Turkish Chemical Industry and Its Future

The chemistry sector, recognized worldwide as a symbol of developed economies, had a market value of EUR 1.6 trillion in 2005 and EUR 3.5 trillion in 2015. The Turkish chemical sector holds only approximately 1% of this economic value. This trend, which nearly doubled over the past 10 years, is an indicator of high growth rates to be experienced until 2050 and is the reason why chemistry was selected as the most important sector. China, which imports all of its oil, had no say in the global chemical and petrochemical sector 35 years ago, but by 2015 it had achieved EUR 1.409 trillion in revenue and captured 40% of world chemical trade, rising to a leading position. The United States ranks second with USD 519 billion, and Germany third with USD 148 billion. China owes this rapid development to more than twenty mega-scale (4,000-10,000 hectares) chemical clusters it established on its coastlines. However, a high level of development, cheap labor and domestic demand were effective in establishing this system. The Turkish chemical sector achieved USD 38.364 billion in chemical imports and USD 14.716 billion in chemical exports in 2017.

The foreign trade deficit from the chemistry sector stands at USD 23.648 billion, representing 31% of the total current account deficit of USD 76.736 billion. It is the second-largest import sector after energy.

The import contribution share, which was 25% in 2012, rose to 31% in 2017. The annual import growth rate is running above demand for chemicals. Turkey's increasing import dependency runs counter to the trend of rising local sufficiency observed globally. Before Turkish Chemical Industry determines its strategy regarding future development, it would be beneficial to first evaluate EU production data, taking into account its proximity to and trade relations with EU Chemical Industry: • Chemical production grew by 1.9% in the January-March 2018 period compared to the same period in 2017. In the first quarter of this year, chemical production declined 1.4% compared to the last quarter of last year. • Chemical prices increased by 2.5% (Q1, 2018). Producer prices exceeded the previous year, increasing 2.5% across the EU chemical sector throughout March 2018. • Chemical imports rose 8.3% (January-February, 2018). EU chemical imports increased from EUR 17.4 billion to EUR 18.8 billion in January and February 2018 (year-on-year). • Chemical exports jumped 5.8% (January-February, 2018). EU chemical exports increased by EUR 1.5 billion in the first two months of 2018, reaching USD 26.4 billion. The United States is the EU's largest export market with EUR 5.6 billion and a 21% share. • Capacity utilization in the chemical industry declined to 82.9% in Q1 2018 compared to the 84.1% achieved in Q4 2017. • A marked and continuous decline is observed in chemical exports from the EU to the Middle East, China and South Korea.

Accordingly, before making future projections for Turkish Chemical Industry, the main factors to be addressed should be grouped under economy, geopolitics, society, technology and environment.

How correct the new investment steps to be taken to shape the Chemical Industry in Turkey will be, how and where primary raw materials will be sourced in the future, cost analysis, international trade protectionism, advanced energy policies and their costs, high-technology products, development of products that will be needed for future new industrial sectors and quality education and the potential of our chemical engineers (University-Industry Cooperation)... the correct forecasting of answers to the following questions will be necessary.

Economy

• Will the economic development recorded by China, India and Africa as we reach 2050 change the global balances? • After the 4th Industrial Revolution, will production concentrate at points close to consumption and affect today's existing trade routes? • Will protectionist policies increase in world trade? • As technological advances lead to lower production and distribution costs, how will the economy be affected? • By 2050, due to consumer pressure and changes in European legislation, increased transparency is expected in areas such as the environment and working conditions. How will European companies be affected by this development in terms of competitive strength, innovation, investment, first-mover advantage, and transparency of chemical content? • Will increased automation cause a 50-60% reduction in jobs by 2050? What measures need to be taken for society to adapt to this development? • How will consumer behavior and major market actors be affected as a result of digitalization? • By 2050, how will the European chemical industry be affected by the increasing shift towards a circular economy?

Geopolitics

• Will EU integration strengthen by 2050? • As power balances shift globally both from west to east and from north to south, and in favor of actors such as multinational corporations and civil society organizations over nation states, how will the European economy be affected by 2050? • How will increased competition for access to limited resources (energy, raw materials, water, food, etc.) affect European chemical producers? • Will consumption economics focused on sustainability create an opportunity for the chemical industry to transition to alternative material production?

