INTERNATIONAL BANK FOR RECONSTRUCTION AND ......the U.S. Export-Import Bank Loan 18. Restructuring of Existing Loans 19. Projected Sales Proceeds - Stage I 20. Projected Income Statement

RESTRICTED

Report No. PI- 1 3a

This report is for official use only by the Bank Group and specificaily authorized orpnizationsor persons. It may not be published, quoted or cited without Bank Group authorization. TheBank Group does not accept responsbility for the accuracy or completeness of the report.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

APPRAISAL OF THE

ERDEMIR STEEL PLANT EXPANSION PROJECT

TURKEY

February 4, 1972

Industrial Projects Department

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Current Equivalents

Currency Unit - Turkish Lira (TL)

Prior to January 1972 From January 1972

US$ ' TL15uS$ ;oo,Po 00 IL15,9000,000 TL141, 000,000TL1 Us$0o.o66 US$0.071TLl,OOO,OOO a US$66,666 US$71,A20

Abbreviations and Acronyms

AID - United States Agency for International DevelopmentEximbank - United States Export-Import BankETI - European Investment BanktJEC - United States Steel Engineers and ConsultantsKoppers - Koppers Company of the U.S.A.

Weights and Measures

Except where otherwise stated all measures are in the metric system

Erdemir Financial Year

January 1 - December 31

APPRAISA. OF THE


TURKEY

Table of Contents

Page No.

SUMMARY AND CONCLUSIONS ................... e....***..e****4** i

I. INTRODUCTION ............ eOO * * ......................... 1

II. THE COMPANY *............................. 1

A. Origin 1...................................**** 1B. Present Facilities 2.............................. 2C. Production and Financial Position .....o............ 2D. Ownership, Management and Labor ................... 3

III* THE MARKT ............................. 4

A. The Turkish Industrial Setting ....................B. Domestic Market for Flat Steel ..... ............... 5C. Marketing ........ 7....... ..... 7

IV. THE PROJECT ........................................... 7

A. Purpose and Major Facilities ...................... 7B. The Project in the Longer-Range Planning

Perspective . 8C. Ecology 9..................................... .... 9D. Project Management, Training, Technical

Assistance and Project Schedule ................... 9

V. RAW MATERIALS ................. ........................ 10

A* General ooseo..................................o.....o 10Be Iron Ore ....e.oo....s..o.....*.oo* oe.e..e..so...oo 10C . Coal ............. ..... .................. .... ...... 10

VI. INVESTMENT REQUIREMENTS AND FINANCTAL PLAN ......... C . 11

A. Cost of the Project ............................... 11B. Financing of the Project ... ....................... 12

The original appraisal was prepared by Mr. Bertil Walstedt with theassistance of Messrs. Aroon K. Basak and William P. O'Neil. Subsequentappraisals and the financial plan have been prepared by Messrso AroonK. Basak, William P. O'Neil and Gerhard Becher.

TABLE OF CONTENTS (Cont'd)

Page No.

VII. PROCUREMET ............................... 13

A. Engineering and Procurement ... *.................... 13B. Allocation of Foreign Loan Funds and Bidding

Procedures lb,.......*s*****.***.**..0006000...... lbC. Allocation of Bank Loan .. e.....e.............. 15

VIII. COSTS OF PRODUCTION AND SALE *********,****,*********** 15

IX. FINANCIAL REORGANIZATION, EARNINGS AND FINANCIALPROJECTIONS ......... ............................... 17

A. Financial Reorganization .......................... 17B. Financial Projections SsSO ............. 18C. Financing of Long-Range Expansion ................. 18D. Internal Financial Return and

Sensitivity Analysis .... OS0gOO ................... 20

X. ECONOMIC JUSTIFICATION ....... *........................ 21

A. The World Steel Industry - Present Positionand Growth Dynamics ... * ........................... 21

B. Future World Prices ......... ...................... 21C. Erdemirts Domestic Selling Prices as

Compared with Import Prices ....................... 22D. Comparison of Erdemirts Domestic and

European Domestic Prices 0.0...... ................. 23E. Nominal and Effective Protection o.................. 2F. Import Policy ....... o2.............................. 2G. Foreign Exchange Savings ......................... 2H. Internal Economic Return *....O..g................ 25

XI. AGREEMENTS REACHED DURING NEGOTIATIONS ................ 26

A. Co-lenders, the Government and the Company ........o o .. a 26B* Government .. *........e.o **oo* oo* ooooo.....0....... ...o 26C. Company o........ ......o.o o ...ooo......00.0.... 27

TABLES

1. Production and Sales, 1966-19702. Income Statements, 1966-19703. Balance Sheets as of December 31, 1966-19704,. Ownership of Erdemir Shares, December 31, 19705. Estimated Total Steel Supply in Turkey, Finished Mill Products, 1950-19696. Steel Supply in Turkey - Total Finished Products vs. Flat

Products, 1950-19697. Detailed List of Project Facilities (Stage I)8. Stage II Facilities9. Facility Timing Schedule

10. Available Market and Output Projections for the Project 1971-198011. Projected Disbursement Schedule

TABLE OF CONTENTS (Cont'd)

12. Consumption of Coal and Iron Ore13. Delivered Prices for Erdemir 1970 Purchase of Iron Ore14. Economics of Foreign vs. Domestic Ores, Stages I and II15. Summary of Typical Blast Furnace Practice16. Summary of Estimated Capital Investment - Stage I17. Tentative List of Project Facilities which may be covered by

the U.S. Export-Import Bank Loan18. Restructuring of Existing Loans19. Projected Sales Proceeds - Stage I20. Projected Income Statement - Stage I21. Projected Cash Flow Statement - Stage I22. Projected Balance Sheets - Stage I23. Average Monthly Remuneration of Salaried Personnel and Wage Earners - 197024. Projected Cash Flow Statements - Stages I and II25. Internal Financial and Economic Return Calculations - Stage I26. Sales Price Comparisons for Steel27. Comparison of Erdemir and World Market Prices28. Calculation of Effective Protection29. Foreign Exchange Savings

ANNEXES

1. Present and Future Markets for Erdemir Steel2. Major Technological and Economic Trends in Steel Production3. Ecologyb. The Supply of Iron Ore and Coal for Erdemir5. Cost of Operations6. Comparison of Erdemir's Prices with World Prices

CHART 1 - Belgium: Quoted Export Base Prices for Steel Plates and Sheets

MAP

TURKEY

APPRAISAL OF THE


SUMMARY AND CONCLUSIONS

i. The Government of Turkey has asked for a Bank loan of US$76million equivalent to help Eregli Demir ve Celik Fabrikalari, Turk AnonimSirketi (Erdemir), Turkey's largest integrated steel producer, to financethe expansion of its present annual capacity of 900,000 tons of ingot equiv-alent (after completion of some work under way) to 1.8 million tons with acorresponding increase in finished flat steel products, medium plate, hotand cold rolled sheets and tin plate. The plant is well located at Eregli,north of Ankara on the Black Sea. It will continue to utilize local coaland mainly local iron ore.

ii. Erdemir, which is Turkey's second integrated steel mill, was com-pleted in 1965 and has rapidly expanded its output to the point where italmost wholly covers the Turkish demand for flat rolled products. In 1970,the Company reported sales of about TL 1,100 million and earnings beforetaxes of approximately TL 132 million; it is efficiently run, operates atcapacity and has good management, virtually all Turkish nationals.

iii. The Turkish Government holds a majority of Erdemir's shares (58%),with Koppers Associates (a consortium of U.S. firms who designed, built andran-in the original plant) and the Turkish private sector sharing the restin about equal parts. The Company's statutes provide for its operations tobe conducted as a private enterprise, regardless of the extent of the State'sshareholding, and for eventual transfer to private ownership. The Govern-ment and Erdemir have agreed to ensure that the Company continues to be runas a private enterprise, free from the constraints under which TurkishGovernment-owned firms (State Economic Enterprises) operate.

iv. The Turkish market for flat steel products has been expandingrapidly and at times has revealed shortages due to import restrictions. Fur-ther vigorous growth in steel-consuming industries is expected to increasethe market for Erdemir's flat products in Turkey by about 10% annually (againsta 7% annual growth in GNP) from about 486,000 tons in 1970 to 1.3 million tonsby 1980. This is roughly equivalent to Erdemir's capacity after completionof the project (Stage I) assuming that the Company would later (Stage II)undertake some additions to its hot and cold rolling facilities. It is ex-pected that in the foreseeable future Erdemir will remain Turkey's only pro-ducer of flat steel.

v. The major facilities to be financed under the proposed projectinclude a second blast furnace, a third oxygen steel vessel, the Company'sfirst continuous casting unit, a semi-continuous hot strip mill replacingan existing reversing "Steckel" mill, a doubling of existing cold rollingcapacity and various other supporting and auxiliary facilities. Stage I is

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expected to be completed by 1975, at about the time Stage II which is out-side the present project, would need to be taken up depending on marketdevelopments.

vi. The project was defined in a comprehensive project report preparedby U.S. Steel Engineers and Consultants in collaboration with the Company.Koppers Company of U.S.A. have been appointed the General Engineering Contrac-tor, to be responsible for project design and construction management. TheCompany will also have a long-term technical assistance contract with an es-tablished steel producer outside of Turkey. Training will be organized withthe engineering contractor and equipment suppliers. These arrangements aresatisfactory to assure efficient execution of the project.

vii. Project cost, excluding interest during construction but includingadditional working capital, is estimated at US$290 million equivalent, ofwhich US$181 million would be in foreign exchange. Adequate contingenciesand price escalation are included. Since project cost estimates have origi-nally been based wholly on U.S. equipment, no revision for currency revalua-tion appears necessary, but an additional amount of US$5 million for con-tingencies is available in the Eximbank loan to cover possible foreign ex-change project cost increases. The financing plan provides for the whole ofthe foreign exchange cost of US$181 million to be borrowed on long termthrough parallel financing as follows (in US$ million): U.S. Export-ImportBank (65) 1/; U.S. AID (40); and the Bank (76). Local currency cost wouldbe covered by internally generated funds (US$109 million). Any cost over-run--both foreign and local--would be met by the Turkish Government as neededby the Company to complete the project within the agreed execution schedule.

viii. Procurement against the Eximbank loan will be tied to the USA, andthose items will be preallocated in which the U.S. is judged to be most com-petitive. The remaining equipment will be obtained on the basis of inter-national competitive bidding, all awards to U.S. suppliers being first setoff against the AID loan. Once the Bank loan is exhausted any remainingequipment will be bilaterally procured from the U.S.A. against the balanceof the AID loan. With the recent currency realignments, it is expectedthat a large part, if not the whole, of the AID loan will be taken up bylowest evaluated U.S. bids emerging from international competitive bidding.If the full AID loan would be so used, up to 65% of the foreign exchangecost of the project will be covered by worldwide tender.

ix. The original plant was heavily financed with debt which currentlyis still about four times the equity. Most of the debt is held by AID andthe remainder by the Government. New equity capital being difficult to pro-cure, Erdemir, the Government and AID have finalized a scheme of debt re-structuring involving subordination, deferral and rescheduling of existingloans to lay the basis for new borrowings. A policy of retaining most of-

1/ Plus US$5 million available for contingencies.

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the earnings is expected to ensure adequate debt service coverage and leadto an acceptable debt/equity ratio some two years after the project is ex-pected to be completed in 1975.

x. Financial projections also indicate that the Company should beable to support some additional borrowing which will be required by about1975-76 to help finance its Stage II project, and that from around 1980Erdemir could support further expansion largely from retained earnings,and if necessary, new equity.

xi. Erdemir's selling prices were significantly raised in July 1971,to cover substantial increases in the costs of a wide range of domesticinputs and also to help finance the project. On the basis of the 1976product mix, Erdemir's average selling price per ton of steel is calculatedto be about 12% above the landed (ex-warehouse, Istanbul) price of equiva-lent duty-free imports, and on the average also compares favorably withEuropean domestic prices, without taking account of the possible upwardpressure on European steel export prices due to the recent currently re-adjustments.

xii. The internal economic return of the project is estimated at about18%, and the internal financial return on the incremental investment at 21%.The economic return is above what would normally be expected in a steelproject. This is primarily due to the fact that the project is closelytailored to anticipated market growth, and can therefore be expected torun at a high degree of capacity utilization from the outset, and thatsome facilities with a high return would be in operation before the restof the project is completed. On the other hand, while these forecasts areattainable, they demand speedy project execution, continuation of the effi-cient management that Erdemir now has, and above all, no interference byfactors that would adversely affect the country's rate of economic growthand thus the demand for the Company's products.

xiii. Based on the agreements reached during negotiations, the projectis suitable for a Bank loan of US$76 million equivalent for a term of 15-1/2years including 5 years of grace. A guarantee fee of 1-1/2% per annum isto be paid to the Government by the Company, in addition to the Bank's normallending rate.

I. INTRODUCTION

1.01 The Government of Turkey on behalf of Eregli Demir ve Celik Fabri-kalari, Turk Anonim Sirketi (Erdemir) has asked the Bank to participate infinancing the expansion of Erdemir's flat products' steel mill at Ereglion the Black Sea (about 300 km east of Istanbul and north of Ankara) from apresent annual capacity, in place or under construction, of 0.9 million in-got tons 1/ to 1.8 million ingot tons by 1975. The Government owns a major-ity of Erdemir's shares. The original mill, completed in 1965, was financedlargely (about US$130 million equivalent) by the U.S. Agency for Interna-tional Development (AID) and the Turkish Government.

1.02 An initial project feasibility study prepared by the Koppers Com-pany of the U.S.A. (Koppers) in November 1969, was followed by a further com-prehensive study by United States Steel Engineers and Consultants (UEC) ofPittsburgh, which formed the basis of the Bank's appraisal. The project, de-signated as Stage I of the Company's longer range expansion program, togetherwith additional working capital is estimated to cost US$290 million equival-ent of which US$181 million is foreign exchange. Project completion is sched-uled for 1975, when Erdemir will consider proceeding with Stage II to bringabout futher rationalization of production, and add more finishing capacity.

1.03 The Koppers and UEC studies indicated that Erdemir's expansion waseconomically justified, but that it required a major restructuring of theCompany's existing heavy long-term debts to provide an adequate debt servicecoverage, while at the same time permitting Erdemir to charge reasonablycompetitive selling prices.

1.04 Bank missions consisting of Messrs. B. Walstedt, A. Basak, G.Becher and W. O'Neil of the Industrial Projects Department and two ecolo-gical consultants, Drs. Katz and Barbaro appraised the project in Turkeyin April and September 1971.

II. THE COMPANY

A. Origin

2.01 The Company was formed in May 1960 with a guaranteed capacity of470,000 ingot tons/year but with relatively inexpensive expansion possibilitiesto over 800,000 tons/year. Equipment for the mill was supplied by KoppersAssociates, a consortium of three major U.S. suppliers - Koppers, Blaw-Knoxand Westinghouse International. Koppers also provided design, engineering,construction management and (under a five-year renewable contract sinceterminated by mutual agreement) general management assistance. Constructionstarted in May 1961, and the mill began operating in late 1965.

1/ Steel in the first solid state after melting. All tons are metrictons.

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2.02 The final cost of the project was about US$292 million includingUS$66 million of working capital and some "non-plant" items such as staffhousing. Most of the US$63 million cost overrun was associated with localexpenditure. Even though the capacity of the mill later proved substantiallyhigher than the conservative performance levels guaranteed by Koppers (nearly50% more in some key operating units), Erdemir suffered in its early stagesof operations from its high investment costs (over US$415/annual ingot ton)and its small scale of operations. An interim expansion and the presentproject are expected to reduce overall investment cost to about US$340/tonat an annual capacity of 1.8 million ingot tons.

B. Present Facilities

2.03 The plant site is located on the BlacK Sea coast some 2 km fromthe town of Eregli. Raw materials (principally iron ore and coal) arereceived by sea while finished products are shipped either by sea or by truck.The port can receive vessels of up to 50,000 dwt. The plant has one blastfurnace and two oxygen steel converters, a reversing Steckel mill for hot-rolling, and facilities for cold-rolling, tinning and finishing operations.Galvanizing on the other hand is not undertaken by Erdemir. The main productsare plates, narrow strip (mostly for welded tubes), hot and cold rolled sheetsand tin-plate. About 46% of the output is cold-rolled. Enough space existsfor expanding the plant to about 5 million ingot tons per year.

C. Production and Financial Position

2.04 The Company's production, sales, earnings and balance sheets from1966 to 1970 are shown in Tables 1 to 3 and summarized below:

Historical Production and Financial Data of Erdemir

1966 1967 1968 1969 1970 1971/1_

Production: (1,000 tons)Steel Ingots 325 446 546 568 702 488Flat-Rolled Products 211 267 402 384 503 472Non-Flat Products 91 82 54 49 16 27

Net Sales (million TL) 487 689 869 987 1,105 1,262

Net Profit (Loss) before (16) 52 110 134 132 55Taxes (million TL)

Long-Term Debt/Equity Ratio 82/18 80/20 78/22 76/24 82/18 82/18

/1 Estimate based on 11 months actual unaudited results.

2.05 Except for a strike in 1969 and the unscheduled relining of itsblast furnace in 1971 which accounted for the drop in production and profitin that year, Erdemir has been able to run its plant close to capacity. Inthe past two years it sup?lied all but a small portion of Turkey's require-ments of flat products, although in 1971 this was only possible through theimport of semi-finished steel (slabs and hot rolled coils), to replace lostproduction on account of the blast furnace relining. Under an interim expan-sion program which is expected to be completed by late 1972, the Company ispresently raising ingot capacity to about 0.9 million tons per year, and im-proving blast furnace operations and ore use through the construction of asinter plant.

2.06 Substantial price increases for a wide range of domestic productswere approved by the Government from mid-1971 affecting coal, rail freights,tax on fuel oil, and electricity. These together with a steep rise in salariesand wages have increased Erdemir's operating costs. Erdemir's selling prices,which are essentially controlled by the Government and had remained unchangedsince 1968, were raised on average by 25% in July 1971 to offset Erdemir'scost increases and also help finance its expansion program.

2.07 AID is the Company's largest creditor, accounting for close to80% of its long-term debt outstanding as of December 31, 1970. Dollar debtsrose sharply in terms of Turkish Lira with its devaluation in August 1970(67%), but will decrease slightly with the recent change in currencyparities (7%),

D. Ownership, Management and Labor

2.08 Erdemir's shares are held by the Government (58.4%), KoppersAssociates (18.9%), the Turkish private sector including the Is Bank andthe Ankara Chamber of Commerce and Industry (20.8%) and foreign individuals(1.9%) (Table 4). One-half of the Government's shares are preference shareswith voting rights equal to one-half of ordinary shares, giving it a 51.5%voting majority. The Company's Articles of Association provide for theGovernment shares to be resold to private investors at the higher of paror market value, at which time they would automatically be converted intoordinary shares. This conversion was to have taken place by 1967 but withthe shares still being quoted under par has not yet occured.

2.09 Mr. Ali Cimen, previously President of Karabuk 1/, is Chairman ofErdemir's Board of Directors. The Board has nine members of which four arenominated by the Government (two each by Karabuk and Sumerbank), one eachby the IS Bank and the Chamber of Commerce and three by Koppers. Erdemir'sArticles of Association specifically provide that, regardless of the pro-portion of the state shareholding, the Company should be regarded and run

1/ State-owned irozn and Steel Corporation of Turkey at Karabuk, primarilya producer of non-flat products.

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as a private enterprise. Implementation of this arrangement has allowed theCompany to build up a competent and efficient staff and to follow business-like attitudes and procedures, to the advantage of its operations. It hasbeen agreed during negotiations that this arrangement will not be alteredwithout the prior consent of the Bank.

2.10 Executive management of the Company is vested in the Presidentwho attends Board meetings but is not a member of the Board. Mr. MetinIplikci, a mechanical engineer and until lately President of the State CementCorporation has been President since January 1971. Like his predecessors heprovides vigorous and capable leadership. One Senior Vice President (Mr.Kenan Okan) and eight functional Vice Presidents ably assist Mr. Iplikci withexecutive management. Both top and middle management are efficient andresult-oriented and benefit from an excellent operational and budgetary controland reporting system which is in use. Nevertheless, Mr. Iplikci is aware ofthe need to strengthen some parts of Erdemir's management and organization tohandle the large expansion program, and generally to allow the Company to faceup to the challenge of Turkey's economic association with the European CommonMarket in the course of the next 10-15 years.

