Identifier
Created
Classification
Origin
06ANKARA4488
2006-08-04 12:58:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Ankara
Cable title:
PRIVATIZATION AND PRICES REVIVE TURKEY'S COAL AND STEEL
how-toVZCZCXRO0729 PP RUEHDA DE RUEHAK #4488/01 2161258 ZNR UUUUU ZZH P 041258Z AUG 06 FM AMEMBASSY ANKARA TO RUEHC/SECSTATE WASHDC PRIORITY 7681 RUEATRS/DEPT OF TREASURY WASHDC PRIORITY INFO RUEHIT/AMCONSUL ISTANBUL PRIORITY 1045 RUEHDA/AMCONSUL ADANA PRIORITY 0989 RUEHBS/USEU BRUSSELS
UNCLAS SECTION 01 OF 02 ANKARA 004488
SIPDIS
TREASURY FOR JROSE, MNUGENT AND KMATHIASEN
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN EIND EINV TU
SUBJECT: PRIVATIZATION AND PRICES REVIVE TURKEY'S COAL AND STEEL
REGION
UNCLAS SECTION 01 OF 02 ANKARA 004488
SIPDIS
TREASURY FOR JROSE, MNUGENT AND KMATHIASEN
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN EIND EINV TU
SUBJECT: PRIVATIZATION AND PRICES REVIVE TURKEY'S COAL AND STEEL
REGION
1.(SBU) Summary: In a recent visit to the Black Sea coal and steel
towns of Zonguldak and Eregli, we were struck by the economic
revival over the past two years. Privatization of state coal and
steel enterprises combined with strong global prices have made a
noticeable difference, providing further evidence that Turkey's
strong economic growth is neither a mirage nor solely benefiting
elites in Turkey's major cities. End Summary.
--------------
No Sign of Steel Privatization Controversy
--------------
2.(SBU) In a visit to Eregli and Zonguldak on Turkey's western Black
Sea coast, we found a striking change from an earlier visit in 2004.
We began in Eregli, headquarters of Erdemir, until recently one of
Turkey's largest state-owned enterprises. The town's economy is
dominated by the giant Erdemir steel complex, the locus of a
majority of Erdemir's production capacity. Erdemir had $3.1 billion
in sales in 2005 and net income of $143.5 million. Erdemir's
privatization process had stirred intense controversy, including
anti-privatization lawsuits by labor unions and demonstrations in
Eregli itself. Oyak, the military pension fund conglomerate won the
tender and took a controlling share in the company in February,
2006.
3. (SBU) In Eregli we met first with Erdemir's new management, led
by Oyak EVP Aydin Muderrisoglu, a former business school professor
in the U.S. Muderrisoglu and other Oyak executives were very
pleased with the acquisition of Erdemir. Even though eyebrows were
raised at the size of Oyak's winning $2.77 billion bid for 46.12%
of Erdemir, Oyak now feels vindicated by Erdemir's strong
profitability, helped by high world steel prices and booming local
demand from Turkey's automotive, white goods, and construction
industries. Muderrisoglu said the Turkish market consumes 9 million
tons of steel and Erdemir produces 3.9 million. He emphasized that
the steel business is a global business with prices of Erdemir's
principal inputs and products determined by global markets and
priced in dollars. For this reason, he said the recent fall in the
exchange rate and jump in interest rates will have little impact on
Erdemir's profitability.
4. (SBU) Oyak is continuing and expanding the $2 billion investment
program begun by the previous public sector managers. Another Oyak
executive, Ergun Okur, who is overseeing Erdemir's other large
complex in Iskenderun in Southeast Turkey, told us much of the
investment program is focused on the Soviet-origin Iskenderun
operation rather than the more modern Erdemir complex.
5.(SBU) Following our visit, Oyak announced it had appointed a
career Erdemir executive, Oguz Ozgen to run the company. Ozgen, who
took us on a tour of the plant, had managed Erdemir's Romanian
subsidiary.
