The readjustment of energy charges impacts negatively on iron & steel sector competitivity..Turkish Iron & Steel Producers Association

With Turkey's TEDAS' (public electricity company) readjustment on energy charges, consumers paying induction and minimill charges have been included in the industrial subscriber group. The rearrangement will increase the energy costs of producers by over 20 percent depending on the usage situation and where the electricity is taken from. The aforementioned charges' readjustment has been largely attributed to the expectations of the EU Commission, which has prohibited all manner of state aid to the iron and steel sector. The iron and steel sector has accepted the introduction of EU standards in energy charges in a comprehensive manner. The energy charges to industrial groups in the EU are separated into four categories. The energy charges are at the following levels: Average energy costs in EU member countries*

                        Pence/kwh      cent/kwh         TRY/kwh
                     Jul 05  Jan 06  Jul 05  Jan 06   Jul 05 Jan 06

Energy consumers,   5,45     6,12    9,59   10,55    12,91   14,27    small-scale 
EU 15 (average)

Energy consumers,    4,10     4,64    7,22    8,00     9,71   10,82
medium-scale 
EU 15 (average)

Energy consumers,    3,91     4,40    6,88    7,58     9,26   10,26
large-scale 
EU 15 (average)

Energy consumers,    3,58     4,01    6,30    6,91     8,52    9,35
very large-scale  
EU 15 (average) 

*Taxes are included Especially at the weekends and on public holidays, Turkey's energy consumption always decreases significantly and some power plants of the EUAS (Electricity Generation Co. Inc.) close down. This situation, which causes complications in the production process and increases energy costs, also leads to major losses in employment and revenues. However, both power plants and industrial companies have to work at full capacity to enable Turkey to pursue stable growth and to solve its unemployment problem. Rearrangement of the energy costs is required so that weekend operating becomes more attractive for high energy-consuming industrial companies. This would contribute to boosting productivity in the energy sector and would also accelerate economic growth. Fluctuations in the iron and steel prices are closely linked to input and freight costs. Although domestic steel consumption showed a rise greater than 20 percent in 2005, prices showed a significant decrease. Meanwhile, the pre-tax income of the steel sector fell 77.9 percent compared to 2004 due to developments in the international markets. Despite the scrap advantage, average energy prices in the EU member countries are around 30 percent lower than in Turkey. The price gap between Spain and Turkey stands at 40 percent. Prices are around 3 cent in Russia which is one of Turkey's leading competitors. Furthermore, the steel sector is actively protected in Russia and Ukraine by the implementation of a scrap export duty of Euro 30/ton and Euro 18/ton respectively. In spite of the demand of the EU Commission, Turkey's Foreign Affairs Ministry and Undersecretariat for Foreign Trade, Russia and Ukraine have declined to change their export duties. Thus, steel producers in both countries retain a significant advantage. In addition, the energy prices of around 2 cent in China, along with the low labor and input costs provide a huge advantage for Chinese steel producers over the Turkish mills. Consequently, the Chinese have been able to start increasing their market share in the Middle East and the Gulf countries by applying discounts of $50-60 per ton. Under the new arrangement, energy prices for mini-mills have reached TRY 12/kwh in Turkey. Following the change, the costs of some enterprises will reach $20 million annually. The other factor that will impact negatively on enterprises are the cost increases in energy output. On the other hand, the low-price charges applied to housing in opposition to EU member countries, are increasing the energy input costs of industrial enterprises. Iron and non-ferrous metal exports reached $9 billion in the January-September 2006 period. Iron and non-ferrous metal exports are expected to surpass $12 billion by the year-end. The growth rate of iron and non-ferrous metal exports in the January-September 2006 period was twice as high as the growth rate of overall exports. The energy input costs have to be reduced in order to ease the foreign trade deficit in the steel sector and maintain its contribution to economic growth. Consequently, in order not to reduce the Turkish steel sector's competitivity in international markets, the negativity in energy input costs has to be reduced by the following measures: - Almost the same charges as EU member countries have to be applied in Turkey - Night charges have to be applied at the weekends and on public holidays or to large-scale energy consumers - The energy prices rate between housing and industry has to be balanced as in OECD countries. Turkish Iron & Steel Producers Association www.dcud.org.tr