A failed coup in Turkey could lead to drastic plastics concerns

A failed coup attempt launched late last Friday by a wing of the Turkish army has had little impact on the polymer market. So far, Turkey’s petrochemicals sector has not been ruffled by the recent coup attempt and production levels are unaffected according to sources at Turkey’s largest plastics producer Petkim.

However, the coup attempt has raised concerns about the unstable state of politics as well as the Turkish economy in the near future, especially regarding the volatility of its currency. The country was already facing a weakening economic situation with GDP dropping below 2% over the last year, and the recent geopolitical unrest is likely to exacerbate the situation.

Turkey is a large demand center and trading hub for petrochemicals, relying on imports to meet the vast majority of polymer demand. Turkey is also a re-exporter of plastics and manufacturer of finished plastic goods, especially into Europe and the Middle East, given its location. Furthermore, the country is a pivotal East-to-West link for upstream oil and gas with key pipelines running through Turkey to other parts of Europe, Middle East and Africa.

Turkey’s geographical and geopolitical position makes the country a very favorable destination for global polymer markets. Total polymer (PE, PP, PS, PET, PVC) demand in Turkey is around 5.5 million mt per year, but the domestic polymer production is about 770,000 mt per year. Due to this limited domestic production, imports account for more than 80% of commodity consumption. According to Platts Analytics, imports met 94% of Turkey’s PP and 77% of its PE demand in 2015.

VIDEO | Turkey Coup Attempt: What has been the impact on global commodities, energy markets?

Key polyethylene and polypropylene importers

Focusing on polyethylene (PE) and polypropylene (PP) trade based on 2015 annual trade data from UN Comtrade, the top importers of PE into Turkey are from major production centers in Europe, Asia and the Middle East. Saudi Arabia tops the bill with 372,520 mt, followed by Iran (203,650 mt) and South Korea (174,230 mt). Germany, Belgium and Spain are the largest European importers into Turkey, with combined exports at 203,417 mt, followed by the UAE, USA and Singapore. Overwhelmingly, though,  Turkey’s geographical positioning and the low production cost in certain Middle Eastern countries allows that region to dominate the share of PE imports into Turkey, accounting for close to 50%. Europe is Turkey’s next largest regional trading partner with around 30% of PE distributed.

Saudi Arabia is also the largest single PP importer into Turkey with 491,000 mt, followed by Egypt (180,400 mt), Iran (126,705 mt) and India (102,864 mt). Remaining top importers include South Korea and some European players. Again, as with PE, the rest of the Middle East dominate the Turkey PP import picture, accounting for 50% of 1.56 million mt of PP coming into the country.

Also, in an early snapshot of polyolefins trade in 2016, Saudi Arabia, Iran and Egypt were the largest exporters of PE and PP to Turkey in the first quarter of 2016.

Currency weakness and volatility leads to concerns

Turkey’s import-heavy polymer industry could face a major challenge with the volatile Turkish Lira amid political uncertainty following the failed coup. The Turkish Lira initially fell 4.5% against the US dollar and eventually settled 2% lower. Against the Euro, the Lira was down 4% and 2% down versus the Saudi Arabian Riyal post-coup attempt. Many traders believe lingering uncertainty could lead to short-term demand shocks, as Turkey’s import bill could rise, or be so volatile in the short to medium term that converters will lack a stable cost base. Furthermore, polymer market players could face supply disruptions with key importing countries if the political atmosphere in the country worsens.

Turkey has a range of favorable polymer duty regimes with the EU and key Asian countries, including South Korea, India and Indonesia. This all could be jeopardized if the fallout of this attempted overthrow of the government starts impacting international relations.

Turkey also is a major destination for the Asian-based aromatics chain. For example, South Korea, a key aromatics and derivatives production hub, agreed a Free Trade Agreement in 2013 with Turkey, meaning imports from the Northeast Asia giant have an advantage over many other countries. In 2015, Turkey's purified terephthalic acid (PTA) imports from South Korea rose 23% to around 263,000 mt year on year. In June 2016, Turkey was the single largest export destination for South Korean PTA at 41,695 mt, up 27% year on year, South Korean customs data showed.

Prolonged disruption could impact growth

If the recent turmoil spreads and causes further unrest, this could slow economic growth and reduce plastics consumption in the short to medium term. Looking at Turkish PE and PP demand growth in detail, Platts Analytics expects consumption to grow year on year over the next five years at an average of 4% for PE and 3% for PP.  Deficits for both products will continue to widen as demand is expected to outweigh supply.  Ultimately, this could have a cascading impact on the industry further downstream, weakening Turkey as a key trading hub for many years to come.

If the economic climate worsens as a result of continued unrest, the aforementioned PE and PP growth rates could potentially be slashed by half. Cumulatively from the period 2016 to 2020, demand destruction for PE would be close to 640,000 mt and for PP it would be around 400,000 mt in this low demand case environment. This potential reduction in consumption would be 35% of current Turkish PE demand and 22% of current PP consumption.

Eshwar Yennigalla, petrochemical analyst, contributed to this post.