Rough guide to Turkey
No industry wants overcapacity. It can heighten competition and weaken pricing, all to the detriment of the incumbent producers. Governments have little incentive in constraining capacity additions. Their main objective, especially with regard to the cement industry, is to guarantee an abundance of low-cost supply and to ensure that public housing and infrastructure programmes get built. They’re usually perfectly happy to let the market rationalise the production base.
With one foot in Europe and the other in Asia, Turkey is home to one of the largest domestic cement industries. Here, cement capacity is expected to reach 105Mt this year while clinker capacity will touch 64Mta. Meanwhile, domestic cement consumption is expected to be only 46Mt, implying a dramatic surplus of cement capacity, now amounting to nearly 60Mta, or a theoretical clinker surplus of nearly 20Mta.
In reality, unused capacity is not as high as these figures suggest, due to the successful export efforts of domestic producers with net exports reaching 12.6Mt in 2009, up from 10.52Mt in 2005.
Nevertheless, the question of overcapacity is an important one. Looking at the data, Turkey saw an explosion of new capacity come on stream between 2005 and 2009, amounting to nearly 36Mt. During the same period, the domestic market grew by 11Mt: not enough to absorb these tonnages.
There are many straightforward explanations for how such a wide supply-demand gap could arise, and why such a boom in capacity took place during this period.
On the supply side, Turkey is an attractive location for cement production, being endowed with a good distribution of viable limestone deposits, making nationwide cement production possible. Furthermore, Turkish producers enjoy a favourable cost advantage versus their counterparts in other regions due primarily to lower labour costs.
Traditional barriers to entry have also been in decline, encouraging newcomers into the market. The high capital expenditure associated with plant construction has certainly decreased in recent years, particularly for those willing to exploit cheaper technology from China. Moreover, during the years leading up to the global financial crisis, capital was both available and relatively cheap.
And on the demand side, the rationale for capacity expansion (prior to the financial crisis) was supported not only by the country's robust internal demand drivers (long-term infrastructure and housing development needs), but also by rising demand from global export markets – above all Iraq, a country which has been consuming increasing volumes of regional cement supply.
All in all, the sustained upturn in the consumption cycle ahead of the crisis combined with over-optimistic forecasts for future cement demand and cheap, easily available capital inevitably attracted a wide range of new investment into the industry, resulting in the supply-demand dynamic we see today.
But the apparent overcapacity is not entirely the result of the “irrational exuberance” of the industry. There are other economic factors that come into play, not least that electricity is around 20% higher in Turkey compared to other EU countries (due to power generation shortages, and being an easily available form of taxation). Producers are encouraged to operate their energy-intensive grinding mills during the limited off-peak periods, and it becomes economically viable to install additional grinding capacity to make up for operational redundancy during the peak tariff hours. Hence, the large difference between clinker and grinding capacities noted above.
Whatever the cause, overcapacity continues to be a problematic reality for the Turkish cement industry, resulting in low capacity utilisation rates (reported at around 55% in 2008-09) and price pressure. Industry players have responded positively by building up their export markets to 16Mta, making Turkey the largest exporter in the world. Going forward, fundamental demand drivers are robust and likely to drive consumption up to around 50Mt by 2012. Nevertheless, there is some way to go before internal demand catches up with supply, therefore it is certain that the traditional export markets of Iraq, Syria, the Mediterranean and Africa will continue to play an important role by absorbing some of the capacity hangover.
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