2.11 The original plant was started up and run by expatriate techniciansand operators, but these have now largely been replaced by Turkish nationalswho were trained alongside and have quickly picked up the required skills.At the end of 1971 personnel strength stood at about 4,100. Despite steadyimprovement in man-hours per ton steel produced, operational efficiencies arestill below European standards mainly because of Erdemir's small scale. Withone labor union representing the workers, labor relations have on the wholebeen satisfactory with only 12 days lost from labor disputes since 1965.

III. THE MARKET

A. The Turkish Industrial Setting

3.01 Turkish manufacturing output grew by about 10% per year in the1960's. Growth was spurred by the "new" industrial materials and equipmentindustries, such as steel, fertilizers, machinery, motor vehicles and trac-tors. They account today for roughly the same proportion of the total valueadded as traditional industries (i.e., food, textiles, and wood products).Next to machinery, steel showed the highest growth rate of all industrialsectors, reflecting the coming into production of Erdemir.

3.02 Industrial growth during the current decade will be determinedmainly by three factors: (a) the extent to which Turkey's balance of paymentsproblem can be solved; (b) progress in the liberalization of trade and Turkey'sintegration with the European Common Market; and (c) Government economic poli-cies, particularly the degree of encouragement given to the private sector andforeign investments, and the willingness radically to change the structure andimprove the efficiency of the State Economic Enterprises.

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3.03 Development of labor and entrepreneurial skills combined withlow Turkish wages and increasing access to the European market, could leadto dynamic industrial growth. Nevertheless, there are also significantuncertainties regarding the overall growth of the economy and, in particular,the pattern of industrial growth.

B. Domestic Market for Flat 3teel

3.04 Total steel consumption in Turkey has grown by 5.5% cumulativelyduring the 1950's and by 12.3% during the 1960's, with an average annualincrease of 9% from 1950 to 1970. Consumption in 1969 had reached 1.4million tons of finished steel, or about 41 kg per capita (Table 5). Theproportion of flat-rolled to total steel products remained at slightlyless than one-third over most of the period (Table 6). Over the last fouryears, after Erdemir came into production, the use of flat products hasincreased by about 13% per year, with Erdemir covering an increasing shareof the market, as shown in the following table:

Supply of Flat Steel Products(1,000 tons)

Imports andErdemir Karabuk Total Index

1967 261 66 327 1001968 360 62 422 1291969 415 46 461 1411970 486 39 525 161

Imports which are quantitatively controlled, totalled about 10,000 tons in1970, essentially in special steels not made in Turkey.

3.05 UEC projected the future Turkish demand for flat steel productsby using a global and an end-use approach. The global approach relatedthe use of flat steel to the gross national product in a simple regressionand resulted in an increase in flat steel demand during the 1970's of 10%per year. The end-use approach involved an estimation of the projectedsteel requirements of major users based on their future plans and yieldedan annual rate of growth of 14%. This latter result, however, appearedto UEC to reflect short-range optimism stemming from current high demandrather than realistic long-range plans or expectations of the consumingindustries. For the purpose of planning the expansion of Erdemir's productioncapacity, UEC therefore depended on the results of the global approach.

3.06 In 1970, Turkey's GNP grew by 5.6%, compared with an average of6.6% in the four preceeding years, but the Bank anticipates that Turkey has

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the ability to grow at a rate in excess of 7% -/, the same rate UEC assumedin its forecast. In a developing country it is typical for steel consump-tion to increase more rapidly than GNP (9% for steel vs 5.2% for GNP inTurkey from 1948-1969), or even in a developed country during periods ofrapid economic growth which are accompanied by intense capital spendingand therefore steel consumption. The following table shows some compari-sons of the growth of steel consumption and GNP at constant prices.

Average Annual Growth of Ingot Steel vs GNP, 1957-1967

% Steel Ratio SteelConsumption Growth % GNP Growth to GNP Growth

Japan 15.0 10.1 1.48Greece 11.9 6.5 1.83Mexico 9.3 6.3 1.47Spain 14.1 6.0 2.35Brazil 7.9 5.5 1.43Germany 3.1 4.6 0.68U.S.A. 2.7 4.1 0.66

UEC concluded that Turkish steel demand could rise 1.43 times the growth ofGNP or at an annual rate of 10%. Assuming further that flat steel wouldcontinue to contribute about 31% of total steel demand--which is likely tobe conservative at Turkey's present state of development-UEC projected theTurkish domestic flat steel demand (excluding special steels and Karabuk'spresent flat steel production) as follows:

Projected Turkish Domestic Market for Erdemir's Flat Steel Products(1,000 tons)

1970 1975 1980(actual)

UEC Estimate 486 780 1,270

3.07 The project-Stage I-provides for an annual saleable output atfull production of 915,000 tons of flat products, 300,000 tons of billets,60,000 tons of ingots and 180,000 tons of pig iron and the financial projec-tions assume that this output will be reached by 1976 (Table 19). The futuregrowth in demand for flat products above this level of output is to be metby a further expansion of rolling facilities to be operational under StageII in 1977. This plan is acceptable as it affords a cover against the riskof cyclical fluctuations as well as the chances of the growth in GNP fallingbelow 7% per annum.

3.08 The Bank is inclined to project Turkey's demand for flat steelproducts through 1980 somewhat higher than the UEC estimate (Annex 1). Thisimplies a margin of safety for the project. Should the flat steel demand infact prove to be higher than the UEC estimate, the Company could advance the

1/ "Memorandum on the Current Economic Position and Prospects of Turkey" -- June 24, 1971.

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additional rolling capacity planned for Stage II and advance the installationof continuous slab casting which might otherwise be included later (paras.4.03 and 4.04).

C. Marketing

3.09 Most of Erdemir's output is sold directly to ultimate consumers,whose number tripled, from 408 in 1968 to 1,238 in 1970. The Company hasfound this direct contact advantageous and necessary to minimize speculativebuying by middlemen in periods of pronounced shortage. The Company maintainsits own sales offices in the major cities. Inventory of finished productsat the mill has recently been maintained at 10-12% of sales; this is a lowfigure and reflects the favorable market situation. Erdemir has orders forvirtually a whole year's output, hence, it can schedule production runs eco-nomically. Most sales are against cash; credit is given mainly to a fewGovernment agencies but amounts to substantially less than advances bycustomers.

IV. THE PROJECT

A. Purpose and Major Facilities

4.01 The project (Stage I) involves an approximate doubling of keyfacilities and includes the following major additions:

Total Plant CapacityNew Facilities Including New Facilities Remarks

Description Capacity (1,000 tons/year)1000 ton/Yr

1. No.2Blast Furnace 827 1,654 Attainable output, supported

by coke plant expansion.

2. Third Oxygen 1,800 Potential output 2,000,000Steel Vessel 900 tons if pig iron sales are

dropped.

3. Billet Caster 300 300 Continuous caster, (75 mm x75 mm and 100 mm x 100 mm).

4. Semi-continuous Replaces Steckel mill.Strip Mill 1,200 1,200

5. Cold Reduction 660 660 Doubling horsepower andMill speed of existing tandem

mill.

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4.02 A detailed description of the installations forming part of theproject and their timing is given in Tables 7 and 9. Apart from the in-crease in capacity and improved economies of scale, the project will providethe following major benefits to plant operations:

a. Operating advantages will arise through increased capacity ofthe existing "combination" slabbing/plate mill when producingslabs for the new semi-continuous strip mill instead of reducingthem further for the Steckel mill.

b. Quality improvements will come from the capability to producecoils of lighter gauge with closer tolerances and better sur-faces, and the production of plate through a new normalizingfurnace.

C. Greater operating security and flexibility will be achievedthrough the second blast furnace, additional finishingfacilities and the freeing of the combination mill for addi-tional plate production.

B. The Project in the Longer-Range Planning Perspective

4.03 As early as 1977, Erdemir's Stage I capacity would fall short ofexpected flat products demand, a gap which could build up to some 355,000 tonsin 1980 (Table 10). In Stage II additional rolling facilities are plannedin order to increase output of flat products and reduce sales of semi-finisheditems (billets, pig iron). These additions might include primary mill improve-ments or continuous slab casting, hot mill and tandem mill modifications, addi-tional cleaning, annealing, temper rolling, tinning, and finishing capacity(Table 8).

4.04 Once market growth and product mix patterns are firmly establishedduring the 1970's, major additional plant expansion (beyond Stage II) willprobably be required in about 1980. Such expansion should be guided by thelatest technical/economic developments available at the time, but would prob-ably include a new coke plant, a third larger blast furnace, basic oxygenfurnace, separate plate mill and slab caster, conversion of semi-continuousto fully continuous hot mill, new cold mill and possibly galvanizing andcoating lines. As technology progresses, the conventional hot metal/steelprocesses indicated previously could conceivably be substituted by new ap-proaches such as greater use of prereduced and prepared burdens, and directreduction. Annex 2 discusses major technological and economic trends insteel production. The Company has agreed during negotiations to have a com-prehensive study of its expansion plans for Stages II and III completed bythe end of 1973. The Government has also agreed to coordinate the growth ofthe steel companies in Turkey, to allow economic expansion of individualplant capacities within Turkey's total needs.

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C. Ecology

4.05 Steel plants are frequently criticized for air and water pollution(Annex 3). Two ecologists engaged by the Bank studied the situation atEregli in detail in September 1971. Their findings confirm that environmentaldamage due to present plant operations are minor, although attention must begiven - as the plant expands - to acid and phenol disposal, sewage treatment,mill service water effluent, smoke and sulfur dioxide emissions, and possiblyother items. The Company has agreed during negotiations to undertake ecolog-ical improvements acceptable to the Turkish Government and the Bank. A pro-vision of US$5.0 million has been included in the project cost estimate forthis purpose.

D. Project Management, Training, Technical Assistance and Project Schedule

4.06 For efficient management control, the Company has recently estab-lished a Corporate Engineering Department to deal with the immediate expan-sion project, as well as future market analyses and long range facility plan-ning. This new department, assisted by additional Turkish and expatriatepersonnel will oversee and review the activities of Koppers, who in competi-tion with four other engineering firms, have been appointed the GeneralEngineering Contractor. The functions of the Engineering Contractor willinclude design engineering, writing of specifications, procurement, scheduling,budgeting, overall construction management, supervision of start-up, andacceptance of equipment.

4.07 With the exception of the continuous billet caster and, to a lesserextent, the semi-continuous hot strip mill, Erdemir personnel are well ex-perienced in operating the general type of plant included in the project.However, technological advances and design modifications on newly introducedequipment, make it imperative that training be thorough to assure continuingeconomic operations after completion of start-up. Direct operator trainingwill be accomplished in conjunction with equipment suppliers, and by observa-tion of operating facilities in other countries.

4.08 The Company has agreed to enter into a long-term technical assist-ance contract with an efficient international steel producer not later thanmid-1972, for purposes of technical assistance, training and operating manage-ment techniques. The Bank would allow US$1.0 million from its loan to be usedfor the foreign exchange fees and expenses of such a contract.

4.09 The General Engineering Contractor has started work, and it isexpected that some critical equipment will be ordered b- mid-1972 and theproject essentially completed by 1975. The project's construction scheduleis shown in Table 9 and tentative disbursements by quarters in Table 11.

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V. RAW MATERIALS

A. General

5.01 The availability, quality and cost of the two raw materials, ironore and coking coal, are of major importance to most steel producers and soare other purchased materials such as fluxes, steel scrap, ferro-alloys, tin,fuel oil, power, sulfuric acid, molds, stools, rolls and spare parts. In1970, iron ore and coal on the one hand and these other inputs on the other,totalled TL 354 and TL 234 million respectively, or about 76% of Erdemir'scost of goods sold. Inputs other than ore and coal are normally availableto a steel mill in a developing country at a combined cost somewhat higherthan in industrialized countries. In the case of Erdemir, the cost disadvan-tage of these other purchased materials was roughly 7% in 1970.

B. Iron Ore

5.02 Previously, Erdemir had been using mainly lower quality domesticores, but has started utilizing some high-grade imported ores (Table 12),primarily to increase blast furnace output, and will continue to do so inthe future. Despite such admixture, there will still be a cost penalty inusing predominantly domestic ores. This is only partly a matter of price;domestic ores are now available at about 26 US cents per unit of Fe-in-ore(Table 13), compared to 22/23 cents for imported ores. More importantly,the use of lower-grade domestic ores reduces blast furnace output (by about240,000 tons of iron per year) and also increases coke and limestone con-sumption. The resulting reduction in gross earnings would be particularlypronounced whenever the Company would lose sales because of lower blastfurnace output (Tables 14 and 15).

5.03 The Government during negotiations has agreed to conduct a tech-nical and economic study on the best methods of improving the productionand transportation of domestic iron ore, and making it more competitive.Until concrete results are achieved from actions taken under this study,Erdemir will be permitted to import a portion of its iron ore, to enrichits ore blend and reduce costs.

C. Coal

5.04 Erdemir obtains all its coal from TKI (State Coal Company) mines.Although somewhat high in ash, this coal is well suited for the manufactureof metallurgical coke. By 1980, the Turkish steel industry would consumethe bulk of the presently projected output of 6.8 million tons of coal peryear. After the mid-1971 price increase and with the revalued Turkish Lira(January 1972), Turkish coal is slightly more costly (by about 7%) than im-ported coal. In this calculation allowance has been made for its higlh ashcontent which results in lower coke yields and higher coke consumption inthe blast furnace. An analysis of the iron ore and coal supply and priceprospects is given in Annex 4.

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VI. INVESTMENT REQUIREMENTS AND FINANCIAL PLAN

A. Cost of the Project

6.01 The project cost is estimated as follows. More details are shownin Table 16.

Cost of the Project

Total(TL million) (US$ million) Expend-

Local Foreign Total Local Foreign Total iture

Engineering 51.8 109.2 161.0 3.7 7.8 11.5 4.0Civil Works,Installation andMiscellaneous /1 586.6 - 586.6 41.9 - 41.9 14.5Basic Equipment,Materials & Spares - 1,899.8 1,899.8 - 135.7 135.7 46.8Freight and In-surance /2 168.0 168.0 /2 12.0 12.0 4.1Contingenciesa) Physical 47.6 114.8 162.4 3.4 8.2 11.6 4.0b) Price

Escalation 103.6 228.2 331.8 7.4 16.3 23.7 8.2

SUBTOTAL 789.6 2,520.0 3,309.6 56.4 180.0/3 236.4 81.6

Technical Assist-ance 1.4 14.0 15.4 0.1 1.0 1.1 0.4Pre-operating Ex-penses 84.0 - 84.0 6.0 - 6.0 2.1Increase in NetWorking Capital 647.4 _ 647.4 46.2 - 46.2 15.9

GRAND TOTAL 1,522.4 2,534.0 4,056.4 108.7 181.0 289.7 100.0

/1 Includes local labor, materials and equipment./2 Included in civil works, installation and miscellaneous./3 Includes estimated US$5 million of local supplies in local contracts awarded

under international competitive bidding.

6.02 Interest and guarantee fees during construction of about US$30million on project loans are not capitalized in the financial projectionsbut assumed to be paid out of operations. However, the Bank will allow upto US$7 million of its loan to be drawn for payment of interest during con-struction, reserving the right to reduce this allocation if more funds wereto be needed for the purchase of internationally bid equipment for the project.

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6.03 The basic cost estimates of the project facilities were made byUEC from their experience with similar installations and escalated to the endof 1971. Foreign equipment costs have been further escalated, in line withrecent trends, at a rate of 6% per year from January 1972, or altogether byUS$16.3 million. In addition, contingencies of US$8.2 million (6%) have beenprovided to cover possible cost increases due to unforeseen changes in thescope and design of the project. Local capital expenditures relating mainlyto materials, labor and equipment for construction have been escalated by 10%per year compounded from January 1972. The recent trend in construction costshas been somewhat in excess of this rate, but 10% should be adequate as anaverage, since the inflationary effects of the August 1970 devaluation, areexpected to taper off.

6.04 Revaluations of European and Japanese currencies may raise theprices (measured in US dollars) of equipment manufactured in these countries,although most likely not to the full extent of such revaluations due to pre-sent strong competition among steel mill equipment suppliers. Since equip-ment cost estimates were based on U.S. procurement, it is not expected thatthe recent changes in currency parities will affect capital costs beyond thecontingencies allowed.

B. Financing of the Project

6.05 The entire foreign exchange cost (US$181 million) of the project,(including an estimated US$5.0 million of local supplies in local contractsawarded under international competitive bidding) is planned to be financedby borrowing, while the local cost (US$109 million) including an increasein net working capital, will be financed from the Company's internallygenerated funds. Since local currency requirements for the project areintimately interwoven with Erdemir's other financial requirements such asrepayment of existing debt, the subject is fully discussed in Chapter IXwhich deals with the Company's financial reorganization.

6.06 The financing plan is as follows:

Proposed Financing Plan(US$ million)

Foreign Exchange Cost

Eximbank 65AID 40IBRD 76Total Foreign Exchange Loans 181

Local Currency Cost

Internally Generated Funds 109290

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A large part of the foreign exchange financing will come from bilateralsources. However, quite apart from the fact that other untied funds (suchas from the European Investment Bank and the Kreditanstalt fur Wiederaufbau)were not available in addition to funds already allocated to other projectsin Turkey, it will be shown below (para. 7.04) that the tied financing inthis case is unlikely to burden Turkey.

6.07 The US$181 million of foreign exchange financing is consideredadequate, but Eximbank has agreed to add another US$5 million for contin-gencies, thus increasing its loan to US$70 million. Furthermore, the Gov-ernment will cover any project cost overrun in local and foreign expendi-tures, on terms satisfactory to the Bank and as needed by the Company tocomplete the project within the agreed execution schedule.

6.08 The proposed Bank and AID loans would be made to the Turkish Gov-ernment at assumed interest rates of 7-1/4% and 3% respectively and relent tothe Company at 8-3/4% and 7%. Both loans would be for 15-1/2 years includinga grace period of 5 years.

6.09 Eximbank's loan of US$70 million will be in three tranches and madeto the Turkish Government. US$28.5 million would be provided by Eximbankdirectly at 6%; another US$28.5 million would come from commerical banks withEximbank's guarantee, presumably at 1-1/2% above the New York prime rate plusa 3/4% guarantee fee to Eximbank. The third tranche of US$6 million would beprovided through suppliers' credits probably at 7% interest. The average costof Eximbank's financing to the Company would therefore be about 6.5%.

6.10 Under Eximbank's regulations the Borrower has to make a 10% down-payment, in this case US$7 million. Erdemir will pay this amount in localcurrency for conversion into dollars by the Government. The Eximbank loanwould be for 16 years including 4-1/2 years of grace. Erdemir's repaymentsof principal would be used first to repay the suppliers' credits, then thecommercial banks and lastly Eximbank.

VII. PROCUREMENT

A. Engineering and Procurement

7.01 Erdemir recently appointed Koppers as the contractor responsiblefor engineering and construction management of the project. The foreignexchange cost of these services estimated at about US$8.0 million will befinanced by Eximbank under its loan; biddIng was therefore restricted toU.S. firms. While the Bank did not participate in the selection it reviewedtne contract, and is satisfied that it covers Erdemir's needs, and will allowprocurement under the Bank's guidelines for equipment and services to befinanced by the Bank.

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B. Allocation of Foreign Loan Funds and Bidding Procedures

7.02 Procurement procedures relating to the parallel financing of theforeign exclhange cost of the project have been set up as follows:

Tied and International Competitive Bidding(US$ million)

International CompetitiveBidding

Tied Bidding and Procured ProcuredTotal Procurement in U.S.A. in U.S.A. World-wide

US Eximbank 65 (+5) 65 (+5 reserve) -- --

AID 40 -- 40 --

IBRD 76 -- _ 76131 65 (+5 reserve) 40 76

116

7.03 The engineering contract and some equipment -- for example, thehot rolling mill - will be pre-allocated to the Eximbank loan for procure-ment in the U.S.A. These are items in which U.S. manuractures are consideredto be fully competitive and in which a reasonable degree of competition ex-ists within the U.S.A. (Table 17). The rest of the equipment, will be pro-cured against lowest evaluated bids emerging from international competitivebidding, all awards to U. S. suppliers being first set off against the AIDloan. Should the AID loan be exhausted before the Bank loan, further lowestU.S. awards will be paid out of the Bank loan. Should the Bank loan be ex-hausted first, the remaining equipment will be bilaterally procured from theU.S.A. against the balance of the AID loan.

