Turkish PP, PE market uncertainty set to continue into November

Focus article by Matt Tudball

LONDON (ICIS)–The ongoing uncertainty in the Turkish polypropylene (PP) and polyethylene (PE) markets caused by political and economic instability is set to continue until after the country’s second general election this year, to be held on 1 November, sources said this week.

Turkey has had a turbulent year so far in 2015, both within the PP and PE markets, but also in terms of its economy and within the country’s political system.

Now, players in the market are waiting to return to the polls in November in the hope that a new government will be elected and some form of stability returns. However, how long it takes for things to settle down if a new government is elected waits to be seen.

“Everyone is mixed [in their views about market direction] but also in hold mode until after the election. If no one party gets a majority, then they will take a month to form a coalition and then it’ll be December/January before things become normal again,” a Turkish trader said.

The Turkish president, Recep Tayyip Erdogan, called for a second election to be held in November after coalition talks between the ruling Justice and Development Party (AKP) and Nationalist Movement Party (MHP) failed to reach an agreement to form a new government following the June 7 elections.

Rather than passing the mandate to form a coalition government to the parties in Turkey, President Erdogan instead called for a second election to be held in the hope of seeing a party emerge with a majority vote. As a result the country have been without an elected government for the last four months.

During this time the polymers markets have seen demand and prices drop, though as a result of combined factors of which the political situation is just one.

Buying appetite in Turkey has been weak in 2015, especially on PP, as exports of finished goods has not been performing as expected. It was only the lack of material due to European and Middle Eastern production problems that caused prices to rise in the first half of the year. Once availability improved, PP and PE prices started to drop around the world, but as other markets saw a rebound in prices at the end of August, Turkish prices remained flat.

The problem lies with the attitude of buyers in Turkey, who are unwilling to buy large parcels from suppliers because of weak end-user demand. They have been keeping stock levels low because up until the end of August they felt there was still room for further drops based on the bearish direction of feedstock costs.

When crude prices started to stabilise and then rebound in September, Turkish buyers continued purchasing on a hand-to-mouth basis, in some cases borrowing material for immediate needs from neighbours or other buyers in the industry.

The preference for just-in-time delivery was evident by an increase in Egyptian PP exports to Turkey in June-August compared to Iranian material.

Delivery times for Iranian cargoes trucked from manufacturing sites in Assaluyeh in the south and Tabriz in the north of Iran typically take around 7 days to arrive in the key PP processing hub of Gaziantep. Egyptian cargoes can reach Gaziantep in approximately two days, however, which has increased the attractiveness of Egyptian material to Turkish PP buyers as it means they can keep stock levels low but still have access to material with a relatively short delivery time.

The increase in Egyptian PP imports over Iranian material from June can also be partially attributed to military activity in the southeast of Turkey which began with an attack by the terrorist group ISIS in the Turkish town of Suruc, but has escalated to regular and deadly exchanges between Turkish security forces and the outlawed Kurdish Workers’ Party (PKK).

While there has been no direct disruptions to trade routes between Iran and Gaziantep, an attack on a truck carrying Iranian license plates has made it increasingly difficult for buyers in Turkey to find willing drivers to bring material through the affected area. If buyers can find drivers, they face higher carriage and insurance costs.  

Further impacting PP, PE demand levels in Turkey is the dramatic depreciation of the lira against the US dollar which is also unnerving Turkish buyers and traders.

With the lira reaching a record low of 3.067 against the US dollar (USD) on 24 September, buying imported material has become incredibly costly for both buyers and traders. Rather than buy material to only have it sit around in warehouses because demand is so weak, traders as well as buyers have also kept stock levels low, in some cases only buying material from suppliers when buyers have placed their orders.

(Source: XE.com)

This buying attitude could have an adverse effect if it discourages suppliers from the Middle East and Iran from sending cargoes to Turkey in favour of more reliable and profitable markets such as China or southern Asia, where demand is stronger than in Turkey.

The uncertainty around the future of the lira did not improve even as it showed some gains against the dollar in October, rising to 2.905 on 9 October. The rallying in the currency has only added to the cautious buying sentiment this week because some buyers hold off making purchases in case the lira appreciates further.

The Turkish market is desperate to see a return to some form of normality, with an elected government, a stable currency and a more optimistic outlook for the future. How far away that future is from the country’s current situation, however, waits to be seen.