REPUBLIC OF TÜRKİYE MINISTRY OF INDUSTRY AND TECHNOLOGY – CHEMICAL SECTOR REPORT (2020) (Part 6)

3.2. Development Trends in Turkey (National Competition Level)

Alongside rapid technological developments, competition is increasing with the progressive liberalisation of world trade. These developments bring science and technology policies to the forefront and require greater resource allocation to research and development activities. For Turkish manufacturing industry, which is attempting integration with the European Union on one hand while facing competitive pressure from countries with low labor costs on the other, policies and strategies are of great importance. The chemical sector, as in the rest of the world, holds a key position in the development of other industrial branches in our country. Of the products manufactured by the chemical sector, 30% reach consumers directly while 70% are used as intermediate goods or raw materials in other sectors. When we examine the intermediate goods imported in the chemical sector, we see that a large portion is made up of petrochemical products. Looking at the production processes related to these products, we observe that the products emerging at various stages of a process continuing from crude oil constitute intermediate material products for the chemical sector. Petrochemical production in Turkey falls far short of meeting even 25% of the country's needs. For this reason, Turkey needs new petrochemical investments, expansion of the petrochemical product range, and production of high value-added products based on petrochemicals. The chemical sector heads the list of sectors causing foreign trade deficit in Turkey's economy. Although some of the imported chemicals are imported by other sectors, the imports are recorded in the chemical sector account. The same problem occurs in exports. Although there are one or two chemicals in each exported product, these figures do not appear among the sector's export figures. Reducing the imported input ratio holds great importance in export performance. However, in sectors oriented towards export, if the import input usage rate is high, the contribution of these sectors to closing the foreign trade deficit will be limited. This is because rising exports will also bring about an increase in imports. Seventy percent of chemical sector production is used as input by other sectors. For this reason, investments in raw materials and semi-processed goods areas of the chemical sector are of great importance in reducing imported input usage throughout industry. Reducing imported inputs appears possible only through domestic production. Figure 27. Turkey's position in fundamental competitive factors

4. FINANCIAL RESOURCES AND INCENTIVES

• Project-Based Incentive System

Due to reasons such as the existing incentive system being a broad-based implementation and not allowing for diversification, flexibility and positive discrimination according to projects through project-based evaluation, there was a need for a project-based incentive system. Within this scope, a new incentive mechanism was designed by the defunct Ministry of Economy to meet the current and future critical needs of our country, ensure supply security, reduce external dependence, implement technological transformation and support specific-sized investment projects that are innovative, R&D intensive and high value-added. Thus, the "Law on Supporting Investments on a Project Basis and on Making Amendments to Certain Laws and Decrees with Force of Law" was published in the Official Gazette dated 7 September 2016 and entered into force. The framework Decision of the Council of Ministers regulating the procedures and principles relating to implementation (No. 2016/9495) was published in the Official Gazette dated 26 November 2016, No. 29900. In April 2018, 23 projects that would benefit from this incentive were announced. Six of these projects will be implemented by five separate companies in the chemical sector. The total investment value of projects receiving incentive in the chemical sector was announced as TRY 53.4 billion and the additional employment to be created as 8,750. The incentive-receiving projects include petrochemical production such as crude oil refining, polyethylene, polypropylene, PTA-MEG production and carbon fiber and intermediate product manufacturing.

Technology-Oriented Industry Drive Program

With the Presidential Decrees No. 1402 and 1403 published in the Official Gazette dated 7 August 2019, very important changes were made to our investment incentive system. The Technology-Oriented Industry Drive Program covers the period between 2019 and 2023 and is among the subjects that the recently accepted 11th Development Plan places at its focus.

11. In the Development Plan, it is clearly stated that within the scope of the Technology-Oriented Industry Drive Program, investments in priority sectors will be supported in a product-oriented manner covering the complete R&D, design, investment, production, marketing and export processes; the products to be supported in priority sectors within the Program will be identified and announced within the framework of strategic priority, technological development level, future potential, impact on technological development, impact on current deficit, technical competence and capability, and domestic production criteria; and the Program will be implemented as an end-to-end support mechanism.

