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Analysis: Turkey's economic woes hitting construction-related commodities

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Analysis: Turkey's economic woes hitting construction-related commodities

Destaques

Petcoke users switching away from imports

Turkish rebar market grinds to halt on economy, forex

Plastics industry sees slow growth over next 2 years

London — Turkey's economic woes caused by a loss of investor confidence in the policies pursued by the government of President Recep Tayyip Erdogan have hit the construction industry and the commodities it uses.

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The fiscal and monetary tightening now on the cards to support the ailing Turkish lira is likely to compound this. Steel rebar and feedstock scrap as well as PVC and the petcoke used as fuel by cement plants are all in the firing line.

This means petcoke traders will be watching the results of the Turkish central bank's meeting Thursday after the bank earlier signaled it would change its stance, indicating a rate hike.

Higher rates could increase currency volatility and increase cement plants' financing costs.

Sources in the petcoke market have already been struggling to source cheaper material, with retaliatory tariffs of 4% on imported petcoke imposed by the Turkish government after the US imposed tariffs on Turkish metal exports.

President Donald Trump imposed the tariffs from March 23, saying imports of selected steel and aluminum products from several countries, including Turkey, were a threat to national security. US tariffs were doubled on August 13 to 20% for aluminum and 50% for steel as a retaliatory measure against Turkey after US citizen Andrew Brunson was imprisoned over links to the Gulen movement, which Erdogan says was behind the attempted 2016 coup against him.

Brunson denies the charges.

The lira reacted immediately by plunging to seven to the dollar, marking a drop of around 45% since the start of the year and 8% since the start of August.

According to customs data, Turkey imported 3.11 million mt of non-calcined petcoke over January-July, an increase of 31% on the year, with the US supplying 85%.

Traders say they expect petcoke imports to fall as a result of the tensions with the US and the economic situation in Turkey.

Petcoke buyers are looking to domestic sellers because of the rise in imported, dollar-denominated petcoke prices, with a new refinery to come online next year that will add 700,000 mt/year on top of the 800,000 mt that is already produced in Turkey.

CURRENCY PLUNGE HITS STEEL PRODUCERS

The drop in the lira meant Turkish steel producers were unable to purchase scrap cargoes for their electric arc furnaces to replenish stockpiles and produce finished products such as rebar for the whole of August. "There are issues with the mills, they have very limited liquidity and they cannot [make scrap purchases] as they normally would," an agent said.

Rebar futures dropped immediately after Trump tweet on the doubled tariffs, with the London Metal Exchange front-month September futures diving $22.50 on the day to $498/mt.

Turkey is the larger exporter of rebar to the US, with 255,850 mt finished product shipped in first half of 2018. Industry sources said rebar sales ground to a halt domestically due to low demand from August. "There is very little inquiry from the construction sector," an agent said, adding that the country needed a more stable currency to get the economy moving again.

NO SEASONAL PICK-UP FOR PVC DEMAND

Another sector to face a challenge is Turkish plastics. According to industry body Pagev, 697 companies are active in the Turkish plastics construction materials industry and the construction and building sector accounts for around two thirds of Turkish PVC demand.

Turkish production is around 154,000 mt/year. Last year Turkey imported 800,000 mt and exported just over 8,000 mt, indicating that domestic consumption is around 946,000 mt/year.

Over January-July Turkey imported 466,753 mt of pure PVC, up 6.3% year on year, according to the latest data from Turkstat.

"The current situation has impacted Turkish plastics production, especially construction plastics," Pagev president Yavuz Eroglu said in an emailed statement to S&P Global Platts. "There are estimated 1.5 years of housing stock unsold and the construction industry is focused on selling the stocks."

"Companies who do not have exports (thus hard currency hedging) and have debts in foreign currency face tough times. It is obvious that there will be some consolidation in the market in the short and medium term," Eroglu said. "Although the plastics business is growing approximately 3%-4% [a year] because of plastic product substitution (replacement of glass, metal, wood with plastics), we do not expect to have high growth years in the next two years of so."

According to S&P Global Platts data, Turkish PVC prices have been in steady decline since March 2017, despite a brief recovery in late May and June, with prices slipping from $975/mt on March 14 to $890/mt by August 8.

PVC spot prices in Turkey remained stagnant in the month from August 8 as the lira tumbled and Turkish plastics buyers adopted a wait-and-see approach.

Buyers were aided in avoiding the market by the Turkish holiday season in the second half of August.

However, the seasonal trend of an uptick in demand in September, after the summer holiday period, failed to materialize in early September.

The lack of buying interest in Turkey has generated concern across the EU, because it is the origin of around 57% of Turkish PVC imports. The rest comes from the US (15%), Mexico (10%), South Korea (6%), Russia (4%) and Egypt (3%).

"The current situation is very unclear. We should know by October," a European market source said. "Demand could drop by 20% this year in Turkey."

However, short lead times and lower freight rates could give EU material an advantage over PVC from other parts of the world, according to the source.

Another European PVC market source said: "A lot of PVC imports were stored in warehouses and not consumed. The Turkish domestic market is oversupplied. Importers have stopped buying. There will be minimal import levels in September. Inflation is likely to rise further. The construction sector will be in big trouble as it was a bubble."

--Jamila Al Ibrahim, jamila.al.ibrahim@spglobal.com

--Piers De Wilde, piers.de.wilde@spglobal.com

--Maria Tsay, maria.tsay@spglobal.com

--Luke Milner, luke.milner@spglobal.com

--Simon Price, simon.price@spglobal.com

--Edited by Jonathan Dart, jonathan.dart@spglobal.com; Jonathan Fox, jonathan.fox@spglobal.com