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Turkish steel margins suffer amid higher cost base

Turkish mills are having difficulty reflecting recent rises in energy costs as well strong scrap prices in their finished product pricing amid sluggish domestic market sentiment and stiff competition in export markets.

Turkish mills input costs have risen notably in recent years, particularly hitting the costs of electric arc furnaces, with a 15% electricity price hike at the beginning of July further cranking up the pressure.

“Energy is the second cost item of the steel producers after raw materials. The energy cost for Turkish producers has significantly risen in recent years. If we compare it with 2017, the increase in our energy costs reached around 100%,” Ugur Dalbeler, CEO of one of Turkey’s leading steelmakers Colakoglu told S&P Global Platts Friday.

Dalbeler, who is also a board member of Turkish Steel Exporters’ Association (CIB), said there were two main reasons for the energy cost rises — Turkey’s last resort supply tariff and its renewable energy support mechanism (YEKDEM).

“The average electricity tariff in Turkey is currently at Lira 30/kWh and when we include YEKDEM on it, our electricity cost reaches Lira 45/kWh. Another problem in YEKDEM is we couldn’t predict the price of the electricity we use at the moment, as the bill is generally determined on the 20th of the ensuing month,” Dalbeler noted.

On top of the internal dynamics of the price increase, the persistent weakness of the lira versus the US dollar has also added to costs for imports like scrap, which are dollar-denominated, while salaries and domestic expenditure like electricity are paid in lira, an Iskenderun-based steelmaker said.

According to him, changes in electricity costs alone have meant a $10/mt increase in the cost of producing products like rebar.

On the back of relatively high collection costs in exporting regions and strong iron ore prices, scrap prices have withstood the ongoing weakness on finished steel products, primarily rebar.

As such, depending on their size, several mills surveyed by Platts have indicated a breakeven spread between the export rebar price and the scrap price at $165-$170/mt.

With the current rebar price approximately around $460/mt and lower for some bigger mills and a scrap import price of $295/mt CFR, this suggests little margin or profit for most mills.

Market participants currently do not expect a strong downside to scrap or strength in rebar prices during the summer months and on the back of sluggish demand, some Turkish mills have already looked at cutting capacity utilization further, which is currently at around 60%-70% in Turkey, source said.

“I know all mills are working maximum two shifts a day,” one Turkish source said, expecting further cuts.

A Turkish longs steelmaker said Friday: “Due to the rising input costs, including energy, I am expecting further capacity cuts from Turkish producers. One or two producers may even make some radical movements and can stop production temporarily.” Some steelmakers were heard cutting production by as much as 20%-30% from the already reduced levels.

However, some steelmakers, particularly of flat products, along with some larger long steel producers, were still seeing robust export sales and hence continuing to operate at unchanged capacity.
Source: https://www.spglobal.com/platts/en/market-insights/latest-news/metals/071919-analysis-turkish-steel-margins-suffer-amid-higher-cost-base

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