7.04 The recent currency realignments are expected to strengthen thecompetitive position of U.S. suppliers, and might lead to a maximum of 65%of the estimated foreign exchange costs of the project being procuredthrough international competitive bidding. Even if this percentage issmaller, these arrangements are still satisfactory in view of the inabilityto raise more untied financing for the project. Moreover, the lower interestrates of the Eximbank and AID loans as compared to multinational financing,ensures that any direct cost penalty to Turkey is minimal.

7.05 It is estimated that about US$5.0 million of local supplies maybe included in local bids awarded under international competitive bidding.Procurement under the Bank loan will allow qualified Turkish suppliers tobid, and they would be accorded a 15% preference of the CIF cost of importedequipment or the customs duty, whichever is lower.

7.06 Contracts for civil works are not to be financed by the Bank loan,but will be submitted to competitive bidding within Turkey. Should Erdemirand the Bank agree that domestic construction industry constraints are result-ing in construction delays and undue cost increases, international competitivebidding for part of the civil works will be invited.

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C. Allocation of Bank Loan

7.07 The following major items will be financed by the Bank:

Category Amount(US$ million)

1. Equipment, spares, freight, insuranceand related services 54.0

2. Technical assistance 1.03. Interest and other charges on the loan 7.04. Escalation, contingencies and unallocated 14.0

76.0

VIII. COSTS OF PRODUCTION AND SALE

8.01 Economies of scale achieved by the expansion project will leadto a significant reduction in costs of production and sale per ton ofsaleable product. The benefits accruing from the project after full start-up are measured below against 1972, the year when the current expansionprogram will be completed.

Costs per Ton of Saleable Product

1976 as %1972 1976 of 1972

Total Saleable Product (1,000 tons) 552 1,382 250

Production Costs (in TL/ton)

Raw Material Costs 866 756 87Manufacturing Labor 194 115 59Reserves, other Inputs and other

manufacturing costs 463 378 82

Sub-total: 1,523 1,249 82

General Administration, Sales Expenses andForeign Supervisory 81 34 42

Depreciation 386 320 83

Sub-total: 1,990 1,603 81

Interest 348 260 75

Total Costs: 2,338 1,863 80

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8.02 Part of the above reduction in per ton cost is due to a shift inproduct mix. A more detailed analysis of the above cost is given in Annex 5,containing both general observations on major factors determining thesecosts and specific assumptions such as on operating rates, productivities,wage and salary rates. The most important assumptions are:

a. All costs are at September 1971 prices, except for salariesand wages, which are assumed to increase by 3% annually inreal terms.

b. To take care of cyclical fluctuations in demand, andinterruptions in production, actually attainable outputhas been revised downward by 5%.

c. Personnel of the Company is projected to grow onlyslightly less than one-third as compared with anincrease in saleable output of 2-1/2 times.

d. Depreciation of equipment is based on an assumed average19-year economic life for existing installations and a15-year economic life for new installations. This is inline with present practice, e.g., in the U. K. and Japan.

8.03 Comparisons of production costs between different steel producersin the world are difficult, not the least due to their varying product mix

which substantially influences production costs. But it is evident that (a)Japanese steel conversion costs, comprising manpower costs plus charges oncapital, are the lowest among those on which data are available and (b) thatErdemir in its present size is not competitive. However, improvement aftercompletion of the project is dramatic; in fact by 1976 Erdemir would benearly as competitive as the European mills reviewed. Even taking intoaccount the possibility of a future drop in European and particularly Belgianconversion costs (Belgium has traditionally exported a major portion of itssteel output) it is suggested that after completion of the project, Erdemirwould be operating on an economically sound basis.

8.04 Erdemir's production costs are not low enough to warrant the in-clusion of a permanent export quota in its sales projections. Nevertheless,in the present phase of the Company's development, it is important that it

expands rapidly to achieve improved balancing and utilization of its facil-ities in order to reduce costs. Exports would help in attaining this objec-tive. During negotiations the Company has agreed to review the possibilityof exporting a portion of its output in future, as part of the study of itsfurther expansion in the mid- and later 1970's (para. 4.04).

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IX. FINANCIAL REORGANIZATION, EARN-INGS AND FINANCIAL PROJECTIONS

A. Financial Reorganization

9.01 Erdemir, from its inception, has been heavily geared towards debt.At December 31, 1970, its long-term debt was TL 2,867 million and equityTL 648 million, giving a debt/equity ratio of 82/18.

9.02 The Company's present heavy burden of debt repayments, made areorganization of its financial structure an essential precondition for anynew borrowings required for the expansion, to provide adequate protection tothe new lenders and allow retention of sufficient internally generated fundsfor meeting local expenditures of the project. The Company, the Governmentand AID have therefore agreed on a plan of restructuring interest paymentsand amortizing existing debt as explained in detail in Table 18 and sum-marized below.

9.03 The Turkish Government has agreed:

a. to convert its main construction loan to the Company ofTL 469.4 million into a 30-year loan with a grace periodof 16-1/2 years, so that amortization would begin in 1988,after existing and now proposed new foreign exchange loanswill have been fully repaid; to capitalize interest for5 years, beginning January 1, 1971;

b. to defer amortization and capitalize interest on three ofits other loans to the Company totalling TL 168.2 millionfor a period of 4-1/2 years, commencing July 1, 1971 andto defer debt service beyond that period if this wouldcause Erdemir's current ratio to fall below 1.5.

9.04 AID has agreed:

a. to defer principal repayments due in 1972 and 1973 on Part Aof its foreign exchange loan of TL 1,449 million;

b. to extend the grace period of Part B of its foreign exchangeloan by two years to October 1, 1974;

c. to defer repayments of principal and capitalize intereston its main Turkish Lira loan of TL 111.6 million forfive years beginning in 1972 and to defer debt servicebeyond that period if this causes Erdemir's current ratioto fall below 1.5.

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9.05 The Government took two further measures previously mentioned, toimprove the Company's ability of self-financing. In July 1971, it permitteda price increase for the Company's products, slightly higher than requiredto offset increases in costs. In addition, the Government authorized theCompany to depreciate its fixed assets over 15 years for new assets, andover the same period from 1971 for assets previously acquired, against aperiod of 29 years that applied hitherto. Tax reliefs will be allowed onthe accelerated basis.

B. Financial Projections

9.06 Projected Sales, Income Statements, Cash Flow and Balance Sheetsare shown in Tables 19 to 22 and are summarized on the following page. Theprojections were made on the basis of September 1971 prices for both inputsand outputs (on the assumption that the price structure will remain unchangedin real terms) except for salaries and wages which are assumed to increaseby 3% annually in real terms to reflect an improvement in the standard ofliving in Turkey (Table 23). Profits and cash generation in 1971 were reducedby the unscheduled blast furnace relining, but are expected to increase grad-ually from 1972, showing a significant rise upon completion of the projectin 1975/76.

9.07 During the construction years debt service coverage is adequatebut drops to a low of 1.5 times in 1977 after start of repayment of thenew loans. However, by then the Company is expected to have accumulated asubstantial cash balance. After 1977, debt service coverage is expected toimprove gradually and be above 1.7 times by 1979.

9.08 The financial projections assume the implementation of a policyof maximum retention of earnings and no new borrowing or capital expendituresbeyond routine outlays, so as to build up equity and improve the debt/equityratio as quickly as possible. No dividends are to be paid except to theCompany's non-founder shareholders at the rate of 9.5%. Dividends to found-er shareholders and any other possible cash distributions, will only be per-mitted after the debt/equity ratio drops below 60/40, and then only if aftersuch payments, current assets are in excess of current liabilities by at least1.8 times. Such a policy is expected to improve the debt/equity ratio from72/28 in 1976 to 59/41 in 1978.

C. Financing of Long-Range Expansion

9.09 The above financial projections were prepared for Stage I only.Nevertheless, as explained in para. 4.03 the expected growth of Turkey'sdomestic demand, will require the implementation of Stage II to increasethe plant's capacity for producing flat products possibly as early as 1975.Erdemir's financial position between 1975 and 1980 was therefore examined,to determine possibilities for financing Stage II which will require aboutUS$75 million equivalent, including additional working capital. Table 24shows Erdemir's projected cash position through 1980 with Stage I plusStage II, indicating that the Company would need TL 140 million (US$10 mil-lion) of additional financing in 1975 and 1976. These financing requirements

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Summary of Financial Projections /(TL Million)

__2_ 1972 1973 1974 X 1976 1971Income Statements

Sales 1,262 1,l91 1,730 2,213 3,136 3,318 3,318Costs of Production & Sales 820 886 1,026 1,250 1,761 1,794 1,863Depreciation 205 213 219 335 433 455 467Interest 182 192 269 337 349 360 3L-Corporate Tax 17 64 52 87 221 268 240Net Profit After Tax 38 136 165 203 372 442 407

Balance Sheets (December 31)

Current Assets 1,088 1,289 1,247 1,412 2,206 2,824 3,088Current Liabilities 408 418 596 730 1,047 1,264 1,238Net Fixed Assets 2,901 3,266 5,081 5,284 5,172 4,810 4,440Long-Term Debt 2,967 3,407 4,860 4,943 5,005 4,654 4,200Equity 673 789 933 1,111 1,443 1,834 2,203

Current Ratio 2.7 3.1 2.1 1.9 2.1 2.2 2.5Long-Term Debt/Equity Ratio 82/18 81/19 84/16 82/18 78/22 72/28 66/34Debt Service Coverage 1.4 3.4 2.9 1.9 2.4 2.3 1.5

Sales as % of Total Assets 31.2% 32.3% 27.1% 32.6% 41.8% 42.8% 43.4%Net Profit after Tax as

% of Sales 3.0% 9.1% 9.5% 9.2% 11.9% 13.3% 12.3%Net Profit after Tax as

% of Total Assets 0.9% 2.9% 2.6% 3.0% 5.0% 5.7% 5.3%

Cash Flow Statement (1972 - 1976)

Sources of Funds Allocation of Funds

Net Profit, Before Tax Corporate Tax, Dividends,and Depreciation 3,663 Staff Bonuses 564

Old Loans 3/ 60 Interim Expansion 60Interest Capitalization- 260 Project - Foreign Expenditures 2,520Sale of Capital Stock 5 Project - Local ExpendituresNew Foreign Exchange and Start-up Expenses 922

Loans 2,443 Routine Capital Expenditures 125Repayment of Old Loans 635

Total Funds Available 6j431 Repayment of New ForeignExchange Loans 34

Increase in Net WorkingCapital for Project 647

Increase in Net WorkingCapital Not for ProjectV 924

Total Funds Allocated 6,431

1/ Slight differences are due to rounding-off.2/ Based on 11 months actual results.:/ Does not include interest capitalization on Bank loan.i Includes increase in net working capital for interim expansion and surplus cash.

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would be less if Stage II is delayed. On the basis of the projections,Erdemir's financial position should permit these new borrowings, and theCompany should be able to finance further expansion beyond Stage II largelyfrom internally generated funds, and if necessary, new equity.

D. Internal Financial Return and Sensitivity Analysis

9.10 Internal financial return calculations (before payment of corpo-rate taxes) and sensitivity analysis together with major assumptions, forthe incremental investment in the project are shown in Table 25 and sum-marized below:

Summary of Internal Financial Return Calculations

Rate ofCase Project Cost Operating Cost Sales Revenue Return

------------ % of expected value ---------… 7D

1. Base Case 100 100 100 21.22. 100 125 100 15.03. 100 100 75 7.94. 110 /1 100 100 18.85. 110 /1 125 100 12.96. 110 /1 100 75 6.07. 100 100 90 /2 18.08. 100 125 90 /2 11.09. 110 /1 100 90 /2 15.610. 110 /1 125 go /2 8.9

/1 Project delayed one year and total project cost up 10%./2 Selling prices down 10% from 1977 onward.

9.11 The financial return on the incremental investment in the projectis estimated at about 21% (Case 1). Case 5 would indicate the lowest returnof about 13% that may realistically be expected. Returns below this are at-tributable to circumstances which are unlikely to occur. A 25% drop in salesrevenue would reduce the return to about 8% (Case 3), and if this is coupledwith a project cost increase, the return would be even 'Lower (Case 6).

9.12 The Government and the Company have the intention of reducing sell-ing prices in real terms if practicable, around 1977. A 10% drop in sellingprices at that time would reduce the return to 18% (Case 7) or 15.6% ifcoupled with higher project cost (Case 9). Case 10 shows that such a pricereduction would not be practicable if operating costs had at the same timerisen by 25%. The Bank is interested in the Company charging prices whichare adequate to allow Erdemir to meet its financial obligations and contrib-ute to the financing of future expansions, but once this condition has been

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met, any further cost decline in producing steel should be reflected in areduction in steel prices in real terms, for the benefit of the Turkish con-sumer. The Company has agreed that it will consult with the Bank beforealtering selling prices.

X. ECONOMIC JUSTIFICATION

A. The World Steel Industry - Present Position and Growth Dynamics

10.01 In 1969, industrialized countries accounted for all but a smallportion of the world steel output of 570 million tons and consumed most ofit. Developing countries produced some 25 million tons and imported an-other 14 million tons from industrialized countries; the main exporterswere Western Europe and Japan.

10.02 The cost structure in steel favors industrialized countries incertain important respects. Imports of iron ore and coal can be deliveredto Western Europe or Japan at a cost equal to, or even less (due to economiesin large scale ocean transport) than the equivalent cost to most developingcountries. The cost of capital and project cost per se are lower in indus-trialized countries. This is significant since the capital per person em-ployed in the steel industry is high, varying between US$50,000 and US$100,000.Last, but most important, economies of scale are very considerable: the perton capital and manpower requirements for a 500,000 ton flat products in-tegrated mill, about Erdemir's initial size, would normally be about twiceas high as for a 2 million ton mill.

10.03 In recent years, there has been dynamic change in the steel industry,compounded by rapid technological evolution, drastically reduced ocean freightrates leading to the establishment of giant new mills at ocean side locations,and growing financial concentration favoring structural rationalization andfacilitating the provision of new funds. In the U.K., as well as in Franceand Belgium, structural rationalization was made a condition for publicfinancing, which was provided on terms amounting to a subsidy.

B. Future World Prices

10.04 This background of technological progress, economies of scale, mod-ernization and publicly supported financing explains the trend towards a de-cline in real steel prices during the last decade, interrupted only by rela-tively short price booms (Chart I). Future world steel prices are difficultto predict with any great confidence, but real prices are likely to declinegradually, with increasing productivity of both capital and labor. Whilethe effect of productivity increases on manpower costs is likely to be ab-sorbed by higher wages and salaries, depreciation allowances and returns oncapital per ton of steel should decline as very large new coastal mills inthe 8 - 12 million ton range are completed and as existing plants are fur-ther depreciated. On balance, steel production costs (measured in terms of1971 dollars) may fall by US$5-$7.50 per ton of finished steel.

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C. Erdemir's Domestic Selling Prices as Compared with Import Prices

10.05 Price comparisons on large tonnages of diversified product mixand under widely varying world production and marketing conditions are dif-ficult to make, and Table 26 explains the reasons for these difficulties insome detail. Nevertheless, it is believed that the following evaluation ofthe Company's competitive position vis-a-vis import prices and comparisonswith domestic prices in other European steel producing countries are mean-ingful.

10.06 Annex 6 contains a detailed discussion of Erdemir's prices inrelation to world prices, as at March 1971, prior to Erdemir's mid-1971price increases and movements in European and Japanese currency valuations.Table 27 shows the Company's new increased selling prices against importprices of similar categories of steel at the exchange rate of US$1 - TL 15.Both prices are "delivered at Istanbul" where most imports are landed, andex-duty. C.I.F. import prices have been increased by 10% to cover landingcosts, letter of credit and financial charges, and warehousing costs. Usersof steel in Turkey are prepared to pay a premium of over 20% to have steelavailable on call from Erdemir, rather than follow costly and cumbrous im-port procedures.

10.07 Average domestic and import prices net of taxes, shown in Table 27,are summarized below:

Comparison of Erdemir's Domestic Selling Prices with Import Prices(IJS$ per ton)

Product Import Prices Landed Excess ofMix Erdemir's Domestic in Turkey Excluding Domestic Over1976 Selling Prices Import Duty Import Prices

Pig Iron/Ingots 16.5 107.53 92.03 16.8

Billets 20.6 119.47 110.00 8.6

Flat Products 62.9 188.89 167.51 12.7

WeightedAverage 100.0 161.16 144.25 11.7

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10.08 Import prices shown in the above table are those which prevailedbefore the recent currency realignments. In fact, recently (January 1972)export prices of steel in European Common Market countries have increasedby between US$5 and US$10 per ton or 2% to 8% of the FOB Europe prices.These movements reduce the gap shown above between the Turkish domesticprice and the cost of imports.

D. Comparison of Erdemir's Domestic and European Domestic Prices

10.09 Revaluation of European currencies are not expected to lead di-rectly to changes in domestic steel prices, but a comparison of Erdemir'swith European domestic ex-mill prices, must take into consideration a higheraverage revaluation of about 5% of the currencies of the European steel ex-porting countries and Japan, in comparison with the Turkish Lira. In thefollowing table therefore, European and Erdemir's prices have been adjustedaccordingly for a few selected items for which - otherwise difficult - com-parability is assured.

Approximate Domestic Prices - US$/Ton(net of taxes)

Erdemir Price:Excess over European

Erdemir Europe PriceUS$ equiv. US$ equiv. X

1. Plate 15mm x 1.5m x 6.OmUST 33.2 177 167 + 6.0

2. Hot Rolled Sheet (cutlengths) 2.95mm/1 .0m/2.OmUST 33.2 167 159 + 5.0

3. Cold Rolled Coil 0.80mm x1.2m x coil, UST 10 224 191 +17.3

4. Cold Rolled Coil, 1.0mmx 700mm x coil, UST 10 213 189 +12.7

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E. Nominal and Effective Protection

10.10 On the basis of present prices and a range of possible increasesin export prices following upon currency revaluation (paras. 10.07 and 10.08),protection, both nominal and "effective", required by Erdemir is calculatedin Table 28, and summarized below:

Rise in Import Nominal EffectivePrices Protection Protection

% x 7%

0 11.7 22.173 8.5 18.184 7.4 17.586 5.4 14.4210 1.6 9.73

"Effective" protection is about 16% after an adjustment of about 5% forthe effect on import prices of currency revaluation. This is consideredacceptable.

F. Import Policy

10.11 Turkey's present steel import policy relies chiefly on quanti-tative restrictions rather than on duties which average only about 15% forsteel products. When domestic production is available it is customary torefuse requests for import licenses. Future policy will be guided by agree-ments within the European Iron and Steel Community (EISC), although Turkey'stransitional affiliation with the European Economic Community (EEC) stillrequires parliamentary approval in Turkey and EEC member countries. Turkeyhas not yet made any specific commitments to reduce tariff or quantitativerestrictions for items included in the EISC product lists, although it hasagreed to negotiate a program of gradual reduction in the future; such nego-tiations are not expected to start before 1975. A few steel products, suchas billets, are treated separately from those in the EISC lists, and theseproducts will be freed gradually from import restrictions over a 22-year pe-riod. Turkey's affiliation with the EEC will also relax restrictions on prod-ucts which use steel as a raw material and, thereby, will indirectly providecompetition for Erdemir.

G. Foreign Exchange Savings

10.12 At full capacity operation of the project, Turkey will have incre-mental annual foreign exchange savings of about US$73 million before servicingof the new external debts for the project, reflecting a pay-off period of suchdebts of about 2 1/2 years. Incremental foreign exchange savings after debtservice on the new external debts are estimated at about US$56 million annual-ly (Table 29).

