Our dearest stakeholders,
We have left behind a difficult year in social and economic terms marked by various problems which have occurred around the world. The ongoing trade wars between the USA and China - although the grounds for a deal have been reached - and the protectionist trends triggered by these developments, Britain’s Brexit uncertainty, the geopolitical developments in the Middle East and the tensions regarding Iran and Libya continued to pose a risk to global economic stability throughout 2019.
The ongoing high rates of indebtedness in developed and developing countries, as well as all the developments throughout the year, have led to a slowdown in global economic activity. Although the USA has seen some positive decoupling with its expansionary monetary policy, there has been a decline in foreign trade and production in developed countries, particularly in the Eurozone. Emerging markets suffered a contraction due to weakness in their real sectors. Although the world’s large central banks sustained their expansionary monetary policies in support of their economies, providing some degree of relief to global liquidity conditions, the impact of these actions on the business environment and growth in our country was limited.
On the other hand, we observed that our country has come a long way in bringing down the current account deficit by maintaining its competitiveness in foreign trade with the supportive effect of the cumulative depreciation in the Turkish Lira and the flexibility companies have shown in diversifying their export markets. The loss of momentum in growth followed by the contraction, which became apparent in the second half of 2018, continued throughout the first half of 2019. Our economy, which emerged from recession with a growth rate of 1% in the 3rd quarter of 2019, achieved 0.9% growth rate in 2019 and it is expected to post 3% growth in 2020.
On the other hand, the price of crude oil, which started the year at USD 53.9/barrel, rose to USD 74.7/barrel during the year as OPEC countries tightly complied with the agreed production cuts, as well as due to the expectation that trade talks would result in a deal and the announcement from the US administration that it would not be extending the exemption granted to eight countries from the sanctions in place against Iran. With the new tariffs imposed as part of the trade wars, the price of crude oil, which had declined to USD 55.3/barrel amid mounting concerns over global economic growth, increased again and closed the year at USD 66.8/barrel due to the drone attack against Saudi Arabia and OPEC and Russia agreeing to deepen their production cut by an additional 500,000 barrels/day. Crude oil prices remained 10% below their 2018 level, averaging USD 64.2/barrel.
Looking at the demand for petroleum products, in line with the slowdown in global economic activity which was especially due to the effects of trade wars, the demand grew by about 960,000 bpd in 2019, almost 40% below the 5-year average growth. On the other hand, the growth which had been expected to be seen in the demand for medium distillates due to the IMO effect in the sector, especially in the last quarter, was instead seen in alternative fuels and fell far short of expectations. This was another important setback on the demand side.
In this climate of weak demand, an additional net refining capacity of 2 million barrels/day, the majority of which being high complexity and mainly in Asia and the Middle East, entered operation. During 2019, the supply shortages experienced in heavy crude oils, the preferred choice of the increasing number of complex refineries, due to OPEC cuts and the sanctions imposed against Venezuela and Iran, significantly eroded the price advantage of heavier crudes which had been enjoyed by complex refineries in the past.
As a result of all these developments, the Mediterranean refining margin, which is a significant indicator of profitability in our region, declined from USD 4.6/barrel in 2018 to USD 1.7/barrel in 2019.
The sliding scale in special consumption tax (SCT), which regulates fuel duties on products in order to ensure that pump prices remain constant amid the fall in value and volatility of the Turkish Lira, in addition to the fluctuating course of crude oil prices, and which came into force in May 2018, remained in force in 2019. Nevertheless, due to the loss of momentum in economic growth, the decline in consumption of oil products, which began in August 2018, continued throughout the first half of 2019. According to EMRA figures, demand for oil products on an annual basis grew by a mere 2.2%, despite rising with the support of base effect from July.
Despite all the global and local developments which complicated the supply of crude oil, Tüpraş purchased 15 types of crude oil from eight countries in a way to create the most suitable charging composition, thanks to its ability to process different varieties of heavy and high sulphur crudes, and with the support of its crude oil supply pool, which it has continuously expanded. Tüpraş, completing its first comprehensive planned maintenance process at the Izmit Refinery RUP facility without any complications, and in a shorter period than expected, produced 28.1 million tons in 2019, reaching a 97.8% capacity utilization rate. During a period in which a new refinery began to operate at full capacity, Tüpraş has also managed to maintain its domestic market share with the exception of asphalt sales on the back of deteriorating infrastructure activities and in line with its sales policies. In 2019, our domestic sales amounted to 22.4 million tons, our total sales amounted to 29.2 million tons and our turnover stood at TL 89.6 billion. Despite all the negativity experienced in the sector and pressure on profitability, our company, which maintains its effective operating capital and robust balance sheet structure by managing financial risks with a disciplined and dynamic approach, managed to remain resistant in the face of negative shocks by generating TL 10.8 billion of free cash flow.
On the other hand, we attach great importance to sustainability in combating climate change, one of the global problems of our age. We are improving our performance in this field with each passing day. For this purpose, the total investment undertaken by Tüpraş, which continued its investments in the name of sustainability in 2019, exceeded USD 6.7 billion within last 14 years.
We were also delighted that the Tüpraş Kırıkkale Refinery New Power Plant, built at a cost of USD 115 million in 2019, has received the project of the year award at the ICCI Energy Awards. I would like to express how proud we are that our Kırıkkale Refinery has become one of the world’s most energy efficient refineries with this project which will decrease energy consumption while raising productivity at the same time.
In 2019, while providing economic added value with its production, Tüpraş also continued to sensitively carry out social work in the fields of culture, the arts, education and sports, all vital for our country. A supporter of the HeforShe movement for women’s empowerment under the leadership of our group, Tüpraş also continues to provide a multi-faceted contribution to the development of society through its sponsorships in the fields of education, sport and culture and the arts, especially through the Arter organization.
Our top priority, which is at the heart of all our achievements and one which we never compromise on, is and will continue to be occupational and technical safety, following in the words of the late Vehbi Koç, who was the founder of Koç Group; “Our most important capital is our human resources”. The main responsibility of all of us is to constantly review our processes with this awareness and to make our working principles safer every day.
Our dear stakeholders,
We rounded off the year 2019, when we fell short of our financial targets due to the challenges experienced on a global and local basis, with successful results in terms of our production and sales targets. With the uncertainties remaining in the global economy and commodity market, and with the global competition heating up with new capacity additions, the year 2020 will not be an easy one for our sector. At Tüpraş, I have full confidence that thanks to our experience and operational efficiency, as well as our strong financial structure, we will achieve much more successful business results in the challenging year ahead of us.
I would like to thank all of our stakeholders, especially our employees, suppliers and business partners, for their valuable contributions and the trust and commitment they have shown in Tüpraş.
Ömer M. Koç
Our dearest stakeholders,