Foreign Investors Continue to Bet on Chemical Sector

According to the Chemical Sector Overview 2019 report prepared by KPMG, foreign investors continue to show interest in the chemicals sector, which was relatively less affected by economic fluctuations last year. The chemicals report from KPMG Turkey's Sectoral Overview series shows that the chemicals sector, which closed 2018 in a better position than general manufacturing, will continue to be a focus of interest for foreign investors in the long term. According to the report, foreign interest in Turkey's chemical industry companies continues. As of the end of 2018, of the USD 29.7 billion in equity investments by foreign residents in Turkey, USD 3.4 billion was invested in the chemicals sector.

Outlook Positive

The long-term outlook for Turkey's chemicals sector is quite positive. Alongside a strong domestic market, the government's support in reducing foreign dependency presents significant potential for the sector. However, realizing this potential depends on how quickly the sector can reduce its dependency on foreign technology and raw materials.

Global Situation

• Global chemicals sector sales revenues grew 4.6% year-on-year in 2017, reaching USD 3 trillion 475 billion. • As with many sectors, while production in the chemicals sector has shifted to Asia in recent years, China alone accounted for 37.2% of sales. European producers ranked second with a 15.6% share, followed by the United States with 13.4%. However, BRICS countries, including China, accounted for 44.1% of total production sales. Ten years ago, a different picture existed, with the European Union and North American countries controlling more than half of total production sales. • The global chemicals sector is expected to exhibit moderate growth performance in line with momentum loss in the global economy in the medium term. Intense competition in the sector, environmental regulations, and uncertainties arising from protectionist trends in global trade are seen as the main risks to the sector's outlook.

Demand for Plastics

• Since the 2000s, global plastic demand has more than doubled. The upward trend is expected to continue despite environmental approaches. The International Energy Agency points out that plastic and other product use will fuel global oil demand through 2050. Particularly the growth performance of China and India will increase demand for petrochemicals.

Situation in Turkey

• The chemicals manufacturing sector displayed different performance from the general economy in 2018. While slowdown became evident from the second quarter in the general economy, production in the chemicals sector maintained its strength through mid-third quarter. Although contraction began in the final quarter, performance was better than general manufacturing. • While general manufacturing grew an average 1.6% in 2018, the chemicals manufacturing sector showed 5.9% growth. According to January 2019 data, while general manufacturing contracted 7.5% year-on-year, this rate remained at 4.2% in the chemicals sector. • Capacity utilization rate, following a fluctuating course, remained in line with general manufacturing in 2018. The sector's capacity utilization rate was 76.9% in 2018. This figure stood at 76.2% in the January-February 2019 period.

Employment Increased

• Over the past 4 years, the number of businesses in the sector has increased, with employment exceeding 80,000 people. According to SGK data from December 2018, there are 4,678 companies operating in chemicals and chemical products manufacturing. A total of 80,857 people are employed in these facilities.

Revenues Rise

• In 2018, despite slowdown in economic activity, domestic revenues in the chemicals industry recorded 34% year-on-year growth, while foreign revenues growth exceeded 50% with support from currency appreciation. • Although price increases in the sector have slowed recently, domestic producer costs averaged 34.6% year-on-year increase on average. The increase in foreign producer price indices was 36.1%. • Exports of chemicals and chemical products rose 7.4% compared to the same period in 2018, supported by low TRY levels, while imports contracted 17.6% in the same period due to weak economic activity. Ümit Bilirgen Partner Energy and Natural Resources Sector Leader KPMG