VZCZCXRO0729
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 
 
 
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. 
 
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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. 
 
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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