From:Selcuk Denizhan To:Dr.

Richard Dawe

INTERNATIONAL DIPLOMA PROGRAM IN INTERNATIONAL

BUSINESS

CHEMICAL INDUSTRY IN TURKEY:

SUPPLY CHAIN PERSPECTIVE

GLOBAL SUPPLY CHAIN MANAGEMENT

2010 SPRING, TERM PAPER
SELCUK DENİZHAN
From:Selcuk Denizhan To:Dr. Richard Dawe

1. CHEMICAL INDUSTRY IN TURKEY

Like many other important industries in Turkey, the Turkish chemical industry
accelerated its development after 1950’s, and production began in some fields,
such as medicine, detergents, textile dyes, printing ink and explosives, though
the production process only covered the final stages. Especially during the
planned economy period, public sector investments were directed to some critical
product groups, such as petrochemicals, fertilizers and basic organic and
inorganic chemicals. On the other hand, private sector including foreign
investments focused on pharmaceuticals, soaps, detergents and synthetic yarn.

Turkey’s strong chemical industry touts soda ash, chrome chemicals and boron
chemicals as some of its main products. The industry supports 4,300
manufacturing companies, some of which have workforces of more than 100
people. Demand for chemicals in Turkey continues to rise, with a total demand of
$21.97 billion USD in 2004 and pharmaceuticals leading the way at $5.4 billion
USD. In 2004, with an increase of 19.8 percent, chemical exports from Turkey
reached $2.5 billion USD. The abundant natural resources and strong demand in
the chemical sector make Turkey a prime spot for investment.

Quick Facts:

1. Annual production volume of the industry is close to $13 billion USD, while
total volume of the domestic market of chemicals exceeds $27 billion USD.
2. As of 2006, 335 foreign capital companies operate in the chemical industry.
3. Fifteen percent, 12 percent and 50 percent of the inputs of the textile, leather
and paper industries are provided by the chemical industry, respectively.
4. Turkey is among the top 10 paint producer countries in Europe.

There are 4,300 companies operating in the sector, and the industry employs
nearly 80,000 people. Most of the private sector companies are located in
Istanbul, İzmir, Kocaeli, Adana and Ankara. The industry produces many
chemicals, such as petrochemicals, inorganic and organic chemicals, fertilizers,
paints, pharmaceuticals, soaps and detergents, synthetic fibers, essential oils,
cosmetics and personal care products. The chemical industry provides inputs to
many other sectors, such as automotive, leather products, glass, textiles and
paper products.
In 2006, the industry’s exports reached $4 billion USD, which made it one of the
highest contributing industries to Turkey’s total exports.

Main destinations for chemical products: Russian Federation ($296 million

USD); Italy ($265 million USD); Ukraine ($198 million USD); Germany ($181
million USD); Romania ($166 million USD); China ($117 million USD); US ($116
million USD); Spain ($116 million USD); Bulgaria ($110 million USD); Azerbaijan
($108 million USD); Kazakhstan ($100 million USD).

Breakdown of exported chemical products: Plastics ($1.4 billion USD; 25.8

percent); Soaps and detergents ($484 million USD; 5.5 percent); Inorganic
chemicals ($462 million USD; 5.5 percent); Pharmaceuticals ($353 million USD;
3.9 percent); Organic chemicals ($346 million USD; 4.1 percent); Cosmetics and
From:Selcuk Denizhan To:Dr. Richard Dawe

essential oils ($306 million USD; 3.3 percent); Paints and inks ($287 million
USD; 3.5 percent).

Main sub-sectors include:

Petrochemicals: The total annual production capacity of the industry is around
2.3 million tons. The dominant company in the sector is PETKİM Petrokimya
Holding A.Ş., which is undergoing privatization. There are two major
petrochemical complexes, one in İzmir-Aliağa of Petkim and the other in Kocaeli
of TÜPRAŞ. The industry produces a wide range of petrochemicals, namely: all
common plastics, aromatics, ethylene glycol, phtallic anhydride, terephthalic
acid, carbon black, synthetic rubber, acrylonitryl and caustic soda.

Pharmaceuticals: There are nearly 140 companies in the pharmaceutical

industry. Eighty-five are manufacturers, 11 are raw material producers and the
rest are importers. Thirty-seven are foreign capital companies with subsidiary
manufacturing operations in Turkey, namely: Bayer (Germany); GlaxoSmithKline
(UK); Aventis (US); Pfizer (US); Roche (Switzerland); Sanofi (France); Novartis
(Switzerland); and Baxter (US). Most of the companies are located in Istanbul,
Kocaeli and Tekirdağ. The industry employs more than 20,000 people, more than
50 percent of which have a university degree. Annual production exceeded 1,400
million units and is around $4 billion USD in 2006. Turkey is one of the 18 self-
sufficient countries in pharmaceuticals production.

