Turkey’s steel industry and its heavy reliance on electric arc furnace (EAF) technology has made it a crucial net importer of ferrous scrap from Europe and North America.
Unfortunately for scrap recyclers, steelmakers in Turkey—as in many other parts of the world—have been coping with finished and semi-finished steel exports pouring out of China, where less scrap-intensive basic oxygen furnace (BOF) steelmaking predominates.
Shipments from China to India, the Middle East and other markets served by Turkish mills have created a ripple effect that prompted steel output in Turkey to drop by 5.7% in the first half of 2015 compared to the year before.
Causes and effect
The fortunes of steelmakers in Turkey are tied not only to that nation’s domestic economy but also to GDP growth and construction activity in the Middle East and North Africa (MENA) region, where a double-digit percentage of Turkish steel is shipped.
Unwelcome Competition?
As of 2015, Turkey’s steel output is approximately twice as great as Iran’s, a circumstance that could in theory be very different if Iran were to repair its relations with Western nations and have United Nations sanctions lifted.
Since November 2013, the five United Nations Security Council permanent members (the United States, China, Russia, France and the United Kingdom) plus Germany and the European Union, have been negotiating with Iran to produce an agreement for limitations to and oversight of its use of nuclear materials.
The subsequent Joint Comprehensive Plan of Action (JCPOA) was announced in mid-July 2015 and is subject to review and ratification by the parties to the agreement.
Any subsequent lifting of sanctions is being viewed opportunistically by some of Iran’s neighbours, including the United Arab Emirates (UAE). A report in the U.A.E.-based The National cites an International Monetary Fund (IMF) estimate that “$13 billion will be added to the U.A.E.’s economy by the ending of sanctions in Iran, as trade between the two countries steps up between now and 2018.”
However, before sanctions are lifted globally, the JCPOA faces a potential hurdle in the U.S. If two-thirds of both houses of Congress pass a resolution disapproving of the agreement, this can override a veto of those disapprovals from President Obama.
Michael Eisner, owner of scrap trading firm Premiere Metal Services in the U.S., believes the agreement is unwise and wrote to his congressional representative David Joyce of Ohio to express his viewpoint.
Congressman Joyce wrote back to Eisner, saying, “This deal would legitimize a nuclear-capable Iran and open the door for its neighbors in the Middle East to seek their own path to a ‘peaceful’ nuclear program and the same deal Iran got. In the most unstable, dangerous region in the world, this is a nuclear Pandora’s box, one that the world cannot afford to open.”
While Turkey is a net ferrous scrap importer, on the finished steel side its status as a vigorous exporter is well established. According to the Turkish Steel Producers Association (TCUD), Turkey produced 36.1 million tonnes of finished steel in 2014 and exported almost exactly half that amount (18 million tonnes) of iron and steel the same year.
Unfortunately for Turkish steelmakers, buyers in the MENA region in 2014—as in other parts of the world—took advantage of affordable finished steel being shipped from China. “Because of the increasing activity of Chinese exporters, Turkey’s total steel export to the Middle East and Gulf Region dropped sharply by 20% from 7.6 million tonnes to 6.08 million tonnes [in 2014],” according to the TCUD. “Turkey’s total steel exports to North Africa also dropped by 5.5% to 1.9 million tons.”
The organization adds, “In 2014, EU-28, Middle East and the Gulf and North Africa accounted for 61% of Turkey’s total steel exports.”
The TCUD cites Chinese semi-finished and finished steel exports as a factor that affects both domestic steel production and the appetite for Turkish steel products in adjacent markets.
In its review of the 2014 market, TCUD writes, “Low demand in the global flat steel export markets (such as the EU) and the entrance of some countries’ exporters, particularly Chinese exporters, to Turkey’s traditional markets with high tonnages and low-priced steel products are some of the factors that kept local production under pressure.”
TCUD adds, “Turkey’s total steel imports from the Far East and Southeast Asia [in 2014] increased by 38.5% to 2 million tonnes. In 2014, Turkey’s total steel imports from China rose by 67% to the 1 million tonnes level.”
