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The Effects of Exchange Rate Increases on Iron and Steel Products Exports

Iron and steel exports in Turkey followed a fluctuating trend in 2006. As of the first 3 months of the year, our exports increased by around 6% and started to regress in April due to the vitality of domestic demand. In the second quarter of the year, the upward trend in value of exports is related to the price increases that occur after fluctuations in input prices, partly in the international market.

The ups and downs experienced in the export of iron and steel products for months are not directly related to the level of exchange rates. Because in the iron and steel sector, the improvement in the currencies has a positive effect, which is limited in terms of domestic inputs such as workmanship and electric energy. On the other hand, imports from abroad, such as scrap, ore, ferroalloy and coal, did not benefit from the exchange rate effect. This is because the domestic supply of the inputs also rapidly adapts to international prices.
In the iron and steel sector, both the prices, the development of foreign trade, the input costs and the supply and demand balances in the international markets play a decisive role. For example, exports to the US in 2004 increased by 164%, but in 2005, exports declined by around 50% as Chinese producers directed their inexhaustible products to the US market in 2005. On the other hand, in the first half of 2006, an opposite trend was observed, and in the January-May period, exports to the USA increased by 99% and exports to the EU increased by about 30%, parallel to the increase in demand in the US and EU markets . It is possible to interpret the increase in exports as a measure to compensate for the tension in 2005.

Similarly, in the beginning of 2006, the increase in the vitality and input costs in the international market made it possible to raise prices in US dollars. The increase in exchange rates resulted in higher prices in TL terms.

It should be noted that, although there is no direct effect of the exchange factor on direct exporting in the iron and steel industry, price increases of up to 60% in TL, contraction caused by domestic demand, exports have been obliged for producers. It is possible to show the withdrawal of TOKI tender as a clear example to the contraction in demand caused by the increase in the exchange rates, which causes the TL prices in the domestic market to rise. On the other hand, in parallel with the ups and downs in the currencies, fluctuations observed in TL-denominated prices could also result in some investment decisions and postponement claims.
In the last two weeks, prices of Turkish steel products have also declined in TL terms due to the decline in exchange rates and foreign exchange prices. If overall stability is achieved in the economy, it is estimated that the vitality of domestic demand will continue. Otherwise, at the point where domestic demand shrinks, it is inevitable that the sector is going to export.

From here, the end result of exchange rate effect can not be taken. Currencies have weight at different rates in foreign trade in each sector. The advantage of the iron and steel industry on the exchange rate remains at a much more limited level than the sectors such as textiles and ready-to-wear.

The export performance of our industry is determined by international market dynamics and domestic demand situation. In the coming months, we will be mainly exported, in the context of demand conditions in domestic and international markets. The fact that China is beginning to feel its weight in ever increasing quantities in our traditional export markets raises the possibility that the high rate of export growth observed in June and July may slow down in the last quarter of the year.

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