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.
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Karabuk - Modern Iron and Steel Factory
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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.
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Privatization
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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.
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Reorganization
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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.
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Employees
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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.
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Financial Turnaround
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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.
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Macroeconomic Implications
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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.
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Governor's Support
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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