Coal imports help Turkish economy in 1H20

Author Erisa Senerdem

Turkish coal imports resisted the economic slowdown driven by Covid-19, rising on the year in the first half of 2020, as a rare move by state-owned utility Euas to support independent coal-fired power plants bolstered demand.

The increase in coal imports indirectly helped the Turkish economy by generating higher dollar-denominated import-tax revenues.

Coal imports rose by 3pc in January-June to 14.4mn t, according to customs data. An estimated 10mn t comprised deliveries to utilities, up by 1.1mn t, or 13pc, on the year.

Coal imports

Coal burn increased despite plunging power consumption in the second quarter, driven by Covid-19. This was mostly as Euas, which operates more than half of the country’s hydropower capacity, reduced its hydro output to bring day-ahead power prices to levels that would trigger greater output from seaborne coal-fired units. Day-ahead margins for even the most efficient gas-fired plants were negative most days in April-May, which also benefited coal-fired plants.

Genmix consumption yoy

Euas made the move despite hydro stocks at major facilities being steady on year-ago levels, when hydropower output had hit record highs, curbing thermal generation. But rather than coming at a cost, such support earned the government significant import-tax receipts, which are denominated in US dollars.

Euas hydro output schedule

Power plants are required to pay an import tax equivalent to $70/t minus the value of the Ice Rotterdam coal futures contract for the delivery month of their fuel intake.

Utilities are estimated to have handed over around $232mn in import taxes for coal during January-June. This is equivalent to 2pc of Turkey’s foreign exchange deficit from energy trading over the same period, the central bank’s balance of payments data show.

The net balance is calculated as foreign currency flows into Turkey from exports of energy commodities minus payments in foreign currency for energy imports. The balance is always negative for Turkey, which is a net energy importer.

Utilities’ taxes due on coal imports were estimated at over $43mn for July, which would bring year-to-date payments to $275mn. Taxes of just $80mn were due in January-July 2019, when API 2 coal prices were above $70/t in January and February and averaged $63.71/t over the full seven-month period, compared with $46.50/t in January-July this year.

Import tax revenues

Revenues from the coal import levy — which applies only to utilities — have come in handy for Turkey, particularly now that it faces a currency crisis. The Turkish lira reached fresh lows against the dollar on 25 August, having depreciated by nearly 6pc since the start of the month and by 24pc since the beginning of the year. The country is contending with a huge reduction in foreign currency inflows, as Covid-19 has wiped out a large chunk of revenue from tourism and exports from certain sectors have fallen (see: Why has the Turkish lira depreciated?).

Why not support gas?

While the move to shore up seaborne coal burn benefitted independent generators and the overall economy, support for gas-fired utilities in the second quarter would have come at a large cost to the country’s budget, as state-run Botas would have had to cut tariffs — to well below its own gas import costs — to bolster gas-fired utilities’ competitiveness against coal-fired units.

Almost all gas-fired utilities buy their fuel from Botas at fixed lira-denominated tariffs, which typically reflect Botas’ import costs.

Botas did cut prices by 13pc on 1 July, in line with lower oil-linked import costs, but even with the reduction, generation costs for imported coal-fired plants continue to hold a wide discount to costs for gas-fired units, with low-efficiency gas-fired plants remaining outside the power mix.

Around 75pc of capacity at seaborne coal-consuming plants was dispatched over 1 July-25 August, compared with only 23pc across the gas-fired fleet.

Why has the Turkish lira depreciated?

Economic and political risks have weighed on the currency:
  • The central bank’s average funding interest rate remains below inflation, despite the bank having raised it in recent weeks, rendering real interest rates negative. This is deterring investors and supporting demand for foreign currency.
  • The bank’s net foreign exchange reserves, excluding swaps, are negative. This reduces its ability to intervene in the foreign exchange market to prevent a sharp depreciation.
  • Tourism revenues have been eroded by Covid-19. The number of tourists entering Turkey in January-July was a fifth of the total over the same period in 2019, according to the tourism and culture ministry.
  • Heightened tensions with the EU following Turkey’s hydrocarbon exploration activities in the eastern Mediterranean have added to the risks, further deterring investors.

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