CHEMICAL INDUSTRY

IN TURKEY:

SECTOR & MARKET ANALYSIS

Sadık Baydere

August, 2013

Disclaimer: This report does not purport to be all inclusive or to contain all the information that the
recipient may require to form its decisions. No representation or warranty, express or implied, is or will be
made in relation to the accuracy or completeness of this document.
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CONTENTS
1 EXECUTIVE SUMMARY .................................................................................................................... 3

2 GLOBAL OVERVIEW ......................................................................................................................... 5

3 DOMESTIC OVERVIEW..................................................................................................................... 7
3.1 Subsectors, Interacting Sectors and Trends............................................................................. 7
3.2 Regional Structures and Clusters ........................................................................................... 10
3.3 Investment and Employment................................................................................................... 11
3.4 Production, Sales and Capacity Utilisation ............................................................................. 12
3.5 Added Value, R&D and Competitiveness ............................................................................... 12
3.6 Cost Components ................................................................................................................... 13
3.7 Foreign Trade.......................................................................................................................... 14
3.7.1 Exports ..................................................................................................................... 14
3.7.2 Imports ..................................................................................................................... 15

4 REGULATIONS ................................................................................................................................ 17
4.1 REACH.................................................................................................................................... 17
4.2 CLP ......................................................................................................................................... 18
4.3 Waste Management ................................................................................................................ 19
4.4 Dangerous Goods Transportation........................................................................................... 19

5 SUPPLY CHAIN & LOGISTICS........................................................................................................ 21

5.1 Logistics Service Providers to Chemical Industry ................................................................... 22

6 MAIN PLAYERS ............................................................................................................................... 25

7 SWOT ANALYSIS............................................................................................................................. 27
7.1 Strengths ................................................................................................................................. 27
7.2 Weaknesses............................................................................................................................ 27
7.3 Opportunities........................................................................................................................... 28
7.4 Threats .................................................................................................................................... 28
7.5 Priority Problem Areas ............................................................................................................ 29

8 FUTURE PROJECTION AND CHALLENGES ................................................................................. 30

9 APPENDIX........................................................................................................................................ 34
9.1 Sector Establishments and Institutions ................................................................................... 34

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1 EXECUTIVE SUMMARY
The objective of this report is to provide a brief outlook and market analysis of the
Chemical Industry in Turkey. It has been prepared for information purposes relating to
this sector based on publicly available information sources at the time this document
was prepared.

The chemical industry is a global enterprise with revenues of about USD 4 trillion and is
a keystone for the global economy converting raw materials (oil, natural gas, air, water,
metals, and minerals) into more than 70,000 different products. A few goods are
manufactured without some input from the chemical industry. The largest corporate
producers worldwide, with plants in numerous countries include BASF, Dow, Eastman
Chemical Company, Shell, Bayer, INEOS, ExxonMobil, DuPont, Henkel, SABIC and
Mitsubishi, along with thousands of smaller firms.

Chemicals are used to make a wide variety of consumer goods as well as thousands of
inputs to agriculture, manufacturing, construction, and service industries. While 30% of
the products from plastics and cosmetics to pharmaceuticals and paints manufactured
by the chemical industry reach directly to consumers, 70% is used as raw or semi-
finished materials in a wide variety of sectors. This makes it a vital industry for our lives
and for other industries. Chemicals are an integral part of daily life in today’s world.

The sector has become the cornerstone of the Turkish industry as it provides raw
materials required for almost every product manufactured in other sectors. It is regarded
as one of the leading sectors growing fast with incentives. It has grown to a production
size of USD 50 billion including petrochemicals in 2013 from USD 10 billion in 2003.

However, the chemical sector with such a wide range of products is dependent on
imports in Turkey. 70% of raw materials used in the sector are imported while only 30%
is provided by domestic production. Dependence on imports is one of the major issues
in the sector. Achieving the highest export figures within the sector, plastics and rubber
products category for example, had an import dependence of 83% in 2011.

The chemical sector itself has become the second major sector after automotive in
export performance. Its 12% annual increase rate in exports is well above other
industrial products which averages about 3%.

In 2012, the chemical sector imports were USD 36.2 billion while exports amounted to
USD 13.8 billion. The figures were USD 37.8 billion and USD 13.0 billion in 2011. With
its USD 50 billion target within Turkey’s 2023 target of USD 500 billion in exports, the
sector itself is regarded as one of the most important among others including
automotive, machinery, metals, textile and apparels.

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The primary products exported by the Turkish chemical industry mainly include
petrochemicals, fertilizers, pharmaceuticals, synthetic fiber and strings, soap and
detergent, as well as paints.

Labour intensity of the chemical sector is quite low as it is an investment and technology
intensive industry. Therefore, with an employment of about 250,000, the share of the
employment of the sector within the manufacturing sector has remained around 8%
within the last 5 years.

Almost 99.5% of about 25,000 companies operating in the sector are small to medium-
scale enterprises in SME category where the large-scale companies add up to just less
than 100. Most of these companies are located in the cities of İstanbul, İzmir, Ankara,
Bursa, Konya and Kocaeli. One of the major problems of the sector is the “right location
for investment” due to environmental and health concerns. “Specialised Organised
Industrial Zones” are very important for the development and growth of the sector.

There are about 314 companies with foreign investment in the Turkish chemical industry
which has a share of 13 percent of total foreign capital in Turkey. 1

The weighted capacity utilisation rate of the industry was about 75% in the last 5 years. 2

The chemical industry is a heavily regulated sector mainly due to environmental and
health concerns. Although not being a full member of EU, Turkey as a candidate has
existing and upcoming obligations for regulations such as REACH, CLP, Waste
Management, Transport of Dangerous Goods legislations within the negotiation process
started in October 2005. It is inevitable that these regulations impose high costs to the
companies in the sector where SME companies can only adapt at a level of 30%.

“Turkish Chemical Sector Strategy and Action Plan 2013-2016” prepared with the
contributions of private sector organisations, government agencies and universities was
approved by Supreme Planning Council and published in Official Gazette in 20.11.2012.
The objective of the report is “To reach as the chemical sector to a dominant position in
the world by improving the balance of trade with high-value-added processes and
products sensitive to the environment and human health in a competitive and
sustainable manner”.

The long term vision of Turkish chemical industry has been defined as “To make Turkey
an investment base by producing high value-added products” within the scope of the
Industrial Strategy of Turkey aiming “To become the investment base of Eurasia for mid
and high-tech products”.

1
Investment Support and Promotion Agency of Turkey, August 2010 www.invest.gov.tr
2
TUIK, Turkish Statistical Institute www.tuik.gov.tr

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2 GLOBAL OVERVIEW
Chemicals are an integral part of daily life in today’s world. There is hardly any industry
where chemicals are not used and there is no single economic sector where chemicals
do not play an important role.

The global chemical industry consists of a very diverse and complicated range of
products and produces intermediates for most other consumer industries. The raw
materials including, oil, natural gas, air, water, metals, and minerals are converted into
more than 70,000 different products. The majority of consumer products that are used
every day have at least some tie to the products of the chemical industry.

With revenues of about USD 4 trillion, chemical industry is one of the world’s largest
markets with major contributing regions being Asia, Europe and North America. The
compound annual growth rate (CAGR) over the five years spanning 2006-2010 has
been 5%. Europe only grew at about 1% in 2010 while Asia being the region with the
largest CAGR at 10%. Global chemical markets grew 11.6% in 2011.

The geographical segmentation of the chemical industry overwhelmingly resides in the

Asia-Pacific region. In 2011, the Asia-Pacific accounted for 51.9% of the industry.
Europe and the Americas followed with 23.4% and 22.6% (NAFTA 17.1%) respectively.
China, USA and Japan ranks as the first 3 markets with 26.8%, 14.9% and 6.4%
respectively. Germany, South Korea, Brazil, France, Taiwan and Russia follow. 45% of
the global production is subjected to foreign trade, Europe having the largest share.

