INSIGHT: Turkey's challenges in the PE and PP market

05 February 2014 16:55 Source:ICIS News

LONDON (ICIS)--In 2001, at the start of the new millennium, economist Jim O’Neill sat in his office at Goldman Sachs and came up with a phrase that would become synonymous with the ideas of opportunity, investment, growth and prosperity during the early years of the twenty-first century. His paper, "The World Needs Better Economic BRICs",  written for Goldman Sachs's "Global Economic Paper" series, caught the world’s eye.

Step forward Brazil, Russia, India and China – the BRIC countries (and later to be joined by South Africa, which, amongst other things, gave the acronym a handy ‘S’ at the end). Hailed by O’Neill and many others after as the new driving force behind global economic growth, the BRICS (or at least some of them) lived up to the hype by outperforming many developed countries in the first decade of the aughts.

In the country’s 10th Five-Year Plan (2001-2005), China mapped out its strategy for economic development and showed strong exceptional year-on-year growth, seeming to be the leader of the new BRIC pack, even appearing to bounce through the 2008 economic crisis relatively unscathed. So much so, that in an interview with the New Statesman last month, O’Neill said that if he had to come up with the name again, he’d just call it the ‘C’ because “China’s one and a half times bigger than the rest of them put together.

Suddenly the world was full of Sinophiles. Companies wanted to build there, countries wanted to trade there, even Olympians wanted to compete there.

But all good things eventually come to an end, or at the very least start to lose some of their new shine. China’s GDP has slowed in recent years. India, as the world’s largest democratic economy is still trailing its feet and not living up to its potential, Brazil is a slow starter, and Russia is facing a slight public image crisis in the run up to the Winter Olympics.

As the popularity of the BRICS starts to crumble, the MINT countries could offer some refreshing green shoots of growth for the coming years.

MINT is comprised of Mexico, Indonesia, Nigeria and Turkey. All are emerging economies, all have favourable – young - populations and all are well located, geographically.

In particular, Turkey has attracted the attention of the petrochemical world and is seen as one of the largest growth areas for the export of petrochemicals, including polypropylene (PP) and polyethylene (PE), as well as other plastics such as PVC and acrylonitrile-butadiene-styrene (ABS).

Turkey sits at the nexus of Europe, the Middle East and India, and is closer to Asia than the mature northwest European markets. It shares a border with Iran on the Asian side, and close enough to eastern Europe and the European Union to build trade close relations with those regions.

This potential stretches beyond the local region as well. South Korea signed a Free Trade Agreement (FTA) with the country in May 2012, eliminating import duty on many products and reducing it for others. In terms of ABS trade to Turkey, for example, South Korea now accounts for around 70% of material entering the country each year, according to a European ABS producer.

The FTA also includes both PE and PP. PP import duty rates from Korea are now 0%. Furthermore,  all PE products, including all grades of high density polyethylene (HDPE), and linear low density polyethylene (LLDPE) also benefit from 0% import duty. Low density polyethylene (LDPE) is still applicable to duty, but the rates drop annually.

In addition to shipped cargoes from across the world, Turkey is one of the few countries that was importing trucked cargoes over the border from neighbouring Iran. Delivery times of trucked cargoes can be as short as seven days, making Iranian material a tempting option for Turkish buyers.

Following the easing of sanctions on Iranian goods, Turkish producers of plastic finished goods can now export material to markets such as the EU. In addition, from 1 January to 21 February 2014, the import duty rate for Iranian PE and PP imports to Turkey has dropped from 6.5% to 3%, giving Iran even more advantage over other suppliers entering Turkey.

However, as always, there is a downside. Iran has supply issues because of ageing production plants badly in need of maintenance and investment. Whilst the lifting of sanctions will allow Iranian producers to import materials in order to repair facilities, sanctions have only been lifted for an initial six months and Iran only has limited PE and PP production capacity.  Subsequently, despite favourable (albeit short-term) duty rates and excellent location, Iranian PP and PE imports into Turkey remain limited.