6.(SBU) The Government's decision to privatize Erdemir had sparked
protest marches in Eregli and Ankara and was publicly attacked by
former Erdemir CEO Kerim Dervisoglu. Now, however, the controversy
seems to have died down. Muderrisoglu told us Oyak is not feeling
any local resentment. Under the terms of the privatization tender
Oyak committed not to reduce staff by more than 5% during the first
3 years of their management control.
7. (SBU) At Eregli municipality, we met with Deputy Mayor Ruan Cinar
and a colleague who was also a foreman at Erdemir. They had no
complaints about the privatization. Erdemir employs 7,000 people in
Eregli - a town of 82,000. Given Erdemir's vital importance to the
town, the municipal officials said the local population's concerns
were understandable but that people were reassured once Oyak won the
tender. Although the steel company still dominates Eregli's
economy, a new shipbuilding factory is due to open later this year
using steel from Erdemir and will create 5,000 additional jobs.
--------------
Newly Prosperous Atmosphere in Coal Town
--------------
8. (SBU) Even more striking was the difference two years had wrought
the coal mining town of Zonguldak. The town's main hotel had built
a modern, upscale wing and the Chamber of Commerce had moved from a
cramped old building to a large steel and glass edifice. When we
came two years ago, Chamber of Commerce President Salih Demir told
us Zonguldak was "the last Communist town in Turkey," hopelessly
dominated by the leftist coal miner's union, and the perennially
loss-making state-owned coal company. The data lends some support
to this view of Zonguldak: the province has the least income
inequality in Turkey as measured by the Gini coefficient.
ANKARA 00004488 002 OF 002
9. (SBU) The state coal company, TTK, was not even slated for
privatization because it was deemed politically impossible, and the
apparatchik-like manager who received us in 2004 was unwilling to
disclose the company's (embarrassingly bad) financial information to
a visiting American diplomat.
10. (SBU) In 2006 we found the former TTK CEO had been replaced, and
the new Deputy General Manager, Cetin Onur, was quite open with us.
Though he admitted that TTK was still losing money, he explained
that its management was trying to reduce the size of the loss,
mostly by privatizing operation of some of TTK's mines. This
strategy avoided the political controversy of privatizing TTK as a
whole and had succeeded beyond management's expectations. Salih
Demir, whose company operates one of the privatized mines, told us
the private mines now produce 4,000 tons of coal while TTK-operated
mines produce 6,000 tons. Onur told us TTK is trying to reduce
costs by gradually reducing "above-ground" staff, whose numbers had
grown during the bad old days of political management of TTK.
11. (SBU) Both the Chamber of Commerce President and Mayor Secaattin
Gonca told us about attempts to diversify the local economy. Salih
Demir described an an ambitious scheme to develop a new industrial
zone about 20 kilometers east of Zonguldak in the Filyos valley.
The new site would be near the new Zonguldak airport, but is also
expected to have a port, a power plant and, it is hoped, a new oil
refinery and other factories. Shortly after we visited Zonguldak,
Turkish newspapers reported that Russia's Lukoil was planning to
build a new refinery near Zonguldak, one of several new refinery
projects under consideration in Turkey. The location would allow
Black Sea tankers to unload crude to be refined for the Turkish
market without the tankers having to pass through the congested
Bosphorus straits.
12.(SBU) Both in Eregli and Zonguldak, government officials and
business people were hopeful that they could develop more of a
tourist industry in the region given the proximity of the region's
beaches to Istanbul and Ankara. The area boasts dramatic green
hills rising from the Black Sea coast. In Zonguldak, however, the
Mayor and the TTK executives admitted they desperately needed
funding for a new sewage and wastewater system, given that
wastewater currently flows untreated into the Black Sea.
--------------
Comment:
--------------
13. (SBU) Zonguldak and Eregli may not be the most representative
regions from which to draw conclusions about the broader Turkish
economy, since high world prices for steel and coal have had such a
big impact on the two major local industries. However, the visibly
improved atmosphere can also be attributed to good economic policy
at the national level. From the broadest perspective, the
macroeconomic policies spurred strong growth in many industrial
sectors that has translated into strong demand for coal and steel.
