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Cablegate: Struggling Se Turkey Textile and Agricultural Sectors

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A

1.(SBU-BUS SENS) Summary: In meetings with PO in the last
month, local businessman have been cautiously noting signs of a
bottom in the regional economy and expressing guarded positive
macro outlooks about a gradual return to growth in the region
over the next 3-4 years. They also spoke of the need for
consolidation in the textile sector, but noted the weakness of
such a tradition in Turkey's business culture. Large food
producers and commodities business people noted a "down year" in
the making and commented on international contributors to their
business models. End Summary.

Cotton brokers in Adana are "miserable"
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2. (SBU BUS) Recently a prominent Turkish cotton broker,
headquartered in Adana, spoke to PO about the "woes" in the
cotton brokering business this season. "There are just a few of
us in Turkey," he said," but we are miserable." He attributed
current challenges to a "slowdown in China in the last three
months and a bumper crop in cotton coming in this year." He
said that the "Chinese demand (for imported cotton) has really
dropped. They obviously decided to cool things down and their
demand for (imported) cotton this quarter is really low now
compared to (this time) last year." He said that Turkish cotton
producers have expanded their cultivation areas this year and
more farmers opted to expand their cotton planting after last
year's elevated prices. All told, he summarized that reduced
Chinese demand for cotton and an increased anticipated worldwide
cotton supply this year was squeezing cotton brokers' margins
and knocking 20-30 percent off last year's gross revenues.

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3.(SBU) The broker, who sells about 200,000 bales of U.S.
(Texas, Carolinas and Memphis) cotton annually to open-ended
spinning Turkish mill clients to account for almost half his
annual sales, made an appeal for the U.S. to continue GSM
financing. He claimed that many of his larger deals are
dependent on GSM financing and that it is not a "distorting
effect on commodity trade, like quotas." He said that, other
than U.S. cotton for which he foresaw continued strong Turkish
demand, his other cotton sources are Israel, Turkmenistan,
Uzbekistan and west Africa.

Consolidation, but survival in Turkish textiles predicted
--------------------------------------------- --------------

4. (SBU SUS SENS) Several textile business people and observers
asked about regional prospects with the multi-fiber agreement's
(MFA) expiration approaching were not optimistic in the
short-term, but offered guardedly positive long-term views.
Most saw that the MFA's expiration would mean more competition
than many older, traditional and poorly-managed mills could
handle. They were particularly worried about short-run effects
in the Cukurova area, near Adana, where they predicted many
failures and much unemployment on the horizon. While they noted
some short-term respite from a recent drop in cotton prices,
they observed that very strong Chinese competition had reduced
margins tremendously and that their targeted foreign sales
denominated in dollars had declining value. They also pointed
out slowly growing Turkish labor costs relative to South,
Southeast and Central Asian textile producers as well as rising
energy costs. One contact, who manages and partly owns a
synthetic fiber's textile plant in Tarsus, said that "a few of
the healthier Cukurova companies want to compete fairly like the
big players, but are being undercut by failing mills who are
null-invoicing, paying only day rates for labor and otherwise
dumping products on the market." They said that the financially
strong textile industries in Gaziantep (SANKO) , Kahraman Maras
(KIPAS) , Istanbul and Bursa, who have invested - or publicly
committed to - almost 900 million dollars in new plant this
year, would weather the new competitive trends, albeit with
lesser margins and lower returns on equity. Nevertheless, since
most are almost entirely privately held, this factor would not
be that significant. "Textiles are a way of life for the big
players," one observer noted.

5. (SBU BUS SENS) "Logically, there would be consolidation in
textiles," one businessman said," but that is harder in this
'patron' business culture, where companies are privately-held
and your factory is the core of your social identity. Our
lawyers are also just getting to understand this business tool,"
one American-educated businessman said. Still some small mills
in Kahraman Maras and one or two near Adana have closed or been
sold out, if they were new enough, by the big players in
Kahraman Maras. "Others will try to move offshore, such as a
few have done in Turkmenistan and Bulgaria," another businessman
added, "Still this is risky since doing business in
Turkmenistan is unpredictable and Bulgaria's low wage rates
could rise with EU accession."