Soaps and Detergents: There are 709 companies manufacturing various

cleaning materials, and the sector employs more than 10,000 people. Most of the
companies are located in Istanbul, İzmir, Kocaeli, Gaziantep, Mersin and Adana.
Turkey’s annual production capacity for detergents and soaps reached 1.3 million
tons and 550,000 tons. respectively. The industry produces at world quality
standards and the number of companies that have ISO 9000 Quality System
Certificates and ISO 14001 Certificates is rapidly increasing. Some of the
multinational detergent companies that have manufacturing and marketing
facilities in Turkey are Procter & Gamble, Henkel, Colgate Palmolive, Unilever and
Benciser.

Paints and Dyes: There are 20 big companies and about 400 small or medium-
sized manufacturers. About 80 percent of the companies are located in the
Marmara Region, and most have ISO 9000 certification. The sector produces
over 500,000 tons annually. Turkey is among the top 10 paint producer countries
in Europe. Around 60 percent of the industry’s production consists of decorative
paints. The sector has become one of the most FDI-concentrated industries.

Cosmetics and Personal Care: There are about 350 companies manufacturing
various cosmetic products most of which are located in Istanbul and the sector
employs nearly 4,000 people. Annual production of the sector is close to $400
million USD. Major multinational companies have manufacturing and marketing
facilities in Turkey, and most of them operate through joint-ventures and
licensing agreements. Some of these are Procter & Gamble, Henkel, Colgate
Palmolive and Unilever. The industry reached world quality standards, and most
of the companies have ISO 9000 Quality System Certificates and ISO 14001
Certificates.
From:Selcuk Denizhan To:Dr. Richard Dawe

Fertilizers: There are seven companies producing fertilizers, two of which are
public companies, but included in the privatization program. The industry has an
annual production capacity of nearly 6 million tons. AN 26, AS, DAP, TSP, urea
and composed fertilizers are the major fertilizers that are being produced.
Domestic production meets domestic demand and the rest is exported (1).

The Turkish chemical industry has developed significantly in terms of quality,

productivity and protection of the environment, and is in the process of adopting
the EU’s Technical Standards. In addition, the responsible care, the chemical
industry’s trademarked noncompulsory initiative on environmental, health and
safety issues, has been successfully implemented since 1992. The Turkish
chemical industry has competitive power because of various raw materials
advantages. Turkey is among the main producers of soda ash, chrome and boron
chemicals. The Turkish petrochemicals industry has shown considerable growth
since 1970. The dominant organization in the Turkish petrochemical sector is
Petkim Petrokimya Holding A.Ş. which is a public company and under a
privatisation scheme at present. There are two petrochemical complexes, one is
the PetkimAliağa complex in İzmir and the other one is the Tüpraş (Turkish
Petroleum Refineries Corporation)Körfez Petrochemical and Refinery in Kocaeli.
In these two complexes a wide range of petrochemicals, all common plastics
(HDPE, LDPE, PS, PVC, and PP), aromatics, ethylene glycol, phtallic anhydride,
terephthalic acid, carbon black, synthetic rubber, acrylonitryl and caustic soda
are produced. The total production of these petrochemicals reaches about 2.9
million tons/year, and meets about 25 % of domestic demand.

Chemical industry, Export Promotion Center of Turkey

2. SUPPLY CHAIN MANAGEMENT IN CHEMICAL INDUSTRY

Over the past decade, many chemical companies around the world have
overhauled their production operations. In Europe, the scope for further cost
reduction in the production process is now limited, given the size and age of
much of the plant capacity. There, nevertheless, remains significant potential for
improving the efficiency with which chemical products are distributed. Indeed,
few other activities offer as much potential for cost reduction. Realising this
potential may not be easy, but competitive conditions in the global chemical
market will force European producers to make radical changes to their supply
chains. It has been suggested that supply chain productivity improvements of 3-
5% per annum may be required to maintain the competitive position of the
European chemical industry. This creates a compelling case for change.

