Dr. Burak Köseoğlu
Swiss Consulting
What awaits us in the economy and cement industry in Türkiye and the world in 2024?
The war that began next to us in 2022 between Ukraine and Russia has marked its second year in February. The ongoing conflict between Palestine and Israel, which has resulted in the loss of thousands of innocent lives, has now entered its fourth month. A few weeks ago, missiles were launched into Pakistani territory by neighboring Iran, prompting a reciprocal response from Pakistan. As tensions persist between China and America, countries are closely monitoring the latest developments in the region. From a geopolitical perspective, one could say that the world is in a state of turmoil. All these developments, along with the current situation in the social, economic, and political conjuncture, continue to have a direct impact on the global cement industry. The world economy is becoming increasingly globalized. This globalization is closely tied to factors such as the rise in international trade, liberalization of capital movements, advancements in communication technologies, and the fostering of international cooperation. Globalization is a transformative process that significantly affects the world economy, and it encompasses several important dimensions. Nowadays, all goods produced locally or regionally can be made available to the international market, and demand originates from a global level. All the events mentioned above, which lead to fluctuations in the global order, closely affect all industries by triggering the Butterfly Effect. For instance, the logistics issues and energy crises resulting from the wars mentioned above, many of which occurred in our immediate region, have significantly affected the inputs and overall economy of the cement industry in a negative manner. For these and many other reasons, the world has become a very big yet very small place.
So, how do political and administrative crises affect the world economy?
Following the Covid-19 pandemic, which originated in China and spread globally, along with the subsequent crisis it caused in various sectors, including the Evergrande Crisis in 2021, the real estate industry faced significant challenges. In the months following this crisis, numerous real estate companies, including Sunac and Country Garden, were also impacted. Last year, the international credit rating agency Fitch stated that up to 40% of Chinese construction companies could be facing difficulties. In the list of the World’s Top 250 International Contractors, China maintains its leading position with 81 companies. According to the Fitch report, difficult times await some of these large companies. As of today, the annual construction production worldwide is approximately 6.13 billion square meters, with China accounting for 2 billion square meters of this total. As of 2022, there are approximately 110,000 registered contractors in China. After registering an annual increase of 10.9% in May 2019, Chinese housing prices have been on a negative trend since the beginning of 2023, with annual increases of zero in recent months.
Many individuals in China purchased pre-sale properties from the country’s largest construction firms through mortgage financing. The debt crisis and general economic challenges faced by these companies continue to raise concerns across various aspects of the global economy. The US stock market is considerably larger than the Chinese stock market, and approximately 20% of the listed assets in China are related to real estate. This rate however is only 5% in the USA. This clearly shows that the real estate sector in China is highly inflated. For the past three years, the Chinese government has been making various efforts to address this situation. However, unfortunately, the crisis in the sector persists. While this situation naturally impedes the achievement of annual growth rates of 7% or more required for China, it significantly affects world economies. The stagnant and unable-to-increase demand from China continues to slow down the global economy. In the old continent of Europe, persistent inflation arises due to the aging population and the rapidly declining demand. The slow recovery in other Asian economies is contributing to a favorable recovery of America. However, inflation, which remains close to twice the FED target, is preventing a reduction in highinterest rates. In short, there is economic stagnation or occasional decline occurring all over the world.
Amidst all this uncertainty, what kind of world awaits us in 2024?
It would be appropriate to make an interpretation in terms of what is expected for the Turkish economy in 2024. After the local elections scheduled for March 31, 2024, which are perceived more as a referendum on the current government’s performance rather than just local elections, signs of election-driven economic policies are likely to emerge by April. It would not be surprising if inflation hovers between 9% and 11% by January 2024. It is possible that we could see inflation reaching as high as 8% in April-May. While this will make a rapid decline in interest rates almost impossible, it will also limit foreign interest. This year could see a rapid increase in costs within the housing and construction sectors, while demand and prices may decline on the sales side. On the bank loans side, due to anticipated practices aimed at reducing liquidity and demand in 2024, a rapid decrease in interest rates will likely cause demand to remain on a low course. In addition to returning to normalization in high inflation rates and adequately implementing contractionary policies to reduce consumption demand in order to approach the 36% rate determined as the MTP target at the end of the year, spreading tax revenues to the general public, increasing tourism revenues, and boosting exports, it is imperative to reduce the net reserves in the central bank reserves from negative $45-50 billion USD to positive territory. Based on these economic facts, average growth rates in Turkey may potentially remain at 2.5% in 2024. This is likely to result in the troubled process continuing in the cement sector, as in all sectors.
On a positive note, following the earthquake disaster experienced in 2023, there is a growing demand for reconstruction in the affected region. The government’s proactive involvement in this regard is expected to support a portion of the demand in 2024. However, on the downside, it appears that the government may reduce its investments, leading to significant declines in the number of new projects, especially in Istanbul. The anticipated purchases from foreigners continue to decline rapidly.
What awaits the Turkish Cement Industry amidst these developments?
With 52 integrated facilities, 18 packaging and grinding facilities, and 70 factories, the Turkish cement industry stands as the foremost in Europe and one of the leading forces globally. To enhance its position, the Turkish cement industry must explore new markets in foreign countries in the coming period and strive to maximize its exports. Furthermore, we can see that all our companies have begun preparations to gradually integrate certain production technologies or adaptations, particularly those supported by Artificial Intelligence, into their systems, thereby enhancing efficiency. Indeed, the wars and devastation in our neighboring countries, which encircle our nation from all sides, result in humanitarian tragedies. However, significant market opportunities could also potentially arise for the sector in countries such as Palestine, Ukraine, and Syria. Yet, everything hinges on swiftly resolving these conflicts and restoring peace.
Continuing the investments initiated in 2023, the cement production has now reached a capacity of 119,000,000 tons, propelling it to the 5th largest position in the world. However, the downward trend in the exports of the sector, which had already contracted domestically in 2021, 2022, and 2023, persisted. At this point, it seems like a necessity for Türkiye to seek markets in new regions while increasing its share in the US and Middle East markets for 2024. Many companies that are leaders in the sector may find it beneficial to implement better marketing strategies and invest in innovative and creative R&D studies to capitalize on this momentum.
There are elections in more than 50 countries worldwide this year. These include countries with significant populations, such as the USA, Russia, India, and Indonesia. On the other hand, ongoing conflicts, wars, economic fragility, and high interest rates appear to persist on our agenda. In this case, Türkiye must swiftly formulate future strategies for this sector, which plays a vital role in economic development and serves as a key regional and global player.
Energy and fuel represent the primary costs in Turkey, as it is worldwide. Therefore, the key factors to consider when conducting an economic analysis of the cement sector are energy and fuel costs. At this point, I believe it is necessary for the government to implement new measures to stimulate the sector, particularly focusing on boosting exports. Introducing incentives provided by the sector itself, such as meeting the energy needs of the sector, could be a crucial step in making these slower periods more efficient. This situation may compel Chinese companies, which are the largest producers in the world by far, to become more active in export markets due to the ongoing construction crisis in China for several years.
In light of all these facts, I believe that in 2024, as we embark on the second century of the Republic, all sectors will unite, and everyone will contribute to the economy by fulfilling their roles.