- 25 -

H. Internal Economic Return

10.13 The internal economic return on the investment in the project hasbeen calculated by using landed import prices ex warehouse Istanbul (para.10.07) for output (Table 25). Inputs which could be imported, such as coal,iron ore, molds and stools, but which are procured domestically by the Com-pany at higher than world market prices are valued at world market prices.Inputs which the Company imports, such as tin, are valued exclusive ofTurkish import duties and taxes. Costs and benefits of the project to theTurkish economy are thus valued at world market prices. Sensitivity testshave been made for the effects on import prices of currency revaluations, toshow the impact that the currency revaluation should have on the internaleconomic return.

Summary of Internal Economic Rate of Return and Sensitivity Analysis

Case Project Cost Operating Cost Sales Revenue Rate of Return

------------% of expected value---------------

1(Base Case)100 100 100 18.02 110 100 100 15.73 100 100 103 19.64 110 100 103 17.25 100 100 104 20.16 110 100 104 17.77 100 100 106 21.08 110 100 106 18.6

Cases 2, 4, 6 and 8 - Project completion delayed one year, and projectcost up 10%.

The internal economic return of 18% on the project is attractive, and reflectstwo main factors. Firstly, the incremental investment including working capi-tal of US$320 per additional ingot ton produced is low and greatly improvesthe capital/output ratio of the plant. Secondly, the project commences toreceive some benefits from the second year of construction through the con-tinuous casting of billets, reaching full benefits from the fifth year, be-cause of market development preceding plant expansion. This is more rapidthan applies to many other steel plants.

10.14 Under cases 3, 5 and 7, the economic return improves furtherbecause of assumed long-term rises in import prices of 3%, 4%, and 6%following upon European and Japanese currency revaluations, allowing theuse of higher levels of world prices in measuring the economic return.

10.15 A second rate of return which might be called "internal financialreturn with zero nominal protection" has been calculated, assuming Erdemirproduces at actual operating cost but sells its products at world marketprices. This rate of return would be 15.4% at current import prices, with-out any effects of currency revaluations.

- 26 -

10.16 Despite the apparent attractiveness of the project, it is emphasizedthat eventual results in the task of putting a highly leveraged company likeErdemir on a sound operational, financial and economic footing will dependon several factors. The most important of these are that: (a) Turkey'seconomy will need to grow at around 7% annually, within which demand forflat steel products would rise by about 10%, requiring a fair amount of newinvestments in steel consuming industries, and that (b) present managementpractice and attitudes would continue, to ensure adherence to the projectschedule and operational and financial projections which, though realistic,demand efficient performance. Given these general conditions, Erdemir canreasonably be expected to achieve the projected results.

XI. AGREEMENTS REACHED DURING NEGOTIATIONS

11.01 Agreement was reached on the following principal points duringloan negotiations with:

A. Co-lenders, the Government and the Company

(a) Parallel foreign exchange financing in the amounts of US$65million (plus US$5 million for contingencies) by Eximbank andUS$40 million by AID, the Government providing foreign exchangeto Erdemir for 10% down-payment on Eximbank-financed equipment(paras. 6.05 - 6.10).

(b) Financial reoroanization of the Company involving restructuringof interest payments and amortization of existing debt to (i)retain the maximum possible cash with the Company during theconstruction period, (ii) provide adequate debt service coverageand (iii) lay the foundation for sound future growth beyond theproject (paras. 9.02 - 9.04).

(c) Pre-allocation of equipment to be procured in the U.S.A. againstEximbank finance (para. 7.03).

(d) Application of international competitive bidding to as much ofthe AID loan of US$40 million as can be taken up by the lowestevaluated U.S. bids (paras. 7.03 - 7.04).

B. Government

(e) Except with the prior consent of the Bank, the law setting upErdemir, or its Articles of Association are not to be amended,to allow Erdemir to continue as a private enterprise (para. 2.09).

(f) Coordination of the growth of steel companies in Turkey, to alloweconomic expansion of individual plant capacities, within Turkey'stotal needs (para. 4.04).

- 27 -

(g) Preparation of a study by December 31, 1973 on the best methodsof improving the production and transportation of domestic ironore to make it more competitive (para. 5.03).

(h) Permission to Erdemir to import a portion of its iron orerequirements, to enrich its ore blend and reduce costs (para. 5.03).

(i) Guarantee to provide any additional funds, foreign exchangeor local, needed by the Company to complete the project inthe event of a project cost overrun (para. 6.07).

(j) Authorization of depreciation rates corresponding to a 15-yearaverage life for the project installations and from 1971 forexisting installations (para. 9.05).

C. Company

(k) Preparation of a study on the Company's expansion plans byDecember 31, 1973 for Stages II and III (para. 4.04).

(1) Implementation of measures for minimizing environmental damagefrom the project (para. 4.05).

(m) Arrangement for technical assistance from a suitable steelproducing company outside of Turkey by June 30, 1972 (para. 4.08).

(n) Restriction on dividends except to non-founder shareholders,unless and until a minimum debt/equity ratio of 60/40 isachieved, and a current ratio of 1.8 is maintained (para. 9.08).

(o) Restriction on borrowings if debt/equity ratio would therebyexceed 60/40; restriction on routine capital expendituresduring the construction period, and thereafter (para. 9.08).

(p) Consultation between Erdemir and the Bank on steel pricing(para. 9.12).

11.02 With the indicated agreements, the proposed project constitutesa suitable basis for a Bank loan to Erdemir of US$76 million equivalent,for a term of 15-1/2 years including a 5-year grace period.

Industrial Projects DepartmentFebruary 4, 1972

ERDElIR

PRODUCTION AND SAL1S (1966-1970)

1966 1967 1968 1969 1970

Production 6 ales Production Sales Production Sales Productial Sales Production Sales

'000t ('OOO tons) (TL Million) ('000 tons) ('00t tors) (TL MillionT ('000 tons) ('000 tons) (TL hillion) ('000 tons) ('000 tons) (Ti Ifllion) ('OO0 tons) ('000 tons) (TL Mfilon)

Flat Rolled Products

Tin Plate 27.1 26.5 86.5 51.9 48.9 1b8.3 43.1 44.4 144.3 47.3 49.3 161.5 55.5 55.2 180.1

Cold Rolled Products 46.3 42.4 85.6 80.2 69.0 139.5 119.5 111.4 273.8 122.6 136.4 333.1 158.5 148.9 367.1

Hot Rolled Products 45.8 38.5 66.9 54.1 43.9 79.9 59.1 50.3 94.2 76.6 84.2 156.6 108.4 107.0 202.4

Plate 27.1 24.1 52.4 28.o 42.4 77.9 86.7 74.4 148.1 83.2 86.3 174.9 112.0 107.2 215.1

Skelp 64.2 61.0 119.0 52.6 56.9 100.2 94.o 79.8 140.2 54,.3 59.1 106.0 68.8 67.4 120.0

Sub-total 210.5 192.5 410.4 266.8 261.1 545.8 402.4 360.3 800.6 384.0 415.3 932.1 503.2 485.7 1,084.7

Other Products

Ingots - - - - - - - - - - - - 3.2 2.0 3.4

Pig Iron 70.7 67.4 ) 63.0 58.6 47.8 41.1 49.8 40.8 18.2 12.1 10.0 8.9 2.0 2.3

3looms 20.8 17.1) 58.4 19.3 22.2 ) 36.6 12.7 11.0 11.6 28.7 28.9 31.7 3.8 3.8 5.3

Slabs - 0.2 ) - .0 ) - 0.5 0.7 2.2 2.2 3.2 0.1 0.9 1.5

By-products - - 18.2 _ - 58.8 15.3 10.0 7.8

Total 302.0 277.2 487.0 3149.1 341.9 689.o 456.2 421.6 869.o 4331, 987.0 619.2 494,.4 l.16.0

Industrial Projects DepartoontOctober 4, 1971

TABLE 2

ERDEKIR

INCOME STATEMENT (1966-1970)(TL Mitllion)

1966 1967 1968 1969 1970

Sales Proceeds 487 689 869 987 1,105

Cost of Goods Sold 398 537 592 687 769(of which Depreciation) 89 90 90 94 127

General Expenses

Administration and Sales 17 21 23 19 19Amortization of Start-up Expenses 12 12 12 11 11Foreign Supervisory and Training 20 16 8 4 3

Other Income (Expenses) 2 4 12 4 (18)

Interest 581/ 55L/ 136 135 153

Income and Corporation Taxes - - 43 59

Net Income after Taxes (16) 52 110 92 73

1/ Only 1% interest for 1966 and 1½% interest for 1967 was paid on debt repayablein TL as compared with the stated interest of 5.75% on these loans, theremainder having been paid out of Net Income in 1968, 1969 and 1970.

Industrial Projects DepartmentOctober 7, 1971

TABLE 3

ERDEMIR

BALANCE SHEET AS OF DECEMBER 31 (1966-1970)(TL Million)

1966 1967 1968 1969 1970

ASSETS

Current Assets

Cash and Near Cash 11 96 100 281 189Accounts Receivable 41 34 69 63 77Inventories 419 401 437 450 562Other 37 53 77 59 129

Total Current Assets 508 584 683 853 957

Fixed Assets

Gross Fixed Assets 2,464 2,467 2,497 2,530 3,503-/Less: Accumulated Depreciation 106 196 _28 375 508

Net Fixed Assets 2,358 2,271 2,212 2,155 2,995

Other Assets 11 39 47 49 57

Start-up Expenses 46 34 23 11 -

TOTAL ASSETS 2,923 2,928 2,965 3,068 4,009

LIABILITIES

Current liabilities

Accounts Payable ) 66 57 82 43Customer Advances )35 35 65 128Income Tax, Dividends & Bonuses - - - 54 59Long-term Debt Payable Within 1 Year 48 35 12 180 145Other 67 23 27 49 119

Total Current Liabilities 17 159 132 430 494

Long-term Debt 2,245 2,211 2,207 2,035 2,867i/

EQUITY

Capital Stock 521 522 522 523 523

Retained Earnings (16) 36 104 80 125

Total Equity 505 558 626 603 o48

TOTAL LIABILITIES AND EQUITY 2,923 2,928 2,965 3,068 4,009

Increase of TL 820 million due to devaluation of TL on August 10, 1970.

Increase of TL 924 million due to devaluation of TL on August 10, 1970.

Industrial Projects Department

TABLE 4

ERDEMIR

Ownership of Erdemir Shares, December 31, 1970

FOUNDERS TL

Turkish Iron and Steel Corporation (GOT - Karabuk) 153,000,000 29.21/Sumerbank Holding (GOT) 153,000,000 29.22.Koppers Associates S.A. - Zurich 98,988,500 18.9Turkish Is Bank 300,000 0.0Ankara Chamber of Conmmerce and Industry 125,000 0.0

OTHER SHAREHOLDERS

Turkish Private Sector 107,961,000 20.8Foreign Sector 9,971,500 1.9

Total Issued 523,346,ooo 100.0Authorized, butnot issued 76,654,ooo

Total Authorized 6oO,OOO,OOO

j/ One-half of the shares held by GOT are preferred shares which carryonly one vote per share as contrasted with two votes for all othershares. As of December 31, 1970, therefore, Karabuk and Sumerbanktogether controlled about 51.5 percent of the votes.

Industrial Projects DepartmentJanuary 18, 1972

TABLE 5

ERDEMR

ESTIMATED TOTAL STEEL SUPPLY IN TURKEY - FINISHED Mfl PRQDUCTS(1950-1 9(9)

DOMESTIC PRODUCTION IMPORTS TOTAL SUPPLY

1000 1 PCT OF 1000 PCT OF 1000

YEAR METRIC TONS TOTAL SUPPLY METRIC TONS TOTAL SUPPLY METRIC TONS

_ 2 3 4 5 6

1950 120 40 179 60 299

1951 150 53 132 47 282

1952 165 46 196 54 361

1953 185 37 318 63 503

954 210 54 176 46 386

955 225 49 234 51 459

1956 230 63 135 37 365

1957 255 76 8o 24 335

1958 265 79 68 21 333

1959 305 65 166 35 471

1960 315 62 193 38 508

1961 345 68 149 32 494

1962 375 71 153 29 528

1963 470 67 226 33 696

1964 540 76 166 24 706

1965 680 79 181 21 861

1966 895 82 190 18 1085

1967 1140 92 106 8 1246

1968 1155 94 77 6 1232

1969 1283 91 127 9 1410

NOTE: DOMESTIC TONNAGES INCLUDE FINISHED STEEL MILL PRODUCTS MADE FROM IMPORTED

SEMI-FINISHED MATERIAL. IMPORT TONNAGES SHOWN, THEREFORE, COVER FINISHED

STEEL MILL PRODUCTS ONLY, TO AVOID DUPLICATION. SUCH SEMI-FINISHED IMPORTS,

FOR EXAMPLE, AMOUNTED TO 167,000 TONS IN 1968 AND 200,000 TONS IN 1969.

Source: UEC Feasibility StudySeptember 1970

TABLE 6

ERDEMIR

STEEL SUPPLY IN TURKEY - TOTAL FDTISHED PRODUCTS VS. LAT PRODUCTS (1950-1969(INCLUDING IMPORTS)

1000 Metric Tons

Flat Rolled Total Flat RclledYear Products All Products Pct of Total

. 1 2 4 _ __

1961 122 494 25

1962 179 528 34

1963 209 696 30

1964 178 706 25

1965 257 861 30

1966 300 1085 28

1967 329 1246 26

1968 413 1232 34

1969 453 1410 32

Source: UEC Feasibility StudySeptember, 1970

TABLE 7Page 1

ERDEMIR

DETAILED LIST OF PROJECT FACILITIESSTAGE I (THE PROJECT)

1. Dock facilities - one additional unloading tower, 1,000 MT/hr capacityand related modifications to conveyor systems.

2. Raw material storage - expansion of storage capacity to assure con-tinuous operations at higher plant operating levels.

3. Coke battery, 85 additional ovens, by-product recovery equipment.

4. One additional blast furnace, 29t6" diameter.

5. BOF facilities - 3rd veasel, 95 MT, related support equipment.

6. Oxgen plant - one additional column - 200 MT/day capacity.

7. Lime kiln - one additional kiln - 225 MT/day capacity.

8. Continuous caster for billets - 300,000 MT/yr capacity (sizes 3" x 3"and 4"t x 4"t).

9. Primary mill improvements - second soaking pit crane, 25 MT capacity.

10. Plate finishing facilities - relocate 156" shear; new normalizingfurnace - 45,000 MT/yr; rotary shear facility - capacity 1" thickness.

Uil. Hot rolling mill facilities - semi-continuous 66" hot strip mill, 2slab reheat furnaces (130 MT/hr), edger, scalebreaker, rougher, 6 four-hi-finishing stands, downcoiler, etc.

12. Pickling facilities - one additional sulfuric acid pickle line.

13. 4 stand cold rolling mill - double mill speed and horsepower, withadditional motors and gearing changes. (Addition of 5th stand isunder review.)

14. Annealing furnaces - 6 single stack radiant tube furnaces, 18 bases;related atmosphere gas generating equipment.

15. Temper rolling mill - one additional 4 hi-single stand temper mill.

16. Cold rolled sheet shear line - one additional cold rolled sheet sidetrimming and shearing line. (Suitable for lighter gauges and heaviercoils than existing shear line.)

17. Power house facilities - new 3rd and 4th boilers, 2nd turbo blower,3rd turbo generator.

TABLE 7Page 2

18. Utilities - expansion of general plant utilities - water, electricity,compressed air, etc., supply distribution.

19. Plant services - transportation, shipping, material handling, maintenanceand service shops and other necessary plant support fkmctions will beaugmented as required.


TABLE 8

ERDEEIR

STAGE II FACILITIES

Further near term expansion, beyond facilities included in the projectcould include:

UEC "Stage II" Facility Group (to be operational about 1977, depending onverification of market growth)

(a) Primary mill improvements (or early introduction of con-tinuous slab caster to achieve additional primary rollingcapacity for plate and savings in operating costs).

(b) Hot mill - 3rd furnace, 2nd coiler.

(c) 4 stand tandem mill - possible 5th stand (if not added inStage I).

(d) Annealing furnaces and bases.

(e) Electrolytic tin line

(f) No. 2 temper mill, 2nd stand

1/(g) Electrolytic cleaning line 1-

(h) Plate finishing facilities.

(i) Cold rolled slitting and recoiling line.

(j) Utilities and support facilities.

1V A separate cost justification related to expansion of tin plate capacitywould be desirable.


Table 9

TURKEYERDEMIR EXPANSION PROJECT

FACILITY TIMING SCHEDULE

(RELEASE DATES AND START OF OPERATIONI)

Il FACILITY '70 '71 '72 '73 '74 '75 '76 '77 '78 ' 79 '8

COKE COKE BATTERY- 85 Ovens & By-Products _ * __

_ _ _ _ _ _ _ _ l I_BF BLAST FURNACE - 29'-6t"

BOF MOLD PREPARATION AREA

BOF SCRAP HANDLING AREA - _

BOF BOF ALTERATION$ ____ _ I___BOF 3rd BOF VESSEL _

BOF 2nd LIME KILN - 225 MT/Day - __ _

BOF g3rd OXYGEN GEN.- 200 MT/Day ir

HRM | BILLET CASTER _ I i _

HRM | SOAKING PIT CRANE _ I _ IHRM HOT STRIP MILL _

HRNI PLATE SHEARING, NORMALIZING,etc.

HRM | ROTARY PLATE SHEAR _ I JCR | 2nd PICKLING LINE - _ i _

CR COLD ROLL MILL - Increase Speed _r_

CR BATCH ANNEAL - 6 Fcos. - 18 Bases

CR TEMPER MILL #2

CR COLD ROLL SHEET SHEAR LINE #2

SERV. POWER HOUSE FACILITIES

SERV. UTIULTIES & SERVICES

DOCK 2nd UNLOADER, ORE STORAGE EXT.

WORLD BANK 6212(R)

TABLE 10

ERDJUIR

AVAJLABLE KARKST ASD OUTPUT PROJECTIONS FOR THE PROJECT(1,000 tons)

* 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980Available Domestic MarketPlates 121 130 145 160 175 190 210 235 260 290Skelp 62 75 80 90 100 130 120 130 145 160H.R. Sheets 117 120 135 145 155 170 185 205 225 240C.R. Sheets, Black Plate 154 180 205 230 265 295 330 370 410 450Tin Plate 56 65 70 75 85 90 100 110 120 130Total Flat Rolled 510 7 70R5 770 § 975 1050 110 177-0

Billets / - _ 60 200 300 300 300 300 300 300Ingots (for sale)§/ - 60 60 60 60 60 60 60 60 6oTotal Steel Products 15 lT 1215 170 1UO- 10- 1630

Output Projections - "Project" 8/Plate 121 127 127 160 175 190 190 190 190 190Skelp 62 65 65 90 100 110 110 110 110 110H.R. Sheets 117 119 119 145 185 220 220 220 220 220C.R. Sheets, Black Plate 154 154 154 230 265 305 305 305 305 305Tin Plate 56 56 56 75 85 90 90 90 90 90

Total Flat Rolled 30 5T 7ri 700 71S 975 917 915 915 915

Billets - - 60 200 300 300 300 300 300 300Ingots (For sale) - 60 60 - 60 60 60 60 60 60Total Steel Products 715 3r 7T1 oo li7f ./' 1773i/ 172./ 1277 1-277 1277

Ingot Equivalent 729 804 864 1182 1495 1648 1648 1648 1648 1648Purchased Slabs or Ingots

(Ingot Equivalent) (1i9) - - _ _ _ _ _ _ _Ingots to or from Inventory - 96 36 (132) 62 62 (124) - 124 (124)

Ingot Production: M** 705 900 10-50- 15T7 1710 ig:54* 1;B 17727 lfli,-Ingot Capacity 4 800 900 900 1050 2000 2000 2000 2000 2000 2000Ingot Operating Rate-I 69% 100% 100% 100% 78% 86% 76% 82% 89% 76%

IHot Metal Requirements 473 774 774 903 1390 1520 1340 1470 1580 1330Pig Iron Sales _ -_7 - 250 180 180 180 180 180

Iron Output: 3 777 l TQ 1640 1700 1520 65070 170 m151Iron Capacity 7 475** 778 872 1209&5 154 1654 1448*- 1654 1654 1448-H'Blast Furnace UtilizationZ/ 100% 99% 99% 74% 100% 103% 105% 100% 106% 104%

* UEf November 1970. Total market growth as estimated by both Erdemir and the Bank Staff would be somewhathigher.

i* Years of blast furnace relining.

