TURNAROUND AT PRIVATIZED STEEL COMPANY

UNCLAS SECTION 01 OF 02 ANKARA 002408 SIPDIS DRL PLEASE PASS TO USDOL ILAB BILL BRUMFIELD DEPT PLS PASS ALSTEEL COLLECTIVE E.O. 12958: N/A TAGS: EIND ELAB EMIN PGOV SOCI TU SUBJECT: TURNAROUND AT PRIVATIZED STEEL COMPANY REF: A. ANKARA 1321 ¶B. ANKARA 2159 ¶1. (U) Summary. Karabuk Iron and Steel Works (Kardemir) was rescued from closure in 1995 through the cooperative effort of labor, business, townspeople, the Chamber of Commerce and then-Prime Minister Tansu Ciller and, today, can be considered a successful privatization story. It is not, however, representative of Turkey's larger privatization program which has had difficulty transferring to private sector control larger, higher profile state companies. Karabuk's turnaround over the past three years is the result of new, better management and a strong steel market. End summary. -------------- Karabuk - Modern Iron and Steel Factory -------------- ¶2. (U) Turkey's first modern iron and steel factory, built in 1939, is located in Karabuk near the Black Sea coast to provide the region with employment in recognition of the 35,000 people from the province who died during the 1915 Canakkale Battles. -------------- Privatization -------------- ¶3. (U) Losing U.S. $40 million a year, the Kardemir plant was an early candidate for privatization in 1995. The GOT was glad to be rid of this albatross and with the support of then-Prime Minister Tansu Ciller and the Turkish Chamber of Commerce, sold Kardemir to a consortium of employees, business people and local residents for the symbolic price of one Turkish lira (1995 TL 1 = approximately 1995 U.S.$.00002) on April 1, 1995. The company currently trades on the Istanbul stock exchange and its major stockholders are employees, local businessmen, townspeople and Kardemir retirees; the stock currently is valued at U.S. $150 million. -------------- Reorganization -------------- ¶4. (U) British-educated Ph.D. and Chairman of the Board and General Manager of Kardemir Osman Kilavuz__ and Celik-Is Steelworkers Union President Feridun Tankut frequently work together to promote industry-union cooperation. Kilavuz__, who has been chairman for only 26 months, was recruited from his position as chairman of the larger Erdemir Steel Factory located in the Black Sea city of Eregli. ¶5. (U) Although hemorrhaging $40 million per year prior to privatization, in the four years after the 1995 reorganization, the company invested U.S. $220 million to modernize the factory. After modernization, the cost of producing steel decreased by $50 a ton. During the 1999-2000 economic crisis, Kardemir was severely mismanaged and additional cost cutting efforts were implemented. -------------- Employees -------------- ¶6. (U) Today, Kardemir employs 8,800 people. The plant is managed by highly-trained engineers, bilingual in Turkish and English. Kilavuz__ commented that his staff is motivated, well paid by local standards, but paid less than similarly-qualified staff at steel plants at Erdemir and Izdemir. -------------- Financial Turnaround -------------- ¶7. (U) Between 1998 and 2002, Kardemir's debts totaled US $250 million; as a result needed investment and maintenance were not financed, capacity utilization decreased to 50 percent, wages were not paid and raw material stocks were adequate for only one or two weeks. Under Kilavuz__'s guidance, 2004 sales amounted to U.S. $324.3 million, a 92 percent increase over 2002-2003 sales, and generated a profit of U.S. $78.8 million, an increase of 177 percent over 2002-2003 profits. Comment: The timing of Kilavuz__'s arrival at Kardemir was fortuitous: strong global demand for steel was undoubtedly a key factor--along with better management--in Kardemir's turnaround. End comment. -------------- Macroeconomic Implications -------------- ¶8. (U) Kilavuz__ worries about the long-term viability of the Turkish steel industry because he fears that China has the potential to control the steel market. He notes that China, already a major importer of Turkish steel, uses all of its own production as well as what it can buy on the world market. Kilavuz__ expects China to use 30 percent of the world's steel production in 2005. -------------- Governor's Support -------------- ¶9. (U) According to Governor Cemalettin Sevim, Kardemir is directly responsible for the economic success of Karabuk Province. ¶10. (U) Comment: Kardemir's turnaround is a success story on several fronts: labor relations, privatization and economic survival in a depressed area. Kardemir's chronic losses were what induced the GOT to privatize. For this reason, Kardemir is not representative. The GOT has had great difficulty transferring to private sector control higher profile state companies that are less costly to hold in the state's portfolio. End comment. EDELMAN