Import Rules Chafe in Turkey


Turkeys lubricant companies and their base oil suppliers were disappointed by the inconclusive outcome of the countrys parliamentary elections last week. The introduction last year of complex regulations designed to stop the illegal adulteration of automotive fuel has imposed significant cost and complexity on the lubes sector, and the election results makes it unlikely the rules will be changed soon.

The countrys lubricant industry has complained since January 2014 when the government introduced measures aimed at stopping fuel adulteration. Before then, some automotive fuel suppliers had been mixing petroleum with base oil, trying to take advantage of the different import duty rates applied to different petroleum products.

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An analysis of trade data, hints at the size of the problem: Turkey has one base oil plant with capacity to make 400,000 t/y. It needs approximately 500,000 t/y for its domestic lubricant consumption, and another 50,000 t/y to produce finished lubricants that it exports. But last year the country imported about 900,000 tons of base oils, which suggests that up to 350,000 tons was destined for fuel adulteration, according to Selim Sanver, managing partner of Turkeys Serem Petrol.

With the import duty on automotive fuels three times higher than the rate for base oils, it will continue to encourage illegal mixing of fuels, Sanver said. The government tried to stamp out this illegal activity by imposing regulations and controls that make it difficult for lubricant suppliers to import base oils into Turkey. If they are not careful, the government will drive much of our industry offshore, he said.

The government makes a huge amount of money from fuel taxes – they are amongst the highest rates in the world, said Sanver. It has made it profitable to adulterate fuels. You can make 60 U.S. cents per liter by mixing base oil with petroleum. The government intends to stamp out this illegal activity.

The regulations that took effect at the start of 2014 require base oil importers to seek a license from the Republic of Turkey Energy Market Regulatory Authority. Licenses are only issued according to buyers finished lubricant production capacity, and the amount of base oils they already hold in stock. Only lubricant producers may obtain licenses, but traders may use them on behalf of a blender.

All base oil importers now need a license, explained Sanver, and you can only import according to your approved capacity. What makes business even more difficult is that if a company wants to import a base oil product into Turkey, it needs to give a bank guarantee to cover the value of the material.

The size of the bank guarantee required by the state for keeping the base oil in the bonded area is calculated as the total value of taxes multiplied by 1.2. The total value of taxes is equal to the value-added tax (levied at 18 percent of the product value) plus the special consumption tax (currently 1.024 Turkish lira per kilogram of product).

Most of the time, the requested bank guarantee is close to the actual full value of the product, and you only get the funds returned when you can prove you have sold all of the product, said Sanver.

At present the stringent regulations also apply to storage and mean that products cannot be blended in tanks, only by specialized blending plants. The changes to the regulative framework make doing business very difficult, Sanver concluded. We dont know when it will change again.

Investors and traders hoping for economic stability following last Sundays parliamentary elections in Turkey were disappointed. The Turkish lira has traded near record lows in the days since the June 7 vote and stocks on the Bosra Istanbul exchange had lost about 8-10 percent of their value compared with mid-May as nervous investors reacted to the prospects of a minority or coalition government after the ruling Justice and Development Party (AKP) failed to win a majority.

AKPs loss of its parliamentary majority for the first time since 2002 makes President Recep Tayyip Erdogans desire to change the constitution to strengthen the presidency unlikely to become a reality. The election result is likely to leave the party struggling to form a stable government, so amending fuel duties is unlikely to be a priority.

William Jackson, senior emerging markets economist at research firm Capital Economics, said in the near term, the coming weeks are likely to be marked by uncertainty over coalition negotiations. This will remain the focus of the markets, which have already delivered a resoundingly negative response.

But not everyone was so pessimistic. The election results are clear evidence of the vitality of Turkish democracy and will support investor confidence, said Christopher Dembik, an economist with Saxo Bank. Our macroeconomic outlook is still positive for Turkey because of the combination of low oil prices, decelerating inflation and a weakened Turkish lira which supports exports. This economic situation should support export and domestic demand in 2015.

Serem Petrols Sanver says of the outlook, Its a mystery, and no one knows what will happen if we have a coalition. We could well have a new election within the next 12 to 18 months.

Thats not the best scenario for business, he continued. Significant investment requires stability and not uncertainty.

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