duty to result in a fall in steel prices in 2018, however. Rather, it expected prices to continue to rise due to increasing raw material costs. “Increasing electrode, ferro-alloys, refractories, scrap and
coal prices are pushing up production costs,” Namik Ekinci, ÇIB’s former board chairman, had said.

“The contractors, who complain about high rebar prices, do not want to sacrifice their high profits... The cost of rebar is only 1.5-4.6% of construction costs, according to our research. The rising rebar price in the past year only affected building prices by 0.3-1%,” Ekinci said. “At the end of the day, contractors’ profit margins are still 45-70%,” a level not seen in any other part of the world, he added.

The removal of the import tax on rebar has also left Turkey unprotected against dumped and non-standard material, and will not help domestic rebar prices to fall, Ekinci said. “Steel prices are set in the global markets and Turkish contractors are using the cheapest and highest quality material, even if they complain. It is unacceptable to protect one industry while another is harmed,” he added.
As Ekinci predicted, the rebar prices in Turkey continued to increase so far in 2018.

Exports and trade measures

In the export markets, the situation was even worse due to protectionist measures against the country’s long steel exports.

The US imposed a global 25% duty on steel imports and 10% on aluminium imports after concluding its Section 232 trade investigation of imports with a bearing on the country’s national security, but then announced temporary exemptions for countries and regions including the EU, Australia, Brazil, South Korea, Mexico and Canada.

The economy minister Nihat Zeybekçi said on May 12 that Turkey may take counter-measures against the Section 232 import tariffs. Turkey is not on the exemption list, Zeybekçi said, even though the country has a trade deficit with the US. It exported steel worth $1.2 billion to the US in 2017, but the value of its imports from the US totaled $1.3 billion, he said. Turkey is the sixth-biggest steel exporter to the US, he added.

“We told [the US government] very clearly that Turkey should be kept out [of the Section 232 process]. We also made attempts [to gain exclusion] by applying to the World Trade Organization [WTO]. Very recently, we told them that we will take counter-steps,” Zeybekçi continued.

“Our arguments regarding counter-steps will be similar to those of the US. We can do this very quickly. After that, we can enter a period that will negatively affect the US more [than it will affect Turkey] in terms of the trade between [the countries]. We are leaving all the doors open,” he said. The Turkish ministry of economy started an investigation into the effects of steel imports on the country’s domestic steelmaking industry in April.

Turkey exported 6.4 million tonnes of steel products in January-April 2018, down by 6.3% year-on-year, while the value of the exports rose by 19.3% year-on-year to $4.7 billion, according to the ÇIB. The biggest portion of Turkish exports was rebar with 2 million tonnes. Turkey exported 1 million tonnes of hot-rolled coil, 617,000 tonnes of welded steel pipes, 574,000 tonnes of sections and 561,000 tonnes of wire rod in January-April 2018.

“The main reason for falling steel exports is the Section 232 decision, which sharply reduced our exports into USA,” Adnan Aslan, the board chairman of ÇIB said. “Turkey’s steel exports into USA fell by 48.3% year-on-year to 455,000 tonnes in January-April. Section 232 is the biggest obstacle for Turkey and we are still working on putting Turkey in the exemption list, as Turkish steel industry exports under the WTO rules,” he added.

Q1 statistics

Turkey exported 1.61 million tonnes of rebar in the first three months of the year, which was 14.88% lower than the same period of last year, according to the Turkish Statistical Institute (TÜIK). But the value of the country’s total rebar exports were 11.58% higher than the corresponding period of 2017.

Yemen was the biggest buyer of Turkish rebar in the January-March period, importing 248,904 tonnes, down by 2.11% year-on-year. Turkey’s exports to the US in the same period fell by 41.59% year-on-year to 189,115 tonnes, while its exports to Israel rose by 4.90% year-on-year to 171,703 tonnes.

In the same period, Turkey’s exports into Canada and Netherlands have increased significantly, according to TÜIK data. Turkey exported 131,079 tonnes of rebar to Canada, compared with the 29,205 tonnes exported during January-March 2017, while the country’s exports into the Netherlands totaled 75,744 tonnes, up from last year’s 14,593 tonnes.

Turkey produced 9.54 million tonnes of crude steel in January-March 2018, a 7.92% increase over the corresponding period in 2017, according to the Turkish Steel Producers’ Association (TÇÜD). Crude steel production was 3.37 million tonnes in March alone, a 7.60% increase year-on-year.

Billet production reached 6.50 million tonnes in the first three months of 2018, up by 8.45% from 5.99 million tonnes.

