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Factbox: Turkish steel restarts but weak demand, protectionism dim prospects

COVID-19 hit Turkey's economy mid-March. Most industrial sectors, including steel long product mills, halted production in April, when the nation's monthly crude steel output dropped 26.3% on year to 2.2 million mt, after a strong first quarter, according to the World Steel Association.

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Due to the adoption of stringent measures, the spread of the virus has slowed in recent weeks and most of Turkey's industrial sectors, including most steel mills, had restarted production as of the second week of May, in line with normalization efforts globally.

However, the domestic steel market outlook is bleak for the rest of the year, despite government efforts to spur domestic demand by cutting interest rates. In Turkey's major European Union export market there are rising protectionist pressures.

Construction, typically the biggest steel-using sector, is expected to continue to shrink in Turkey during 2020 from 2019 levels.

Turkish automotive producers - typically the second biggest steel consuming sector - plan to raise capacity use only gradually depending on market conditions, following a 91% on-year plunge in production in April, when white goods production shrank 54%.

The World Bank has slashed Turkey's growth estimate for 2020 to 0.5%, from 3% foreseen before the COVID-19 pandemic.

Mills' capacity usage fell as low as 45% in April, according to Turkish Steel Producers' Association TCUD. Ugur Dalbeler, CEO of major producer Colakoglu, believes the second quarter will be "hard" for Turkish mills, with market recovery possible in the second half of the year. Turkish mills' 2020 crude steel output is expected to fall significantly from 2019.

Sharp exchange rate fluctuations, together with virus-related business interruptions, have significantly damaged most of the small, medium and even large Turkish steel producers' balance sheets, sources say. "The first half of 2020 has been lost. Let's hope that there's some relief in the second half," a steel service center manager said.

Related infographic: COVID-19 latest blow to Turkish steel industry

Infographic: COVID-19 latest blow to Turkish steel industry

INFRASTRUCTURE

Turkey produced around 33 million metric tons of steel in 2019 - 20 million mt of long steel products and 13 million mt flat steel - relatively flat on year, according to Turkish Steel Producers' Association TCUD. It was the eighth largest steel producer worldwide.

Some 68% of Turkey's steelmaking capacity is electric arc furnace based, with 24 EAF plants, making it the world's biggest importer of steel scrap. In 2019 it imported 18.86 million mt of steel scrap, according to International Recycling Bureau BIR.

At the start of 2020, Turkish market participants were expecting a strong year following the halving of US Section 232 tariffs on steel imports from Turkey to 25% in Q2 2019, which helped Turkey maintain its steel exports last year.

TRADE FLOWS

Turkey's steel industry is dependent on scrap imports and on steel product exports. It typically exports 50% of its total steel output every year.

However, Turkey's steel exports shrank by 25% year on year in April as a result of the pandemic, TCUD reported.

The sector is vulnerable to exchange rate fluctuations and changes in global trade flows or protectionist currents that may lead to alterations in existing tariff and quota systems. In mid-May the European Commission started an investigation into allegations of dumping of Turkish hot-rolled coil into the EU. On May 25, Turkey notified the World Trade Organization that it could impose customs duties on steel imports from the EU in retaliation for the move.

The EC is also reviewing its steel import safeguards, which have temporarily reduced interest in Turkish-origin long steel imports. Following a sharp demand drop for Turkish-origin steel in the country's key export markets at the height of the pandemic, Turkish mills have recently booked large-volume rebar cargoes into Hong Kong and the US, suggesting some improvement in demand sentiment since mid-May.

The Turkish lira has fallen around 20% against the dollar since the beginning of the year as its depreciation has accelerated during the coronavirus pandemic.

The US is Turkey's largest ferrous scrap supplier, having provided 984,000 mt of scrap in Q1 2020 - around 250,000 mt higher on year - followed by the Netherlands and the UK. Russia in recent years has been Turkey's fourth-largest ferrous scrap supplier; however volumes fell off in Q1 due to lower prices and intensified competition from US and European suppliers. In Q1 the average price to Turkey was $270/mt CFR, down from $310/mt CFR in Q1 2019.

Russia's scrap export trend to Turkey reversed in April when the pandemic paralyzed activity at US and EU scrap merchants, while Russian collection was not so greatly impacted thanks to milder restrictions on businesses. Last month the volume of ferrous scrap Russia's Rostov and Volga river ports exported to Turkey jumped by 65% to 35,370 mt, up from 22,000 mt in March.

Going forward, Russia's shipments will depend on the pace of steelmaking recovery in Turkey, as the scrap procurement price needs to be higher than the current $240/mt to make exports appealing.

PRICES AND MARGINS

Turkish mills' hot-rolled coil prices fell by as much $100/mt during March, hitting as low as $400/mt mid-April, as the pandemic reduced demand in both domestic and export markets.

Turkish rebar export prices plunged $50/mt over three weeks in March before bottoming out in early April, and despite a moderate rebound remain significantly below the pre-COVID-19 level. An upturn in finished steel demand is expected with the end of Ramadan, although the impact of the coronavirus continues to depress demand. Turkish mills were heard to have sold large-volume rebar cargoes to Hong Kong, with prices heard at $390-$395/mt FOB Turkey for 55,000 mt shipments. A number of US-bound rebar sales have also been reported from three Marmara mills, but talk of rebar sales to the EU currently remains limited, with uncertainty surrounding the review of the EU steel import safeguards.

Turkish mills were heard to have booked eight deepsea scrap cargoes late last week, ahead of the Bayram holiday, which took place May 24 until May 27. Six cargoes were sold by Baltic recyclers, with one heard from a UK recycler and another from a Benelux seller. Scrap sell-side sources expect Turkish mills to take a step back from scrap buying in the coming days, as their focus shifts to boosting finished steel sales.

Premium heavy melting scrap HMS 1/2 (80:20) has traded within a range of $239-$252/mt CFR so far over May, with the downside limited by continued tight scrap supply, due to coronavirus-related collection restrictions and a sharp drop in the availability of new production scrap, following automotive stoppages in April in key scrap-exporting regions. The upside to scrap prices has been limited by poor domestic and export finished steel demand.

Import prices for Turkish ferrous scrap had plunged to $207/mt, their lowest level in four years, in early April, on coronavirus-fueled concerns of demand weakness. Benchmark import scrap prices recorded a $60/mt drop from pre-coronavirus levels over the second half of March.

The Turkish long steel melting margin - the spread between Turkish export rebar and import scrap - has remained within a range of $147-$161/mt so far in May.