1t Includes 30,000 tons of assumed exports.Includes 60,000 tons of assumed exports.

3 Includes 35,000 exports in 1977, and smaller quantities in 1978, of H. R. Sheets.F Ingot production divided by ingot capacity.V No. 1 Furnace plus 90 days of No. 2 Furnace at 60% of capacity.

The figures for ingots and billets represent projected sales by Erdemir rather than the total marketwhich could exceed the projected sales.

i The fact that projected output would exceed normal blast furnace capacity is not highly significant,since the projected output could be reached, if necessary, by various expedients, including a higheradmixture of rich imported ores or pellets. Alternately hot metal ratio in the BOF could be reduced

slightly.

8/ At full operating rate (vs. 95% for purposes of financial projections).

Indastrial Projects DepartmentOctober 15, 1971

TABLE 11

ERDEMI'R

PROJECTED DISBURSEMENT SCHEDULE

IBRD Fiscal Year US $ Million Equivalentand Quarter Procurement against Accumulated Disbursements

US EximbankFY 1972 IBRD USAID Total IBRD Total

4th Qr. 1.60 2.00 3.60 1.60 3.60

FY 1973

1st Qr. 4.1o 5.80 9.90 5.70 13.50

2nd Qr. 4.90 6.80 11.70 10.60 25.20

3rd Qr. 13.00 19.40 32.40 23.60 57.60

4th Qr. 13.80 19.50 33.30 37.40 90.90

FY 1974

1st Qr. 13.80 20.40 34.20 51.20 125.10

2nd Qr. 6.50 9.70 16.20 57.70 141.30

3rd Qr. 4.90 7.20 12.10 62.60 153.40

4th Qr. 1.10 1.40 2.50 63.70 155.90FY 1975

1st Qr. 0.40 o.60 1.00 64.10 156.90

2nd Qr. 0.40 o.60 1.00 64.50 157.90

3rd Qr. 0.40 o.60 1.00 64.90 158.90

4th Qr. 3.30 3.60 6.90 68.20 165.80

FY 1976

1st Qr. 3.30 3.60 6.90 71.50 172.70

2nd Qr. 1.70 1.65 3.35 73.20 176.05

3rd Qr. 1.80 1.65 3.45 75.00 179.50

4th Qr. - 0.50 0.50 75.001/ 180.00

75.001/ 105.00 180.00

J1 Disbursement of US $1 million for Technical Assistance Contract notincluded.


ERDEMIR

CONSUMPTION OF COAL AND IRON ORE AT100% PROJECTED PRODUCTION LEVEL

(1000 tons)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Coal 770 791 806 806 806 1,648 1,648 1,648 1,648 1,648 1,648

Iron Ore

Domestic n.a. 529 963 1,152 1,152 2,352 2,293 2,030 2,293 2,293 2,030Foreign n.a. 300 300 300 400 400 500 500 500 500 500

Total Ore 996 829 1,263 1,452 1,552 2,752 2,793 2,530 2,793 2,793 2,53o

Production Level

Hot Metal Production 555 434 778 872 872 1,650 1,710 1,500 1,710 1,710 1,500Ingot Production 702 550 900 9.00 1,050 1,557 1,710 1,524 1,648 1,772 1,524Sinter Production - - 714 1,198 1,161 1,148 1,148 1,148 1,159 1,172 1,172


ERDEMIR

DELIVERED PRICES FOR ERDEMIR

1970 PURCHASES OF IRON ORE

Rail (6) Port and TotalName of distance Moisture Fe Railroad loading Sea Transport Delivered Price at Eregli

mine mine to content content Price Delivered f.o.b. Freight charges Freight andport Handling

km. % TL/Ton TL/Unit Fe TL/Ton TL/Ton TL/Ton TL/Ton TL/Ton TL/Unit Fe

Karakuz 24 5.5 54.43 70.95 1.30 81.47 23.32 15.56 120.35 198.30 3.64Peveci 22 9.9 51.22 62.28 1.21 81.49 23.32 15.56 120.37 195.87 3.82

*kdag 8 2.6 59.55 54-47 0.91 80.28 23.32 15.56 119.16 176.81 2.96

Buyuk Egmir 40 2.9 56.78 100.89 (1) 1.51 (4) - - 25.76 25.76 127.41 2.24

Karamadazi 30 0.8 54.51 62.76 1.15 89.27 23.32 15.56 128.15 191.94 3.52

Bizmisen 25 1.0 63.26 62.15 0.98 84.45 23.32 15.56 123.33 186.72 2.95

Catinkaya 13 3.8 55.71 73.77 1.32 73.05 23.32 15.56 111.93 190.12 3.41

Uzunpinar 74 5.8 50.05 65.71 1.31 70.66 23.32 15.56 109.54 181.99 3.63

Itabira (7) 570 1.9 69.28 147.79 (1) 2.13 - - - 154.68 304.30 (5) I.39 (2)

Weighted AVerage (3) 54.41 6 3.43 1.16 (4) 116.25 186.58 3.43

(1) Delivered on ship.

(2) In the absence of the Turkish lira devaluation, the cost at Eregli would have been TL 2.87 per unit Fe.

(3) Excluding imported ore. (Itabira)

(4) Excluding TL 15 per ton cost of loading ore on vessel.

(5) Including customs duty, insurance

(6) Recent price increases (July 1971) have increased rail freight rates by about TL 28/ton above levels indicated in this table.

(7) Indicated delivered costs are not representative, due to adverse short term conditions at time of purchase

NOTE - July, 1971: Adding the recent price increase in rail freight to the basic ore cost shown above results in the following:

Previous Ore Price (1970) =165dn TL/UJni, Fe

Add'l. Freigh, Cost 1971)= 28.00 .51

Recent Total Cost = 214.58 3.9)4 or 26.27rz/Ye Unit, , based on US $1 = TL 15


ERDEKIR

ECONOMCIS OF FOREIGN VS "DOMETIC" ORES. STAGES I & II(Alternates oa and lOa - UEC Study)

MILLION T.L.1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

1. Sales Proceeds: domestic ores 1,139 1,238 1,385 1,602 2,364 2,728 2,862 2,958 2,989 3,023 3,0632. foreign ores 1 218 1 306 1,495 1,691 2 362 2,725 2 954 3 204 3 020 3,042 3 2193. Difference: 79 60 110 i9 :- -2 -.- -3 91= 19 - 5

4. Raw Materials: domestic ores 408 421 453 524 779 918 946 959 962 970 9825. foreign ores 369 403 455 512 709 818 888 945 879 860 9256. Difference: 7-9 -_n -7 Mi m -100 m 7 M -fl

7. Sundry Mfg. Costs: domestic ores 183 204 227 270 347 398 430 457 462 477 4998. foreign ores 191 211 235 276 344 394 432 471 260 474 5059. Difference: ° 7 5 -m; m M M 6

10. Sundry Overhead Expense: domestic 16 15 16 15 10 7 6 6 5 2 211. foreign ores 16 14 15 14 10 7 5 3 5 2 012. Difference: - -, -1 -- T- - - 7- _-_7

13. Net Income Before Taxes: domestic 99 164 128 41 370 518 584 627 640 667 70614. foreign ores 209 243 227 136 442 620 732 876 756 800 91115. Difference: 11 37 IIs 7 TM TM I m M

16. Net Income After Taxes: domestic 63 104 81 27 231 323 364 391 399 416 43917. foreign ores 131 153 142 86 276 386 456 545 472 498 56718. Difference: 73 7 - X 773. X X i

19. Total Turkish Ore used, "domesticore case" thousand tons 2,245 2,205 2,205 2,205 2,205 2,205

20. Approximate Cost, TL millionl 1426 419 419 419 419 41921. Cost Penalty in percent of Ore Cost (line 15/line 20) 23.9% 35.3% 59.4% 27.7% 31.7% 48.9%

L/ Both cases assume "orld Market Procurement" and escalation of domestic resource costs by 10 per cent. The benefits from using foreign ores varysubstantially from one year to the next, (a) reflecting charges in the proportion of foreign ore to total ore and (b) depending upon whether themain benefit is increasing output or (where there is a market constraint) reducing the cost of blast furnace operations.

/ Assuming ore price of TL 190/t delivered Eregli, and US $1 - TL 15

NOTE: This table has not been modified to reflect changes in delivered costs of ore, effective July, 1971, or changes in exchange rates, effective in Jan., 1972. DIHowever, it effectively demonstrates the concepts used by UEC in comparing the economics of foreign Vs domestic ore and related order of magnitude of acosts involved. wA very simple alternate calculation is shown on the following page for purposes of comparison. Both calculations indicate similar "order ofmagnitude" savings due to use of foreign ore.

In both cases, apparent results should be adjusted for business fluctuations and realistic appraisal of other ;-lternatives available forincreased iron production, such as a larger furnace, use of high top pressure, oxygen injection, different burden preparation, etc.

Fource: UNC Feasibility StudySept., 1970

TABLE 14Page 2

ALTERNATE CALCULATIONS

Economics of Fbreign and Domestic 07esBased on Pig Iron Sales Qnly 1 /

Assumptions:

I. Blast Furnace Production:

a) with 100% foreign ore: 2706 tons/day/furnaceb) with "domestic ore": 2360 tons/day/furnace

(includes 500,000 T/yr foreign ore)

II. Approximate profit on additional sales of pig iron:

a) Sales price 1583 TI/ton or $105.53/tonb) Less cost of production - approx. 810 TL/ton or 54.00/ton

(excluding depreciation, selling,general administrative expense)

c) Approximate gross profit - 773 TI/ton or $ 51.53/ton

III. Approximate domestic ore costs delivered: 215 TI/ton or $ 14.33/ton

IV. Approzimate domestic ore usage: 2.2 million tons

V. Approximate foreign ore cost deliveredall fees paid: $14.00/ton

ROUGH CALCULATIONS

Capacity Considerations Only 21

a) Approximate reduction in capacity at full operative rate:

(700 furnace days/yr) (2706-2360) = 242,000 ton/yr potentialloss in capacity.

1/ Analysis based on pig iron for simplicity, since no other processlimitation, except pig machine, can enter. In practice, products ofhigher value would normally be considered.

In addition, major savings (at least $5 million/yr) in raw material pur-chase costs also result from use of foreign ore. Most of these savingsapply even when market conditions do not require capacity operation. Ifthese savings are added to the amounts mentioned previously, the totalcost penalty associated with use of domestic ore amounts to over 50%.

3/ Based on US$1 = TL 15.

TABLE 14Page 3

b) P>elated profit (if market is available and limited only byblast furnace capacity):

(TL773) (242,000 TL/yr) - 187 milJ.on TI/yr or $12.5 million/yr

c) If this "lost profit" is arbitrarily related to cost ofdomestic ore, for perspective, it is equal to:

187 millionWTI/yr = 187 million TL(2.2 million Tonsfyr) (215 TI/ton) 473 million TL

or 40% of the ore cost

d) If "lost profit" is related to total saleable product, it isequal to:

l.255 million or $8.60/ton producttons

Conclusion

When the given conditions apply and no other constraints limit sales ofpig iron (or other products with similar/bigher profit) lost blast furnacecapacity associated with use of domestic ore results in a significant costpenalty to Erdemir.

For this reason, it would be highly advantageous to the company toreserve the option to import foreign ore for economic reasons, in tomnagesrequired to support full operations - especially when sales are limited byblast furnace capacity.


TABLE 15ERfDlIR

ERDEMIR EXPANSION PROGRAM

Summary of Typical Blast Furnace Practice (1976)

1976Domestic 100 pct.

Grouping Specific Item Units Ore ForeignCase Ore Case

Present Furnace at 28'0" DiameterPresent Furnace at 29'6" Diameter x xNew Furnace at 29'6" Diameter x xForeign Ore 1000 MT/Yr. 2437Blast Furance Availability Fce. Days/Yr. 700 700Sinter Plant Availability Days/Yr. 347 347Ore - Turkish Blended Kg/MT. - -Ore - Foreign Blended . 220 752Sinter - Eregli , 694 691Roll Scale 61 61BOF Slag 22 92

BLAST Total Metallic Burden: 1760 1FURNACE Fluxes - Limestone 10 _5_BURDEN - Dolomite I? 50 5o

- Total _50- 50Gravel (For Slag Analysis Control) 30Coke Rate - Gross at 5 pet. H20 661 569Oil for Tuyere Injection (2 pct. Sulfur) ,, 50 50Fe Percent 92.1 93.4

HOT Mn , 2.1 0.7METAL P .16 .13ANALYSIS Si 1.0 1.0

5 ,, .033 .033Hot Blast Temperature 927 927Blast Humidity g/CuM 39 39

OPERATING Oxygen Enrichment Percent 0 0CONDITIONS Top Pressure ATM .2 .2

Wind Rate (AISI Carbon Basis) 127 max. 1000 CFM 114 114_______________ Furnace Delays MiLn./Fce.Day 140 140

Slag Volume Kg/MT 315 254Slag Analysis - SiO2 32.9 3.

- A1203 17.4 17.5SLAG - MgO 10.0 10.0PRACTICE - CaO , 36.6 37.2

- S ,, 1.9 1.4Basicity - Bases/Acids Ratio .93 .93

- Bases/SiO2 , 1.42 1.42YIELD Metallic Yield Percent 95.2 96.7

Flue Dust and Sludge Recovered Kg/MT 58 39Production - Daily MT 2 270b

- Annual 1000 MT 1654 1724PRODUCTIVITY Furnace Utilization - Days Days/Yr. 700 637

- Percent Percent 100 91Unused Capacity - Annual 1000 MT 167Turkish Ore Fines Kg/MT Sinter 72Foreign Ore Fines 118 958

SINTER Flue Dust and Sludge 8,4 56PLANT Flux Fines , 200 177BURDEN Coke Screenings 60 60AND Sinter Analysis - Metallics Percent 35' -55.4 b2.3PRODUCTIVITY - SiO 2 + A1203 7.7 3.9

- CaO + MgOD 12.5 6.5- Basicity Ratio 1.62 1.66

Sinter Pant Utilization Days/Yr. 347 47_ Annual Production 1000 MT/Yr. 1148 1186

July 1971

NOTE: The above data is representative of typical blast furnace practice, operating conditions,and burden, although slight variations from the above do occur in 1976 from inventorybuild-up related to a blast furnace reline in 1977.

Source: UEC Feasibility StudySect., 1970

Industrial Projecta DepartmentOctober 15, 1971

EIRDEMIR

SUNI4ARY OF ESTIMATED CAPITAL INVESTMENT - STAGE Ius$'OO (15 TL = US3$a)

Cost Escalated to Construction DateForeign Local

Exchange Cost Currency Cost Total

1. Coke Battery s. By-products - 85 Ovens 16,199 5,028 21,2272. Blast FVrnace - 29'6" Diameter 24,388 8,253 32,6413. Mold Preparation Area 588 250 8384. Scrap Preparation Area 813 285 1,0985. BOF Alterations 5,313 2,337 7,6506. 3rd BOF Vessel - 90 MT/HT 4,173 2,155 6,3287. Burnt Lime Kiln - 225 MT/D 1,135 380 1,5158. OxYgen Generator - 200 MT/D 4,292 970 5,2629. Billet Caster - 300,000 MT 11,756 2,290 1406

10. Soalcing Pit Crane 601 39 64011. Hot Strip Mli 56,091 12,125 68,21612. Plate Finishing 2,092 927 3,01913. Rotary Plate Shear 1,308 315 1,62311X. Pickling Line #2 6,409 1,905 8,31415. Cold Mill - Increased Speed 4,658 1,160 5,81816. Batch Anneal - 6 Furnaces & 18 Bases 1,905 567 2,47217. Temper Mill #2 7,806 2,522 10,32818. Shear Line #2 3,380 1,020 4,40019. Power House 7,585 1,882 9,46720. Utilities & Services 8,058 8,348 16,40621. Ship Unloader 2,029 238 2,26722. #/3 Boiler 3,381 794 4,17523. Extension of Ore Yards 2,040 1,710 3,75024. Provision for Ecology 4,000 900 4,900

180,000 56,400 236,400

a) Foreign Exchange Costs escalated at 6% per year.b) Local Currency Costs escalated at 10% per year.c) Fbreign Exchange Costs include contingencies of 6.1%.d) Local Currency Costs include contingencies of 7.4%0.


Table 17

TENTATIVE LIST OF PROJECT FACILITIES WHICH

MAY BE COVERED BY THE US EXPORT-IMPORT BANK LOANI/

Approximate CostIncl. Freight

(Million

1. Hot Strip Mill (excluding reheat furnace) $b1.0

2. Engineering 9.0

3. Temper Mill 4.2

L. Cold Rolled Shear Line 1.7

5. h Stand Tandem Mill Modifications 3.7

6. Construction Materials, Spares, and OtherItems to Balance 5.8

TOTAL $65.o

NOTE: An additional $5.0 million is available from the Export ImportBank to cover contingencies and additional items for U.S.procurement, as may be required for the project.

Such items could include:

(1) Possible 5th Stand for Tandem Mill

(2) Rolls, Bearings, additional supplies and spares

(3) Part of overhead travelling cranes, miscellaneousconstruction materials, services, etc.

Industrial Projects DepartmentFebruary L, 1972

1/ The Company has requested Eximbank to finance these facilities throughthe Eximbank loan.

ERDEhIR

Restructuring of Existing Loans

Amount Outstanding Last Principalas of December 31, 1970 Interest Rate Repayment Due

FOREIGN EXCHANGE LOANS (TL Million) % Year Restructuring

Unchanged Loans1. AID - Interim Expansion Loan 116.3 5.75 19882. AID - Sinter Plant Loan 13.6 6 19853. Chase Manhattan Bank Debentures 15.0 7 19714. French Credit 6.2 6 1981

Restructured Loans5. AID - Loan A 1,656.1 5.75 1986 Deferral of principal repayments totalling

TL 180.6 million and due in 1972 and 1973 andamortization over remaining loan period.

6. AID - Loan B 472.7 5.75 1981 Deferral of first four semi-annual principalrepayments totalling TL 92.9 million and due in1972, 1973 and 1974 and amortization over remain-ing loan period.

TURKISH LIRA LOANS

Unchanged Loans I/7. GOT - Dividend Advance- 5.9 - -

B. AID/GOT - "G" Fund 26.9 8 1986

Restructured Loans9. GOT - Construction Loan 484.6 5.75 1986 Conversion into 30-years loan with 161 years of

grace, i.e. amortization coemencing in 1988.Capitalization of interest for 5 years co_encing 1971.

10. AID - Cooley Loan 119.0 8 1986 Deferral of principal repayments totalling TL 37.2million and due in 1972 to 1976 and capitalization ofinterest for 5 years commencing 1972.

11. GOT - Interim Expansion Loan - 2/ 7 1986 Deferral of first six semi-annual principal repaymentstotalling TL 6 million and due in 1973 to 1976 andcapitalization of interest for 1972 to 1976. Amortiza-tion over remaining loan period.

12. GOT - Sinter Plant Loan - 3/ 6 1986 Deferral of first six semi-annual principal repayments )4/totalling TL 12 million and due in 1973 to 1976 andcapitalization of interest for 1972 to 1976. Amortiza-tion over remaining loan period.

13. GOT - Special Development Fund 96.2 6.65 1986 Deferral of principal repayments totalling TL 19.7million and due in 1971 to 1976 and capitalizationof interest for 1971 to 1976. Amortization overremaining period. )

1/ Dividend Advance repayable to GOT if company declares dividend of 10% or higher.

2/ Loan of TL 25 million not drawn down as of December 31, 1970. Loan has been fully utilized in 1971.

3/ Loan of TL 50 million not drawn down as of December 31, 1970. Loan has been fully utilized in 1971.

4/ Coemencing 1977, principal repayments will be furtherdeferred and initerest capitalized on loans Nos.10 to 13 if and when the Company's excess ofcash resources over priority cash requirements is not sufficient to service these loans, Cash resources and priority cash requirements are defined as follows:

Cash Resources: Cash and marketable securities in hand + Net profit after tax and provision for legal reserves in previous year + Depreciation in previousyear + Proceeds from sale of capital stocks in previous year.

Priority CaslRequirements: 170 percent of principal repayments on foreign exchange loans due during the current year + Budgeted increase in net working capital during current year.

