Ugur Dalbeler: “There will be further production cuts in steel sector”

Çolakoğlu Metalurji`s CEO spoke about steelmakers` perspectives for 2020

Ugur Dalbeler is one of the top managers in the Turkish steel industry. He leads Colakoglu Metalurji and is a board member of the Turkish Iron and Steel Exporters’ association and vice president for the Turkish Iron and Steel Producers’ association.

The problems of Turkish and Ukrainian steelmakers overlap in many respects, even though they are direct competitors in the markets. On the sidelines of the European Steel Conference in Milan Çolakoğlu Metalurji’s CEO told us how the Japanese started dumping in the Turkish market; what will happen when all security measures in the steel industry will be removed and why steel prices should rise, while production level – decrease.

Mr. Dalbeler, what are your expectations for the steel demand in 2020?

– Let`s go region by region. I am putting China aside, as it’s totally unknown region to me. I mean the information about Chinese steel sector is complicated and confusing. Over the last 3-4 years things in China weren’t that good, but there are smart people who are not expecting them to repeat the same mistake as it was in 2014-2015 – flooding the world with their steel. So, let’s say, China is good. What about the rest of the world?

The US is a closed territory. They play their own game in their own backyard. In the other regions, especially in Europe, we witnessed the drop in demand in the second half of 2019. I’m not expecting much of an improvement on the demand side in this difficult world, but I’m expecting the steel industry to take the necessary measures to find the equilibrium. So, in 2020 I expect things to be healthier or much more moderate despite the low demand growth. And I expect steel production to come down. In 2019 Turkey has already dropped its production by 10% – it’s not only due to protectionism measures on the export side, but also the contraction of the local demand. Germany is down by 5%, Russia is also down by 5%, and so on.

I believe there will be further production cuts globally and we will achieve a balance of the supply-demand to at least a reasonable margin, because the current situation is totally unsustainable, especially for the European producers.

What are your expectations for the steel and iron ore prices in 2020?

– The prices are low now, so is the demand. And it may go even lower. Liquidity in the market will be high, and in such circumstances commodity prices usually go high. This will be affecting the steel prices.

But the price is not really my concern, and never been my concern. My concern is the margin for the producers. Over the last 30 years in this industry I sold steel for $150 and for $1500. So, I do not really care about the price, but care about the percentage we have as producers.

But the prices are pressing the margin…

– Yes, today it is so, because the raw materials prices are high. I still believe that the prices for the raw materials remain on the high side for the certain issues, but I am not expecting the iron ore prices to go down to the levels that we had few years before. Scrap demand will remain strong too. As a result, the steel price must go up so the steel producers could have a reasonable margin.

So, you are expecting the high iron ore and scrap prices to push the steel prices up at some point?

– I’m not expecting scrap and iron ore prices to go really down. They might go down to a certain extent, but not to the point where iron ore costs $40-45, and scrap – $170. This is not what I’m expecting.

Do you expect the scrap and iron ore prices correlation to work again?

– There is no 100% correlation between these two sides, because, as you know, the scrap is the main input for the long products, while iron ore is the main input for the flat products. And there are different dynamics on these materials, because of the scale of the companies and the consumption levels in different regions. But on top of this there is another factor, which makes the equation even more complicated – the protectionism. So today we are not talking about general global tendency or a price level, because there are different dynamics, different rules and different players in every region, which makes the business more and more complicated.

Just to give you an example: the price of pig iron today is over $300, which is doesn’t make sense because the same is the price for some steel products. CIS countries are selling its pig iron for $300+. Why? Because there is a high demand in China. Why? Because of the emission issue. I can give a lot of examples like this. Things are getting more and more complicated today.

What are your expectations for the Turkish steel industry in 2020?

