OUTLOOK ‘17: Turkey PP market faces uncertain start to the year

(recasts, clarifying description of dates in Turkstat import chart) 

LONDON (ICIS)–Turkish polypropylene (PP) market participants face an uncertain start to 2017 because of on-going economic issues caused by geopolitical unrest in the region and a weakening currency, leading to cautious buying activity and potential shortage of supply.

2016 finished with the Turkish lira dropping to record lows against the US dollar almost every week, which continued into the new year. The lira reached a new low of 3.62/$1 on 5 January, falling to yet a new record low of 3.72 on 9 January 2017, making it the poorest-performing emerging market currency in the world, according to local news sources.

However, while the deadly terrorist attack in Istanbul on 31 December went some way to causing the drop in the currency, that has been exacerbated by a stronger dollar. Consumers further down the PP chain are using the poor economic situation to delay payment or cancel orders, which is shortening liquidity further up the line.

As a result, raw material consumers and converters are managing stocks carefully and buying less, creating less demand for producers in the Middle East and Iran in particular, with Iranian producers reducing exports to Turkey towards the end of last year.

The Turkish polymer market is also, to some extent, at the mercy of the Chinese market. Higher CFR (cost and freight) prices in China compared to the Turkish market means suppliers can get better netbacks in China than in Turkey. Iranian producers in particular have been taking advantage of this, as well as some Middle Eastern suppliers, and the result is less supply to Turkey.

Due to cheaper freight rates from the Middle East to China compared to Turkey – approximately $10/tonne from Saudi Arabia to China compared to $50/tonne on average from Saudi Arabia to Turkey – Turkish prices will need to rise at least $40-50/tonne higher than those in China in order to make suppliers consider Turkey as an attractive alternative.

The good news for Turkey is that Chinese PP prices have started to soften on declining PP futures ahead of the Lunar New Year, which begins on 28 January. Chinese CFR flat yarn (raffia) prices dropped to $1,000-1,040/tonne CFR China Main Port on Friday 6 January, as Turkish homopolymer raffia prices rose to $1,020-1,040/tonne CFR Turkey on Thursday 5^th, marking the first time Chinese raffia prices have been lower than Turkish levels since early December.

(Turkish CFR raffia prices vs China CFR flat yarn (raffia) prices)

Despite the drop in Chinese levels, higher upstream costs and limited supply may limit further reductions, and those same factors could cause Turkish prices to continue to rise.

Producers have almost all increased their January offer prices to Turkey because of the rising crude prices following the cutback in oil production by both OPEC and non-OPEC oil-producing countries.

This, together with limited to supply to Turkey because of better arbitrage opportunities in China and some planned maintenance outages in Egypt and India at the end of last year, will allow producers to take a more bullish stance with Turkish buyers. These buyers may also find themselves in a tough negotiating position if they have kept their stocks limited in recent months because of the uncertain market outlook.

Players from all sides of the market will also be watching to see what happens should a proposed referendum on constitutional change get the go-ahead in the first half of the year. The referendum will be to decide whether current president Recep Tayyip Erdogan will be granted executive power to rule Turkey as President. Regardless of the outcome, the referendum itself may lead to subdued trading activity in the country as was seen around the elections in June 2015.

(2011-2015 full-year homopolymer imports & 2016 Jan-Nov imports. Source: Turkstat)

However, despite the on-going economic problems and political uncertainty faced in Turkey, it is still one of the largest importers of PP in the world, with annual import rates continuing to grow, with 2016 volumes looking on track to match those of 2015. Due to the large volume of imports entering the country, producers cannot afford to ignore the market even with the currently weak demand levels.

By Matt Tudball

(Picture source: Source – WestEnd61, REX, Shutterstock)