Industrial Projects DepartmentFebruary 1, 1972

ERDEMIR

PRWBCTED SALES ROCEEDS - STAGE I(in TL tooo0

1971 1072 1973 1974 1975 1976-1990

Quantitv VA1,W- Prices Quantit Value Quantitv Value Qua tit Value Quantity Value QuVntity Value(I'000 tons) (too0 tons) ( tns000)00 tos'000 tons) ti000 tons)

Ingots 1 1,995 1,827 60 109,620 60 100,620 - - 60 3/ 94,980 60 94,980

Billets -- - - - - 60 114,180 200 355,600 300 527,700 300 528,600

Plates

Mill Edge 45 93,795 2,393 43 102,899 43 102,899 45 107,685 39 93,327 45 107,685out idge 15 40,544 2,911 19 55,309 19 55,309 45 130,995 59 171,749 107 311,477From Coils 61 144,537 2,470 65 160,550 65 160,550 70 172,900 77 190,190 38 93,860

Skelp 62 123,332 2,254 65 146,510 65 146,510 90 202,860 100 225,400 110 247,940

Hot Rolled Sheets

Coils - Pickled - - - - - - - - - - 3 7,341- Unpickled 62 145,072 2,447 66 161,502 66 161,502 70 171,290 74 181,078 82 200,654Cut Length - Pickled 21 47,626 2,516 20 50,320 20 50,320 29 72,964 31 77,996 31 77,996- Unpickled 34 72,821 2,342 33 77,286 33 77,286 46 107,732 80 187,360 lO4 243,568Cold Rolled Sheets

Coil - Side Trimmned - - 2,984 - - - - - - - - - -- Not Side Trimmed 27 68,538 2,832 28 79,296 28 79.296 63 178,416 74 209,568 82 232,224Cut lengths 91 239,292 2,920 911 274,480 94 274,480 124 362,080 146 426,320 176 513,920Black Plate - Coils 20 65,993 3,513 19 66,747 19 66,747 214 81 ,312 25 87,825 26 91,338- Cut Length 2 7,200 3,600 2 7,200 2 7,200 3 10,800 4 14,400 4 14,400Blued - Sheet 9 26,646 3,241 7 22,687 7 22,687 10 32,410 10 32,410 10 32,1110- Black Plate 5 17,757 3,7148 4 14,992 4 14,992 6 22,488 6 22,488 7 26,236

Tin Plate 56 200,852 ,0145 56 _226,520 56 226,520 75 -303,375 85 3143,825 90 364,050

511 1,305,000 581 1,555,918 6111 1,670,098 900 2,315,907 1,170 2,886,616 1,275 3,188,679

Pig Iron 11 14,958 1,583 _ - 87 137,721 - - 250 395.750 180 284.940

522 1,319,958 581 1,555,918 728 1,807,819 900 2,315,907 1,420 2,282,366 1,455 3,473,619

By-products 13,200 13,400 13,400 _ 13,400 _ 18,700 18,700

TOTAL OTJTOJT 1,333,158 1,569,318 1,821,219 2,329,307 3,301- 6 3,492,319

1 Assures weighted average prices for 1971. Billet Prices - Year TL/ton 31 All commercial quality.

19'(3 1,9031974 1,7781975 1,7591976 1,762

Industrial Projects DepartrrentSeptember 29, 1971

TABLE 20

4444 01444444� C 4 4444

01 4�44 44 4414w' 4* 0 4 04 4404CI 0.04.0 444444 4 4110 4. I I 04 44444 411 044004 444

* 44 - 4-

4444 44400 - 4 4 4 4444 4444 44$44404444 404440

51 414 04440 0 04 4 4

4444 0"444 4 4 4 0 -C I 4440. 44440.44014 4 4 0C I NOCO a�"""'-" C 41 4 4 41 I --

4 44 10440 - - 44 4 41' 4l�1 - 4 - - -

4444 04044444404NI 4444 444444--- C 4 444040C I N 40 444444 0 4114 4 4111 00 4444 I

4 44 04440 - 44 4 4

4N4N 4NC404 4 4 4 4 4 44 44444I�444��4 4C - 0 0 0 0 44 40404l 4440 444444 4 41,44 Clll 44 4044,

4 44 044444 - 04 4 4

44144 044444 C - - 4 C 44 4444

41 4444 C4444 4 o 0 4 44 0044:1 � 4.0 444404.144 OIl. 44444

4444 444444 0 C 4 - NC 4044S -- 4044141144 I 0144 4C 42 � 04444 0

41 4444 4444444 4 4 4 - 44 4444

21 440 4C444� 4 414 4 CIII 44 4444

4o140 � � 4 4 0 CIII 40 04441

2 00 444 4

OIl 4 44 044440 0444 4 40 Ol * - ' -

I -- 4 4 44 4 4�4'

4 4 4 -

�, 7:; 44�440 44444 4004444

4444 � 444

(4 4j 4440 404444 40444111 44 40404

'"' .4 ' - 0

I � ;�::::2"��: 2 '44 4

�'0�' 44"'40'44'444 4

4 4404 24444

41 4444 44440�444440444..4 4440.444 4

�i � - 4 4 44 4 4 0

41 44.04 444444 4 00444444- 40 4-4404j 4 44444444 4 44 .4 4 -

4! 4440 4440444 4 44 4 4444 44 4o04

0 N4444 4400 444 414 4 444.-' 401 21 404404 - -

0440 4 40 4 4 44 4 444. 04 44444

41 0 44400404

.41. 0 II04 0 0 4 40 1 040

- 01' 4 40 00 0040 00 00 40

0g0� � 44 04 44 01. 04

O 40.0401400 0 .1.- 00 0 04.004400 0 0000 40. 0.140 1. 44 01. 004 14 �1.44 00 41.1 �0 44404044...4 004440... 4 0.40 0 4 4 0 448 040401.04 40 0. 01000 0. Ol 140 140400

001.. 14040404 0 0.,o.o4 0 0040040.4 0

0. 000000. <001. H �o1E-I4 �4 044-4401.4 00000 0 COO 0 4 0..o4440-0 1440 000 00.400. 0.00.00(40404'4 4 0 44 14 H H0 0 0 0 0

01

ERD0EM0IR

PROJECTED CASH FLOW STATEMENT - STAGE I(TL NMLLLION)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

SOURCES OF F17NDS

Interi= Expansion and SiDter Plant LaLnsAID 155.9 60.2 - - - - - - - - - - - _ - . _ _ _GOT 75.0 - - _ _ - -_ _ _ _ _ _ . . _ -,Fr-ach Credit 13.4 -

New Foreign Exchange Lan.s - 342.9 1,569.5 226.8 247.7 56.1Sale of Capital Stack 0.3 1.0 I.n 1.0 1.0 1.0 1.0 1.0 1.0 1.0

Shtrr-Tern back Credit 30.0 (30.0) - - - - - _ _ _ _ _ _ _ _ _ _

Interest Casitatlitti-n

COT C-nstr-ticx Leon 13.4 28.2 29.8 31.5 33.1 17.6 - - - - - - _ _ - . - _ .Other 1/ 3.1 19.8 21.9 23.5 25.2 28.6

Iaoahlea - 10.2 6.8 17.2 30.3 2.4 4.3 (2.1) 0.3 3.3 (1.9) 0.5 3.5 (2.4) 0.3 (6.9) (2.5) 0.5 3.5 (8.2)Csoto-er Advaxcno 39.2 (18.0) 23.8 48.2 92.3 (48.2) _ - - - (66.3) - - - - (33.2)Ap eo..aiox o 204.9 2'2.8 218.3 33531 427.2 442.3 450.6 454.0 457.4 465.7 469.0 47D.4 475.7 429.0 479.2 274.0 275.7 277.3 279.0 167.1Aeorc.ieasta of tart-u Enonos-o .2 0.2 5.0 12.9 16.4 17.7 17.6 12.1 5.0 1.4 - - -- ----Nct Protit before Taxes 55.0 199.8 216.6 289.6 592.8 709.5 647.0 720.8 747.3 716.4 791.1 813.5 772.8 847.0 865.9 1,029.9 1,103.2 1,110.9 1,045.3 1,211.3

TOTAL FENDS AVAILABLE 590.2 826.9 2,088.0 973.3 1,455.7 1,222.2 1,119.3 1,191.4 1,223.6 1,198.5 1,196.9 1,287.8 1,252.0 1.323.6 1,345.4 1,263.8 1,376.4 1,388.7 1,327.8 1,370.2

ALLOCATION OF FUNDS

Corporate T..e., Dividends, Bons.e. 5g.0 30.9 84.6 73.6 112.0 261.7 314.7 283.9 317.9 329.4 313.8 348.3 357.9 338.1 372.3 320.4 448.7 482.5 485.7 455.3

7nvestmentsEnterix Expa-sion and Sixter ploss 207.1 60.2 - - - - - - - - - - - -Stage I Espansion Foreign Etpondit-r-s - 352.0 1,625.4 232.4 254.1 55.3Scao. I Etopasiso Local Espand-totes - 139.4 3.3.l 281.4 36.1 -RExtiso Capical Ependpoit-os 480 25.0 25.0 25.0 75.0 25.0 0.0 50.0 50.0 50.0 50.0 50.0 30.0 50.0 50.0 50.0 51.0 50.0 60.0 10.0Blast Furnace Reline - - - - - - 30.0 - - .0 0 - - 30.0 - - 30.0 - - 30.0Start-up Expenses - 1.0 0.6 27.3 35.6 17.8 7.0 0.1 - - - - - - - .

lo-e-cor)ro 305. - - 119.6 522.9 140.4 (15.0) 57.5 57.5 (115.0) 57.5 57.5 (111.0) 57.5 57.5 (115.0) 57.5 57.1 (111.0) 57.5

ORG-oahbln, 77.1 15.7 19.1 78,6 73.9 14.5Adsanccs Looscactucs (65.9) 42.9 13.7 34.4 60.6 4.0 0.4 (4.27 0.7 b.6 (3.7) 1.0 6.0 (4.8) 0.8 (13.8) (5.0) 0.9 7.1 (16.4)O ther 0.2 - 34- . 4 . .--

Ge papmersOld Fo.. ign Forhange Loons 118.0 14.6 9. 3 167.3 196.7 196.7 196.7 196.7 196.7 196.7 196.4 135.9 135.9 135.9 12P.6 121.3 10.8 11.0Old Local Lo 'so 17.5 1.7 1.7 1.7 1.7 13.3 41.2 41.2 41.2 41.2 41.2 41.2 41.2 41.2 41.2 35.7New Foreign Ecchasgc Loans - - - - 34.1 Y15.9 215.9 215.9 215.9 215.9 215.9 215.9 215.9 215.9 215.9 216.3 33.6GOT Gonsrruction Loa. 15.1 _ - _ _ 48.0 48.0 40.0

TOTAL FUNDS ALLOCAIED 727.0 b84.4 2,162.5 1,001.3 1,319.4 771.6 740.9 841.1 879.9 754.8 871.1 849.8 722.7 833.8 866.3 704.5 778.3 683.5 505.8 594.4 4.

Cla s Gao,136.8) 142.7 (74.51 128.0) 136.3 450.6 370.4 350.3 343.7 443.7 325.8 438.0 529.3 409.8 479.1 559.3 598.1 705.2 822.0 775.8 toGosh ta7 door- sog0ssstsg 188.9 52.1 194.0 120.3 92.3 228.6 679.2 1,049.6 1,399.9 1,743.6 2,187.3 2,513.1 2,951.1 3,480.4 3,970.2 4,449.3 5,008.6 5,606.7 6.311.9 7,1339 a

CashI BaLlsoce - End Ag 52.1 194.8 120.3 02.3 220.6 679.2 1,040.6 1,599.9 1,743.6 2,187.3 2,513.1 2,951.1 3,480.4 3,970.2 4,449.3 5,008.6 5,606.7 6,311.9 7,133.9 7,909.7D104 LcOolce Csveraoc 1.4 3.4 2.9 1.0 2.4 2.3 1.5 1.6 1.7 1.7 1.8 2.0 2.0 2.2 2.3 2.2 3.6 7.7 12.0 12.3

1/ D-c r n ocI,dls pr-po-sd copotalloalio of 'pUr GA 07 -1lls -at-c-ot during Io'Rtr,,rrloo tn 111D Loon.

IFbaotrsol Proscro lopastoonsFobrlocvy I, 1072

ERDEHIRl

PROJECTED BALANCE SHEETS - STAGE I(is Ti Milile-

1970 1971 1972 1973 197'. 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

ASSETSCurret Asse.ts

Cosh 188,9 52.1 194.8 120.3 92.3 228.6 679.2 1,949.6 1,399.9 1,743.6 2,187.3 2,513.1 2,951.1 3,480.4 3,070.2 4,449.3 5,008.6 5,606.7 6.311.9 7,133.9 7,909.7

Receivable, 76.5 103.6 119.3 138.4 177.0 250.9 265.4 265.4 265.4 265.4 265.4 268.4 265.4 265.4 265.4 265.4 265.4 265.4 265.4 265.6 265.4

I-veeorle 562.1 868.0 868.0 868.0 887.6 1,510.5 1,658.9 1,543.9 1,601.4 1,658.9 1,543.9 1,681.4 1,658.9 1,543.9 1,601.4 1,658.9 1,543.9 1,601.4 1,658.9 1,543.9 1,601.6

Advo..... to Coat-ot-r &, Suppliors 128.4 62.5 105.4 119.1 153.5 214.1 218.9 227.3 223.1 223.8 230.4 226.7 227.7 234.5 229.7 230.5 216.7 211.7 212.6 219.7 203.3

Other 8.9 1.4 1.4 1.4 ~~~~ ~~~~ ~~~~ ~~~~ ~ ~~~ ~ ~~~1.4 1. 144 1!14 14 1.4 1.4 4 1!41.425.4 1.4 1.4 1.4 1.4 1.4 .

Tot. Currees A-tel 9516. 1.087,6 1,288.9 1,2417.2 1,41, ,0. ,2. ,8.6 3412 3831 4284 4,608.0 5,104.5 52.6 ,081 6,603.3 7,036.0 7.686,6 8,650.2 9.164.3 9,985.2

Fixed A-stsGros FliXd A-sts 3.502,7 3.613,7 4,191.3 6,224.7 6.763.5 7,078.8 1,158.9 7,238.8 7,288.9 7.338.9 7,418.9 7,488.9 7,518.9 7,598.9 7,648.9 7,698.9 7,778.9 7.828,9 7,878.9 7,958.9 8,008.9

Les,Actoms lald Depreclati.n 508.1 713.0 925.8 1,144.1 1,479.2 1,906.4 2,348.7 2.79.3 3.253,3 3.7107 4.1764 4,645.4 5.117.8 3,593.5 6 072.5 6,551. 7 6,825.7 7.101,4 7,378.27 7,657.7 7,824.8

Net Fie As_ts 2,994.6 2,900.7 3,265.55 3,80.6 5,784. 3 5,172. 4,1. ,396 4056 3,6208.2 3,242.5 27,823.5 2,401.1 2,005.4 1,576.4 1,14. 95. 775 0. 301. 8.

Other Assets 57.3 59.1 59.1 5.1 59.1 59.1 59.1 59.1 59.1 59.1 59.1 59.1 59.1 59.1 59.1 59.1 59.1 39.1 59.1 59.1 59.1

St-rt-pr IsEese- - - 1.0 51.4 28.4 598.2 63. 537 6.1 18.3 6.4 1.4 - - - - - - -

TOTAL ASSETS 4.008,7 4,047.4 4.614,5 6,388.3 6,783.6 7.495,2 7.756, 7.645, 7,62.0 7.598,9 7.536,4 7.49Z,0 7.564,7 7,590.1 7.703,6 7,811.8 80.3 ,4.2 9,009.5 95461,2.

LIABILITIESCurene,t LiabilitiesPasobles 42.5 42.5 52.7 59.5 76.7 107.0 109.4 113.7 111.6 111.9 115.2 113.3 113.8 117.3 114.9 115.2 108.3 105.9 106.3 189.8 102.6

Cost-- Adv--ce 127.9 147.1 149.1 173.0 221.3 313.6 265.4 265.4 265.4 265.4 265.4 199.1 199.1 199.1 199.1 199.1 165.9 163.9 165.9 165.9 265.9

Coe P-rt. T--e, Diid-sds 4 BoOos- 59.0 30.9 04.6 73.6 112.8 21.17 314.7 283.9 317.9 329.4 313.8 348.3 357.9 338.1 372.3 380.4 448.7 482.5 483.7 455.5 528.9

ton-er Dobe Doeeti Oeyd 145.6 14.3 11.0 169.0 190.4 744.1 453.0 453.8 453.8 453.8 453.8 393.0 393.0 393.0 385.7 372.9 227.1 92.6 48.0 48.0 48.0

Shr-Ts,,lan C-odil - 30.0 - -- - - - - - - - - - - - - - - -

Other 118.7 125).8 120.8 1200 10.8 120.8 120.8 120.8 120. 0 120 .8 12 0. 120.8 120.8 120.8 120.8 12 01 12 10.8 120.8 120.9 120.8 120.8

TotalT Cocoa,1: Liabsl tie- 493.7 407.6 418.2 595.9 730. 1,047.2 1,264.1 1,237.4 1,269.5 1,281.3 1,268.7 1,174.5 1,184.6 1,168.3 1,192.8 1,789. 1,7.8 907.6 926.7 899.8 965.2

Old Fornign E-ch-ng Loos 2,741.5 7,177.3 2,223.4 7,016.1 1,959.3 1,442.6 1,463.9 1,269.2 1,072.5 875.8 679.4 543.5 407.6 271.7 143.1 21.8 11.0 - -

Old Local L.-n 77.5 35.9 34 3 34.2 364.1 370.1 363.3 324.1 282.9 241.7 7090.5 109.3 110.1 76.9 35.7 - --- -

Se- ForeIgn Es-hange L4-4, 2 2 - 32.9 1,9 12.4 7.139,2 2357.8 2, 193.0 1, 977.1 1,7461.2 1,545.3 1,329.4 1,113.5 097.6 681.7 465.0 249.9 33.6 ----

GOT Cosslt-ciio Loa- 475.3 400.7 517.0 546.0 5770.3 611.7 629.3 629.3 629.3 679.3 629.3 629.3 429.3 629.3 629.3 629.3 629.3 58.3 533.3 485.3 437.3

TOtal Land-T-r DeSt 2,0864.7 2,967.1 3,407.4 4,859.5 4,942.9 5,005.7 a,653.~ 4,199.7 3,745.9 3,292.1 2,038.6 7,445,6 2.052,6 1,659.6 1,273.9 901.0 673.9 58~1.3 533.3 485.3 437.3

EQUITYCapita1l Sock 523.3 523.4 524.4 525.6 796.6 527.976 581.96 57,9.4 530.4 531.76 532.6 532.6 532.6 532.4 332.4 532.4 532.6 532.6 532.6 532.6 532.6

LgolReIs I'. 74.5 74.5 35. 49.0 74 14.9 147.3 103.3 720.7 256.5 266.3 266.3 246.3 764.3 246.3 766.3 266.3 264.3 766.3 266.3

Retained E .. igs 113.3 134.6 739.0 1.72.7 534.3 035.8 1,195.1l 1,5275.0 1,092.7 2,273.2 2,4640.0 3.07Z3,0 3.528,6 3,963.3 4,438.0 4,923.51 5504.7 6,125.4 4.750, 7,340. 0,23.0

Total Oqaity 640.3 677.7 700.9 972.9 1,117.7 7,442.0 1,030.4 7,207.7 7,606.413,025.5 3,429.1 3,071.9 4,327.5 4,747.2 5,234.9 5,722.4 6,303.6 6,924.3 7,549.5 7,139.5,0,221.

