Turkey’s petrochemical industry, led by the Azerbaijani-owned Petkim Petrokimya Holding, is calling for state subsidies to help develop the sector and cut the volume of imports, which threaten to grow following Iran’s return to the global market.
“Turkey’s petrochemical industry is in dire need of special incentives from the state to push the sector to create high value-added products, as well as increase the knowledge and capital-intensive investments to meet domestic demand,” Sadettin Korkut, managing director of Petkim, tells bne IntelliNews.
According to BMI Research, “Turkish petrochemicals production growth has slowed over the past year and the country's industry entered 2016 with further downward pressure on prices in an increasingly challenging market.” BMI estimates that Turkey's overall chemicals growth in 2015 was 3.2%, down from the 4.6% chemicals growth reported in 2014 and in line with the country's overall industrial slowdown.
According to updated data provided by Petkim, Turkey’s petrochemical production stood at 3.118mn tonnes in 2015, with 755,000 tonnes exported. Petkim produces ethylene, polyethylene, polyvinyl chloride, polypropylene and other chemical building blocks for use in the manufacture of plastics, textiles, and other consumer and industrial products.
Petkim says its current production meets around a quarter of Turkey’s domestic demand for petrochemicals. However, because of the growing size of the market and increasing export demand, large and rising volumes of petrochemicals need to be imported each year. Between 2002-2015, Turkey imported $175bn worth of petrochemical products for use at home. “As the domestic growth performance for the last decade reveals, Turkey will have to import more petrochemicals,” says Korkut.
Yet Turkey’s petrochemical industry has significant potential for development, thanks to the rising level of the country’s industrialisation and population growth, as well as its geographic proximity to the key markets, especially Europe.
Korkut says Petkim’s goal “is to take our domestic market share to the range of 30-35% by 2023”. To do that, Petkim is undertaking a series of big investments at its Star Refinery, as well as moving up the value chain with a new division called Petkim Specialties to focus on the production of high value-added engineering plastics and high-tech plastics.
Putting Petkim right
Petkim, which celebrated its 50th anniversary last year and is ranked by Forbes as Turkey’s 31th biggest company by revenue, was acquired in 2008 by the Azeri state energy giant Socar for about $2bn. Since then, Socar has brought in several outside investors, including the US investment bank Goldman Sachs, which in August last year acquired a 13% stake in Socar Turkey Enerji, the Turkish subsidiary of Socar, for $1.3bn. On March 28, Socar Turkey Enerji said it has sold a 2.75% stake in Petkim to an unnamed foreign holding company for $51mn, leaving itself a 56.32% stake in the petrochemical maker (see chart).
Petkim’s shares on the Borsa Istanbul have also performed well in the years since hitting a low of TRY1.57 in March 2011. In the five years since, the shares have more than doubled and stood at TRY3.89 at the end of March. However, this rise has resulted in a valuation that's too high for some. In downgrading the stock to ‘Sell’ from ‘Reduce’ in April, Tamas Pletser of Erste Bank says: “Based on our estimate, Petkim trades at 12.7x 2016 EV/Ebitda, which looks rich to us, especially as we are at the top of the petrochemical cycle.”
On March 4, Petkim reported what it termed some of its best ever financial results. 2015 net profit surged to TRY626.4mn (€195mn) from just TRY6.5mn the previous year, while revenue grew to TRY4.53bn versus TRY4.13bn a year ago.
Socar has said it plans to invest around $20bn in Turkey, mainly on the Petkim Peninsula in the Aegean province of İzmir, which will include extensive operations, a container port and the Star Refinery in addition to Petkim. Socar says it plans to invest $10bn in Turkey’s petrochemical industry by the end of 2018, with more than 50% of this already committed.
The investment in the Star Refinery, the first oil refinery project in Turkey since 1975, is crucial for Petkim. With a capacity of 10mn tonnes a year, the $5.5bn refinery is set to go online by March 2018, reducing Turkey’s dependence on imported refined oil products, Socar Turkey CEO and Petkim board member Kenan Yavuz told a press conference in June last year.
“Our refinery will be fully operational by March 2018. We’ll have an annual capacity of 10mn tonnes of refining products, a fourth of which will be used by petrochemicals maker Petkim and the remaining sold to the third parties… Turkey imports around $20bn worth of refining and petrochemicals products annually… With the Star Refinery online, we will cut the current account gap $2.5bn annually,” Yavuz was quoted as saying.
According to Petkim, it has signed a 20-year off-take agreement with Star Refinery to take 270,000 tonnes of mixed-xylene and 1.6mn tonnes of naphtha annually. This should cut its feedstock cost by $30 per tonne. “We expect Petkim’s reported earnings to drop in 2016-17, but they could turn higher from 2018 thanks to the Star refinery, energy projects and Petlim additions,” says Erste’s Pletser.
Petkim is also at the forefront of Turkey’s attempt to establish itself as a producer of more specialist petrochemicals. Earlier this year, Petkim established a new company, Petkim Specialties, to focus on the production of high value-added engineering plastics as well as hi-tech plastics for the use in the automotive, defence and medical sectors. It was also announced that the assets of Petkim’s plastic processing factory, with a capacity of 14,000 tonnes, will be transferred to Petkim Specialties, in addition to buying new equipment to raise capacity by 10,000 tonnes at an initial investment of $5mn.
Petkim claims in its latest results that the “2015 petrochemical environment continued to be supportive for naphtha-based producers” like itself. However, the operating environment is unlikely to improve much soon, and could be set to get much tougher after the recent lifting of nuclear sanctions on Iran, which will become a major emerging competitor in this sector.
Thanks to its abundance of crude oil and natural gas, and a favourable geographic location as well as sufficiently developed infrastructure, Iran has been heavily expanding its petrochemical industry since the early 2000s. Despite international sanctions, it managed to increase its petrochemical capacity to 60mn tonnes a year by the end of 2015. Industry players say the country has the potential to double this capacity within the next few years now that many sanctions have been lifted.
“Iran, which is a major producer of petrochemicals, has lower production costs than Turkey, while Germany, being the world's most important producer in the chemical industry, has very important commercial relations with Iran,” says Korkut.