The volume of steel produced in Turkey by using electric-arc furnaces increased by 10.81% to 6.58 million tonnes in January-March 2018, up from 5.94 million tonnes in January-March 2017. Output from blast furnaces rose by 2% to 2.96 million tonnes, from 2.90 million tonnes in the same comparison.

The flat steel market is also slow in the country, because the Islamic holy month of Ramadan started in May and will be followed by the seasonally slow months of June and July.

FLAT PRODUCTS
Turkish flat steel producers are looking for more trade protection as their traditional export markets take more protective measures themselves, and as local production capacity increases.

The country produced 3.043 million tonnes of slab in January-March 2018, up by 6.81% year-on-year from 2.85 million tonnes. Beyond the US trade measures already mentioned for long products, on March 26 the European Commission (EC) launched a safeguard case into 26 carbon and stainless steel products that are imported into the EU. This investigation is likely to result in quotas being applied instead of tariffs, according to an announcement by the International Rebar Producers & Exporters Association (Irepas) in April 2018.

The US and Europe are both important export destinations for Turkish steel products, the TÇUD noted in April 2018. But it added that countries which will no longer be able to sell their steel to these areas will instead target countries that do not have strong trade protection, such as Turkey.

These developments mean that 2018 will be a difficult year for the Turkish steel sector, and the advances that the sector achieved in production and export volumes in 2017 will be hard to match in 2018, TÇUD said. The steel-consuming sectors in Turkey should target increased use of domestic products, while the country needs to conduct countervailing duty investigations to protect local production, the association said.

Production and trade

Turkey produced 11,684,000 tonnes of slab in 2017, up by 15.15 % on the 10,147,000 tonnes produced in 2016. Turkey’s domestic hot-rolled coil (HRC) price, which was $540-550 per tonne ex-works on January 6, 2017, fell to as low as $485-495 per tonne in June 2017, but had recovered to $585-610 per tonne by late December 2017.

Turkey reduced the import duty applied to incoming shipments of HRC intended for re-rollers to 3.5% from the previous 5%, with effect from January 1, 2018. The duty remains at 9% for other HRC imports. The Turkish ministry of economy also imposed import duties on some hot-rolled steel plates, cold-rolled coil (CRC) and tinplate products with effect from January 1, 2018.

According to the ministry, plates with certain Harmonized System (HS) classification codes for traded products are now subject to import duty at 9%. Some CRCs have become subject to 10% import duty. With this decision, all imports grouped under HS code 7209 are subject to 10% import duty because all other such products were already subject to that level of duty. Tinplate with HS codes 721240201921 and 721250201011 are now subject to 15% import duty. Coated coils with nine different HS codes are also subject to 15% import duty. All these products had been subject to no duty until 2018.

In addition, the ministry of economy started an investigation into the impact of steel imports on the country’s domestic steelmaking industry on April 27 2018. The probe includes flat, long and stainless steel, along with steel tube & pipe products. The investigation includes hot-rolled flat steel imports with HS codes 7208 and 7211, cold-rolled flat steel with HS code 7209, coated flat steel with HS codes 7210 and 7212, and alloy flat steel with HS codes 7225 and 7226.

The long steel products under investigation are wire rod under HS codes 7213 and 7227, steel bar under HS codes 7214 and 7215, sections under HS code 7216, steel wire under HS code 7217, and bars and sections under HS code 7228. Railway or tramway track iron or steel under HS code 7302, and tube & pipe under HS codes 7303, 7304, 7305 and 7306, are also under investigation, along with stainless flat steel under HS codes 7219 and 7220.

The probe will be finalized in nine months’ time, but may be extended by another six months if required, the ministry said.

Automotive industry

The automotive industry is one of the biggest steel-consuming sectors for Turkey’s steelmakers, and as the country exports most of its output to Europe, production increased in 2017 thanks to strong demand in that region’s export markets. Turkey produced a record-breaking 1,695,731 vehicles in 2017, 14.12% more than the 1,485,927 units produced in 2016, the Turkish Automotive Manufacturers Association (OSD) reported.

The country’s vehicle exports increased by 16.78% to 1,332,794 vehicles, compared with 1,141,382 in 2016, according to OSD data. In January-April 2018, Turkey produced 563,695 vehicles, down by 1.67% from the 573,246 made in the first four months of 2017. Exports decreased by 2.36% year-on-year in January-April to 461,495 vehicles, compared with 472,626 vehicles exported in the same period last year.