Curren.t R04i0 1.9 27.7 3.1 2. 1.9 2,1 2. 2, 25 30 3.3 39 . 4.7 5. 5.6 6.4 7. 9.1 10 .2 10.3

Lon-Tr Dob0/EqolyT Russo 82/18 01/10 01 /19 Os/iI 02.18 78/22 72/28 46/3 59/4 52/4 45/55 39/61 32/4 26/74 208 1/6 0/90 892 793 /95/95

Sods6taial Pr-jcT- Dep-rOnectJanuar~y 10, 5972

Table 22a

Summary of Assumptions for Financial Projections

1. Working Capital Requireemnts

(i) Inventory 50% of sales1/(ii) Receivables 8% of sales(iii) Payables 5% of cost of goods sold(iv) Advances from Customers

1972 - 1975 10% of sales1976 - 1980 8% of sales1981 - 1985 6% of sales1986 - 1990 5% of sales

(v) Advances to Contractorsand Suppliers 10% of cost of goods sold

2. Profit and Loss Projections

(i) Salaries and Wages 1971 actuals per man annuallyincreased by 3%

(ii) All Other Inputs and Outputs September 1971 prices(iii) Corporate Tax 38%, less 7.5% tax credit on

investment from own funds(iv) Staff Bonuses 5% of net profit before tax(v) Legal Reserve 5% of net profit before tax,

until legal reserve reaches50% of capital stock

3. Other

(i) Sale of Capital Stock T1 1 million annually until1980

(ii) Blast Furnace Relining Every 6th year of operation

1/ Only in years of slab build-up before blast furnace relining.


TABLE 23

ERD1 R

Average Monthly Remuneration of SalariedPersonnel and Wage Earners in 1970

Salaried Personnel - 14,143 persons

TL

Base Salary per month 2,481Overtime 174Family allowances 181Company portion social insurance 327Bonus by law 358Profit bonus 134

Wage Earners - 2,891 persons

Base Salary per month 1,099Seventh day and holidays 228Overtime 71Family allowances 5Food 86Bonus by law 192Profit bonus 72Company portion social insurance 181

1,934

NOTE (September 1971):

For the purpose of financial projections, the following employmentcosts were utilized:

a) SAIARIED PERSONNEL - 3,600 TL/month + 9% increaseeffective January 1971.

b) WAGE EARNERS - 2,000 TL/month + 25% total increaseeffective in two equal steps, January1971 and January 1972.

Subsequent to 1972, employment costs have been escalated at 3%/yrfor both groups.


ERDEMIR EXPANSION PROJECT - STAGE I AND STAGE IIPROJECTED CASH FLOW STATEMENT

(TL million)

1975 1976 1977 1978 1979 1980

SOURCES OF FUNDS

Change in Cash, Stage I only 136.3 450.6 370.4 350.3 343.7 443.7Incremental Cash Generation, Stage II (3.2) (7.4) 42.8 89.6 131.3 162.4Outside Finance Required for Stage II 70.0 70.0 - _

TOTAL FUNDS AVAILABLE 203.1 513.2 J1.2 439.9 475.0 606.1

ALLOCATION OF FUNDS

Investments

- Stage II Expansion - Foreign Expenditures 105.2 280.5 175.3 70.1 70.1- Stage II Expansion - Local Expenditures 36.2 96.6 60.4 24.2 24.2 -

Increase in Net Working Capital, Stage IIonly - - 40.6- 30.0 32.7 23.5

Repaiments

- Outside Finance Required for Stage II - - 12.7 12.7

TOTAL FEUDS ALLOCATED 377.1 276.3 124.3 139.7 6.2

Change in Cash 61.7 136.1 136.9 315.6 335.3 569.9Cash Balance - Beginning 92.3 154.0 290.1 427.0 742.6 1,077.9Cash Balance - Ending 154.0 290.1 427.0 742.6 1,077.9 1,647.8


hRD8MCR

INTBNAL FINACIAL AND ECONOMC RETIEN CALCULATIMNS - STAGS I(TL MilUon)

1971 1972 1973 1974 1975 1976 1977 1976 1979 1980 1981 192 1983 1964 985 1986 1987 1UN! 1e, 1990

INTERfAL FINANCIAL REllJRN

Project Cost

Foreign REharge Cest - 352.8 1,625.4 232,4 254,1 55.3 _ _ - - - - - - - - - - - -Local Cost - 139.4 383.1 281.4 36.1 -Increase in Working Capital - - - - 486.9 160.5Cost of Prject Start-up - - o.6 27.3 35.6 17.8 7.0 0.1 - _ _ - _ - _ _ - _Cost of Blast Furnace Reline - _ _ _ - - - - _ 30.0 - - - - 30.0 _

Total Project Cost - 493.2 2,009.1 541,1 812.7 233.6 7.0 0.1 - 30.0 - - - - 3.0 - - - -

Project Return

Sales - 239.3 721.9 1,645.1 1,826.8 1,626.8 1,826.8 1,826.8 1,826.8 1,826.8 1,826.8 1,826.8 1,826.8 1,826.8 1,826.8 1,826.8 1,826.8 1,826.8 1,826.8Less: Raw Materiala _ _ 84.1 156.8 58?.0 567.1 567.1 567.5 568.2 594.5 567.9 567.9 567.9 567.9 567.9 594.3 567.9 567.9 567.9 567.9lees: Reserves - - 3.4 17.8 29.2 40.1 40.1 38.8 38.8 42.0 38.8 38.8 38.8 38.8 38.8 42.0 38.8 38.8 38.8 38.8Less, Manufacturing Labor & Benefits _ - 7.3 25.8 40.9 472.9 4.2 48.5 49.0 55.7 53.3 54.9 56.5 58.2 60.0 74.0 63.6 65.5 67.5 69.5Loss: Sundry Manufacturing Cost - - 28.8 130.7 198.2 227.0 227.0 235.2 235.2 252.8 235.2 235.2 235.2 235.2 235.2 252.8 235.2 235.2 235.2 235.2Less: Administratime & Sales Cost - - 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5less: Foreign Supervise,y - 13.8 15.0 15.0 15.0 7.5 3.8 _ _ - - _ - - - - _ _

Net Project Return - - 100.4 374.3 778.3 933.2 939.4 931.5 934.1 880.3 930.1 928.5 926.9 925.2 923.4 862.2 919.8 917.9 915.9 913.9

INTERNAL FIANCIAL RE55RN - 21.15%

INTE8NAL ECONOMIC RETURC

Total Projct Cost - 493.2 2,009.1 541.1 812.7 233.6 7.0 0.1 - 30.0 - - - - - 30.0 - - - -

Project Benefits

Net Project Return - - 100. 4 374.3 778.3 933.2 939.4 931.5 934.1 880.3 930.1 928.5 926.9 925.2 923.4 862.2 919.8 917.9 915.9 913.9Less: Difference KEderir Steel Prices -World Market Steel Prices - 28.0 84.5 192.5 213.7 213.7 213.7 213.7 213.7 213.7 213.7 213.7 213.7 213.7 213.7 213.7 213.7 213.7 213.7

Plus: Diference Cos t of Turkich IronO, - Irported Iron Ore _ - 10.3 10.3 75.4 72.2 72.2 72.2 72.2 57.9 72.2 72.2 72.2 72.2 72.2 57.9 72.2 72.2 72.2 72.2Plus: Difference Cost of Turkish Coal -Imported Coal _ - - - 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3 8.3Plus: Difference Cost ef Other Inputs -Other Inputs at World Market Prices - - 5.0 10.0 b.0 16.o 16.i 16.0 16.o 16.0 16.0 16.0 16.0 16Lo16 6.0 16.0 16.0 16.o i6.oTotal Project Benefits _ - 87.7 310.1 683.5 816.0 822.2 814.3 816.9 748.8 812.9 811.3 809.7 808.0 806.2 730.7 802.6 800.7 798.7 796.7 V

INTERNAL ECONOMIC RETURN 18.007

Industriol Pre irats DepartmentJanuory 18, 1972

TABLE 26Page 1

ERDEMIR

SALES PRICE COMPARISONS FOR STMEE

Selling price comparisons on steel products are sometimes subjectto appreciable error due to the fact that each ton of steel is somewhat'tailor made" to a specific customer requirement and marketing conditionsvary significantly with time and geographic location. It is important toverify the existence of similar products and conditions for meaningfulprice comparisons.

Factors Influencing Costs and Prices - Flat Products

Some of the factors which influence costs of production and mayinfluence product pricing are given below. The importance of each individualfactor is influence existing production facilities at a given plant andcan vary from plant to plant. Any valid price comparison should achievereasonable equity on the important items listed:

(a) Steel grade, chemistry (alloying elements, carbon etc.).(b) Thickness - (effects tons/hr. on production unitsS.(c) Width - (effects tons/hr. on production units).(d) Length, for cut products - (effects tons/hr. on produc-

tion units).(e) Product end use - surface characteristics (i.e. a

refrigerator exterior panel is critical, where a sheetfor galvanizing i5 acceptable with many imperfections).

(f) Tolerances - precise width, length, thickness, 'extraflat', etc.

(g) Processes specified - as slit edge, pi kling (on H.R.products), stretcher levelled, oiled surface (influencesprocessing costs, yield losses, etc.).

(h) Processes not always specified - as skin pass on H.R.products, electrolyticly cleaned C.R. products, etc.

(i) Inapection - rewind/reinspect; especially-certified in-spection or extra chemistry checks, etc.

(j) Form of shipment - nsheets' shipped in coil form, cutlengths, etc.

(k) Packaging, coiJ/lift size - all metal wrap, paper wrap,on wooden skids or platform, etc.

(1) Order size.(m) Lead time.(n) Condition of order book (may determine which extras are

actually charged for).(o) Transportation (absorption of).(p) Warehousing, handling (required to ship on schedule).(q) 'other'.

For tinplate, the abDve, and many additional factors such as tincoating weight, enter due to the very specialized nature oftbe product andits end uses.

TABLE 26Page 2

Conclusion

From the above, the difficulty of achieving meaningful price com-parlsons on large tonnages of diversified product mix, under widely varyingworld production and marketing conditions, becomes clear. Such comparisonsshould be utilized as general indicators only, with due reservation fortheir limitations with respect to accuracy.

Industrial Projects DeparbtentOctober 15, 1971

ERDEMIR

COMPARISON OF ERDEMIR AliO WORLD MARKET PRICES

ERDEMIR ERDEMIR WORLD MARKET PRICES DeEMrT d Pris stabu Co-sta on Charses for ExtrasProduct - Mi. Drlfvoricc 1976 Prices as of 1yip.971 March. 19715RMI'" 7r.5'000 Tocs U. S. $/To. c.i.f Istanbul U. H. /T.n 4) U.S.

U. S. $fTus 2)

Pig Iruc/Ingots 240 105.533

) 83.663) 107.533) 92.033)

Billets 300 117.47 100.00 119.47 110.00

Flat Roled Products

Plates

Mill Edge 45 :15.3 1-- Erdamir dimensional extr-a. nCut Edge 107 194.07 ] 154.05 heavy nd edim pl.ts areFrom Coils 38 164.67 - - about $5.50 lees than ECSC(Table P. 2)SkeIn 110 150.27 125.50 - - Erd irdinao.a ext rabout $3.50 higher (Table P. 2)

Rot Rolled Sheets

Coils Upibkled 82 163.13 117.50 - - Erdmnir dimnasional xtrasabout $1.00 les..

Coils Pickled 3 163.13 133.50 - -Cut Lecgths . Unpickled 104 156.13 141.00 _ - Erdsmir dbosunal extras

cheat $9.70 les..Cut Lecgths Picklod 31 167.73 141.50 - - Erdemir dimenional extras

about $1.35 less.Cold Rolled Shooto

Coils - Sid. Trimmsd - 1958.93 160.90Coils - Not Side Trimned 82 188.80 146.36 -Cut Lengths 176 194.67 147.50 - - Erdemir dimension-l etras.

about $6.15 higher.Black Plotes - CoilS 26 234.20 178.90 -o- Erdetr traeubout $10 higher.Black Plates - Cut Lengthk 4 240.00 183.90 - - Erdes-ir dietnstioroal cotras

abort $6.15 higher.Blued - Sheeto 10 216.07 162.00 - -Blued - Black Plotst 7 249.07 183.90 - -

Tinplate 90 269.67 233.00 - -

Total Flat Producto 915 186.893) 152.283) 188.893

) 167.513)

Ibtal Iron and Steel Products 1,455 159.163) 131.143) 161.163) 144.253)

1) Inclodes chkrges for eotr-s, -ocludes prodaction tax.

2) Inclodes chkrgco for eot-os, U. S. $10 pot too diccoout, presently grooted to Turkioh ioport-rs to meet competition with Elot

Europcac export-rs hbo hen added back, si-ce it i£ co00idered 00 being t-loporory.

3) Woighted averoge.

4) Shipmeot coot Er-gli - Iotaobul aosomcd at U. S. $2 per ton.

5) Landing co-t (ooloodingj-weh.ou.iog, fioanciol charges) osrumed to bh 10I 00 c.i.t. prices.

Indootrilo Proj-cto DeportueotOctober 15, 1971

txchaoge Rote. 0U)1 - TL15

ERDEMIR

CALCULATION OF EFFECTIVE PROTECTION(US$ per Ton of Steel)

Rise in ImportPrices Follow- Imported Landed Imported Value Added at Imported Domestic Value Added Effectiveing Currency Inputs CIF Price of 3 World Market Inputs Price Domestic (B), ProtectionsRevaluation-'/ Finished Products- Prices (A)

% ~~$ $ $ $ $ '$%

0 17.40 135.07 117.67 17.40 161.16 143.76 22.17

3 17.92 139.12 121.20 17.92 161.16 143.24 18.18

4 18.10 140.47 121.67 18.10 161.16 143.06 17.58

6 18.44 143.17 124.73 18.44 161.16 1h2.72 14.42

10 19.13 148.57 129.hh 19.13 161.16 1422.03 9.73

1/ As explained in para 10.08.2/ Prices of imported inputs also increase in line with currency revaluation.3/ Only landed prices are taken, equivalent to CIF +3%./ Equivalent to (B A) x 100 - 100.

CDIndustrial Projects Department NFebruary 3, 1972 m

ERDMIR TABLE 29

FOREIGN EXCHANGE SAVINGS(Per Year at FUll Project Capacity)

Quantity Price Value'000 tons c.i.f. price Istanbul UST7OO

US $/tonI. PROJECT - OUTPUT

Non-Flat Products

1. Pig Iron 93 83.66 7,7802. Billets 300 100.00 30,000

Flat Products3. Plates 63 154.05 9,7054. Skelp 45 125.00 5,6255. Hot Rolled Coils, Unpickled 16 117.50 1,8806. Hot Rolled Coils, Pickled 3 133.50 4017. Hot Rolled Sheets, Unpickled 71 141.00 10,0118. Hot Rolled Sheets, Pickled 11 141.50 1,5579. Cold Rolled Coils, Not Side Trimmed 54 146.36 7,90310. Cold Rolled Sheets 82 147.50 12,05511. Black Plate Coils 7 178.90 1,25212. Black Plate, Cut Length 2 183.90 36813. Blued Sheet 3 162.00 48614. Blued Sheet, Bladc Plate 3 183.90 55215. Tinplate 34 233.00 7,922

TOrAL 787 - 97,537

II. PROJECT - INPUT

Imported Inputs1. Iron Ore 5002/ 14.00 7,0002. Other Inputs (Tin, Fuel Oil, Spares etc.) - - 6,700

TOTAL - - 13,700

III. EXPORT - FOREGONE

1. Coal 842 13.25 11,157

IV. FOREIGN EXCHANGE SAVINGS BEFORE DEBT SERVICE 72,680

V. DEBT SERVICE, FOREIGN EXCHANGE LOANS

1. Principal 11,0002. Interest 5 430

TOTAL 16,430

VI. NET FOREIGN EXCHANGE SAVINGS 56,250

Pay-Off Period:Z/ Approximately 2½ years.

1/ Assumes that total imports of iron ore are related to project.

2/ Pay-off Period is project expenditures in foreign exchange divided by foreign exchangesavings before debt service.

INDUSTRIAL PROJECTS DEPARTMENTJanuary 28, 1972

ANNEX 1

PRESENT AND FUTURE MARKETS FOR ERDEMIR STEEL

A. General Background

1. Total steel demand in Turkey has grown from about 300,000 product

tons in 1950 to an estimated 1.6 million tons in 1970, an average annualcumulative increase of 9 percent. The proportion of imports in total supply

fell from 50-60 percent in the early 23501 '.to 20 percent in the middle19 60's and less than 10 percent since -; 967 when Erdemir started producing

significant quantities of flat steel (Table 5).

2. The proportion of flat steel in total steel consumption averaged

30 percent in 1961/63 and 31 percent in 1967/69 (Table 6); it appears

to be rising only slowly, if at all.

3. The following figures show changes in the supply of flat steel

products by sources 1967-1970.

Erdemir Karabuk Imports Total

Sheets Sheet bsrsL/

1967 261 22 18 26 327

1968 360 24 20 17.5 422

1969 415 23 11 12 461

1970 486 25 4 10 525

Flat product equivalent using a yield factor of 0.75. These sheet

bars are rolled into sheets by a small "hand mill".

Over the last three years the supply of flat products has grown by over 60

percent. Erdemir's market share is now over 90 percent. When Erdemir will

no longer be constrained by capacity shortages, Karabuk's production of

sheet bars and sheets will fade away. Imports are already reduced to a

minimum of special sheet qualities, e.g. transformer sheets. The share of

such special qualities in the total demand may conceivably increase in the

future.

B. Market ProJection - Global Approach

4. The Bank Staff - building on previous studies by SPO, the company,

and UEC - has projected the demand for flat steel products according to

two methods: a global approach and an end-use approach.

ANNEX 1Page 2

5. The global approach relates the use of flat steel to a macro-economic variable (e.g. gross national product) in a simple regression,or to a set of such variables in a multiple regression (say constructionactivity and outpat of metal manufactures and engineering products). Forseveral reasons, only the simple correlation with gross national productis likely to yield significant results in Turkey. Based essentially uponthis correlation and upon an assumed GNP growth of 7 percent per annum,the UEC Study projected a 10 percent annual growth in total steeldemand. UEC further assumed that the proportion of flat steel to totalsteel would remain more or less unchanged at 31 percent; hence demand forflat steel would also grow by 10 percent per annum.

6. The Bank Staff questions whether the global approach givesgood results in projecting steel consumption in developing countries nor,for that matter, in industrialized countries 14 Nevertheless, it maystill be of some interest to show how Erdemir's market (in million tonsof finished steel) would grow on specified hypotheses g

1970 1980

Present base: 10 percent year (UEC) .49 1.27Present base: 11 percent per year .49 1.39Expanded base: 11 percent per year .53 1.48

The assumed 11 percent growth rate corresponds to an elasticity of steeldemand in relation to gross national product of 11/7 - 1.57. Accordingto a study undertaken in the Bank in 19641, the elasticity of steel con-sumption in relation to GNP in a cross-section comparison of 27 countrieswas calculated as 1.9. This analysis, however, is based upon a countrycross-section at a certain point of time. Taking into account a timetrend towards reduced steel consumption per unit of output, this figuremight fall to, say, 1.7. The same study observes that somewhere at aper capita steel consumption of 30-40 kg (i.e. Turkey's present position),conditions often seem to be met for an industrial take-off causing verysteep increases in steel demand. In fact, over a very short period oftime, per capita steel consumption may be lifted from the 30-40 kg levelto figures of 100 kg or higher. Against this background, the assumed 11percent growth in steel demand may seem overly conservative.

One aspect alone may be noted. Although the proportion of flat steelto total steel showed no definite trend in the past in Turkey, accordingto the Company's assessment, this proportion would increase in the future.

Following UEC, all projections assume that Erdemir would absorb all but30,000 tons of the total 1980 market, the balance being covered by imports.In the first two calculations, absorption is included in the growth rate,in the third calculation, absorption is added to the projected growth rate.

ANNEX 1Page 3

C. Market Projection - End-use Approach

7. The end use approach permits projection of demand not only inaggregate terms but by consuming sectors and types of flat steel. It istherefore an indispensible tool in sales strategy and in facilities andproduction planning.

8. A matrix of Erdemir's 1970 shipments of prime uality 21/ flatproducts, by 11 categories of steel and 36 user categories is reproducedin Table M 1. It is shown below in summarized form (thousand tons):

Construction and mining 11.6Plate and sheet fabricating 13.9Machinery 11.1Railway equipment U.-7Automotive 21.9Shipbuilding 3.8Household appliances, etc. 344Water, gas, and other pipe 100.8Oil and gas industry 30.4Containers and bottle caps 27.4Cotton baling 6.oGalvanizing industry 27.6Wholesalers 121.5Other 39.2

461.3

9. In the following, the prospects for major individual markets willbe reviewed in turn and the results summarized in a final section.