In this context, the Program aims to permanently reduce the current deficit and reduce the ratio of imported intermediate goods in our industry, while also creating a stronger export basket. The first implementation within this scope selected "machinery" as the pilot sector. The Technology-Oriented Industry Drive Program, carried out to increase the production of high value-added products and critical products for the development of medium-high and high technology level sectors in Turkey, has two announcements determining the implementation principles and the list of supported machinery sector products; the priority product list announcement and program implementation principles announcement were published in the Official Gazette on 18 September 2019. In ARTICLE 3 – (2) of the priority product list announcement, products from Chemicals (NACE Code 20), Pharmaceuticals and Medical and Dental Equipment Manufacturing (NACE Code 21, NACE Code 3250), sectors with medium-high and high technology levels, are included.

5. SECTORAL ROADMAP

5.1. Plans, Programs and Strategic Objectives

2023 Industry and Technology Strategy

The 2023 Industry and Technology Strategy has been prepared to serve as a roadmap for Turkey in realizing its "National Technology-Strong Industry" vision. Within this scope, in line with the strategy consisting of 5 main components: "High Technology and Innovation", "Digital Transformation and Industry Drive", "Entrepreneurship", "Human Capital" and "Infrastructure", the country is aimed to be carried to 2023 targets in industry and technology fields. In the document, policies that will increase Turkey's global competitive power, ensure economic and technological independence, and achieve breakthroughs in critical technologies are structured within the "National Technology Drive" approach.

Technology-Oriented Industry Drive Program

The aim is to reduce the current deficit by increasing high value-added product exports of our country. In the Eleventh Development Plan, chemistry and pharmaceuticals at medium-high and high technology levels, motor vehicles, marine vessels, rail systems, machinery, semiconductors, electrical-electronics, aviation and space sectors have been identified as focus sectors. In these sectors, the aim is to ensure domestic production of priority products with high added value, R&D intensive, with developing demand trends, in areas with high current deficit, using domestic capabilities. In line with this objective, the Technology-Oriented Industry Drive Program is being implemented, under which investments in priority products will be supported by an end-to-end mechanism from the R&D stage to the operational period. R&D and investment incentives will be provided for domestic production of medium-high and high technology products in order to increase value-added, technology and product development capacity, and reduce import dependence in intermediate material inputs. For this purpose, the product list will be determined and announced by giving priority to intermediate material inputs. Under this program, a mechanism will be established in which R&D, Prod-Dev, investment, marketing and export supports are managed from a single window, end-to-end. The determining criterion at the beginning of the support package to be provided to projects will be the value-added of the project. Both the buyer and producer will be able to benefit from the supports. Within the program to be carried out under the Ministry's responsibility, along with investment incentives, KOSGEB and TUBITAK supports will also be offered to investors. Through this mechanism, in both private sector projects and projects where the public is the buyer, product development, investment and technology acquisition processes will be closely monitored and supported by the Ministry's program office. 11th Development Plan

11. The chemical sector has been selected as a priority sector in the Development Plan. Within this scope; the basic objective is to ensure the production of high value-added, environment-friendly and competitive products in the chemical sector, through sustainable, advanced technology applications, coordinated investments, and thus reducing our country's import dependence, and increasing the sector's share in world production and exports.

Policies and Measures: In the chemical sector; by reducing intermediate material imports, production and exports of high value-added, human and environmentally conscious products will be increased. A large-scale petrochemistry facility will be established in the Çukurova region. Large-scale investments starting in the Ceyhan Energy Specialization Industry Zone will be completed and an integrated production structure including basic petrochemicals will be established. Companies that can supply high-temperature resistant composite materials needed in the installation of nuclear power plants from domestic production will be supported. Facilities producing ferroboron, boron nitride and boron carbide will be completed and put into operation. Refined boron product production quantity will be increased by strengthening R&D capacity and competence, and sales and marketing activities of developed products will be enhanced. Biomass and waste will be used efficiently and evaluated as alternative inputs in chemical production. Demand forecasts for advanced materials used in components of technological products will be identified, and support will be provided for their domestic R&D and production. 361. Applications to increase the R&D and sustainability capability of the chemical sector will be implemented. Regulations will be made to encourage the use of bioplastics, which can be produced from many natural products, especially hemp and corn, and which completely dissolve in nature, and R&D and investment support will be provided. Feasibility studies will be conducted to enable the evaluation of lignite reserves in our country and the establishment of gasification reactors that allow the production of coal-based chemicals (such as ammonia, methanol, monomers, synthetic natural gas, hydrogen, synthetic liquid diesel fuel). The sector will be supported for compliance required by the Regulation on the Registration, Evaluation, Authorization and Restriction of Chemical Substances and the Regulation on the Prevention of Major Industrial Accidents.