More specifically, the GOT's push to reduce the role of the public
sector in the economy through privatization was key. Even before
Erdemir was privatized, the Government had put in place steel
company management who were trying to run the company along private
sector lines, and Oyak's takeover is expected to continue to make
Erdemir a more efficient, globally competitive producer.
14. (SBU) In the case of TTK, the success of its privatization of
individual mines has reduced TTK's losses and created employment in
the privately-operated mines. With so many ordinary Turks asserting
that the strong growth data exaggerate Turkey's economic success,
the turnaround in Eregli and Zonguldak casts doubt on the
frequently-heard thesis that the growth is only benefiting elites in
Turkey's large cities.
MCELDOWNEY
SIPDIS
TREASURY FOR JROSE, MNUGENT AND KMATHIASEN
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN EIND EINV TU
SUBJECT: PRIVATIZATION AND PRICES REVIVE TURKEY'S COAL AND STEEL
REGION
1.(SBU) Summary: In a recent visit to the Black Sea coal and steel
towns of Zonguldak and Eregli, we were struck by the economic
revival over the past two years. Privatization of state coal and
steel enterprises combined with strong global prices have made a
noticeable difference, providing further evidence that Turkey's
strong economic growth is neither a mirage nor solely benefiting
elites in Turkey's major cities. End Summary.
--------------
No Sign of Steel Privatization Controversy
--------------
2.(SBU) In a visit to Eregli and Zonguldak on Turkey's western Black
Sea coast, we found a striking change from an earlier visit in 2004.
We began in Eregli, headquarters of Erdemir, until recently one of
Turkey's largest state-owned enterprises. The town's economy is
dominated by the giant Erdemir steel complex, the locus of a
majority of Erdemir's production capacity. Erdemir had $3.1 billion
in sales in 2005 and net income of $143.5 million. Erdemir's
privatization process had stirred intense controversy, including
anti-privatization lawsuits by labor unions and demonstrations in
Eregli itself. Oyak, the military pension fund conglomerate won the
tender and took a controlling share in the company in February,
2006.
3. (SBU) In Eregli we met first with Erdemir's new management, led
by Oyak EVP Aydin Muderrisoglu, a former business school professor
in the U.S. Muderrisoglu and other Oyak executives were very
pleased with the acquisition of Erdemir. Even though eyebrows were
raised at the size of Oyak's winning $2.77 billion bid for 46.12%
of Erdemir, Oyak now feels vindicated by Erdemir's strong
profitability, helped by high world steel prices and booming local
demand from Turkey's automotive, white goods, and construction
industries. Muderrisoglu said the Turkish market consumes 9 million
tons of steel and Erdemir produces 3.9 million. He emphasized that
the steel business is a global business with prices of Erdemir's
principal inputs and products determined by global markets and
priced in dollars. For this reason, he said the recent fall in the
exchange rate and jump in interest rates will have little impact on
Erdemir's profitability.
4. (SBU) Oyak is continuing and expanding the $2 billion investment
program begun by the previous public sector managers. Another Oyak
executive, Ergun Okur, who is overseeing Erdemir's other large
complex in Iskenderun in Southeast Turkey, told us much of the
investment program is focused on the Soviet-origin Iskenderun
operation rather than the more modern Erdemir complex.
5.(SBU) Following our visit, Oyak announced it had appointed a
career Erdemir executive, Oguz Ozgen to run the company. Ozgen, who
took us on a tour of the plant, had managed Erdemir's Romanian
subsidiary.
6.(SBU) The Government's decision to privatize Erdemir had sparked
protest marches in Eregli and Ankara and was publicly attacked by
former Erdemir CEO Kerim Dervisoglu. Now, however, the controversy
seems to have died down. Muderrisoglu told us Oyak is not feeling
any local resentment. Under the terms of the privatization tender
Oyak committed not to reduce staff by more than 5% during the first
3 years of their management control.
7. (SBU) At Eregli municipality, we met with Deputy Mayor Ruan Cinar
and a colleague who was also a foreman at Erdemir. They had no
complaints about the privatization. Erdemir employs 7,000 people in
Eregli - a town of 82,000. Given Erdemir's vital importance to the
town, the municipal officials said the local population's concerns
were understandable but that people were reassured once Oyak won the
tender. Although the steel company still dominates Eregli's
economy, a new shipbuilding factory is due to open later this year
using steel from Erdemir and will create 5,000 additional jobs.
