Uğur Dalbeler, General Manager of Turkey-based Çolakoğlu Metalurji AŞ and Chairman of IREPAS, discussed his high hopes for the Turkish steel market with SteelOrbis Istanbul during the fall SteelOrbis conference and IREPAS meeting.
In your opinion, was there an optimistic mood at IREPAS this fall?
UD: I think it was fine and mood was optimistic, but sometimes expectations and uncertainties may evoke fear in people. This is the point where the importance of the exchange of ideas becomes apparent; people find the opportunity to reassure each other and a certain solidarity arises. When we set off 25 years ago, everything was quite different than it is now. In the last four IREPAS meetings I see the same thing: The event starts with lots of uncertainties in the agenda, since our business has been surrounded by uncertainties in the last three years, but the outcome of the meeting is positive, so people have more confidence in us now.
Which is the most affected party on the steel supply chain in light of recent economic difficulties? Do you think traders suffer the most?
UD: We all are being affected, both personally and professionally. There are many opinions out there, but I’m curious if they are based on realities. If they were, perhaps we would not have witnessed a year like 2008, and the situation would be different than it is now. Certain things are out of our control. For example, in the past prices were all we were talking about. But in fact, neither we nor any group here have power to control prices, since it is the market dynamics which determine the prices. And there are numerous elements that form the market. Only from this presupposition can one understand the market: Can you adapt yourself to the market situation? Can you survive in market conditions? Besides, if you find the opportunity to share the information that you need, your life becomes easier—at least you become more strong-minded deciding your next move. That’s why I think the IREPAS meeting is useful.
The great challenge for traders is their need to satisfy both producers and consumers, while increases in the foreign exchange rate put pressure on the shoulders of importers. And when any part of the business deteriorates, the whole business becomes unbalanced. A trader can only flourish if all is balanced.
From the producer’s point of view, we should adapt ourselves to market conditions as I mentioned earlier. If prices fall, then we should find the ways to reduce our production and raw material costs. If our business volume shrinks, then we should explore how we can increase our efficiency in order to survive in the market.
The stereotype of the market player, who only wonders about what prices will be, or where he will sell his products, is behind the times. It’s more important to concentrate on planning for the medium and the long term. One way or another production and orders will be always there. But what really matters is the sustainable profitability.
In 2012, which markets will be brighter for Turkish rebar exporters?
UD: In 2012, we can gain back the rebar export volume that we have lost in the Middle East and North Africa. I think South America will remain a key market, but I don’t know much about the Far East—steel trade has started to become more regional, with trade between long destinations becoming more difficult. However, Turkish mills can still do it. That’s why Turkish mills differ from other suppliers, we can transport rebar anywhere in the world, though it’s the less value-added steel product.
Do you think mills from southern Europe, such as Italy and Spain will become competitors of Turkish mills in export markets?
UD: I don’t think so. If they could, then they would have in the past three years. We were all hard hit in 2008 and we all reduced production. Nevertheless, in 2009 Turkey managed to keep its rebar export volume at 2008 levels. The main contribution came from Egypt, who bought 2.5 million mt of rebar from Turkey, and this offset the decline in Turkey’s rebar exports to Saudi Arabia and the UAE. If European mills had the ability, then they could have found a chance to get their share of the 2.5 million mt—but they didn’t. European mills may only penetrate into the Algerian market where they enjoy the advantages of a free trade agreement, whereas Turkish exports are subject to a 15 percent import duty. But in other markets, that is not the case.
Besides, it’s not about only the price anymore. It still counts, but to control a market, suppliers need to ship material on time and the way the buyer requests. Since nobody in the market works with high margins anymore, there is no place for flexibility. The customer should receive his order on time and as he wants—we, as Turks, excel at that.
What do you think about Turkish rebar suppliers’ role in North America?
UD: This year, we started to export rebar to the US market again, even though I was not hoping for it. Can you believe that we buy steel scrap from the US and pay $40/mt to bring it to Turkey and once we produce rebar or wire rod we pay $40/mt again to send it back to the US? And yet we try to offer competitive prices despite all these costs. It does not seem very feasible, since costs reaching up to $80/mt don’t leave much room for competitive prices. However, we can do it, seeking every opportunity. This year, our rebar export performance to the US has exceeded our expectations so far.
In the Turkish domestic market, contractors are complaining about rebar suppliers’ pricing policy, saying that mills are manipulating local prices. What do you think about the situation?
UD: Contractors are our major customers and so a dispute is impossible between the supplier and its customer. We must find the source of the problem and then solve it. Contractors are undertaking long-lasting projects via tenders, calculating their costs according to price levels of that date. And when prices increase when the contractor decides to purchase the rebar, then his profit margin shrinks. That’s when contractors complain about protectionism in rebar prices. But the real situation is quite different. Turkey’s rebar imports reach 100,000 mt every year. If there is no import duty for rebar imports from Romania, Bulgaria, Italy or Greece, then we cannot talk about protectionism. We only demand protective measures for imports from the CIS, since the steel industry in Ukraine and Russia is subsidized. Along with a subsidiary in power tariffs, these countries have also applied export duties for steel scrap for at least the last decade, whereas we receive no government aid. If no protective measure is applied for imports from these countries, our domestic industry will be hurt.