Society

• In what direction will demographic changes affect the European Chemical Industry? • Do you believe there will be a shortage of skilled labor in science, technology, engineering and mathematics by 2050? • By 2050, as communication between colleagues increases and third-party-prepared digital platforms enable short-term rentals of production equipment, how will production and consumption pathways for chemicals be affected? • By 2050, more than half of new cars sold are expected to be 4 out of 5 automatic. Autonomous vehicles are also said to be electric or hybrid. Some even argue that 40-60% of vehicles on the road by 2050 will be shared. Do you believe these projections are realistic?

Technology

• Will the European chemical industry be able to reduce greenhouse gas emissions by 2050? • Will the European chemical industry be able to double biomass use by 2050? • Will electricity generated from fossil fuels become a sustainable option along with carbon capture and storage by 2050? • What role will digital technologies like blockchain play in the 2050 circular economy? • What do you think the carbon dioxide price level will be independent of inflation by 2050? • What measures could the EU take to finance emission reductions?

Environment

• If a sustainable economy becomes important worldwide by 2050, will the European industry have a competitive advantage? • Will it be possible to keep global warming at 2 degrees by 2050? Can we manage to reduce it to 1.5 degrees? • Will climate change-related migration have any impact on Europe? • Will chemical safety and environmental impact remain on the agenda of the European chemical industry? • By 2050, will pollution cleanup costs also be included in prices?

Transition to port-based industrial clusters for Turkey's chemical sector development:

Chemport Chemical Manufacturers Association, which has been working in cooperation and consultation with Port of Rotterdam and Surbana Jurong since 2013, has acquired important knowledge and master plans in establishing chemical clusters and has shared with relevant ministries and institutions the importance of the subject, management approach and what needs to be considered during the setup phase. The sector, which operates with 75% imported raw materials and has only 1% large-scale chemical producers, must obtain support from chemical cluster project companies well-known in the international market to transition to high-technology production and make better use of ports. Among these companies, Surbana Jurong has implemented chemical clusters and smart city projects together in Far Eastern countries such as China, Malaysia, South Korea, India, Panama, Qatar and others. The fact that the world population is shifting from rural to urban life should not be forgotten. The master plan content specifies: what type of petrochemistry should be undertaken, which industries will be established, what capacities should be, assessment of potential areas, land requirements, raw materials and their sources, domestic market assessment, export potential, land use, infrastructure requirements, utilities, port and sea usage and specifications, refinery and process types and costs and payback period.

Subsequently, discussions with international investors are held using the landlord method of land leasing. Upstream and downstream should not be separated. Site selection is made or a decision is made for one of the existing ones.

Infrastructure investment costs are determined. Based on priorities, a booklet is prepared for what will be done. All competent institutions are notified and problems are resolved jointly and quickly. Chemical clusters provide 10-15% cost savings from common uses such as transportation, fire services and restaurants, shared wastewater treatment, steam and DI water facilities due to producer companies being in the same location, thereby increasing competitiveness. Similarly, using the landlord land-leasing method ensures application of international standards, reducing initial investment costs. At this point, it is ideal for industries that will receive raw materials through pipelines to be located around petrochemical investments established in 25-30,000 decare areas. Expansion areas are reserved for future new investments for all facilities in subsequent periods. The aim is not petrochemistry but the petrochemical ecosystem.

What production methods can Turkey use to produce competitive petrochemicals:

Petrochemical investment duration varies between 3-5 years depending on project size, product diversity and raw material type. Preparation of land with a port like Chemport will also take at least 2-3 years, so on average production will not begin for 6-7 years and financial return will occur afterward. Of course, the answer to which will provide future security for petrochemistry must first be clarified: gas or oil? The fact that electric vehicles will play an important role in the future and the rapid development and cost reduction of renewable energy have made oil turn to petrochemistry. Global petrochemical investments have declined 13% over the past 10 years. However, a large number of petrochemical investments were made in the Far East, Saudi Arabia, the United States and Russia. Oil and various gas unit prices and quality play an important role in investment selection. Gas has become the primary raw material for many investments in recent years. However, the advantage provided by facilities established with high gas quality obtained at the wellhead in Russia, the United States and Saudi Arabia has not yet been matched in our country. Natural gas brought to Turkey for heating can only be used in refinery production that began with MTO and MTP, which refers to methane conversion to methanol. These methods must also have their investment costs, product diversity and profitability well analyzed. In short, petrochemical investments prefer cheap raw materials, suitable processes and definitely raw material supply (gas or naphtha) via pipelines to the facility. The propane (C3) content in Turkey's natural gas is below 2%. Therefore, the LPG required for petrochemistry (containing 30% propane) or pure propane must be brought through special shipping in specially secured storage facilities (high freight charges) and after storage, undergoes processing in the refinery to first produce propylene and then polypropylene, polyethylene, surfactants and acrylic acid. PDH facilities are constructed at approximately USD 1.2 billion cost, but over the past five years, like in China, as oil prices fell below USD 50, Propane Dehydrogenation (PDH) facilities became unable to continue production.

