US embassy cable - 05ANKARA2408

UNCLAS SECTION 01 OF 02 ANKARA 002408 
 
SIPDIS 
 
DRL PLEASE PASS TO USDOL ILAB BILL BRUMFIELD 
DEPT PLS PASS ALSTEEL COLLECTIVE 
 
E.O. 12958: N/A 
TAGS: EIND, ELAB, EMIN, PGOV, SOCI, TU 
SUBJECT: TURNAROUND AT PRIVATIZED STEEL COMPANY 
 
REF: A. ANKARA 1321 
 
     B. ANKARA 2159 
 
1.  (U) Summary.  Karabuk Iron and Steel Works (Kardemir) was 
rescued from closure in 1995 through the cooperative effort 
of labor, business, townspeople, the Chamber of Commerce and 
then-Prime Minister Tansu Ciller and, today, can be 
considered a successful privatization story.  It is not, 
however, representative of Turkey's larger privatization 
program which has had difficulty transferring to private 
sector control larger, higher profile state companies. 
Karabuk's turnaround over the past three years is the result 
of new, better management and a strong steel market.    End 
summary. 
--------------------------------------- 
Karabuk - Modern Iron and Steel Factory 
--------------------------------------- 
2.  (U) Turkey's first modern iron and steel factory, built 
in 1939, is located in Karabuk near the Black Sea coast to 
provide the region with employment in recognition of the 
35,000 people from the province who died during the 1915 
Canakkale Battles. 
------------- 
Privatization 
------------- 
3.  (U) Losing U.S. $40 million a year, the Kardemir plant 
was an early candidate for privatization in 1995.  The GOT 
was glad to be rid of this albatross and with the support of 
then-Prime Minister Tansu Ciller and the Turkish Chamber of 
Commerce, sold Kardemir to a consortium of employees, 
business people and local residents for the symbolic price of 
one Turkish lira (1995 TL 1 = approximately 1995 U.S.$.00002) 
on April 1, 1995.  The company currently trades on the 
Istanbul stock exchange and its major stockholders are 
employees, local businessmen, townspeople and Kardemir 
retirees; the stock currently is valued at U.S. $150 million. 
-------------- 
Reorganization 
-------------- 
4.  (U) British-educated Ph.D. and Chairman of the Board and 
General Manager of Kardemir Osman Kilavuz__ and Celik-Is 
Steelworkers Union President Feridun Tankut frequently work 
together to promote industry-union cooperation.  Kilavuz__, 
who has been chairman for only 26 months, was recruited from 
his position as chairman of the larger Erdemir Steel Factory 
located in the Black Sea city of Eregli. 
 
5.  (U) Although hemorrhaging $40 million per year prior to 
privatization, in the four years after the 1995 
reorganization, the company invested U.S. $220 million to 
modernize the factory.  After modernization, the cost of 
producing steel decreased by $50 a ton.  During the 1999-2000 
economic crisis, Kardemir was severely mismanaged and 
additional cost cutting efforts were implemented. 
--------- 
Employees 
--------- 
6.  (U) Today, Kardemir employs 8,800 people.  The plant is 
managed by highly-trained engineers, bilingual in Turkish and 
English.  Kilavuz__ commented that his staff is motivated, well 
paid by local standards, but paid less than 
similarly-qualified staff at steel plants at Erdemir and 
Izdemir. 
-------------------- 
Financial Turnaround 
-------------------- 
7.  (U) Between 1998 and 2002, Kardemir's debts totaled US 
$250 million; as a result needed investment and maintenance 
were not financed, capacity utilization decreased to 50 
percent, wages were not paid and raw material stocks were 
adequate for only one or two weeks.  Under Kilavuz__'s 
guidance, 2004 sales amounted to U.S. $324.3 million, a 92 
percent increase over 2002-2003 sales, and generated a profit 
of U.S. $78.8 million, an increase of 177 percent over 
2002-2003 profits.  Comment:  The timing of Kilavuz__'s arrival 
at Kardemir was fortuitous:  strong global demand for steel 
was undoubtedly a key factor--along with better 
management--in Kardemir's turnaround.  End comment. 
-------------------------- 
Macroeconomic Implications 
-------------------------- 
8.  (U) Kilavuz__ worries about the long-term viability of the 
Turkish steel industry because he fears that China has the 
potential to control the steel market.  He notes that China, 
already a major importer of Turkish steel, uses all of its 
own production as well as what it can buy on the world 
market.  Kilavuz__ expects China to use 30 percent of the 
world's steel production in 2005. 
------------------ 
Governor's Support 
------------------ 
9.  (U) According to Governor Cemalettin Sevim, Kardemir is 
directly responsible for the economic success of Karabuk 
Province. 
 
10.  (U) Comment:  Kardemir's turnaround is a success story 
on several fronts:  labor relations, privatization and 
economic survival in a depressed area.  Kardemir's chronic 
losses were what induced the GOT to privatize.  For this 
reason, Kardemir is not representative.  The GOT has had 
great difficulty transferring to private sector control 
higher profile state companies that are less costly to hold 
in the state's portfolio.  End comment. 
EDELMAN