The OECD’s Environmental Outlook to 2050 notes that while annual global chemical
sales doubled over the period 2000 to 2009, OECD’s share decreased from 77% to
63% and the share of the BRIICS countries (Brazil, Russia, India, Indonesia, China, and
South Africa) increased from 13% to 28%. 3

3
Global Chemicals Outlook 2012, UNEP www.unep.org

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4
Source: CEFIC

The chemical industry is highly regulated. With new regulations such as REACH, the
industry framework is changing to adapt to innovative solutions. The main constraints on
the global chemical industry are energy costs, raw material changes, labour costs and
regulations. Despite these limitations, the industry is expected to grow at a fairly high
rate over the next five years and thereafter. While many of these companies have
extensive sustainability plans they are still lagging behind other industries.

The chemical market is recognized as being divided into five distinct segments; base,
consumer, pharmaceutical, specialty and fine, and agriculture chemicals. The base
chemicals segment consists of the largest of the five with 41% of the total value. A far
second, pharmaceuticals comprise of about 28%. The remaining 31% is split between
the remaining three segments.

The majority of the raw materials or ingredients in the chemical industry are derived
from oil and natural gas. Therefore prices of the products fluctuate greatly according to
the supply and demand of these inputs. The threat of substitutes is very low because
the buyer typically needs a very specific chemical composition that is not available
everywhere. However, in the base chemical markets, margins are rather thin as these
products are very commoditised and available from multiple market players. The
industry has high barriers to entry and exit primarily due to the large costs of production
plants.

There are a few large players with a lot of smaller, specialised, companies. The largest
corporate producers worldwide, with plants in numerous countries include BASF, Dow,
Eastman Chemical Company, Shell, Bayer, INEOS, ExxonMobil, DuPont, Henkel,
SABIC and Mitsubishi, along with thousands of smaller firms. Some of these large
companies generate sales of more than $50 billion in a single year.
4
Charts: CEFIC European Chemical Industry Council www.cefic.org

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3 DOMESTIC OVERVIEW
The chemical industry in Turkey started in 1950’s and developed in the 70’s and 80’s
with public sector refinery and petrochemical facilities of Tüpras and Petkim as the main
suppliers of raw materials to the industry. The sector opened up to export markets with
the reduction of customs tariffs in 1984, further increasing its export focus in 2000’s. In
the same years, public sector core components of the sector belonging to the State
such as Tüpras, Petkim, Petrol Ofisi, Petlas, Gübre Fabrikaları were privatised.
Privatisation policies in the sector has been claimed to further increase the import
dependence of the sector which still continues heavily.

The continued foreign investment flow to the sector accelerated after 2001 crisis where
most of the major companies in the sector mainly the pharmaceutical subsector have
attracted foreign capital. In 2000s, chemical industry experienced significant
developments in the context of integration into foreign markets. 5

3.1 Subsectors, Interacting Sectors and Trends

Chemical industry has a wide range of products mainly grouped into two major
categories as “consumer chemicals” and “intermediate chemicals”, based on their
purpose of use. The sector produces approximately 2,600 chemical substances which
keep up with global competition levels in terms of methods and technologies used.

Consumer Chemicals category has a share of about 35% which includes cleaning
products (soap, detergents), cosmetics, pharmaceuticals, etc. Having a share of about
65%, Intermediate Chemicals category covers a wide range from specialty chemicals,
paint, varnish, ink, petrochemicals, plastics and rubber, synthetic fiber, industrial gases,
pesticides, fertilisers, other basic inorganics, etc. Intermediate chemicals mostly form
the primary or intermediate input as raw materials to other sectors.

Another classification of the sector based on the chemical composition of the production
in Turkey and the respective share of each component as at 2011 is as follows: 6
ƒ Plastics and Rubber Products 31%
ƒ Medical and Pharmaceutical Products 20%
ƒ Consumer Chemicals 11%
ƒ Synthetic Rubber and Plastic Raw Materials 11%
ƒ Synthetic and Artificial Fibers 7%
ƒ Paint, Varnish and Inks 6%
ƒ Other Unclassified Chemicals 5%
ƒ Basic Chemicals 4%
ƒ Chemical Fertilizers and Nitrogen Compounds 4%
ƒ Agricultural Chemicals 1%

5
PETROL-İŞ, Petroleum, Chemical and Rubber Workers Union www.petrol-is.org.tr
6
TUIK www.tuik.org.tr (NACE Rev.2 Codes: 20-21-22) and PETROL-İŞ www.petrol-is.org.tr

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Plastics and Rubber Products subsector which by far has the biggest share in
chemicals industry production and sales in Turkey with 35% has a critical dependence
on imported raw materials. Even if the planned capacity increases are achieved,
domestic production of plastics and rubber raw materials will only reach to 45.2% from
its existing level of 31.2%. Dependence on imports reduces the possibilities of
competitive production for both domestic and foreign markets. This increases the share
of imports (mainly from Far East) of the finished plastics and rubber products for
domestic market causing a considerable negative effect on the foreign trade balance of
the country. Plastics and Rubber Products subsector has an important role in chemical
industry as 60% of all employees and 77% of companies operate in this segment while
achieving almost 50% of chemical industry exports. It has reached the production
volume of 8 million tons in 2012 presenting a 5.6% increase from the prior year.

Import dependence on raw materials is actually a common problem for the sector in
general. For example, in Cleaning Products (detergents and soaps); LAB, STTP,
enzyme, optical bleach, perfume, tallow, tropical oils, caustic soda, and salt are
imported. 40% of the production is consumed within the domestic market while 60% is
exported making the Cleaning Products subsector one of the few sectors exporting most
of its production.

Pharmaceuticals industry is one of the most high-value-added and major subsectors

within the chemical industry providing approximately 10% of the industry’s production. In
spite of its potential to compete in world markets, with a share of only 0.2%, it has yet to
reach the desired competitive edge based on the evaluation parameters for
competitiveness. Among about 300 companies in this subsector, 53 have production
facilities of which 14 are international companies with foreign capital.

With its sectoral structure and strength, Paint and Varnish subsector has achieved
remarkable progress especially in the last 10 years becoming the 4th biggest producer in
Europe with its economic size of over USD 3 billion. Having a capacity usage rate of
65%, it has a share of 2% in world markets where 40% of global production is achieved
by 3 major players. The paints and coatings sector has developed significantly matching
the growth in Turkey’s construction, automotive and marine industries as well as
producing for the export markets. There are around 600 manufacturing facilities in the
market. 7

Within Consumer Products subsector, home care and personal care market is a
dynamically growing one. P&G, Unilever, L’Oreal, Colgate and other major
multinationals have been in the Turkish market for many years. Detergents, soaps,
men’s grooming, depilatories, bath and shower, baby care, personal hygiene, hair care
and toothpastes are the main products in this subsector. 8

7
IBP Export Information Platform, Ministry of Economy www.ibp.gov.tr
8
TIM Turkish Exporters’ Assembly www.tim.org.tr

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For Fertilisers subsector, trends in agriculture are important as fertiliser is a major

agricultural input. The national agricultural income is increasing but at a slower rate than
GDP, decreasing the ratio of agricultural income to GDP from the most recent peak of
14.3 percent in 1997 to 8.4 percent in 2009. There are seven companies, all being
private companies, which exclusively produce fertilizers: Tugsaş, İgsaş, Bagfas, Toros
Gübre, Ege Gübre, Akdeniz Gübre and Gübre Fabrikaları. Domestic production covers
the majority of domestic demand but there are also imports. (7)

In Petrochemicals subsector, the main player is a former public company Petkim,

which was privatised in 2007. Having its petrochemicals complex in Aliağa, İzmir,
Petkim’s product range includes petrochemical substances of LDPE, HDPE, PVC, and
PP products, master-batches, olefins, fiber and aromatics. These products are important
inputs for the construction, electricity, electronic, packaging, textile and also medical,
dyeing, detergent and cosmetic sectors. In addition, Tüpras, Turkey’s largest petroleum
company has its crude processing / refining and petrochemical production facilities in
Yarımca, Kocaeli.