Hailed as one to watch as part of the MINT club, Turkey faces challenges from one of the BRICS -  China. In recent months, Middle Eastern countries have found the arbitrage opportunity with China too good to pass up. China’s requirement for vessels with which to export its goods means suppliers to China have been enjoying freight costs as low as $5-10/tonne according to some market sources, just so there are empty ships in China ready to take goods away.

With just one local producer, Petkim, operating within Turkey, the country is always in danger of being left short of material. If producers from the Middle East, Iran or India decide China offers better netback opportunities post Lunar New Year, Turkey could get left behind. Producers will only look to Turkey as an alternative export destination if Chinese prices begin to drop.

Turkey does have a growing PP market and Gaziantep, the country’s carpet production hub, is taking in large amounts of PP fibre grade each year. Turkey’s PP market situation was further helped with the reduction of duty rates from India on 1 January 2014, to 3% from 6.5%. Unlike Iran, Indian duty rates do not have an expiration date, so will remain a popular choice for Turkish buyers.

Turkey still faces significant issues, however. Since the end of 2013, political problems within the country have seen a dramatic plunge in the value of the lira against both the US dollar and the euro, leading to the Turkish Central Bank having to take drastic steps and raise inflation rates on 28 January. The impact of Turkey’s currency issues on PE and PP demand has been particularly harsh.

A declining Turkish Lira against the US dollar in recent weeks has caused concern for Turkish PE and PP buyers with the impact felt particularly acutely by smaller companies.

The lira has dropped to 2.24 lira to the US dollar this week, compared to 2.02 lira to the US dollar on 10 December, reflecting ongoing political issues in the country ahead of a year of elections. Political tensions are having a negative impact on the economy, leading to an air of uncertainty amongst consumers of PE and PP-produced goods.

Speaking about the current market situation, one trader in Turkey said: “We have had some political problems here, so the effect is the Turkish lira lost 10% of value against the US dollar, so this puts a lid on everything. Everyone is holding and waiting to see what happens with the lira, so business-wise it's very dry right now.”

The trader added that small businesses in Turkey are feeling the pressure more than larger companies, as they are struggling to pass on increases in the raw material costs of high density HDPE pipe and film grades to end-use consumers. HDPE pipe in particular is suffering from weak demand in February, when the construction industry slows down because of colder weather.

“In the past they [producers of end-user goods] used to like the price increases because they were able to put increases in their final products, but now they are saying they can't sell,” the trader said.

“Demand [in Turkey] is at a reasonable level but the problem is the exchange rate, the increasing US dollar,” a local producer said.

Larger consumers in Turkey, so far at least, appear to be less affected by the drop, but remain cautious about how long the dip may last.

“[We have not experienced] too much impact yet but it's difficult to foresee,” a buyer of copolymer and homopolymer PP said.

“It depends on the political stability in Turkey. There is a tension in the markets, and the most important time is the time around local elections on 13 March. This year will be a difficult year,” the buyer said, adding that it does not expect to see much growth in the market in 2014.

PE and PP demand is still picking up following the traditional slowdown over the winter holiday period, and current supply is able to meet demand levels, but some players have concerns over first-quarter availability.

“It is very big hurdle for everyone here, especially for importers. But, it is [a] fact, and definitely affecting the importers importing more product,” a trader of Middle East product based in Istanbul said.

Availability of Iranian material is said to be tight, though sources were not certain of the reasons behind this. Bad weather in Iran was blamed by one source, whilst a possible shortage in domestic gas availability in Iran was suggested by a second.

iddle Eastern producers are also directing product to Asia, and in particular China, where the netback opportunities are better than in Turkey. PP offers from the Middle East are scarce, and are only for end-of-January loading, a Turkish trader said.

The tentative buying activity of Turkish converters may come back to haunt them in coming months. If Chinese demand picks up in February after the Lunar Holiday, Middle East and Iranian producers will probably start sending material to China, where they can command a higher price.

This would leave Turkish converters with low stock levels and limited availability. Subsequently, one Middle Eastern producer indicated it would not be surprised if Turkish prices rise in March because of tightness in the market.

Once it can master its political and economic issues and see its currency strengthen against the US dollar, Turkey may well become the one to watch in the PE and PP markets. 

Additional reporting by Iain Packham

By Matt Tudball