Exchange rate crisis will hit paint firms

M. Akın Akçalı, Deputy Executive Board Chair of the Paint Industrialists Association and CEO of the Akçalı Group of Companies that includes Permolit Paint, said that the paint sector had an external dependency of 60-70% and raw materials came from abroad.

 Akçalı commented, “For this reason, the fluctuation in exchange rate has a huge effect on paint. And our biggest handicap is sales being on long terms in the paint sector in Turkey. We manufacture paint with 60-70% foreign currency inputs and sell on terms such as 150 days, 180 days or 210 days. We have not experienced great difficulties in collecting these payments until now. Let us say that a huge mishap has not cropped up. But, if things go awry today for construction companies, this will affect us directly.”

 Debt troubles

 Stating that the rapid rise in the exchange rate had negatively affected the sector, Akçalı commented, “One would very much like for the Turkish lira and dollar rate to be on parity But this is not going to happen. But, let it reach a certain level and stay there. Let everyone make their plans and programmes accordingly. But, we carry very great risks when there is huge fluctuation like this. It is an especially troublesome period for companies that have foreign currency debts. The costs of financing have increased greatly due to high interest rates.”

 Indicating that as a company they did their utmost to invest using equity capital, Akçalı said, “However, there is the consideration that the growth rates we have targeted are above the profit rates in our sector. As such, you absolutely feel the need for loans in the long term and after a certain point equity capital ceases to suffice.” With reference to the overall rate of indebtedness in the sector, Akçalı also said, “Of course there are companies in difficulty, I mean, we know of companies that keep going on debt of up to 70% or 80% of their turnover. There are currently around 350 manufacturers in the sector. They were in the region of one thousand five years ago. There are also many illicit manufacturers. At one time, the companies in the first five or the first ten only manufactured first-class paint. Now, every company manufactures products of all qualities. With foreign currency inputs amounting to 60-70%, and sales being on long terms and in Turkish lira, this has become a huge burden on companies, because you import on a cash basis the part that is 60-70% in foreign currency, otherwise you cannot compete. As such, the strong companies stay on their feet much more, while the other companies have to change sector.”

 Investment in Europe on the cards

 Noting that they have had manufacturing plant in Nigeria for four years and in Russia since 1996 and they had opened an office in the UK last year, Akçalı said, “We are manufacturing 100 tonnes a day in Russia and 40 tonnes in Nigeria. We are currently on the look-out for investments in Europe. We are planning to start this investment at the end of 2018. We are thinking of a large plant. Given the high interest and exchange rates, it will take long years to make a return on domestic investments under current economic conditions. We are going abroad, too, and thinking of investing and earning there and bringing it to Turkey. Our annual manufacturing capacity in Turkey is 50,000 tonnes. We export ten per cent of this to 22 countries. We are a company with 100% domestic capital and a 36-year past.” Noting that 15,000 people work in the sector, Akın Akçalı conveyed the following information:

 -It is worth changing the paint every two years. Houses used to be with stoves and houses were painted every Eid. Now, on the one hand, there has been a transition to natural gas and houses get less dirty. Also, since higher quality and erasable paints are now manufactured, the time between repaints is getting longer.

 -Women chose the paint colour. This year grey tones have been in fashion.

 -Depending on the size of the house, the cost of painting varies between 300 and 1000 lira.

 -Per capita paint consumption now in Turkey is ten litres. Five years ago it was six litres. Sixty per cent of the sector is construction paint and 40% industrial paint. Car, furniture and machinery paint are subsumed under industrial paint.

 Organized industrial zones source of easy earnings

 Noting that 200 people worked in their companies, Akçalı said their factories were in Istanbul Esenyurt but they were unable to find space in the organized industrial zones on the periphery of Istanbul. Akçalı remarked, “Organized industrial zones have become the source of easy earnings for some people. These places need to be well supervised. Space must be given to industrialists who really want to engage in manufacturing. We have been unable to move into certain organized industrial zones because the costs were very high. When we ask for space in organized industrial zones in our vicinity, we see that some of them are currently not in operation or are in the hands of people who do not make investments. This is why we cannot find space in organized industrial zones. When you look at the cost of the investment today, the money you have invested in the plot is dead money.”

 2.1 billion in sales

 Stating that there had been growth of close to 4% in construction paint from 2016 to 2017, Akçalı said, “Even if there appears to have been an increase in the first six months of 2018, we think there will be a slight decline in the tonnage in the second six months. But, it will still finish on par with last year. There are sales of 480,000 tonnes of decorative paint, that is construction paint, on the Turkish domestic market. This amounts to sales of 2.1 billion lira.

 Support necessary

 Explaining that the number of companies in the sector could fall over time to fifty or one hundred due to cost pressures and sales on long terms and it was currently impossible to manufacture certain raw materials domestically, Akçalı said, “When there was high profitability in the sector, it was possible to get a return on these investments. But just now, making an investment without state support is very difficult. Such investments vary between 500 million dollars and one billion dollars. Without these investments being made you will not easily get home-grown paint.”

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