Turkey has specific competitive advantage as one of the main global producers of soda
ash, chrome and boron. Soda Sanayi AS, a private company under the Şişecam
Group, is the main producer of soda, chrome, sodium bichromate and chrome. Another
privatised important player is Eti Soda AS, which utilizes an extremely rich trona (natural
soda ash) reserve found near Ankara, at Beypazarı. It is globally the second largest
reserve after a reserve in Wyoming, United States. A new substantial trona reserve has
recently been found near Kazan, Ankara. The aggregate natural reserves at Beypazarı
and Kazan are estimated at around 836 million tons. Around 72 percent of the world’s
boron reserves are in Turkey. Boron products are inputs for the agriculture, detergent
and soaps, ceramics, insulation fiberglass, timber preservation, flame retardants,
nuclear power plants, cosmetics and medicine, metallurgy, and many other industries.
Pure boron exports in 2009 totalled USD 435 million.

As the below chart shows, the chemical industry underpins virtually all sectors of the
economy and its strategies impact directly on downstream chemical users. 9

9
CEFIC European Chemical Industry Council www.cefic.org

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3.2 Regional Structures and Clusters

Chemical industry is localised mostly in coastal areas of the country mainly due to the
importance of logistics.

Producers of petroleum products, plastics and rubber, detergents, soaps,

pharmaceutical chemicals, paint, etc. are located mostly in the three major industrial
cities of İstanbul, Kocaeli and Sakarya in Marmara Region; and in İzmir in Aegean
Region. Mediterranean Region hosts mostly fertiliser and petroleum companies in
addition to soda and bicarbonate producers which provide input to mainly cleaning
products subsector as raw material. Fertiliser factories stand out in Blacksea Region.

As the following chart shows, most of the 22,000 companies in the sector are located in
the cities of İstanbul, İzmir, Ankara, Bursa, Konya, Antalya, Kocaeli Gaziantep, Adana
and Mersin. With 38.6%, İstanbul by far is the most preferred location for the sector.

One of the major problems of the sector is the “right location for investment” due to
environmental and health concerns. The cluster approach has been widely applied
lately as a successful method of increasing competitiveness for the industries.

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“Specialised Organised Industrial Zones” are very important for the development,
competitiveness and growth of the sector. 10

3.3 Investment and Employment

In chemical industry, almost 250,000 people are employed by about 25,000 firms which
compose approximately 9% of employees and 7% of the total number of companies in
the manufacturing sector.

According to official TUIK figures, 21,836 companies with 229,465 employees operated
in 2009 compared to 14,489 companies and 191,348 employees in 2004; an increase of
51% in number of companies and 20% in employees respectively in 5 years. 8

83% of the firms operating in chemical industry are micro-sized enterprises with 1-9
employees. 14% are small-scale with 10-49, 2.5% are medium-scale with 50-249 and
only 0.5% is of large scale companies with more than 250 employees. Companies with
1-50 employees make up almost 97%. This shows the structure of the chemical industry
in Turkey where most enterprises are kind of family-owned with insufficient advanced
technology and low capacity utilisation rates.

Turkish Statistical Institute TUIK compares the revenues of each company to the
highest 4 and 8 to find the degree of industry concentration for each subsector giving
important clues about its monopolistic structure. Based on this study last conducted in
2008, there is low concentration (low monopoly) in plastic and paint subsectors, medium
concentration in cosmetics, rubber and other chemicals subsectors, and high
concentration with the remaining subsectors which require advanced technology and
high investment capital.

Taking the revenues of the companies in the sector, many subsectors of the chemical
industry is said to be dominated by a monopolistic structure but most of the companies
in the sector are in the subsectors with low or medium concentration.

Between 1954 and 2011, 29,283 foreign-owned companies operated in Turkey. 524 of
these were in chemical industry out of 4,733 foreign-owned companies invested in
manufacturing industry. In 2011, 44 foreign-owned companies were formed in chemical
industry while 9 domestic companies had foreign capital injection as partnerships. 11

Chemical industry stands out as one of the major sectors having foreign capital inflow. It
has a 13% share in the total foreign capital in Turkey. However, most of the foreign
capital entry is realised by means of acquisitions or through partnerships with existing
successful companies. For this reason, foreign capital inflow to the sector is quite
irregular.

10
Ministry of Science, Industry and Technology www.sanayi.gov.tr and TUIK www.tuik.gov.tr
11
Ministry of Economy www.economi.gov.tr

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3.4 Production, Sales and Capacity Utilisation

The share of chemical industry production in the manufacturing industry total is 25%
including petrochemicals and 12.2% for the other subsectors; chemicals and chemical
products, medical and pharmaceutical products, and plastic and rubber products.

According to TUIK, although the production value of the chemical industry decreased by
0.6% in 2009, its share within the manufacturing industry increased from 10.8% to
12.2%. Production value in 2009 amounted to TRY 51.1 billion (~ USD 33 billion) in
chemicals and chemical products (43%), pharmaceuticals (15%), plastic and rubber
products (42%) subsectors of the industry.

Chemical industry turnover/sales index increased 13.2% on average for each year from
2005 until 2008. Index of 100 in 2005 reached to 144.7 points declining from 3rd quarter
of 2008. Index reached to 163.6 points in 2010 with 13% increase and to 196.5 points in
2011 with an increase of 20%. 12

The capacity utilisation in the sector has shown a steady improvement considering it is
importance in terms of supplying raw materials as input to many other sectors.

Weighted capacity utilisation has been realised as 73.9% in the last 5 years. Between
2008 and 2012, the capacity utilization rates were 74.0%, 68.0%, 75.2%, 77.8% and
74.4% respectively. 13

3.5 Added Value, R&D and Competitiveness

Chemical industry (including refined petroleum products; NACE rev.2 Code 19)
produces about 30% of the total value-add created in manufacturing industry in general.
The value-add is 13.77% for the remaining subsectors; chemicals and chemical
products (code 20), medical and pharmaceutical products (code 21), and plastic and
rubber products (code 22). Its share in the total value-add for the country is 4.51%.
There has been a steady increase in this value-add since 1998.

Gross Domestic Research and Development spent in Turkey was TRY 11.2 billion in
2011 with a 20.4% increase compared to the previous year. R&D spent share within
GDP was a mere 0.86% in 2011. R&D spent of the chemical industry amounted to TRY
486 million; a 4.34% share within the total domestic R&D spent in the country. In 2009,
2,626 employees worked in R&D activities which are about 1% of the total workforce of
the chemical sector in general.

Based on sales of the chemical substances per capita, Turkey lags far behind the EU
countries. The most striking example is Ireland having 8,354 EUR of sales per person
with EUR 34 billion sales to a population of 4.1 million while Turkey achieved only EUR
195.5 per person with EUR 14 billion sales to a population of 71.6 million. In Germany

12
TUIK (NACE Rev.2 Codes: 20-21-22) www.tuik.org.tr
13
TCMB Turkish Central Bank (NACE Rev.2 Codes:20-21-22) www.tcmb.gov.tr

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the figures are EUR 1,783 per person, EUR 147 billion and 82.5 million while Hungary
has EUR 607 of sales per person. 14

Chemical industry is largely import-dependent in terms of raw material inputs. To reduce

this dependence, investments should be made for the production of basic chemicals.
Utilising the high potential for raw material requirement, investments to increase the
competitiveness with its high technology and R&D intensive context should be
encouraged and supported with incentives. Bureaucratic procedures should be
minimised with optimised and accelerated processes. Appropriate locations should be
identified for logistics purposes and industry clusters as Specialised Chemical Industry
Zones should be established with supporting infrastructure and facilities.