In PDH facilities, long-distance propane transport and high freight charges, the risk of falling oil prices, and the low chance of competition due to the limited number of products sold based solely on propane increase operational risk.

However, shale gas exploration gradually coming to the forefront in our country, natural gas drilling on our Eastern Mediterranean coasts and methane hydrate exploration work in the Black Sea could be the beginning of long-term and affordable raw material access for our petrochemical investments in the coming years. As can be seen, there is a risk today that a newly constructed petrochemical facility could become economically unviable following 5-10 year economic and geopolitical developments. These high-cost investments must be planned for the next 30 years and inevitably require having access to the cheapest raw materials and the ability to produce many different products in terms of export competitiveness. Those considering this risk must necessarily purchase gas at long-term cheap raw material contracts and enter into agreements proportional to oil prices. There is a necessity for relevant ministries to provide support for these national investment projects in securing petrochemical raw materials (gases, naphtha, crude oil). For higher-cost but lower commercial-risk petrochemical investments, Flexible Naphtha Cracker process has also been developed. In the 5-10 year future vision ahead, it is thought that research work on three separate new methods will leave a mark on petrochemical production: 1) Circular economy enabling used polymers and similar waste to be converted back into raw materials. This method will also reduce the impact of chemicals on the environment. 2) The process of obtaining methanol from coal in addition to conventional raw material sources of oil, naphtha and gas, and subsequently obtaining petrochemicals. 3) Intensive research and innovation are being conducted especially in Singapore and Arab countries on obtaining diverse products by using crude oil directly as a raw material for petrochemical production. In this process, the initial refining process is bypassed and ethylene and propylene production proceeds. However, Capex is still high and intense work on the project continues.

Turkey: Requirements to be a world-standard petrochemical and specialty chemicals center:

Excellent location positioning and effective land use. Multipurpose port and commercial storage tank farm establishment. • Emphasizing infrastructure services such as shared pipeline corridors to make inter-facility transfers easier and more cost-effective. • Due to close positioning of facilities, one company's products should be usable as another company's raw materials. (Transfer via pipelines) • Ensuring sustainable raw material and technology development. • Ensuring general energy efficiency. • Installation and effective use of technological systems ensuring compliance with environmental regulations. • Non-production services are provided by third-party suppliers, reducing costs. • At least one integrated petrochemical facility must be present. Specialty chemical production companies using chemicals from this facility as raw materials should be located nearby and close to the port. • Specialty chemical producers serve more specific functions for textiles, automotive, agriculture, paints, construction chemicals, etc., so they are higher in the value chain. • Existence of laws protecting intellectual property rights and their complete enforcement. • Qualified workforce access and R&D capacity ensure investor confidence. • Security. • Opportunity to benefit at the highest level from government incentives. Provision of special conditions with long-term and low-interest investment credits. • Within 10 years of investment start: USD 20 billion production. Creation of 10,000 new jobs and employment with USD 15 billion industrial investment to follow. • Lower energy and raw material prices. • Currently, the Ceyhan Energy Region is indicated for Turkey's petrochemical industry. This area is small-scale due to high hills and forested areas. Also, the coastline is far from expectations but can be developed.

In this case, it would be beneficial to establish Chemport Istanbul Chemical Energy Region in the Northern Marmara Region area of 5,000-7,000 decare and near the sea for specialty chemicals investments. Currently there is no ready location for specialty chemicals investments.

It is inevitable that the said investment operate with proximity to the market and consumption and R&D-innovation-focused qualified employment. In this way, two large chemical clusters will form. Petrochemicals proximity to raw materials, specialty chemicals proximity to market and consumption. • Supporting competitiveness. • Through competitive operations positioned correctly on the coast, the sector can attract new technology investments and first-class service providers, enabling greater exports. • Increasing high-technology product export ratio against growing protectionism worldwide. In the future, "specialty chemicals" will become even more valuable and sought after. If we expect international mega-investments to arrive, we must have port-equipped chemical industrial complexes constructed and operated at international scales and standards. Haluk Erceber President, TKSD Turkish Chemical Manufacturers Association