Turkish polymer market faces economic uncertainties

Turkey's polymers markets are facing challenges from the country's economic underperformance, and new uncertainty arising from disputed election results and US trade policy.

The country's President Recep Tayyip Erdogan is contesting the result of local elections that were held in Istanbul last month. Turkish polymer buyers are typically cautious in times of political uncertainty, so this is another negative factor in a market already struggling with economic issues and a weakening of the local currency.

Turkey is undergoing a period of economic decline. Outright gross domestic product (GDP) contracted in the second half of 2018, and has fallen in each of the past four years on a per capita basis, including a 9.2pc year-on-year drop last year. Inflation was nearly 20pc in March. The construction sector in particular is suffering, with high interest rates deterring house buyers. Imports of polyvinyl chloride (PVC), which is mainly consumed by manufacturers of pipes and profiles for the construction industry, fell below 700,000t last year for the first time since 2009, down from a peak of over 900,000t in 2013.

Producers are also facing the impending loss of duty-free status for exports of some products to the US. Washington has said that it will remove Turkey's preferential trade status, which has allowed products including several types of carpets (PDF) to be imported into the US duty free. The loss of preferential duties for rugs could hurt demand in the important polypropylene (PP) fibre industry.

Demand expectations are limited by the approaching Muslim fasting month of Ramadan, during which consumption typically slows down. This will be countered by slowdowns in production and logistics in the Middle East, where the majority of polymers consumed in Turkey originate.

In addition to reductions in underlying demand, Turkish converters are faced with high import costs for their raw materials, as a result of the fall in the value of the Turkish lira against the US dollar. Turkey is a market that depends strongly upon imports, with around 1.5mn t of polyethylene (PE) and 2mn t of PP in 2018, and around 700,000t of PVC. The vast majority of PE and PP imports arrived from Mideast Gulf countries; South Korea, Egypt and European countries supply into the spot market. Western European producers provide most of Turkey's PVC.

Petkim is the sole domestic polymer producer. It provided 144,000 t/yr of PP, 96,000 t/yr of high density (HDPE) and 350,000 t/yr of low-density (LDPE) and 150,000 t/yr of PVC last year.

Turkish buyers have always leveraged a range of import options. For PE this range has widened, because more offers of material have arisen as a result of US shale ethane-based capacity. Average monthly US PE exports to Turkey more than doubled in the six months to February 2019 — the most recent period for which data are available — compared with the average of the prior six months.

Turkey's status as a very large polymer importer makes it an obvious target for US producers seeking alternative outlets to China, which has diminished as an export destination because of the trade dispute between the countries. Middle East countries including Saudi Arabia, Iran, Qatar and UAE remain by far the largest suppliers to Turkey, although volumes from these and other east-of-Suez producing nations declined slightly at the same time US volumes picked up. This may demonstrate those countries filling the supply gap in China left by the US.

There are also signs that Turkey's manufacturing sector is heading towards stability. The IHS Markit/Istanbul Chamber of Industry Purchasing Managers' Index (PMI) was 47.2 in May. This remains in contraction territory, but demonstrates a marked improvement compared with a drop to the mid-thirties in the second half of last year.