Turkish flat steel market poised for restructuring

Increased protectionism, exacerbated lately by the Covid-19 pandemic, is highlighting the imminent change facing the Turkish flat steel market.

Already-subdued demand for flat steel in Europe, underpinned by weakness in the integral automotive sector, weakened further by the pandemic, is encouraging the European Commission to tighten hot-rolled coil (HRC) safeguard measures. From 1 July, Turkey is subject to an HRC quota of about 340,000 t/quarter.

The average monthly allocation equates to 114,026t until 30 June 2021, compared with an average of 230,930 t/month last year. This implies that more than 100,000 t/month would need to find a new home. "What will happen with this capacity is unknown, especially when China normalises," an import company said.

The pressure in the market was already felt last month, but was alleviated by China's import spree, which led to the unlikely precedent of Turkey exporting to the country.

But market participants in Turkey are concerned that Chinese import demand could be a temporary solution. If such import levels, which are not unusual for China, abate, Turkish mills would feel the real impact from the loss of almost half of their European sales."If the Far East pauses, it will be a disaster for Turkey," a trading firm said.

And a 10pc safeguard duty was introduced last month in Egypt, another one of Turkey's main sales destinations. Buyers in the country since then have been turning to the sole supplier in the country. Other destinations, such as Algeria and the Gulf Co-operation Council, are in the process of introducing some form of safeguards, which would hinder Turkey's sales opportunities further. "Soon there will be no place to export," a mill source said.

In addition, Russian integrated steelmaker Magnitogorsk Iron and Steel (MMK) is set to return to the market this or next month with increased capacity, having completed an upgrade to one of its rolling lines. This will undoubtedly exert pressure on both the Turkish domestic market and exports into the Middle East and north Africa.

Turkish mills need a threefold solution moving forward in order to ensure their profit margins do not get squeezed tighter.

First, there is a need to find new export opportunities and diversify sales further. "Turkish mills will need to find a new market to take in at least 300,000 t/quarter," a market participant said. This is easier said than done in the current protectionist zeitgeist. Under normal circumstances, only southeast Asia would be able to take in such spot volumes, but that would require a real compromise on prices, considering freight and severe competition from other suppliers in Asia-Pacific, India and the CIS. An alternative, which requires more resources and will see a fragmentation of sales, is to target smaller markets in regions such as Latin America and Africa.

Another option for Turkish mills is to push the government more aggressively to introduce safeguard measures, although this would squeeze re-rollers and pipe producers, whose sales also have been hindered by global protectionist measures. A quota system could ensure imports are still a viable and lower-priced supply alternative, but that local producers do not lose more of their market share, although these would be difficult to administer.

Finally, a quick fix would be production cuts. Notoriously, mills in Turkey and elsewhere are reluctant to confirm or publicise output reductions, but in the current economic scenario, this would be required if they were to prevent a slump in prices if or once demand from the Far East eases and import pressure on the Turkish market worsens.

By Lora Stoyanova