3.6 Cost Components

Due to environmental and health concerns, the cost problems of the chemical industry
starts at the investment stage which is comparatively higher than investing in other
sectors due to selection of the right location and lengthy bureaucratic process.

The main cost components of the chemical industry could be listed as:
ƒ Raw materials (import dependence)
ƒ Technology (import dependence)
ƒ Supply chain and logistics
ƒ Compliance to regulations such as REACH
ƒ Waste Management (disposal and recycling)
ƒ Above average labour costs

As highlighted before, import dependence on raw materials and technology is a major

burden on the chemical industry. Even if the customs tariffs are waived, imported raw
materials does have at least 10% share on total costs.

The sector itself is subject to heavy regulations mainly due to environmental concerns.
Regulations such as REACH, CLP, Waste Management, Transport of Dangerous
Goods legislations impose high costs to the companies in the sector where SME
companies can only adapt at a level of 30%.

With almost 13% of its sales turnover, logistics costs of the chemical industry are higher
than other sectors. Compulsory compliance to regulations for safer and orderly transport
and storage of hazardous substances without harming the environment and human
health increases the production costs. Logistics partners providing quality services and
having expertise in optimizing the supply chain management costs of the industry would
increase the competitiveness of the sector.

Labour costs per hour are higher in the sector compared to other sectors in the
manufacturing industry due to the requirement for educated and highly skilled
employees needing further training regularly during their employment.
14
CEFIC www.cefig.org and EUROSTAT European Statistics www.epp.eurostat.ec.europa.eu

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3.7 Foreign Trade

As highlighted many times, the most prominent feature of the chemical industry is its
dependence on imports. This dependence is not only for raw materials but also for
finished products and intermediary materials which is reflected markedly in foreign trade
figures.

The dilemma is that as the exports increase, the requirement for raw and intermediate
materials increases hence fuelling the increase in imports in line with exports, not
helping the foreign trade imbalance.

It is evident that import dependence of the chemical industry can be altered by a

planned and structured investment strategy in the subsectors with high value-add
capacity and by increasing the R&D activity of the sector in general. The positive effect
of the government investment and support in the past for the subsectors producing high
added value such as petrochemical and refining before their privatisations is required
today for the entire sector.

As will be seen below, USD 13.8 billion worth of exports were made to 189 different
countries in 2012 while imports of USD 36.2 billion are made from 142 countries.

The following foreign trade figures are classified with NACE Rev.2 and ISIC Rev.4
codes of 20-21-22 for the subsectors of chemical industry as 20 - Chemicals and
Chemical Products, 21 - Basic Pharmaceutical Products and Preparations, 22 - Rubber
and Plastics Products) excluding code 19 - Refined Petroleum Products. 15

3.7.1 Exports
Chemical industry exports of USD 2.2 billion in 2002 increased every year since 2006
reaching USD 9.7 billion in 2008 with a CAGR of 16.8%. Due to the effects of the
economic crises, imports in 2009 decreased by 14.48% to USD 8 billion. In 2010,
exports increased by 27.42% reaching USD 10.6 billion. Increasing trend continued in
2011 and 2012 resulting exports of USD 13 billion (+22.5%) and USD 13.8 billion
(+6.2%) respectively.

CHEMICAL INDUSTRY ‐ EXPORTS (USD million) 
   2008  2009  2010  2011  2012 
20 ‐ Chemicals and Chemical Products  4,532    3,831  5,124  6,154  6,625 
21 ‐ Basic Pharmaceutical Products  467  469  606  615  715 
22 ‐ Rubber and Plastic Products   4,769  4,049  4,908  6,261  6,453 
TOTAL CHEMICAL INDUSTRY  9,769  8,349  10,638  13,031  13,793 
Share within Manufacturing Industry (%)   7.8  8.7  10  10.3  9.6 
TOTAL MANUFACTURING INDUSTRY  125,943  96,143  106,347  127,005  143,267 
Share within Total Exports (%)   7.4  8.2  9.3  9.6  9 
TOTAL EXPORTS  132,027  102,143  113,883  134,907  152,537 
Source: TÜİK (ISIC Rev 4 Codes: 20,21,22)

15
NACE / ISIC Industrial Classifications www.ec.europa.eu and www.unstats.un.org

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The biggest share (37%) of exports made in 2012 was to EU-27 countries with USD 5.1
billion. EU-27 were followed by Near East and Middle East countries (26%) with USD
3.6 billion, Other European countries with USD 1.6 billion (11.6%), Other Asian
countries with USD 1.5 billion (10.9%) and North African countries with USD 0.9 billion
(6.5%).

Egypt had the biggest share of exports with 10.3% followed by Iraq with 6.3%, UAE with
5%, Malta with 4.4%, Germany with 4.2%, Iran, Russia, Italy, USA and Greece as the
major destinations for chemical industry exports.

In “20 (15) – Chemical and Chemical Products” subsector, biggest export markets were
Iran, China and Iraq. In “21 – Basic Pharmaceutical Products”; Germany, Iraq and South
Korea were the major export markets while again Germany, Iraq and Russia ranked the
first three export markets for “22 – Rubber and Plastic Products” subsector.

The companies located in İstanbul achieved a 34.8% share in chemical exports followed
by the cities of Kocaeli (34.1%), İzmir (10%), Ankara (6.9%), Gaziantep (3.6%), Bursa
(2.3%) and Adana (1.6%).

With a 29% share, “2220 16 - Plastic Products” subsector achieved the most exports in
2012 with USD 4.1 billion. It is followed by “2011 - Basic Chemicals” with USD 2.1 billion
(15%), “2023 - Soap and Detergents, Cleaning and Polishing Preparations, Perfumes
and Toilet Preparations” with USD 1.4 billion (10.1%), “2211 - Rubber Tyres and Tubes”
with USD 1.2 billion (8.7%), “2219 - Other Rubber Products” with USD 1.1 billion (8%)
and “2013 - Plastics and Synthetic Rubber in Primary Forms” with USD 1.0 billion
(7.3%).

The major factor of success for increasing exports in chemical industry has been the
efforts to compensate the loss of former export markets such as Europe with new
geographies including Near East, Middle East, Africa and Asian countries. The chemical
industry has now become the second major sector in exports after automotive. With its
average periodic increase of 12% pa, chemical industry has surpassed the other
manufacturing sectors which average 3% increase pa.

3.7.2 Imports
Chemical industry imports increased steadily every year since 2006 reaching USD 30.5
billion in 2008. Due to the effects of the economic crises, imports in 2009 decreased by
21% to USD 24.1 billion. In 2010, exports increased by 26.75% reaching USD 30.6
billion. Increasing trend continued in 2011 resulting exports of USD 37.8 billion
(+23.9%). There was a %4 decrease in 2012 realising imports of USD 36.2 billion.