Imported Chinese steel helped cause a correlating drop in Turkish steel production and mill capacity rates in 2014. “The capacity utilization of the Turkish steel industry went down from 70% in 2013 to 68% in 2014, which is 3 percentage points lower than the global average,” the TCUD reports.
Trade and production figures show the first half of 2015 brought more of the same in the Turkish and MENA markets.
TCUD says imports from China into Turkey grew by more than 190% in the first six months of 2015, with more than 920,000 tonnes of finished and semi-finished Chinese steel entering the country. Turkish steelmakers, through the organization, are among those filing cases with the World Trade Organization (WTO) to stem the flow of Chinese steel into the global market.
If and whether the flow of Chinese steel slows in the second half of 2015 is one factor tied into the near-term health of the Turkish steel industry. The other involves the direction of the economy in Turkey and in neighboring countries.
Tenuous stability
Bright spots for Turkish steelmakers throughout the 21st century have included stable economic growth in Turkey and a building boom in the oil-rich nations of the Gulf Cooperation Council (GCC) that absorbs considerable amounts of steel.
In 2010 and 2011 Turkey’s GDP growth rate exceeded 8.5%, putting it in the same league as China in terms of economic positive momentum.
That growth rate has since slowed, with Turkey this year on pace to record more modest 2.3% to 2.5% GDP growth. Its 2014 GDP growth rate was 2.9%.
Turkey’s ability to serve as a stable and secure place to invest in major capital projects such as steel mills was one of the factors that allowed it to become a steel provider to neighbouring nations in all directions.
Turkey is directly bordered by instability on many of its frontiers, ranging from the economic instability in Greece to the outright bloody conflict in Iraq and Syria. The nearby island nation of Cyprus remains in a state of division, and as of mid-August Turkey’s eastern neighbor Armenia was engaged in escalating tensions with Azerbaijan.
Another eastern neighbor is Iran, whose pariah status with much of the world has in some ways worked to the benefit of Turkey’s steel industry. Iran’s inability to attract Western investment has helped solidify Turkey’s status as an alternative place to invest.
Should the nuclear treaty agreement with Iran be finalised, Iran’s ability to re-engage with the European Union and the global economy will likely bring a mixture of opportunities and threats to Turkey’s steel industry. (See the online sidebar “Unwelcome Competition” above.)
Economic growth has been more reliable in oil-rich GCC nations such as Saudi Arabia, but falling oil prices are now calling into question the ability of those nations to keep investing in infrastructure and urban centers.
Less to gush about
When the world thinks of OPEC (the Organisation of Petroleum Exporting Countries), the oil gushers of the Arabian peninsula quickly come to mind.
Saudi Arabia and its neighbouring states are firmly established as petroleum exporters by volume, but the price fetched for oil on the global market can greatly affect its balance of trade and economic health.
In early August, Saudi Arabia made financial news headlines because of the pace at which it is spending through its foreign currency reserves and the size of its government budget deficit.
“Saudi Arabia has already burned through almost $62 billion of its foreign currency reserves [in 2015], and borrowed $4 billion from local banks in July—its first bond issue since 2007,” according to a CNN Money report.
The kingdom’s budget deficit “is expected to reach 20% of GDP in 2015. That’s extraordinarily high for a country used to running surpluses,” adds the report. Before the price of oil started plunging, Saudi Arabia had decided to invest in major infrastructure projects designed in part to diversify its economy and provide employment opportunities to its youthful population.
As the price of oil has fallen from $107 per barrel to $44, the government’s revenue has dwindled while it continues to spend on the construction projects.
Should the kingdom decide to rein in its spending, it will be one more negative factor against a Turkish steel industry trying to revive its mill capacity rate.
The TCUD’s closing statement in its market review and forecast probably best sums up how 2015 has been shaping up for steelmakers in Turkey: “In short, 2015 is expected to be a year of uncertainties, where positive and negative factors interact.”
The author is the editor of Recycling Today Global Edition and can be contacted at btaylor@gie.net.
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