--------------
Newly Prosperous Atmosphere in Coal Town
--------------
8. (SBU) Even more striking was the difference two years had wrought
the coal mining town of Zonguldak. The town's main hotel had built
a modern, upscale wing and the Chamber of Commerce had moved from a
cramped old building to a large steel and glass edifice. When we
came two years ago, Chamber of Commerce President Salih Demir told
us Zonguldak was "the last Communist town in Turkey," hopelessly
dominated by the leftist coal miner's union, and the perennially
loss-making state-owned coal company. The data lends some support
to this view of Zonguldak: the province has the least income
inequality in Turkey as measured by the Gini coefficient.
ANKARA 00004488 002 OF 002
9. (SBU) The state coal company, TTK, was not even slated for
privatization because it was deemed politically impossible, and the
apparatchik-like manager who received us in 2004 was unwilling to
disclose the company's (embarrassingly bad) financial information to
a visiting American diplomat.
10. (SBU) In 2006 we found the former TTK CEO had been replaced, and
the new Deputy General Manager, Cetin Onur, was quite open with us.
Though he admitted that TTK was still losing money, he explained
that its management was trying to reduce the size of the loss,
mostly by privatizing operation of some of TTK's mines. This
strategy avoided the political controversy of privatizing TTK as a
whole and had succeeded beyond management's expectations. Salih
Demir, whose company operates one of the privatized mines, told us
the private mines now produce 4,000 tons of coal while TTK-operated
mines produce 6,000 tons. Onur told us TTK is trying to reduce
costs by gradually reducing "above-ground" staff, whose numbers had
grown during the bad old days of political management of TTK.
11. (SBU) Both the Chamber of Commerce President and Mayor Secaattin
Gonca told us about attempts to diversify the local economy. Salih
Demir described an an ambitious scheme to develop a new industrial
zone about 20 kilometers east of Zonguldak in the Filyos valley.
The new site would be near the new Zonguldak airport, but is also
expected to have a port, a power plant and, it is hoped, a new oil
refinery and other factories. Shortly after we visited Zonguldak,
Turkish newspapers reported that Russia's Lukoil was planning to
build a new refinery near Zonguldak, one of several new refinery
projects under consideration in Turkey. The location would allow
Black Sea tankers to unload crude to be refined for the Turkish
market without the tankers having to pass through the congested
Bosphorus straits.
12.(SBU) Both in Eregli and Zonguldak, government officials and
business people were hopeful that they could develop more of a
tourist industry in the region given the proximity of the region's
beaches to Istanbul and Ankara. The area boasts dramatic green
hills rising from the Black Sea coast. In Zonguldak, however, the
Mayor and the TTK executives admitted they desperately needed
funding for a new sewage and wastewater system, given that
wastewater currently flows untreated into the Black Sea.
--------------
Comment:
--------------
13. (SBU) Zonguldak and Eregli may not be the most representative
regions from which to draw conclusions about the broader Turkish
economy, since high world prices for steel and coal have had such a
big impact on the two major local industries. However, the visibly
improved atmosphere can also be attributed to good economic policy
at the national level. From the broadest perspective, the
macroeconomic policies spurred strong growth in many industrial
sectors that has translated into strong demand for coal and steel.
More specifically, the GOT's push to reduce the role of the public
sector in the economy through privatization was key. Even before
Erdemir was privatized, the Government had put in place steel
company management who were trying to run the company along private
sector lines, and Oyak's takeover is expected to continue to make
Erdemir a more efficient, globally competitive producer.
14. (SBU) In the case of TTK, the success of its privatization of
individual mines has reduced TTK's losses and created employment in
the privately-operated mines. With so many ordinary Turks asserting
that the strong growth data exaggerate Turkey's economic success,
the turnaround in Eregli and Zonguldak casts doubt on the
frequently-heard thesis that the growth is only benefiting elites in
Turkey's large cities.
MCELDOWNEY