16
ISIC Rev.4 Coding is used for Industrial Activity classification.

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CHEMICAL INDUSTRY ‐ IMPORTS (USD million) 
   2008  2009  2010  2011  2012 
20 ‐ Chemicals and Chemical Products  22,274    16,993  22,309  28,205  27,406 
21 ‐ Basic Pharmaceutical Products  4,736  4,419  4,770  5,065  4,326 
22 ‐ Rubber and Plastic Products   3,454  2,709  3,493  4,484  4,477 
TOTAL CHEMICAL INDUSTRY  30,464  24,121  30,573  37,754  36,209 
Share within Manufacturing Industry (%)   20.2  21.7  21.0  20.5  20.5 
TOTAL MANUFACTURING INDUSTRY  150,712  111,342  145,715  184,272  176,234 
Share within Total Imports (%)   15.1  17.1  16.5  15.7  15.3 
TOTAL IMPORTS  201,963  140,928  185,544  240,842  236,545 
Source: TÜİK (ISIC Rev 4 Codes: 20,21,22)

EU-27 countries ranked first in imports realising USD 18 billion with 49.7% share far
ahead of Other Asian countries with USD 7.9 billion (21.8%), Near East and Middle East
countries with USD 4 billion (11.1%), Other European countries with USD 2.5 billion
(6.9%) and North America with USD 2.1 billion (%5.8).

In “20 (15) – Chemical and Chemical Products” subsector, biggest import markets were
Germany, China and Saudi Arabia. In “21 – Basic Pharmaceutical Products”; Germany,
USA and Switzerland were the major import markets while again Germany, China, and
Italy ranked the first three import markets for “22 – Rubber and Plastic Products”
subsector. As seen, most of the imports for chemical industry are made from Germany
and China.

With USD 10.7 billion worth of imports, “2013 (16) - Plastics and Synthetic Rubber in
Primary Forms subsector ranked first having a share of 29.6% followed by 2011 - Basic
Chemicals with USD 7.3 billion (20.2%), 2100 - Pharmaceuticals, Medicinal Chemical
and Botanical Products with USD 4.3 billion (11.9%), 2030 – Man-made / Synthetic
Fibers with USD 2.7 billion (7.5%) and 2029 – Other Chemical Products n.e.c. with USD
2.6 billion (7.2%).

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4 REGULATIONS
The chemical industry is a heavily regulated sector mainly due to environmental and
health concerns. Although not being a full member of EU, Turkey as a candidate has
existing and upcoming obligations for regulations such as REACH, CLP, Waste
Management, Transport of Dangerous Goods legislations within the negotiation process
started in October 2005 before becoming a full member. It is inevitable that adaptation
to these regulations imposes high costs for the companies in the sector.

The regulations relating to chemical sector is not collected under a single title within
”acquis communitaire” (EU Law and Policies) rather spread over to 35 different acquis
chapters such as Company Environment, Transport Policy, Free Movement of Goods,
Social Policy and Employment, Law, Enterprise and Industrial Policy, Taxation, Science
and Research, Intellectual Property Law, etc.

The adaptation of European Union regulations to the legislations of Turkey in order to

reach to an environmental quality level required by EU necessitates extra effort and
investment for the companies operating in the sector. This presents additional costs
creating financial and operational difficulties particularly for small to medium-scale SME
companies in the sector which seems to be able to adapt only at a level of 30%.

In this section, some of these regulations including REACH, CLP, Waste Management
and Transport of Dangerous Goods will be examined briefly.

4.1 REACH
REACH (Registration, Evaluation and Authorization of Chemicals) requires the chemical
industry to register all existing and future new substances and preparations
manufactured or imported into EU in quantities of 1 ton or more with a new European
Chemicals Agency.

It aims to improve the protection of human health and the environment while enhancing
the competitiveness of the EU chemicals industry, promoting innovation and R&D efforts
and avoiding the fragmentation of the internal market against the competitive pressure
in recent years from China, Japan and USA.

Turkey has not yet adapted to REACH Regulation. Compliance to REACH regulations
will need to be completed in 2018, within eleven years with effect from 01.06.2007. It is
expected that within this period about 30 thousand chemicals will be registered, priority
given to chemicals with high risk and high volumes.

Since Turkey is not an EU member yet, rather a candidate, REACH regulation does not
have a direct impact on production for domestic markets and exports to non-EU
countries. However, manufacturers exporting to EU countries are required to register all
their high risk chemical substances and products.

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It is claimed that registration and certification of each product costs in the tune of EUR
40-50 thousand. With an average 10 products, each company exporting to EUR faces
with a cost of up to EUR 0.5 million. Not having an incentive mechanism to support the
exporters does present a major dilemma for the industry. However, REACH is not a new
regulation only. Although compliance to REACH is complicated and costly process, it
should be viewed as a strategic business concept and an opportunity to reform and
optimise the business processes towards health and safety for humans and
environment.

REACH costs are critical to some extent for the sustainability of the competitiveness of
the chemical industry. Turkish chemical industry has features which could affect the
competitiveness both positively and negatively.

Strengths and opportunities which would positively affect the competitiveness:

⊕ Almost all the companies required to register in 2010 are of the large-scale and/or foreign-owned
⊕ Registration obligation is based on EU export quantity rather than production quantity.
⊕ Most of the SMEs have already pre-registered while final registration deadline is 2018
⊕ Production and export of goods is relatively high weight
⊕ Low levels of SVHC use
⊕ Reduces the registration obligation for intensive imports of raw materials from EU

Weaknesses and threats which would adversely affect the competitiveness:

Θ Most of the companies in the sector are small to medium-scale SMEs
Θ Extra costs arising from the third-country status
Θ Lower activity for strategic decision-making processes
Θ Passive attitude of cost sharing
Θ Intensive input costs increases the costs of imports from the EU with increasing prices

The Ministry of Economy has encouraged its affiliated body The General Secretariat of
Istanbul Mineral and Metal Exporters Association IMMEA to establish its first help desk.
IMMEA has been functioning as an industrial help desk for REACH and CLT as from
September 2007 and 2009 respectively. IMMEA conducts awareness activities and
provides technical help and guidance for Turkish exporters. 17

4.2 CLP
The classification, labelling and packaging of chemical substances and mixtures are
regulated by CLP European Regulation. CLP Regulation which came into force on 20
January 2009 aims to apply United Nation’s Globally Harmonized System GHS criteria.
The Regulation is about the hazards of chemical substances and mixtures and how to
inform others about them. It is the task of the industry to establish what are the hazards
of substances and mixtures before these are placed on the EU market, and to classify
them in line with the identified hazards

The companies that produce or import the substances and mixtures in EU will have to
classify, label and package their products under CLP rules after a transition period.
17
IMMIB Istanbul Mineral and Metals Exporters Association www.reach.immib.org.tr www.clp.immib.org.tr

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Two target dates were defined that affect the classification, hazard communication and
packaging of hazardous substances and mixtures; 1st December 2010 for substances
and 1st June 2015 for mixtures. Since the fines for not complying with CLP regulation is
quite high, companies exporting to EU do give great emphasis for the implementation
procedures.

4.3 Waste Management

EU waste legislation is formed with the principles of encouraging environmentally
friendly production technology and processes producing minimum level of waste, re-
usage as much as possible, enabling recycling or making it usable as a source of
energy, and improving waste disposal through effective means of environmental
legislation.

Turkey has achieved substantial compliance to the Regulation on General Principles of

Waste Management published in 2008 and to Waste Framework Directive of EU.
Regulations prepared based on EU Waste Catalogue and Decision 2000/532/EC for
establishing a Waste List, lists all hazardous and non-hazardous waste in a manner
consistent with EU.

In addition, National Waste Management Plan (2009-2013) has been accepted within
the framework of “Methodological Guide to the Preparation of Waste Management
Plan”. It is envisaged that Regional/Local Waste Management Plans are prepared in
addition to the so called plan aiming to build a Waste Management System which is
more organised, integrated and institutionally structured. Released in 2010, the
Regulations on Landfill and Incineration of Waste have harmonised the Turkish
legislation with the relevant regulations of EU.