6. TARGET-FOCUSED PROGRAMS

6.1. Regulatory Arrangements

Investment One of the important factors affecting the sector's achievement of projected targets is capacity utilization proportional to requirements. In addition to increasing the value-added of sectoral products, investment is also necessary. It is assessed that existing regulations in our country and parallel practices do not encourage investment. Finding investment sites is particularly extremely difficult. Due to fragmented parcels, it is difficult to obtain land of sufficient size. Even when land of adequate size is found, bureaucratic processes are lengthy and complicated. Therefore, previously planned land located at appropriate logistics positions, especially on coastal areas, needs to be parceled by the state and opened to investment. On the other hand, the "single window" implementation, which has been on the agenda for a long time to facilitate investment, is now expected to be realized. Through this, the investor's permission and licensing processes with relevant Ministries can be quickly resolved.

European Union Regulatory Alignment

The sector most affected by the European Union acquis harmonization works is the chemical sector. The issue that environmental, occupational health and safety and technical safety regulations published on these subjects directly or indirectly affect the sector that has not yet built the necessary infrastructure is that regulations enter into immediate implementation. Additionally, regulations that are still in draft form in the EU are published and implemented in Turkey. For example, the Soil Pollution Regulation, although still in draft stage in the EU, has been published in our country and partially implemented, with full implementation expected in 2015. When specifications of chemicals are examined, another regulation directly concerning the sector is REACH (Registration, Evaluation and Authorisation of Chemicals). This Regulation, which brings together approximately 40 existing chemical-related regulations under one umbrella in the EU, although today it appears to concern only companies exporting directly to the EU, also affects the suppliers of companies exporting to the EU. The first Directive issued by the EU in this area was Directive 67/548/EEC (on the classification, packaging and labeling of dangerous substances), and throughout approximately 40 years until REACH was published, the stakeholders' accumulation of experience in this matter formed the infrastructure for REACH implementations. To comply with REACH implementations, companies and countries need serious infrastructure. Another important Regulation is the "Regulation (EC No 1272/2008) on the classification, labelling and packaging of substances and mixtures (CLP Regulation)" published as an addendum to REACH. This Regulation introduces new criteria in the classification of chemical substances and mixtures, and also causes changes to product labels and safety data sheets. Through the project titled "Technical Assistance for Implementation of REACH Regulation" carried out by the Ministry of Environment and Urbanization, REACH was harmonized with Turkish legislation and the Regulation on the Registration, Evaluation, Authorization and Restriction of Chemical Substances was published in the Official Gazette on 23 June 2017 and entered into force.

Road Transport of Dangerous Goods (ADR)

The Regulation on the Road Transport of Dangerous Materials was published in the Official Gazette dated 24 April 2019 by the Ministry of Transportation and Infrastructure and entered into force. With this regulation, dangerous material transport activities to be conducted on public roads are aimed to be carried out in a safe, secure and orderly manner without causing harm to public health and other living organisms and the environment, and to determine the procedures and principles relating to the responsibilities and obligations of those involved in these activities; shippers, receivers, fillers, loaders, unloaders, packers, tank-container/portable tank operators, transporters and drivers of all types of vehicles carrying dangerous materials.

Institutional Arrangements

Nowadays, it has become very important that chemical substances are compatible with the environment. In this respect, the term "green chemistry" comes to the forefront. Risk management should be applied in all stages from the design phase of environment-friendly products to their loss of product quality and disposal.

Major Projects

With the completion of the refinery investment that will have an annual crude oil processing capacity of 10 million tons, the annually produced 1 million 660 thousand tons of naphtha will be used as the basic raw material of Petkim. Thus, Petkim's external dependence, which currently meets more than 80% of naphtha supply through imports, will be reduced. Following the realization of this investment, cooperation opportunities with other companies are expected to emerge for the next stages of the production chain. For this purpose, the company continues its efforts towards the "value-site" project, which aims to ensure integration in the refinery-petrochemistry-energy-logistics areas. The "value site" project, which anticipates an integrated production structure through clustering with other sectors and companies, will reduce our country's raw material dependence in the petrochemical sector. Human Resources The chemical industry, in terms of its structure, is capital intensive and a sector that needs qualified labor. Both white-collar and blue-collar workers who will be employed need to receive serious education during their training. In this respect, industry should also contribute to the educational programs of our universities. Regarding mid-level personnel, the development of standards for the chemical industry initiated by the Vocational Qualification Institution and the prioritization of employment for people who receive education and certification within these standards will both reduce the shortage of qualified personnel and enable people to acquire a profession.

