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Turkish steel navigates trade barriers and flagging domestic demand

After a healthy first half of 2018, the Turkish steel market now faces a drop in demand from both domestic and international customers.

International policy changes and a recession in the Turkish economy have contributed to a wider trade flow diversion across flat steel products like hot rolled coil (HRC), and long steel products like rebar and billet, with some effects also due to be felt more strongly in the wider ferrous scrap pricing complex.

An increase in US tariffs on Turkish steel imports from 25% to 50% in mid-August 2018 was the first factor in a longer process that triggered an intensification of trade flows. Faced with the doubling of tariffs on long and flat products that month, Turkey lost one of its main export markets for finished steel products overnight.

Simultaneously, the Turkish domestic market faced strong headwinds, as at the end of 2018 the country slipped into recession for the first time in a decade. As the Turkish Lira lost around 30% of its value by the end of last year versus 2017, steel makers and affiliated sectors have been hit by tightened credit conditions, and the construction sector has experienced several bankruptcies.

Data from Turkish statistics institute TUIK showed a 41% year-on-year drop in construction permits between January-September, while 1.5 million-2 million homes in Turkey remain unsold, illustrating the collapse in demand for long-steel products. Vehicle sales of domestic passenger and light commercial vehicles shrank by 44.2% from January to March 2019 on the year – a worrying sign for flat steel product demand, which relies heavily on buying from the automotive sector.

Given the country is the eighth biggest exporter of steel in the world, trade in ferrous products is a pillar of the Turkish economy. Conversely, Turkey also plays an essential role in trade flows and pricing for several steel products in Europe, Asia, North America and some parts of Africa.

At 37.3 million mt, Turkey’s overall crude steel production is dwarfed by global production of 1.8bn mt – with China contributing 928.3 million. But its strategic location between Europe and Asia, and commercial presence in the Middle East and North Africa, have given it a special position in world steel trade.

Flat products: Turkey targets EU countries

The US, one of Turkey’s traditional markets for HRC was restricted in the first half of the year 2018 and completely shut off from mid-August, in combination with slipping domestic demand. But Turkey was nevertheless able to redirect and even increase its HRC exports to EU countries by around 20% – driving the hike in overall EU imports and displacing product from the Ukraine, South Korea and India.

For cold rolled coils (CRC), Turkey’s growing reliance on EU customers was even more dramatic, with exports increasing by 113% in 2018 versus the previous year, as the neighbouring bloc replaced the US as Turkey’s main export destination. The EU also absorbed Turkey’s coated coil exports – again, usually consumed by the US – with Spain attracting the majority of the material. That more than doubled overall imports of products like hot-dipped galvanized products into Spain.

As Turkey morphed from a net importer of HRC in 2018 to a net exporter, the EU also took measures to control this trade flow diversion. Overall imports of the flat product into the EU increased by 20% on the year in 2018, and pressured domestic prices to the disadvantage of EU producers.

Still, the generous global quota for HRC established in February this year will mean the EU remains the main consumer for Turkish rolled flat steel products, with little further diversion expected in the bloc’s already slowing market.

Long products in search of outlets

Long products faced a similar, yet even more dramatic shift in trade flows following the US import tariff hike, but tighter national quotas from the EU point to further redirections of material, as producers search for new outlets.

As access to the US was cut off, Turkish rebar producers focused their attention on the EU initially. Turkey increased its exports to the European Union by 89% on the year, which in combination with a hike in exports from the Black Sea region saw overall European imports of rebar surge by 51.2%.

Southeast Asia was another region that saw strong inflows from Turkey, as China’s exports in 2018 were restrained due to strong domestic demand and capacity reduction efforts, part of the country’s wider environmental commitments. While exports to Singapore remained largely unchanged, more material was sold into Hong Kong and Malaysia, up 30% and 75% on year.

With considerably stricter safeguards from the EU on long products like wire rod and rebar, the original relief for non-EU longs producers in the first half of 2018 faded. Turkey, as well as some CIS producers, faced national quotas well below the previous year’s numbers.

Rebar imports from Turkey, for example, stood at 831,070 mt to the EU in 2018. The new rebar quota for Turkey in 2019 is around 287,179 mt on an annualized basis, Platts calculations show.  While strong exporters like Turkey could take advantage of the remaining global quota once their national one is completed, it can be expected that exports to the EU from Turkey will be halved this year. The same is true for Black Sea exporters.

As such, large volumes of long products, largely originating from Turkey and the Black Sea, will once again have to find a new home, with some expecting the material to flow to Central and South America as well as African outlets. Flows to Southeast Asian markets, which proved attractive in the second half of last year, could remain spotty as a more export-oriented China as well as India, Qatar and Saudi Arabia are serious competitors in these markets. It remains uncertain, and increasingly unlikely, that these markets can compensate for Turkey’s reduced flows to EU countries or the US.

Scrap volumes fall

Turkey’s woes do not end with finished products. Weak domestic demand and curtailed exports of long products, which make up 50% of overall Turkish steel exports, also affect flows of ferrous scrap to Turkey—the world’s biggest import market for the raw material.

Turkey’s crude steel production in the first two months of 2019 dropped by 16.1% year on year to 5.2 million mt. Output from electric arc furnaces (EAFs), which use scrap steel as feedstock, was down by 22%  year on year for January-February 2019 This corresponded to a 38.3% drop in scrap import in the same period, versus 2018.

While March and April saw a slightly better crude steel output, according to some longs producers, there is limited recovery in sight in the domestic market and continued export struggles abroad as some Turkish steelmakers anticipate a 15-20% reduction in overall steel output by the end of the year. With lower production, scrap imports are anticipated to be considerably lower unless safeguards are lifted.

At 20 million mt scrap imports in 2018, a mere 20% reduction in crude production, and hence imports, would imply 4 million mt of scrap that were originally destined for Turkey would flow into other markets instead. The surplus could be considerably higher if current output levels are maintained throughout the year.

Amid lower economic growth and a construction slowdown in Europe, there is little leeway for the surplus scrap from exporters in that region to be consumed domestically.

Instead, markets in the Far East like India, Pakistan and Bangladesh are showing stronger interest for the scrap material. Technavio, a research company, forecasts 8% global growth in arc furnace production in 2019, and expects the majority of this will originate in the APAC region.

Although scrap flows to these Far East countries from European and North-American exporters are likely to intensify, their relatively small market size will probably prevent them from fully absorbing surplus scrap that would have previously gone to Turkey.

As a result, Turkey is in a position to strongly influence this year’s long and flat steel as well as international scrap flows, especially since it can rely less on its own domestic market, with market players across the globe eyeing developments in the country.

While any reduction in import tariffs from the US could mean a return to more traditional trade flows seen at the beginning of 2018, it is difficult to predict how trade policy will evolve. Conversely, if the current tariff remains in place, it could induce further changes to steel flows in 2019, with Turkey driving the trend.

Source: S&P Platts

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