Turkey has achieved substantial compliance to EU legislation regulating management of

packaging waste by means of “Packaging Waste Control Regulation” which came into
force in 2007 and updated in 2011. The regulation does not contain recovery and
recycling targets for packaging materials while it is compatible with EU rules in many
respects particularly including essential requirements for releasing and using the
packaging products on the market, the maximum limit for concentrations of heavy
metals, marking the packaging products during production, and the management of
packaging waste

According to TUIK, 12.5 million tons of waste was produced by the manufacturing
industry in total in 2008. Almost 1 million ton of this was produced by chemical industry
of which 461 thousand tons of waste were recovered and reused while 537 tons were
disposed.

4.4 Dangerous Goods Transportation

EU regulation on the transport of dangerous goods covers the transport of these goods
within and among EU countries by means of road, rail and inland waterways. The

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relevant Directive contains provisions on the implementation of international agreements

that sets the rules and regulations governing the transport of dangerous goods both
internationally and nationally. These international agreements are European Agreement
on the International Carriage of Dangerous Goods by Road (ADR), Regulations
Concerning the International Carriage of Dangerous Goods by Rail (RID), and the
European Agreement on the International Carriage of Dangerous Goods by Inland
Waterways (ADN).

Classification, packaging, labelling, loading and unloading of the goods in question,

technical standards which should be complied by transport vehicles, appointment and
training of security advisers in addition to the rules concerning the transport of
dangerous goods and common audit procedures are some of the criteria which have
been transferred and adapted to EU legislation in line with international regulations and
agreements.

In order to transfer and implement the relevant EU legislation, Turkey has approved and
published the ADR Regulation for the transport of dangerous goods by road in March
2007 including the amendments to this regulation later in June 2008, July 2009 and
December 2010. However, only certain items of the ADR Regulation have been in force
due to a defined gradual implementation schedule. Accordingly, the items relating to the
objective, scope and underlying provisions and definitions went into effect as of January
2011 while the application about packaging, labelling and marking officially started in
January 2012. The provisions concerning transport vehicles and units which is the most
crucial part of the regulation was going to go into force in January 2013 but postponed
to January 2014. The remaining provisions of the ADR Regulation will come into force in
January 2014 if not postponed again.

RID Regulation concerning the international transport of dangerous goods by rail was
applied as an enclosure/appendix to the existing COTIF Convention for International
Carriage by Rail of which Turkey is a party since 1999.

ADN Agreement for international carriage of goods by inland waterways has not been
transferred into Turkish law yet.

Transport of Dangerous Goods by Sea has been applied in line with the provisions of
IMDG code as in the EU. Regulation for the training and authorisation under
international code relating to dangerous cargo by sea was published in February 2012.
This regulation relating to dangerous cargo transported by sea defines the rules and
procedures for classification, packaging, marking, labelling, name-plating, loading-
unloading, load handling, stacking, preparation of shipping documents and evacuation
plans, storage, transportation as well as the training of persons involved in preparation,
control and audit processes, etc.

Regulation for the Transport of Dangerous Goods by Air published by the Ministry of
Transport Directorate General of Civil Aviation sets the rules and procedures in
accordance with the ICAO Technical Instructions, as in the EU.

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5 SUPPLY CHAIN & LOGISTICS

One of the important issues where the chemical industry in Turkey has not emphasised
and given sufficient focus is the relationships within its supply chains involving the
suppliers and the customers. While the world chemical industry focuses on science,
R&D, innovation and production; the sector in Turkey seems to have focused mostly on
production.

Chemical industry, delivering only 30% of its production directly to consumers and the
remaining 70% to a wide variety of sectors as their critical supplier should be assessed
with a broader perspective not only within the scope of its own production but
considering its relationships with the other sectors it is supplying to as their supplier.

The optimisation of the supply chain and logistics processes is particularly important for
the sustainable development, growth and competitiveness of not only the chemical
industry itself but for the economic growth and competitiveness of Turkey as a whole.

For the sustainable competitiveness within a rapidly globalising chemical industry,

Turkish chemical industry should give critical attention to the following points in
particular related to Supply Chain:
ƒ Optimised planning and delivery of the orders
ƒ Logistics (handling, transportation and storage) of chemical substances
purchased, processed and distributed within environmental, health and safety
regulations and principles
ƒ Inventory management

As well as the manufacturer, users and customers, Supply Chain Management (SCM)
covers the suppliers of the chemical industry, warehouse, terminal and port operators,
domestic and international transportation companies as carriers and forwarders (road,
rail, sea, inland waterways and intermodal), customs brokers, and many other
intermediary business lines and people.

In order to ensure the integrity and continuity of the integration between order and
delivery, coordination of all these parties in the supply chain in line with environment,
health and safety regulations is inevitably very critical which should be handled in a
specialised manner by the experts.

SCM requires the understanding and compliance with laws and regulations to ensure
the fulfilment of all the conditions relating to documentation of products and shipments
as well as storage, handling, packaging, labelling, transportation, etc. These conditions
may vary depending on the countries, different regions of a country and the level of the
international trade.

The complex structure of the operating environment involving many parties requires a
comprehensive exchange of information. The systems and data used may not be

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technically compatible with each other, most of the time. SCM is becoming more and
more dependent on rapidly evolving Information Technology in terms of its
effectiveness.

The supply chain organisation within a company is obliged to protect the environment
and the people involved in the operations including handling, storage and transportation
of chemicals. Distribution and storage procedure, one of the 6 rules of the Responsible
Care Principle (“Üçlü Sorumluluk” in Turkish), provides guidance for transportation and
storage operations in a safe manner. The role of the chemical industry is to create and
implement a model for work safety and protection of human health and the environment
covering all the parties in the supply chain.

On the other hand, while not compulsory, some system standards such as ISO-9001
Quality Management System, ISO-14001 Environmental Management System and
OHSAS-18001 Occupational Health and Safety Management System are becoming
increasingly common in chemical industry mostly implemented depending on the
supplier-customer relationships. Additionally, Responsible Care, another voluntary
Management System accepted by the relevant authorities is applied in the chemical
industry worldwide including Turkey.

In today’s world where the activities of chemical substance users monitored and
managed on a global scale especially in a fast growing free trade environment, the main
element for global competitiveness has undoubtedly been the successful management
of the supply chain. Therefore, focusing on “SCM effectiveness” is vital firstly for
establishing then preserving the sustainable competitiveness of the Turkish chemical
industry which has the highest rate of logistics costs to sales turnover with almost 13%
than any other sector in manufacturing industry.

On the other hand, effectiveness of the SCM and logistics activities in chemical industry
has a significant impact on the other sectors since 70% of its production is supplied as
raw or semi-finished materials input to a wide variety of sectors.

With this in mind, the parties in the chemical industry should cooperate with each other
and invest for the optimisation of their SCM processes including the handling of logistics
activities by global expert service providers.

5.1 Logistics Service Providers to Chemical Industry

It is an accepted fact that outsourcing the logistics processes to expert service providers
enables significant benefits to manufacturers by creating economies of scale and
reducing the unit costs where logistics costs have a significant share. Outsourcing also
enables the companies to concentrate their own core processes such as R&D,
production, marketing and sales increasing the effectiveness of their supply chain
including inventory efficiency and most importantly their customer satisfaction and
competitiveness.

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This is even more valid for the companies in chemical industry since the handling,
storage and transportation of hazardous and non-hazardous substances and products
specific to chemical industry requires upmost expert attention complying with national
and international regulations relating to health, safety and environment in the strictest
way is very critical for the sector as highlighted.

As far as the logistics service providers providing specialised expert services required
by the chemical industry in Turkey is concerned, one can only spell out the names of a
limited number of logistics companies which concentrate only to the storage and
transportation (particularly domestic) of the inputs and outputs of the industry in liquid,
powder and/or gas form whether hazardous or non-hazardous by appropriate
transportation units such as IBCs, flexi-tanks, tank cars/wagons, trucks and containers.