7. SECTOR PROBLEMS AND WHAT NEEDS TO BE DONE

The chemical sector is the most important industrial sector in the world, providing production support to more than 30 different sectors. It is highly open to R&D and innovation. Chemistry is recognized worldwide as the "Symbol of Development". All countries within the G20 have leading world companies in chemicals. The EU recently aims to regain its lost share of the world market in the coming years by benefiting from regulations such as REACH and Green Deal. In Turkey, while total exports fell by 18% in the first three months of 2020, chemical exports increased by 2%. Imports continue and the sector continues production. The sector's most important demand is the construction of a petrochemical facility. The main reasons for this can be summarized as follows:

• Turkey is an attractive market growing fastest after China and India
• The petrochemical sector being a strategic sector providing inputs to virtually all sectors of the economy.
• Petrochemicals constituting 12% of the foreign trade deficit that forms the basis of Turkey's economic fragility.
• Turkey having human resources and production knowledge accumulation in petrochemistry thanks to Petkim.
• Being the country with the highest import dependence in the world at over 80%, and if investment is not made, this ratio will reach 90% by 2023.
• High import dependence on petrochemical products
• Having the potential to produce high value-added products.
• The potential for development of other sectors that provide raw materials, which are dependent on the petrochemical sector.
• Ensuring that the value-added transferred to other countries with imported petrochemical products remains within the country, and supporting investment, R&D and employment.
• Investment Environment Petrochemical investments are not attractive.

• Bureaucratic barriers (obtaining different permits from different institutions, having to renew permission processes each time a change is made during the investment process and lengthening of processes)
• Regulatory problems Special consumption tax issues
• Lack of infrastructure investments such as clustering required for petrochemistry and Special Industry Zones,
• High energy costs
• Inadequate incentive system
• High logistics and freight costs
• Unfair competition in international trade, ease of market entry
• Encouraging imports and creating a more attractive environment for importers. Policies encouraging trade instead of investment:
• FTA agreements
• Inward Processing Regime Applications

Requirements for New Investments

• Identification of products in which investment can be made – high and medium technology, high import dependence, high value-added products
• For identified products, ongoing and potential investments in the world and our region – long-term production and consumption projections of these products should be prepared
• Selection of production processes for identified products, preparation of pre-feasibility studies based on processes
• Identification of common facilities, production and consumption quantities of steam, water, air, electricity, nitrogen etc.
• Site arrangements, pre-preparations of the site, filling and excavation works if necessary
• Infrastructure preparation, determination of pipes and energy lines for transfer of intermediate goods and products between factories
• Energy requirements of the region and how this energy will be met
• Logistics requirements of the region, port infrastructure, railway and road connections
• Water requirements of the region, nearby water sources, dam, pond, river facilities, possibility of benefiting from seawater,
• Master plan work and feasibility studies of the region
• Regulatory arrangements
• Special consumption tax issues
• Import permits

• Raw material supply; propane supply guarantee, long-term contracts within this scope.
• License selection; identification and selection of the most economical proven licenses for PDH and PP
• Declaration of the region as a Special Industry Zone.
• Incentive system: Addition of interest support for potential foreign loans
• Preventing unfair competition arising in markets for sustainability of production after investment.
• Ease of imports arising from Customs Union and FTA agreements should not prevent domestic production and investment.
• Bilateral arrangements in FTA agreements
• In the Inward Processing Regime, removal of the exception condition from trade policy defense tools.

*This report was prepared by the T.C. Ministry of Industry and Technology – General Directorate of Industry.

REFERENCES

1. T.C. Ministry of Industry and Technology

2. DPT Ninth Development Plan Chemistry Industry Special Commission Report

3. CEFIC European Chemical Industry Report (2020)

4. TURKSTAT

5. Trade Map