The Turkish steel industry is leaving behind a very challenging 2009 and will report growth in 2010, but will continue to face difficulties in terms of competitiveness in sluggish and volatile export markets, according to the latest Turkey Metals Report.

According to the Turkish Iron and Steel Producers' Association, Turkey's long steel production grew 1.4% year-on-year (y-o-y) to 4.71mn tons in Q110, accounting for 77.5% of total steelmaking compared with 82.3% in Q109. Meanwhile, flat steel output grew 36.8% y-o-y to 1.36mn tons, increasing its proportion of total production from 17.6% to 22.5%. In total, Turkey produced 6.07mn tons of steel, 7.6% up on Q109. EAF output rose by 4% y-o-y while blast furnaces increase production by 17%. Around 65% of production came from mini mills with the remaining 35% coming from integrated plants.

A key risk factor for the Turkish steel industry is its dependence on scrap as opposed to direct reduced iron as feedstock. While the industry was able to benefit greatly from low scrap prices during the recession, in contrast with DRI-dependent producers locked in long-term contracts, the recovery in global demand has pushed up demand for scrap and with it increased costs while DRI remains stable. This puts it at a significant disadvantage compared with competitors such as Egypt, where rebar prices were at least US$100 less than in Turkey and where DRI is the main feedstock.

Prices were increasingly under pressure in Q210, particularly in longs as traders in Arab states concluded contracts on supplies of large quantities of rebar in April to June. As the deals were made on the basis of high price levels at a time of falling domestic quotations, distributors sought to purchase cheaper imported products for inventories in order to minimise losses. We expect price stabilisation in H210 leading to a recovery in local demand, but price volatility indicates that producers will find the going tough over the short-term.

A significant threat is the surge in steelmaking capacity in Saudi Arabia, which saw its steel output rise by 41.6% y-o-y and 9.9% q-o-q to 1.33mn tons in Q110. The rapid increase in Saudi output has contributed to the 14.4% growth in Middle East production, which is outpacing consumption. A 10% growth in Middle East consumption is forecasted in 2010. While Saudi Arabia continued to require rebar imports to satisfy demand from the construction sector in H110, traders suspended import purchases while they waited for the cancellation of a 5% import duty on steel products. This helped depress Turkish exports, although the situation is expected to improve in H210 as Saudi traders resume purchases. Turkish steel is heavily influenced by developments in the Middle East and the expanding role of the Saudi steel industry is a significant challenge to its market position. Although Middle Eastern steel output is unlikely to exceed 20-25% of its total consumption requirements over the medium-term, producers had been banking on a swift upturn in the regional market for recovery and capacity growth poses a significant challenge both in terms of volume and price.

As a result of cost pressures and volatility in Middle Eastern markets, the steel industry's year-to-date performance has been uneven, with April seeing a sudden slowdown in response to trends in Arab markets.

In the first four months of 2010, Turkey's steel billet exports grew by 161% y-o-y to 954,173 tons, worth US$454.7mn and up 213% y-o-y. Over the same period, Turkey's wire rod exports surged by 19.3% y-o-y to 396,605 tons while the revenue of these exports totalled US$218.8mn, up 45% y-oy. However, steel bar exports declined by 52.89% y-o-y to 1.85mn tons while the revenue for these exports stood at US$987.2mn, down 44.45% y-o-y. The country's total steel product exports reached 5.36mn in the January-April period while the revenue generated by these exports amounted to US$3.6bn, decreasing by 20.38% and 6.91% y-o-y respectively.

Source: Officialwire