Supply chain costs represent an average of 8-10% of sales revenue for chemical
companies(1). They represent a much higher proportion of the net value added.
At roughly 37% of value-added in the chemical industry, supply chain costs are
significantly more important than in other industrial sectors, such metal
products, building materials, automobiles and paper where the equivalent
percentages are, respectively, 18%, 26%, 28% and 30%(2). This reflects the
relatively low value per tonne of chemical products and relatively high costs of
moving and storing them, given their bulky and hazardous nature. It also
highlights the need for supply chain issues to be given greater priority within the
chemical industry.
From:Selcuk Denizhan To:Dr. Richard Dawe

Of the thirty largest chemical companies in the world, fifteen are headquartered
in Europe and they collectively account for 29% of global chemical sales. The
industry contributes roughly 10% of value added by manufacturing in the EU and
2.4% of its gross domestic product. Approximately three million people work in
the industry, 12% of all manufacturing employment in the EU. The industry is
also unique in supplying virtually every other sector of the economy with
essential materials. The competitiveness of all these other sectors is partly
dependent on the efficient supply of chemical products. It is for this reason that
the chemical industry has been described as the ‘anchor’ of a modern economy.

Over the past twenty years the European chemical market has become more fully
integrated, with the proportion of sales confined to national markets declining
and the proportion of cross-border sales sharply increasing. between 1993 and
2003 the share of domestic sales plummeted from 55% to 25%, while the
proportion of intra-EU business rose from 27% to 46%(7). This has had a
significant effect on chemical logistics. As the geographical distribution of
production capacity has changed little, products have had to be moved over
greater distances. This was facilitated by the formation of the Single Market and
liberalisation of international road haulage operations in 1993, though mounting
congestion on European transport infrastructure is now making these longer
hauls more expensive and less reliable.
Challenges and Issues

The four major problems experienced by the Chemical Industry Sector in Turkey
and the relevant solution proposals

1- Ensuring the Recording of the Unrecorded Economy

Unrecorded production and the products that are manufactured in such areas,
pose serious threats particularly to the consumer health and the environment.
Moreover, the production activities that are conducted on the basis of
unrecorded economy, which refuse to adopt any measures regarding the
protection of human health, technical safety and the protection of environment,
and which do not realize any investments on such matters, also cause unfair
competition from the standpoint of economic life. The supervision of the
production facilities and production activities on a systematic and periodical
basis, will be effective in the prevention of these activities. However, an effective
supervision on the market and the industry, requires the employment of well
trained and qualified personnel. Also, an effective system containing serious
sanctions that deter unrecorded applications must also be introduced.

2- Studies for the Improvement of the Investment Environment

The bureaucracy that the prospective investors in the chemicals sector are
required to handle, is highly ramified, and often deters the investors. The
studies initiated for purposes of improvement of this subject matter, have not
yet been finalized. The portion that is already finalized, are hardly effective in
the reduction of the existing problems. The studies conducted by YOİKK, needs
to be organized in a manner that will include the project that is conducted in
cooperation with the German Ministry of Finance, and in a manner that will
reduce the authorities to which the investors should apply, into a single
authority, if possible.
From:Selcuk Denizhan To:Dr. Richard Dawe

3- The Process of Harmonization with the EU Regulations

A process of transition must be determined in order to ensure harmonization with
the new rules and regulations that have been imposed within the framework of
harmonization with the EU Regulations. It is marked that new and highly
complicated applications are introduced in may areas of whose infrastructure
have not been finalized. In fact, the EU member states have demanded a certain
period for transition for harmonization processes that require a certain
infrastructure. In our opinion, it is highly important for Turkey to make demands
concerning such transition periods during the negotiation process and to
determine such transition periods through consultation with the NGO’s operating
in the relevant real sectors. Otherwise, such harmonization works are bound to
remain on paper.

Within this context, we propose that the “Regulatory Effect Analyses” to be

conducted in connection with our sector, are executed under the leadership of
the newly organized “Sector Assemblies” of the Union of Chambers of Industry
and Commerce (TOBB).

4- Environment Law
The penal sanctions included in the draft bill for the Environment Law, which is
pending negotiations at the Grand National Assembly, shall not affect the normal
operations of the industry. The authorization granted to the municipalities to
have a share of 50% from the fiscal penalties, will activate the municipalities who
are already suffering from lack of funds; and consequently, the municipalities
shall impose penalties on practically every occasion. This application will
occasionally result in the closure of the enterprises. In this respect, the
authorities must be careful in the implementation of the penal sanctions, must
introduce definite criteria in order to prevent arbitrary penal sanctions, and must
introduce certain rules that supervise the offices that impose penalties, and that
may even penalize such offices if deemed as necessary.