– I am not expecting them to make a big jump next year. I do not think they will reach the 2017–2018 levels. It’s still too early. The local consumption is too low. After having a collapse in 2018 the country is still running at relatively high inflation rate. So, under these circumstances I’m not expecting a lot of investments into the fixed assets. The construction activity – the main steel consuming sector – in Turkey will go down too. And because of protectionism the global trading area will get smaller: while the pool to play gets smaller, the number of players will remain the same. The Russians, Ukrainians, Turks and Chinese are playing in a smaller field, where the competition is getting tougher. Even the Japanese… Today, they are not really in a position to ship their goods into the US and they are experiencing more and more difficulties in Europe. So, they will dump all their products in Turkey, because it is still more open market, compared to Europe or the US.

So, under these circumstances, we will have a huge pressure on the import side. 50% of our consumption is being imported. It will be hard for us to increase the production in such a situation. But I believe our steelmakers are going to survive. They will take necessary measures, as it’s totally a private sector. They are very flexible, very quick decision-making and geographically has an advantage – sitting right in the middle of the world, having an equal distance to the East and to the West. They ship their products to Hong Kong, Singapore, Malaysia and Philippines now. And I’m sure that the safeguard measures or whatever the measures are will not last forever. So, the Turkish steelmakers will have again an access to the markets. Before that happened, we have a chance to explore the other areas, like Africa for example.

Are you pushing your government to put some security measures for internal market too?

– Yes, but we have never been successful. We have complained for years for the unfair trading. We wanted to have an investigation to find out if any of the imports coming into Turkey being dumped. Because we know that European and Japanese producers are dumping heavily. Today Japan is consuming only two third of what they produce, and one third they export. And they don’t care for the price, they don’t care for the cost, because they have a local price which cover the costs of the remaining 30-35 million tons of annual exports. They just go into the market and sell for whatever the price and whatever the cost. This is what we are now observing about them in our country.

Are there any decisions to be made in the close future?

– No, no. What we are asking our government is not to keep silent against all these behaviors. So, if they are taking action against us, we should ever respond to that.

My next question is about protectionism. The steel industry is strongly affected by this kind of policies. What is going to happen when the measures will be demolished?

– I have concerns about that. My main concern is these populist approaches, which have no basis. Our chance of making long-term planning for our industry is getting less and less or getting more and more difficult. And that’s going to disturb the steel industry more than we think.

What is your point about excess capacities in the industry? What is the best way to meet the problem?

– First of all, we need agree on a definition of excess capacity. What is really the excess capacity? Chinese have said that they are going to eliminate the excess capacity. In 2016 they declared 45 million tons excess capacity. In 2017 it was another 45 million tons, and in 2018 – 30 million tons. At the same time, they have produced in 2018 much more, than in 2017. So, what they really eliminated, I have no idea. Now they have just declared that they are installing another 97 million tons of capacities – to offsets the capacities have already eliminated. All this doesn’t really make much sense to me.

What we need to focus on — how the new capacities are being brought and what kind of benefits are given for these new capacities. One of the US major steel mill CEO have announced that he was negotiating with different states in the US about the benefits he would have after locating his capacity in one of these areas. So, they say that they don’t have state aid or a subsidy on a federal level, but we all know they have huge benefits given to the investors on a local level: free land, free power, exemption from taxes etc. This is what we need to focus on, and this is what we have to eliminate in the first place. If there is a logic, if there is a calculation behind, welcome to the game. But otherwise, with the help of the state, help of some authorities, this means you don’t play by the rules from the very beginning. This is what we need to concentrate on and fight against to eliminate.

The last question is kind of philosophical. What are the best ways, in your point of view, to increase the efficiency in the steel industry?

– There are many ways of course. But before doing so, I would recommend considering our responsibilities. Steel is still the biggest innovation and invention as far as material is concerned. It is a material of buildings, of transport vehicles and so on. We have our responsibilities towards the community, while the people still don’t believe we generate a big value. Instead they say the steel is a 3D business — it’s difficult, dangerous and dirty. So, in our case, the number one priority is the same – we want to eliminate all risks as far as safety is concerned. Number two priority is the environment. Everybody talks about green steel, responsible steel, but we all have to act accordingly.