6.(SBU BUS SENS) Most experienced textile business people cited
Turkish textile producers' domestic sources of cotton, proximity
to EU and European markets, earlier entry into "branded
products," gradually increasing targeting of higher value-added
products, well-establish client ties, textile innovation and
proven quality, and deeper sources of non-public financing as
the keys to the industry's predicted survival in the next 3-5
years. "It does not mean that we will avoid turmoil, just that
we will survive," one cotton broker concluded.

Which way will Sabanci Group textiles go?
--------------------------------------------- --------

7.(SBU BUS SENS) In the Cukurova textile community, many eyes
are on the Sabanci Group's BOSSA mills, which local contacts
say is really the only financially strong player left in and
around Adana. BOSSA representatives and other Sabanci Group
representatives have said that the company is less and less
enchanted with the low-margin textile industry from which the
company first grew, but it is unclear whether the company is
prepared to sever its ties to the industry altogether. It has
been consolidating its large BOSSA plant area into a condensed
footprint, selling off excess real estate in the process, and
retiring some older workers early, in both blue and white collar
positions. Some observers wonder whether the company, under new
strategic leadership and seeing impending strong competition in
the sector may be tempted to sell its holdings to a strong
textile-focused group, such as SANKO or KIPAS.

Regional businessman sees slow recovery nationwide, SE trailing
--------------------------------------------- --------------

8.(SBU BUS SENS) Polled about future economic prospects, area
business people cautiously are noting signs of a bottom in the
regional economy and expressing guarded optimism about a gradual
return to growth over the next 3-4 years. "Right now no one is
building plant, except the few in the textile business building
in Adiyaman (province) because of the new regional incentives.
There is too much excess capacity already, but they are laying
off fewer workers month-on-month," one business contact who
travels nationwide regularly said. "Southeast Turkey still has
the furthest to go in the recovery, but area productivity is
starting to rise in some sectors. Without more worker skills
entering the labor force, however, the area's low-skill
industries are seeing less of this productivity gain just as
they face rising competition," one contact said, pointing toward
textile, forestry and furniture sectors, strong in southeast
Turkey, as economic "soft spots."

Farmers, Food producers see mixed results, want end to subsidies
--------------------------------------------- --------------

9.(SBU SUS SENS) Several Cukurova region big agricultural
producers complained of "excess competition from foreign
vegetables and wheat with which we cannot compete, especially
with rising fuel prices." They lamented the influx of
"artificially cheap" southeast EU vegetables and some
international grains and strongly criticized international food
subsidy programs. The EU and (the U.S.) have to stop this.
You are flooding the markets with subsidized food products and
drowning us out in Turkey, Pakistan and Africa," one
U.S.-educated Turkish farmer said. These contacts cited the
biggest foreign competition in grains, especially corn and
wheat; onions and potatoes; and some green vegetables, such as
broccoli, singling out Greece, Italy and Spain as their market
interlopers. (Note: Turkey places an 80 percent import duty on
corn and does not meet its domestic demand for corn. End Note.)

10.(SBU BUS SENS) Nevertheless, some niche food product players
saw the market somewhat differently. The representative of an
Adana-based aquaculture farm selling assorted seafood into the
EU markets was optimistic about future growth and noted
expanding demand for her company's products, such as crayfish,
frog legs, shrimp, crab and snails. Another fruit producer said
that his products, greenhouse grown from California strawberry
stock imported annually, was doing well provided he could
protect its brand name from "falsely advertising competitors in
more profitable 'truck markets,' like Istanbul, Izmir and
Ankara." He also noted that, because he did not trust the GOT
to enforce food patents and trademarks, he had hedged his
business by investing in ice cream production as well, because
with a growing population, a significant portion of which was
young, there was always dependable growth in the sweets food

11.(SBU) In yet another perspective on the food products market
in southeast Turkey, Turkish truck drivers frequently delivering
goods to/from Iraq freely talk of loading their truck cabs and
luggage in Iraq with tea, coffee, sugar, cocoa, flour, rice and
candy to re-sell in Turkey where it brings two to three times
its Iraqi cost.


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