TURKEY - The Turkish Petrochemicals Sector.

Turkey has a diversified petrochemical sector. Private business groups are involved in a wide range of activities in this sector. Petrochemicals are produced both for local consumption and for export. Petrochemical imports, necessary to meet the diverse requirements of domestic industries, have risen in recent years.

The largest petrochemical combine in the country is the state-controlled Petrokimya Holding A.S. (Petkim). This has been one of the most profitable state companies in Turkey for years.

Petkim is being privatised. But in February 2004 the tender for the sale of Petkim was cancelled due to a lack of acceptable bids. The tender, the second time the company was offered, was for 88.86% of Petkim.

The remaining 11.14% of Petkim shares, sold to the private sector in recent years, are traded on the Istanbul Stock Exchange.

The State Privatisation Board had cancelled the first sell-off tender on August 6, 2003. The board then said the winner of the tender, Standard Kimya, a company owned by the Uzan family, had failed to fulfill the required conditions.

The 2003 cancellation came as a fresh blow to the Uzan family, one of the richest in Turkey, whose money-making electric power utilities and banks were seized by the authorities over irregularities. The Uzans claimed the onslaught was the result of a campaign led by Prime Minister and ruling AK Party leader Recep Tayyip Erdogan to block the rise of a political party led by one of the family's scions, Cem Uzan. But the AK Party defeated Cem Uzan in local elections held in March 2004.

In June 2003, Standard Kimya had made the highest bid for the state's 88.86% stake in Petkim. Standard Kimya offered $605 million. But media reports then said the Uzans were facing difficulties in acquiring the necessary bank guarantees for the payment after running into trouble with the AKP government.

The Uzans were no strangers to controversy and had faced countless court battles before involving allegations of fraud. The government in June 2003 took control of two of the Uzans' power utilities on the grounds that they had failed to obey regulations.

The move to sell the government's stake in Petkim followed a privatisation of the country's main oil marketer POAS and main oil refiner Tupras (see DT 18). Successive governments since the late 1980s have failed to sell Petkim off due to political wrangling, and lack of interest in the company among local and foreign investors (see background in Vol. 62, DT No. 18).

The petrochemicals industry in Turkey has been undergoing a period of shake-up and consolidation, as a result of two factors:

- Turkey's signing of the EU customs union agreement, which became effective on Jan. 1, 1996; and

- the opening up of the Commonwealth of Independent States (CIS), following the collapse of the Soviet Union, with key CIS members now competing as exporters of petrochemical products to regional markets.

In the past eight years, however, CIS petrochemicals moving into Turkey have had no serious effects on the sector or on Petkim's profitability.

Petrokimya Holding: Petkim has been a prominent venture among the State Economic Enterprises (SEEs), producing petrochemicals, basic chemicals and plastics as well as being one of Turkey's exporters.

Samuel Montagu of Britain has acted as adviser for the sale of the company. It is not clear whether this bank has retained its advisory role until now; nor is it clear when the privatisation of Petkim will be completed.

One problem with this company is that it is over-staffed and some of its units have been inefficient.

Petkim had three consecutive years of losses in 1992-93. Losses amounted to TL 1.4 trillion in 1993 and TL 580 billion in 1992, incurred mainly as a result of huge expenses in the form of loan repayments and the low price for its products. But there was a turnaround in 1994 and in the subsequent years.

Petkim made the highest profits in 1995 among companies listed on the Istanbul Stock Exchange, amounting to TL 22.73 trillion, compared with about TL 3.92 trillion in 1994. Since 1995, Petkim has been ranking from fifth to seventh on the list of the top 500 Turkish companies compiled by the Istanbul Chamber of Industry - following Tupras, Teas, Tekel and Erdemir, all of which having been state enterprises.

However, there have been doubts as to whether Petkim could sustain strong performance. Although demand for petrochemicals in Turkey remains high, the level of competition from the private sector has been increasing steadily in recent years.

Private companies are having small units built to produce a wide variety of petrochemical goods. These units have been enlarged gradually through the recent years. Business circles have long predicted that these companies would eventually eat into Petkim's market share.

Baser Holding, as one example of a private company, has a plant built in 1998 producing polystyrene, which until then was only produced by Petkim. The plant was built at the Yumurtalik Free Zone, near the Ceyhan crude oil export terminal on the Turkish Mediterranean coast.

The Baser plant has a nameplate capacity of 80,000 tons/year. But it has been able to produce more than 100,000 tons/year since 2004. Executives of Baser, which has had a quality standard award of "ISO 9002", have vowed to develop their company into one of the major petrochemicals firms in Europe - an ambition which implies that Petkim would face some serious competition in the coming years.