We think that the solution is switching from spot transactions to futures contracts. If contractors were able to know spot prices and forward prices for six months to a year ahead of time, then they may conclude rebar transactions according to this price information and may hedge their business, getting rid of all the difficulties they face now. It is also useful for the producer. Since the rebar market in Turkey changes on a weekly basis, producers also may face losses, due to changes in both raw material prices and finished product prices.
At this point do you think services of LME or CME may become widespread with pressure coming from contractors?
UD: Yes, it’s possible. The awareness for these services is still limited, and we need to change our way of thinking. Already, these tools are widely used for other metals—although it did take time for those contracts to gain traction. For example, it took almost seven years for aluminum contracts to gain liquidity. For steel contacts, the history is limited to two to three years. In futures markets, trade volume should grow for these markets to deepen and approach the real market; and producers should get involved for a real increase in trade volume. For now, the gap between futures market prices and real prices is wide. Another advantage that is widely ignored for now is that LME is a customer who will never turn its back on you. You can sell as much billet as you want to the LME with the term you desire, and when the term ends you can send the billet physically if it’s advantageous, or close your position on paper.
Last year, Turkey’s rebar exports declined in favor of steel billet, since demand coming from the Middle East—and particularly from Iran—increased significantly along with prices. How is the situation this year? Will steel billet demand grow continuously in the Middle East, in line with the rising finished steel production?
UD: Yes it may continue like this. As Turkish exporters, we did not feel the trade volume contraction back in 2009, thanks to the demand coming from Egypt. However, in 2010, Egypt’s rebar demand regressed to 500,000 mt from 2.5 million mt. And this also affected Turkish mills. Nevertheless, it shows how the dynamism of the Turkish steel industry dazzles, because last year Turkish mills reduced their rebar production in favor of steel billet, since demand was there. Doing this, the Turkish steel exports witnessed a limited loss in 2010.
And steel billet prices increased…
UD: Definitely, because steel production in the Middle East has significantly increased in the last few years. However, since investment for liquid steel production is higher compared to rolling mill investment (in addition to energy, which is not very affordable for many countries), the potential for reaching high levels of production for liquid steel is limited. Thus, their dependence on steel billet prevails. In the meantime, the Middle East and North African markets are protected somewhat against the finished steel imports, whereas the situation for steel billet is different. For example, Morocco applies a duty for rebar imports, but steel billet is duty-free. For this reason, exporting billet to these markets may be more advantageous. Last year, according to Turkey’s average export prices, the gap between rebar prices and steel billet prices was $27/mt. But nobody can turn steel billet into rebar at $27/mt. This is not because rebar prices are low, but because steel billet prices are high. This year, the margin seems even tighter.
Additionally, this year rebar demand has increased both in the Turkish domestic market and in Turkey’s export markets, and Turkish producers started to regain some of their old export markets, such as Hong Kong and Singapore, while adding new markets to their portfolio, enjoying lively demand from Latin America. And in the first eight months of this year, Turkey’s rebar exports grew 10 percent year-on-year, while steel billet exports fell 26 percent. This shows that selling rebar is more profitable than selling billet—but if this situation changes, steel billet exports may increase again.
Since Russia sold much of its steel billet to Iran, the Middle Eastern and North African markets were under Turkish mills’ control. However this year, the North African market has shown some slowdown. But I think North African markets will resume their high activity levels by next year, since there is still demand—it’s only some fears that challenge people.
What is the capacity usage level of Turkish mills? For Çolakoğlu Metalurji for example?
UD: Currently, we are operating at about 80-85 percent of its total capacity. This rate is also valid for Turkish mills in general.
Last year your company announced that it will start test production of new flat steel grades. What is the latest situation?
UD: Yes, we have started test production of new flat steel grades, such as rim grade steel and steel tube grade. But the majority of our production is destined to the production of commercial qualities. Among our major customers I can count steel pipe manufacturers, cold rolled coil manufacturers and steel service centers. But we are trying to expand our customer portfolio, since it’s important to increase the share of high value-added steel. Focusing only on commercial-grade steel production also means being exposed to stronger competition. So it’s one of our priorities to expand our product mix. It’s been a year since we started hot rolled coil production. Our performance is good but we still have a way to go.
Concerning a possible economic crisis, what would be direct effects on the Turkish steel industry?
UD: In the short term, the depreciation of the euro brings two consequences for us. The first one is it gets more difficult to penetrate the European market. Secondly, sometimes European suppliers may become our competitors. In the meantime, Europe is one of our primary raw material sources, and a weaker euro means cheaper scrap.
You’re not pessimistic, then?
UD: No, I’m not. We have witnessed such challenging times that now it doesn’t seem there is much to worry about, especially when Turkey is registering such a strong growth rate.
What about the strengthening of the US dollar and its effects on the Turkish steel industry?
UD: Since the Turkish steel industry is mainly based on exports, we are not using the Turkish lira much. We buy our raw material on a US dollar basis and we sell it on the dollar basis again. Even in our domestic market, steel prices are on the US dollar basis, so it does not affect us much. On the contrary, it may become useful in curbing imports, pushing down the trade deficit. Besides, our local costs decrease as the dollar gets stronger. When we say Europe is becoming more competitive due to a weaker euro, we forget that it is not only the euro which depreciates against the US dollar, but the Turkish lira as well. So we, as Turkish mills, are also benefiting from a similar advantage.