Despite problems facing the domestic industry, the future of the Turkish chemical
sector remains bright. Low per capita consumption of chemicals and the move
towards sustainable growth rates in the general economy, create a compulsive
force to have new investments in the chemical industry. The industry possesses
natural resources and a soaring demand, but lacks adequate capital. The capital
and technology-intensive nature of the industry makes it an ideal field for foreign
investors.
The privatisation of Tupras, which ranks 7th in Europe in terms of refinery
capacity, and expected privatisation of Petkim, the giant petrochemicals
company, pave the way for accelerated investments.
From:Selcuk Denizhan To:Dr. Richard Dawe

Major export products of the Turkish chemical industry were processed plastic
products such as tubes, pipes & hoses & fittings with an export value of US $
1.461 million in 2009. The second major export product was soaps, detergents
and cosmetics with an export value of US $ 1.030 million. Other major product
groups were inorganic chemicals (US $ 610 million) and medicament mixturesput
in dosage (US $ 473 million).
Turkey is exporting all these chemicals to about 180 countries throughout the
world. Major destinations for chemicals were Iraq, Russian Federation, Germany,
Azerbaijan, Italy, Iran and China.
The Chemical Industry Exports by Countries (Value: 1000 US $)
From:Selcuk Denizhan To:Dr. Richard Dawe

Prospects

• The import/consumption ratio and the capacity utilization ratio are especially
high in following sub-sectors and they are considered as potential investment
areas: basic chemicals, plastics in primary forms and synthetic rubber and man-
made fibres. A number of oil and natural gas pipelines are currently on the
agenda within the context of Turkey’s role as a transit route between Central
Asia and Europe, pointing to further demand for these chemicals.
From:Selcuk Denizhan To:Dr. Richard Dawe

• Petrochemicals demand growth has been faster in Turkey relative to the rest of
the world and developed countries. Compared to average GNP growth of 4%
during 1986-2003, thermoplastics demand grew by a CAGR of 11% during the
same period. Besides, Turkey’s general growth prospects, growth potential in
chemicals, automotive, construction, electronics and pharmaceuticals, which use
petrochemicals intensively, point to strong growth for the chemical sector.
Domestic supply of petrochemicals (plastic raw materials, fibre and rubber raw
materials) falls short of meeting soaring domestic demand. The industrial
chemicals sector, on the other hand, imported four times the exports in the mid-
1990s. The share of imports is over 50% in thermoplastics and approximately
100% in thermosets in value terms. The total market size for synthetic rubber
and plastics raw materials was approximately $4.0 billion in 2004.
New petrochemical investments are urgently needed since petrochemical imports
have been increasing rapidly. The rate of demand increases for petrochemical
products in Turkey is 2-3 times higher than the world average. The industry is
not yet saturated and has a large potential for growth. While thermoplastics
consumption in Turkey is 26 kg per capita, this rate varies between 75-100 kg in
developed countries. According to Petkim, the state petrochemical company,
Turkey’s thermoplastics demand in 2005 requires the building of a new ethylene
plant with a capacity of 750,000-1 million tons/year and its downstream units. In
2010, two new ethylene plants with the same capacity and downstream units will
be needed.

• Foreign companies would benefit from the investment opportunities in the

chemical raw materials sector provided that they bring new and advanced
technologies (or provide cheaper inputs) allowing lower production costs. Turkish
companies are interested in cooperating with foreign companies on
manufacturing organic and inorganic chemicals, including specialized resins,
provided that these would have a relatively sophisticated technology and would
have lower production cost in Turkey compared to that in Western Europe. For
example, between 60-80% of the paint inputs (depending on the type of paint)
are met through imports from Europe. That said, it is argued that Turkey could
be a dyestuff production centre for the foreign investors for investing/exporting
to third countries. Major paint and coating producers think that Turkey has
reached the stage to produce paint raw materials locally due to two
developments:

�Competition in paint prices forces paint producers to look at the cost of inputs
more closely.

� Amount of imported inputs is growing each day together with the growing
amount of paint production.
From:Selcuk Denizhan To:Dr. Richard Dawe

• Due to the lack of economies of scale and high raw material prices, domestic
prices have generally been higher than world prices. Industrialists for example
complain about the high prices of Eti Holding’s (the state mining company) boron
chemicals and import these chemicals to a great extent. Turkey needs extraction
and production of boron chemicals at lower costs of production. Eti Holding said
it is open to collaboration with third parties. Surfactants are also competitive
markets open to new entrants, which supply quality inputs. Manufacturers
complain about high surfactant prices of current suppliers. Petkim and a few
other private companies have or had plans to produce LAB.

References

1) Chemical industry, Export Promotion Center of Turkey, http://www.us-

istanbul.com/pdfs/reports/turkey/turkey_chemical.pdf
2) Supply Chain Excellence in the European Chemical Industry,
http://www.cefic.be/files/publications/supply_chain_excellence.pdf
3) http://www.kobifinans.com.tr/en/sector/0104/15942

Selcuk Denizhan