The full enactment of the international regulations mentioned, particularly ADR

regulation, will complete the transformation on the transportation of dangerous goods
which is very critical to chemical industry. These regulations including ADR will benefit
expert logistics service providers which have understood the seriousness of this
transformation hence made the necessary investments accordingly.

Currently, road and sea freight have the biggest share in transportation of the chemical
industry products and materials.

Rail freight is expected to gain momentum when the existing projects for rail
transportation infrastructure are completed. This is strategically important for foreign
trade to/from Europe, Middle and Near East regions.

In terms of storage requirements is concerned, a small portion of sector requirement is

outsourced to logistics service providers in Turkey. In this respect, there is a
considerable market for specialised storage and value-added warehousing services for
the logistics sector to meet this requirement of the chemical industry. This potential is
also valid for on-site value-added services to support pre and post-production processes
of the industry within its manufacturing facilities.

The following is a selective sampler list of the logistics service providers servicing to
chemical industry in Turkey which is not in a particular order.

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6 MAIN PLAYERS

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The above list of 56 companies operating within the chemical industry has been derived
from the “Top 500 Industrial Companies of Turkey” as at year ending 2012 published by
ISO Istanbul Chamber of Industry. 18

As could be identified with our own interpretation, these 56 companies in the chemical
industry make a total of TRY 73 billion of sales corresponding to 21% of Top-500 sales
in 2012 out of TRY 348 billion. (Note: Share of 21% could be misleading since the
details of 17 new entry companies are not listed in top 500 list)

18
ISO Istanbul Chamber of Industry, Top 500 Industrial Companirs of Turkey
http://www.iso.org.tr/tr/web/BesYuzBuyuk/turkiye-nin-500-buyuk-sanayi-kurulusu--iso-500-raporunun-
sonuclari.html

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7 SWOT ANALYSIS
The following SWOT analysis aims to show the strong (strengths and opportunities) and
weak (weaknesses and threats) points of the chemical industry in Turkey analysing its
ability for global competitiveness.

It is a compilation derived from the information available in various resources such as

TKSD Turkish Chemicals Manufacturers Association, Investment Support and
Promotion Agency of Turkey, and Ministry of Science, Industry and Technology. 19

7.1 Strengths
⊕ Young, talented, creative, trained and dynamic workforce
⊕ High potential for entrepreneurship
⊕ Driving force of the private sector
⊕ High consumption potential in domestic markets
⊕ Rich product diversity
⊕ Strong export potential and ability for foreign trade
⊕ Geostrategic importance of Turkey
⊕ Close proximity to EU, existing and potential markets and oil producing countries
⊕ Convenient geographical location for sea, road and rail transportation
⊕ Strengthening industry open to competition
⊕ Awareness and support of industry concerning REACH
⊕ Potential mineral resources and availability of some raw materials such as soda,
ash, boron, chrome
⊕ Significant growth potential for many subsectors (e.g. pharmaceuticals, home
and personal care, paint and coatings, etc.)
⊕ Climate making use of alternative renewable energy resources
⊕ High potential for agro-chemicals market

7.2 Weaknesses
Θ Relatively small scale by international standards
Θ High import dependence (70%)
Θ Insufficient hazardous waste processing facilities
Θ Insufficient R&D investment and innovation activities
Θ Insufficient support for private investments and bureaucratic procedures
Θ Weak industry-university-state cooperation
Θ High energy and raw material prices increasing production costs
Θ Lack of sufficient qualified and productive workforce
Θ Unregistered/informal economy (~45%), counterfeit products, lack of market
surveillance, hence unfair competition

19
Turkish Chemicals Manufacturers Association www.tksd.org.tr
Investment Support and Promotion Agency of Turkey www.invest.gov.tr
Ministry of Science, Industry and Technology www.sanayi.gov.tr

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Θ Limited exposure to high-tech investments especially in SMEs

Θ Insufficient facilities for pre-processing of rich natural resources as input
Θ Insufficient policies to improve production efficiency
Θ Lack of NGOs guiding the development of the sector
Θ Insufficient support for SMEs (training, compliance to global standards)
Θ Dispersed production facilities, lack or horizontal and/or vertical integration
Θ Insufficient natural resources for crude oil and gas which are critical to industry
Θ Low value-added production structure with insufficient advanced technology
Θ Dominance of SMEs (>95%) and lack of integration between them
Θ Lack of global-scale local companies
Θ Inability of SMEs to follow national and international legislation and market
developments
Θ Cost effects on SMEs towards required compliance to EU regulations
Θ Lack of investment and production strategies
Θ Insufficient capital accumulation capability for an investment-intensive sector
Θ Insufficient coordination between legislation enforcement agencies
Θ Deficiencies in industrial property law and practices
Θ Lack of an national industrial inventory for effective use

7.3 Opportunities
s R&D investment and training of the workforce may increase efficiency
s Turkey’s likely EU membership
s Increasing trend for private sector investments
s Better trade ties with neighbouring countries
s Preparation of chemical industry strategy and inventory
s Planning the production of high value-added chemicals
s Availability of natural resources and markets for the production of high value-
added chemicals
s Domestic production of raw materials & processing of natural mineral resources
s Reducing unregistered informal economy by market surveillance and controls
s Joint action in technology and innovation (clustering)
s Identification of priority areas of investment (specials, petrochemicals, minerals)
s Legislative efforts and initiatives in the field of the industrial zones and clusters
s Improvements in the private sector dialogue platform
s Efforts for compliance with international standards in line with growing exports
s Bridge position of the country in terms of oil and gas pipelines
s Understanding the importance of R&D, allocated funds for R&D, benefiting from
EU financial support
s Increasing liberalisation of global free trade

7.4 Threats
0 Fluctuating input prices
0 Extended timetable for Turkey’s EU membership
0 Lack of effective training

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0 Preference of foreign-capital for imported raw materials and investment to the

service industry
0 Increase in unregistered informal economy harming the international credibility,
competitiveness and the growth potential of the sector
0 Inability to furnish a cooperative environment and insufficient trust-based active
participation
0 Inability for cooperation between organisations/companies and sharing data
0 Problems encountered in exports due to REACH and CLP Directives of the EU
0 R&D deficiency
0 Falling behind in biotechnology and nanotechnology on the global scale
0 Insufficient training of the government experts and inability to steer the industry
and the legislation
0 Pushing the sector into chaos by imposing regulations and practices in health,
work safety and environmental protection without appropriate infrastructure
0 Lack of vision-mission, training and financial funding of SMEs in complying to
legislative requirements
0 Political uncertainty in Middle East and North Africa region

7.5 Priority Problem Areas

Based on the Weaknesses and Threats defined in the SWOT analysis above, the
following priority problem areas are identified:
; Lack of policy for the future of the sector
; Insufficient attention to investments and production
; Lack of infrastructure for R&D and innovation
; Lack of skilled human resources and training
; Lack of coordination and cooperation
; Lack of marketing and promotion

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8 FUTURE PROJECTION AND CHALLENGES

Between 1997 and 2007, chemical industry achieved a CAGR of 5% on a global scale
in terms of total sales. In the period 2006-2020, it is projected to have a CAGR of 4.4%.
Based on the growth projections, the sales volume of USD 3.6 trillion in 2007 will reach
to USD 5.1 trillion in 2015 and to USD 6.3 trillion in 2020.

The demand for chemical substances and products will increase especially in
developing countries, particularly in Asia-Pacific region. Increasing investments in
developing countries to the sectors requiring their raw material input from the chemical
industry and the demand for consumer products in line with the increase in income per
capita in developing countries will enable the growth of the sales in developing countries
including BRIIC.