Export volumes

Turkey’s flat steel exports have been increasing, especially since early 2017, thanks to strong demand in Europe. However, the EC’s safeguard investigation into 26 steel product types could prevent the redirection of steel in the global export markets from the US to the EU market.

Turkey exported 4.18 million tonnes of flat steel products in 2017, an increase of 40.22% compared with 2016’s 2.98 million tonnes, according to the TÜIK. The country exported 1.215 million tonnes of flat steel products in January-March 2018. This volume was up by 22.68% from the 990,172 tonnes exported in January-March 2017, the institute reported.

Movements in the pricing of steel and steel commodities in 2018 will not be sharp, according to Gökhan Demiruz, chairman of Turkey’s Flat Steel Importers, Exporters & Industrialists Association (Yisad). Price movements will continue in 2018, but will not change prices by more than 20-25%, he said. Turkey consumed about 16.50 million tonnes of flat steel in 2017, while imports totalled about 8 million tonnes, he added. Flat steel exports out of Turkey reached about 4.50 million tonnes in 2017, compared with 3 million tonnes in 2016.

Consumption and exports of flat steel were both expected to increase in 2018, Demiruz said, because local demand is strong and positive, and new flat steel producers will start production domestically. The over-riding topic in the global steel trade now is protectionism, he added. This gave Turkey an advantage because it has found strong demand in the markets in Europe and the US due to competitive pricing, he said.
But the accuracy of any predictions depends on China’s next move, Demiruz also said, reminding that the country produces 50% of the world’s total steel output.

Ugur Dalbeler, chief executive officer of Turkish steelmaker Çolakoglu Metalurji, agreed with Demiruz. China’s steel exports decreased to 5 million tonnes per month in 2017 from 10 million tonnes per month in 2015, he noted. This allowed steel producers to develop a strong presence in global markets, and 2017 was the best year for the steel sector since 2008, he said.

Dalbeler expected flat steel demand to remain strong in Turkey in 2018, but believed that prices will rise because raw material and slab prices are increasing.

New capacity

Turkey’s Yildiz Demir Çelik, part of Yildizlar Holding, ordered a 1.5 million tpy mill to produce cold rolled, galvanized, annealed and skin-passed coils from Danieli in 2016 and started production of 150,000 tpy of pre-painted galvanized coil (PPGI) at its facility in Kocaeli, in April 2018. The company will start producing 400,000 tpy of hot-dipped galvanized coil in June this year and production of CRC at a rate of 1.5 million tpy will start in September.

In a second phase, Yildiz Demir Çelik also plans to invest in crude steel and flat steel production, potentially in Romania or Russia.
Turkey’s Tosyali is planning to invest in an integrated steel plant in Osmaniye, southern Turkey. The plant, fully owned by Tosyali Holding, will use local iron ore, and the investment will be completed in seven years’ time, with an investment of $7 billion. It will have crude steel production capacity of 2 million tonnes per year, and will replace imports now made by the company to produce flat steel. Tosyali has a total crude steel production capacity of 5 million tpy, using electric-arc furnaces. The company also has plans to invest in iron mining. Turkey has three existing integrated steel producers: Erdemir, Isdemir, and Kardemir. Tosyali Holding produces steel profiles, tubes & pipe and flat and long products in Turkey and Algeria.

Russia’s Magnitogorsk Iron & Steel Works (MMK) may restart the melt shop at its MMK Metalurji unit in Turkey this year. But there may be delays due to the uncertainty in the market created by the Section 232 investigation in the United States and the EU safeguard investigation.

“The US imposed the duty on imports of steel products after we had taken the decision [to restart the melt shop],” Andrey Eremin, MMK’s director for economics, said during a presentation of the company’s operational and financial results for the first quarter of the year in May 2018. “Europe has also started an investigation into steel imports to prevent the redirection of [steel product shipments into Europe] from the US,” he added. The EU trade case will in principle be concluded within nine months, around late November 2018. Eremin said that MMK had made the decision to restart the equipment in late February or early March.

Trade restrictions in the US and the EU could lead to “potential growth of competition in the [Turkish] domestic market,” the company said in its first-quarter report. MMK is currently doing maintenance work on the equipment at its Turkish asset, and making agreements for supplies of scrap and electrodes, as well as gas and energy, Eremin said.

MMK stopped operations at its melt shop and compact strip mill, which have capacity for 2.3 million tonnes per year, in late 2012 because HRC prices had fallen while scrap and energy costs had gone up.

Written By Serife Durmus and Cem Türken



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