This strong demand triggers the need for additional capacity. Towards 2020, it is
projected that an important part of this capacity increase will be established in Asia and
the Middle East. Due to limitations in Japan and South Korea because of environmental
constraints, the investments in Asia region will mainly be in China. On the other hand,
Gulf countries aim to increase their production capabilities to process crude oil and
export processed chemical products in addition to crude oil. Therefore processing
capacity will be expanding in the Middle East.

In Turkey, the most significant development in chemical industry was the allocation of
additional licences for refining the crude oil by the Energy Market Regulatory Authority.
With the start of production by the new refinery having 10 million ton/year capacity, 40%
of the demand for petrochemical products will be met. Another development is related to
the refinery investment of TRY 14.8 billion in Adana.

In 2011, studies started under the Input Supply Strategy to reduce dependence on
imports for intermediate goods and to ensure the production of high value-added
products contributing to improve the current account deficit problem. For this purpose,
R&D and Innovation Committee were formed under the Chemical Industry Council,
TOBB The Union and Chambers and Commodity Exchanges of Turkey. The Committee
identified 50 chemicals of which 10 of were given production priority and defining
strategies to reduce imports of intermediate goods and create added value.

To increase the existing share of chemical exports within global scale of 0.44% to the
level of 0.79% in 2023, three main areas to focus have been identified which are
positioning the country, technological development and rectifications for infrastructure
and regulations. In this context, the use of reinforced country image as a lever,
attracting foreign capital, increasing R&D infrastructure investments for technological
transformation, improvement in bureaucratic procedures, incentive mechanisms and
trade agreements together with providing support with the diversified financial models
were highlighted as critical action points.

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Technological innovations in chemical sector will significantly shape the developments

in the subsectors and products. Within the manufacturing industries, chemical industry
will be the most effected sector by technological advances. Some of the focus areas will
be diversification of drugs and pharmaceutical products, producing large number of new
products, creation of new organic and composite products, creation and production of
polymer, monomer and ethylene-based new materials, production and consumption
expansion of polymer-based materials, creation and production of functional and
synthetic new products.

Along with the technological advances, use of synthetic products and new materials
instead of basic chemical substances will increase and consumption and production
increases of basic chemicals will be limited in line with the increasing demand for
sustainable growth, energy efficiency and environmental protection. Additionally,
production increases will be limited due to strengthening awareness for recycling and
re-use trends in connection with the above sensitivities.

In line with these projections, it is expected Turkey to increase its exports to imports
ratio from the existing level of around %60 to %71 in 2023 through switching to high-
value-added production structure and reducing the imports of intermediate inputs by
utilising the feature of being on an energy corridor between the region where 70%
world’s oil and natural gas reserves are (Middle and Near East) and the largest energy
consuming population (Europe).

“Turkish Chemical Sector Strategy and Action Plan 2013-2016” 20 prepared with the
contributions of private sector organisations, government agencies and universities was
approved by Supreme Planning Council and published in Official Gazette in 20.11.2012.
The objective of the report is “To reach as the chemical sector to a dominant position in
the world by improving the balance of trade with high-value-added processes and
products sensitive to the environment and human health in a competitive and
sustainable manner”.

The long term vision of Turkish chemical industry has been defined as “To make Turkey
an investment base by producing high value-added products” within the scope of the
Industrial Strategy of Turkey aiming “To become the investment base of Eurasia for mid
and high-tech products”.

To achieve this overall objective, 6 main targets were identified based on the priority
problem areas of the sector. To achieve the following 6 goals, 36 action points are
planned to be implemented. These 6 main goals are:
1 Creation of policies for improving the production and export of high value-added
products sensitive to human and environmental health
2 Reducing the imports of intermediate inputs by switching to high value-added
production structure

20
Ministry of Science, Industry and Technoloji, Directorate General of Industry www.sgm.sanayi.gov.tr

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3 Implementation of applications to improve the R&D awareness by creating

national R&D policies in line with the general objectives of the chemical industry
4 Provision of qualified and trained human resource with the awareness of
technology and quality for all levels of the chemical industry
5 Creation of a collaborative environment based on trust focusing on common
goals with active participation of the stakeholders
6 Transforming the foreign trade balance in Turkey’s favour by creating a demand
for domestic products.

Some of the 36 action points identified in terms of approaches and practices followed
and work to be done are as follows:
; Acceleration of clustering activities to transform to high value-added production
; Simplification of mergers and acquisitions
; Promotion of foreign investment by countries such as Iran, Saudi Arabia and
Russia to reduce imports of intermediate inputs
; Expansion of bio-fuel facilities
; Establishing specialised chemical organised industrial zones on the coastline
having an integrated transportation system of sea, road, and rail.
; Establishing and supporting the necessary environment and investments
particularly for petrochemicals, liquid chemicals storage and energy facilities in
Aliağa (İzmir), Ceyhan, Yumurtalık (Adana), Bandırma (Balıkesir) and Samsun in
collaboration with the private sector.
; Increasing the number of techno-parks with university-industry R&D
collaboration focus in areas where the chemical industry concentration is high
and within the specialised chemical organised industrial zones
; Encouraging migration of R&D staff to Turkey & benchmarking best R&D
practices worldwide
; Establishing occupational standards and certified training programs in line with
the requirements of the sector
; Developing new export markets, marketing strategies and action plans for each
product group and country.

Lastly, as a cyclical industry, the chemical industry was hit hard by the economic crisis,
resulting in production cutbacks, plant closures, lay offs and divestments. Both the
business dynamics of these downstream industries and environmental regulations and
initiatives such as REACH, CO2 emission, HPV (1000 high production volume
chemicals) Chemicals Initiative and the worldwide Responsible Care Programme bring
continued challenges and opportunities. Some of these challenges and opportunities for
the sector are as follows: 21
ƒ Process optimisation and cost reduction
Uncertainties remain in the economic environment. Hence, process optimisation
and cost reduction remain high on the agenda of chemical companies.

21
KPMG www.kpmg.com

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ƒ Portfolio and business model review

Whilst the global economic downturn has decimated demand for chemical
products, it offers an ideal opportunity for chemical companies to realign their
business models to the new economic reality.
ƒ Rationalisation of unprofitable production facilities in Europe and
capitalisation on innovation advantage
Chemical companies in Europe need to make hard honest choices now to
rationalise those unprofitable facilities that cannot compete with newer, more
efficient plants being built outside Europe. Instead, ruthlessly focus resources
and investment on those chemical clusters which do remain competitive.
Additionally, they should also try to capitalise on their historic advantage in
innovation to stay ahead of the competition from the East, especially in terms of
developing sustainable solutions that will undoubtedly become increasingly in
demand over the next few years.
ƒ Increasing influence of Chinese chemical producers
After USA, China is the world's second biggest consumer of chemicals, and
chemical makers have long derived benefits from the low cost of labour, cheap
infrastructure, favourable government policies and an immense market. Chinese
companies are collaborating with Middle East companies as part of aims to
become self sufficient in sourcing petrochemicals and raw materials. China
continues to also partner with foreign multinationals in order to develop domestic
technologies and move up the value chain.
ƒ Competition from Middle East based companies
With an abundant supply of cheap oil and gas, reserves and proximity to the
emerging markets in Asia, the Middle East is leveraging its strength to become a
global petrochemicals producer. Middle East companies are seeing advantages
in buying rather than building to gain access to western technologies and
markets. European companies would actively be seeking beneficial joint ventures
and strategic alliances that provide access to both cheap Middle Eastern raw
materials and the burgeoning Asian markets.

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9 APPENDIX

9.1 Sector Establishments and Institutions

Source: Investment Support and Promotion Agency of Turkey, August 2010 www.invest.gov.tr

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