D. Sectoral Projections

Railway Equipment

10. Based upon the UEC study, the steel demand for railway equipment

may be tentatively projected as follows (in thousand tons):

1965 1970 1975 1980

Locomotives 2 4Freight cars 6 6Passenger cars and repairs 2 -

n.a. TY io- -10

The proportion of prime quality products in Erdemir's output is now 89percent. Assuming that this proportion would remain unchanged, our totaldemand estimates will therefore be derived by dividing the figure for primeproducts by 0.89.

ANNEX IPage 4

The above figures were supplied by the Turkish Railroad Administration. Inthe Company's view they are too low.

Steel Fabricating and Machinery Production

11. The Second Turkish Development Plan (1968-1972) projected anannual growth rate for the machinery sub-sector of 22 percent per year.The actual growth 1967-1970 was probably only about 13 percent. Never-theless, this sector has received priority attention by the TurkishPlanning Office, and production should expand rapidly for three reasons:

- growing domestic and export demand, particularly sub-contracting for Common Market countries

- considerable scope for improved utilization of presentmanpower and equipment resources

- substantial inventory of approved projects qualifyingfor various industrial incentives.

The study projects the following growth in gross output values Y

1969 1972 197?

TL million, readjusted 1,640 2,855 7,510adjusted 1,640 2,655 6,660

Index 100 165 430

Interpolating and extrapolating on a linear trend yields indices of 350for 1975 and 620 for 1980.

12. Assuming that flat steel consumption by steel fabricators andmachinery makers would grow pari passu. with their increased production,we arrive at the following demand figures (thousand tons):

197 1975 1980

24 84 145

Accepting the above figures as suitable targets, some lag in implementationmay reasonably be foreseen. Hence, the theoretical targets were reduced by25 percent which yields the following adjusted figures:

/ Roughly adjusted to avoid double-counting with motor vehicle industry.Specifically, the expected production from the Perkins engine projectand the Eaton-Yale-Towne and MKEK gearbox projects was deducted.

ANNE IPag e 5

1970 1975 1980

24 63 110

Automotive Industry

13. The present sheet consumption in the automotive industry is mainlyfor trucks and buses. The proximate outlook for this industry is somewhatbleak. In 1970/71 there was a remarkable decrease in sales due to verysubstantial price increases for the vehicles, reported to total over 50percent (devaluation effect, increase in sales and production taxes).Higher operating costs for motor vehicles (e.g. increased prices for motorfuels) may also have held back sales.

14. The Turkish Government has initiated several measures to improvetruck and bus sales in the short run (mergers of companies to reduce costs,prohibition for Government agencies and the military to purchase vehiclesunder foreign credits, increased export promotion, etc.). Moreover, overthe long run, the production oftrucks and buses should pick up in responseto both replacement needs and needs for additional transport capacity. Thefollowing progression has been assumed (thousand units):

1962 1967 1969 1972 1977 1982

Trucks 14.8 7.5 12.7 12.8 15.8 20Buses 3.3 2.0 2.1 3.8 4.9 7

Flat steel requirements 22 30 48 75(thousand tons)

15. The production of passenger cars and light pick-ups is expected toincrease rapidly as the new Tofas and Renault factories swing into production.S.P.o. has indicated the following preliminary production schedules (thousandvehicles):

1969 1971 1972 1977 1982

Tofas ) - 5 25 45o1Renault ) -

The attainment of these targets may be jeopardized by the proposed highsales prices, e.g. TL 62,000, or over $4,000 equivalent. Nevertheless,using the above production figures, an estimated demand for flat steel of560 kg per unit, and assuming furthermore that Renault would importdeepdrawn body parts until 1975 and that the two companies would share themarket equally, one arrives at the following steel consumption tonmages(figures in thousand tons; mainly 0.5 mm sheets in deepdrawing quality):

1971 1972 1977 1982

1 7 25 62

AMNEX 1Page 6

This does not take into account the planned entry of a third manufacturerwho would produce light pick-up trucks and passenger vehicles for export.If these plans are confirmed, it might be appropriate to add 50 percent tothe above totals 1972-1982.

Shipbuilding

i6. The Ishikawajima Heavy Industries participation with the TurkishMaritime Bank in a new shipyard is apparently moving ahead. In the firstphase the capacity would be about 150,000 dwt per year (corresponding to,say, six tankers or other bulk cargo vessels, or two general cargo ships).The now shipyard has not yet given Erdemir a clear view of its flat steelrequirements. Tentatively, in consultation with the Company, the followingfigures were used adding the new shipyard's demand to the present demand(figures in thousand tons):

1965 1971 1974 1977 1982

12 29 62 112

if, in a second phase, the new shipyard turns to the production of verylarge tankers, much of Erdemir's market might fall out since (according tothe UEC Study) the company does not presently contemplate producing thevery wide plates required (4.5-5 meters). The maximum width of plateproduced on the present combination mill is about 98 inches, cut edge (about2.5 metres).

Household and Commercial Appliances

17. This group includes refrigerators, washing machines, LPG stoves,gas heaters and steel furniture. Domestic sales of refrigerators andwashing machines apparently increased 2-2.5 times 1968-1971. Themarket is now becoming partly saturated, and rather less than a 50 percentincrease is predicted for 1971-74. On this basis, steel demand mightgrow as follows (thousand tons):

1970 1974 1978

Our estimate 34 51 68UEC indication 34 63 110

Water, Gas and Electric Pipe

18. This is the largest of all end uses. Turkey has three manufacturersof welded pipes and tubes, all of whom are located quite close to Eregli,plus one small manufacturer of welded electric conduit pipe. Their presentcombined capacity for longitudinal and spiral-welded tubes is estimated at260,000 tons Y . Details are not presently available regarding the distribution

Mannesmann (130,000) Boru Sanayii (90,000), Umran Spiral (10,000) andYucel Boru (30,000). In addition these manufacturers have facilities toprocess cold-rolled coils as follows: Mannesmann (3,000), Bora Sanayii(10,000), Yucel Boru (6,000).

ANNEX 1Page 7

of total pipe and tube demand by categories, e.g. major water and gaspipe lines, irrigation pipe, city water and gas distribution system,petroleum and chemicals industry, etc. At the present moment, Erdemirsupplies about one third of the pipe and tube market's demand as hot-rolled coils and twothirds as skelp. The proportion may change in thefuture since the tube manufactarers are adding their own slitting facilities,in spite of Erdemirts relatively low price for skelp.

19. The potential market for water pipe is very large. Today only30 percent of Thrkeyts 45,ooo villages have an organized waber supply.

20. In the oil and gas sector, two major projects are under discussion:a natural gas pipe line from Iraq via Bataan through Ankara to Istanbul andan oil pipe line from Iran to Iskenderun. Each line would require about400,000 tons of steel, but the manufacturing of the plate in Turkey forthis huge demand narrowly spaced intime would hardly be an economic proposi-tion. On the other hand, the main gas line would have several branch lines,requiring large steel tonnages which could be supplied by Erdemir. Thereis also some discussion of an oil product line from one of the refineriesto Ankara. Moreover, if a gas line is constructed, the demand for LPGbottles (presently 14,000 tons) would be vastly larger.

21. Pending decisions with respect to the gas line, we have projectedthe following minimum growth (thousand tons):

1964 1965 1970 1975 1980

362 101 155 239

22. There is a large export market in the Middle East for tubes andpipes of every kind. Turkish manufacturers have made studies of thismarket and initiated certain export transactions. If present export incen-tives are retained, this could develop into a major market for Erdemirsteel.

E. Summary of Sector Projections

23. The demand estimates for individual sectors have been summarizedin Table M 2, Footnotes to that table indicate growth assumptions forsectors not specifically discussed above. The end results are as follows,including second quality products:

Demand for Flat Steel

1970 1975 1980

thousand tons 510 924 1,465percentage growth rate 12.6% 9.7% 1i.1%(1970-80)

- Mannesmann only.

ANNEX 1Page 8-

F. Changes in the Specific Use of Steel

24. The above estimates do not take into account the possibility of alower specific use of steel per unit of output resulting from factors such as:

- substitution of other materials (e.g. plastics and aluminum)for steel

- improved (lighter) construction facilitated by the use ofmore refined steels

- manufacture, in steel-consuming industries, of productscontaining more labor and technology per unit of output(and per kg of steel used).

A Swedish study indicates that specific steel use (steel consumption per dollarof output) in Swedish engineering industries has fallen by about 1 percent peryear since World War II, corresponding to a reduction by one-half over 60-70 years.This study, while stressing the large amount of guesswork involved in a projection,expects this trend to accelerate so that the specific use of steel might be halvedagain over 1970-2000. The main reasons quoted are the expected concentration ofSwedish engineering industries on higher-value products (using higher averagequalities of steel and incorporating a higher value added) and some substitutionof steel by plastics. This is in line with a 1967 prediction by Dr. J. Wallace,Director of Research of Pressed Steel Fisher (United Kingdom) that, with anincrease in the output of motor vehicles, the total use of steel would begin todecline by 1972, reflecting substitution of other materials for steel. Whilethis prediction may seem highly speculative, competition of aluminum with steelfor the canning market is a fact, and aluminum would appear to have an edge incertain uses except perhaps as against extra-thin "double reduced" steel canningstock which would not be made at Eregli. Etibank's new aluminum smelter isexpected to come into production by 1972 or earlier, and would be looking for aninitial market for 60,000 tons of aluminum ingots which is almost twice Turkey'spresent consumption.

25. Of course, there are also uses where steel could replace other materials,like cast iron for radiators. Moreover, it seems clear that market growth inrecent years has been held back by short supplies. Nevertheless, on balance,it would seem realistic to count with some inroad on steel by other materials.On the other hand, Turkey might benefit from export orders for steel fabricatingjobs, tanks, pressure vessels, etc. which would have a high steel content perdollar of output. All things considered, there is insufficient evidence forpredictin& a reduction in the steel intensity of production in major steel-using industries in Turkey. Rather, one might regard a one percent per yeardrop in the specific steel use as the lower end of an estimating range, theupper end of which would correspond to no reduction at all in that specific uae.

ANNEX 1Page 9

G. Eventual ELimination of Steel Shortages and Further Export Development

26. The company comnenting on the above analysis has made two generalpoints:

a) Steel consumption today is severely restricted by thesupply shortage. Turkish manufacturers wishing toexport finished products are unable to cover their steelrequirements.

b) Although it is not possible to pinpoint the main areasof attack, Turkey should be capable of developing exportmarkets for products containing steel at a more rapidrate than implied by the Bank's analysis.

There is considerable logic to this argument, and it is appropriate topresent the market forecast as a range of possibilities, corresponding tothe following alternatives:

Altemnative 1 - Present steel intensity. No explicit accountimproved supply availability.

Alternative 2 - Reduced steel intensity. No explicit accountimproved supply availability.

Alternative 3 - Reduced steel intensity. Consideration givenincreased availability of steel and exportindustry demand 1976-80.

H. Conclusions

27. Summarising the above analysis, the following growth in flat steeldemand has been projected (thousand tons):

Annual Percentage Growth1970 1975 1980 L970/75 1975/80 1970/80

Uncorrected estimate 510 9241 l,465Replacement Karabik output (30) _48 78

Total market, uncorrected (514o) 972 1,543 12.5% 9.7% 11.1%

Adjusted lower steel intensity - 926 1,398 11.4% 8.6% 10.0%Adjusted improved availability

of steel 1971-75 and addi-tional export developmentsin steel using industries - 972 1,593 12.5% 104.% 11.4%

Percentages figured in relation to total Turkish supply in 1970, excludingspecial imported grades (540), rather than in relation to Erdemir's marketshare (510).

AM 1Page 1O

It should be repeated that this estimate is subject to the assumption ofan overall cumulative growth rate of 7 percent per year in the Turkish grossnational product.

Industrial Projects DepartmentJuly 19, 1971

ERDEMIR

DISTRIBUTION OF 1970 PRIME QUALITY PRODUCTS BY END USES1/

C.R. H.R. H.R.Tin Blued Blued C.R. Blued C.R. Pickled Unpick. H.R.

Code Consuming Group Plate Sheets Coils Sheets Sheets Coils Sheets Sheets Coils Skelp Plate Total

1 Manufacturing (Total)11 Mach'y. Mfg. (Excl. 13) 68 890 13 271 939 4125 630612 Elec. Machly & Eqpt. Mfg. 63 339 1376 628 183 143 2732

121 Elec. Conduit Mfg. 10 2389 239913 Agr. Machly & Eqpt.Mfg. 541 59 298 1139 1495 353214 Transport Industry (Total) 10231 474 4346 3930 616 17790 37387141 Automotive Industry 9432 468 3691 1726 616 5928 21861142 Railroad Vehicles Industry 779 6 655 2098 8205 11743143 Shipbuilding Industry 20 106 3657 3783

15 Metal & Hardware Mfg. 97 657 24 28665 11622 1940 684 481 4139 48309151 Kitchen & House Appl.,etc. 19 24 21312 316 1725 217 426 24039152 Movable Bldgs., Tanks,etc. 267 31 50 16 1240 1604153 Boilers, Radiators & Eqpt. 581 269 2050 2900154 Tools 8 76 12 315 411155 Profiled Pipes 192 11200 481 11873156 House & Kit.Stoves & Pipes 632 4047 14 4693157 Other Metal & Hardware 78 25 2258 75 89 156 108 2789

16 Mining, Constr. & Infrastr. 5146 6548 69 12610 2403 30631 666t9 16454 1)2F' 161 Mining (Excl. 162) 5 10 98 113162 Petroleum & Natural Gas 5146 5012 69 6 275 628 53 5004 16193163 LPG Bottles and Tanks 12445 1304 499 14248164 Water, City Gas & Elec.

Conduit Pipe 19 81 30003 66566 1732 98401165 Railway Construction166 Housing & Other Building 1531 140 414 5129 7214167 Dam & Power Plants Constr. 319 3992 4311

17 Veg.Oil & Canning Ind. 27444 27444171 Veg.Oil Ind.(Crude &

Natural Oils) 7976 7976172 Canning Industry 4198 4198173 Container Industry 12002 12002174 Bottle Cap Industry 3268 3268

18 Cotton Baling Strip 5839 190 6029181 5839 190 6029

2 Galvanizing Industry 14830 2123 10425 71 101 275503 Traders 16024 5062 211 35167 2289 7825 17535 42 37306 1214614 Other Consumers 206 165 79 1t63 599 508 4071 792 12672 20255

TOTAL 48985 5884 15207 85677 35154 28426 30955 32094 67277 94225 443884Free Stock Primes 149 38 105 862 104 1351 2908 346 117 10489 16469

GRAND TOTAL 49134 5922 15312 86539 35258 29777 33&3 32440 67394 104714 460353 w

I/Erdemir's own use totalling 4053 tons is not included in the total. Source: Sales Division - Erdenir Steel Mill, _A-- -1 -1 n7l

Table M 2Page 1

ERDEMIR

PROJECTION OF MARKEr FOR FLAT PRODUCTS, BY CONSUMING INDUSTRY(figures in th. tons; uncorrected

estimate - see footnote 11)

ErdemirCode No. 1970 1975 1980

Steel fabricating, railway equip., machinery 47.3 92 154

Railway equipment 152 11.7 10 12Steel fabricating 142 13.9) 63) 110Machinery 1 I; exI;l 10.1)Construction and mining 161, 166 11.6 19 32

167Automotive 21.9 60 97

Trucks and tractors 141 21.9 43 64Passenger cars & light pick-ups 2/ 18 48

Shipbuilding 3/ 3.8 40 92

Appliances, hoasehold & comercial 34.4 56 76

Water, gas, power, oil 131.2 210 296

Water, town gas, el. conduits ex12, 164 100.8 150 200Oil and gas transmissi n - to be notedOil and gas industry Ž/ 162, 163 30.4 60 96

Other specified 61.0 97 156

Containers and bo le caps 17 27.4 48 84Cotton strapping _f 181 6.o 7 8Galvanizing plants 8/ 2 27.6 42 64

Other 21 160.7 280 440

Wholesalers 3 121.5Other 4 39.2

Total prime products 460.4 836 1,326

including seconds W 11/ 510 924 1,465

TABLE M.2Page 2

1970 1975 1980

Total, without replacement Karabuk(as above) 510 924 14h65

Replacement of Karabuk productionby Erdemir (30) 78

Total, unadjusted (540) 972 1,543

Adjusted Totals:

I. Considering reduceduse of steel per unitof output - 926 1,398

(11.4%) (8.6X)!/

II. Considering also improvedavailability of steel dur-ing 1971-1975 and exportdevelopment in metalproducts and machinery - 972 1,593

(12.5%) (10.4%)

1/ iercentages within parentheses show cumulative growth ratesin consumption over five-year periods. This growth has beenfigured in relation to totalTurkish supply in 1970 (540)rather than Erdemir's market share (510).

Table M2Page 3-

Footnotes to Page 1

The mining indostry does not show up in any significant manner, as adirect claimant for flat steel (Cf. Table Wl); in fact, the demandconsidered here is mainly for housing and for dams and power plants.Arbitrarily, a growth rate of 10 percent for 1970-75 and 11% for1975-80 was assumed.

2/ Included under trucks and tractors.

3/ Assuming an average total steel consumption of 0.33 t. per gross tonof ship capacity.

-/ See remarks in text.

5/ 15 percent per year 1970-75 (UEC assumption), 10 percent per year1975-80.

N No market study exists. Min. estimate for this sector is 12 percentper year.

Cotton production assumed to grow by 3 percent per year.

Assuming 9 percent per year growth (UBC).

-9 Assuming these would represent approximately same proportion of thetotal use as in 1970.

10/ Adding 11% to prime consumption.

Y/ Before correction for:

a) replacement of Karabuk production.

b) possible changes in the "steel intensity" per unit ofoutput in steel consuming industries.

c) Improved availiabity of steel and intensified exportdevelopment in steel-using industries.


ANNEX 2

MAJOR TECHNOLOGICAL AND ECONOMIC TRENDS IN STEEL PRCDUCTION

Present Structure of World Steel Industry

The 1969 world steel output is estimated at about 570 million tonsof crude steel. Three major producing areas - Western Europe, USSR -Eastern Europe, and North America - produced 138 - 158 million tons each oraltogether 440 mOillion tons, Another 82 million tons were supplied by Japan,15 million tons by the Peoples Republic of China and 11 million tons byAustralia and South Africa, leaving only 22 million tons for the developingcountries outside Europe. Most of the latter wax produced in Latin America(11.7) and India (6.5).

More than 45 million tong of steel were exported in 1968 (excludingintra-ECSC trade of 16.5 million tons). The ECSC area accounted for 18.4million tons and Vapan for 12.8 million tons of this total, leaving closeto 15 million tons for all other principal exporting countries. More thantwo-thirds of this trade was between industrialized countries leaving about14 million tons imported. by developing countries valued perhaps (as a roughguess) at about US$2 billion o.i.f.

Developing countries are important supplirs of iron ore to theworld's steel industry, as may be seen from the following summary of 1968production of iron ore and 1975 projected production and export capabilities.

1975 (Proj.)1968 Production Prodaction ExportsECSC-area 68.7 70.5United Kingdom 13.8 10.0 _United States 88.5 92.0 3.5Japan 2.5 2.5 -

Sub-total 173.5 175.0

Canada 42.7 57.5 42.5Sweden-Norway 36.4 42.5 36.5

Sub-total 79.1 100.0 79.0

South America 61.0 81.4 70.0Africa 47.4 58.9 1.4Asia 35.0 43.5 28.5Australia 25.3 69.3 57.5

Sub-total 168.7 253.1 207.4

In 1968, about 44% of the iron ore used by the major steel making centerswas domestic ores whlle another 20% came from the neighboring areas ofCanada and Scandinavia. By 1975, the percentage of domestic ores may havefallen to about 36% and the Canada-Scandinavia contribution to about 16%.Ifearly one-half would then come from "overseas" sources.

j/ This annex is based on information available in mid 1970. It has not been up-dated to reflect changes occu.rring since that time. Although significant varia-tions have occurred in the interim (particularly in areas of cost, scale ofoperations, and other detail), the annex clearly brings out basic considerationsand issues pertinent to the project.

ANNEX 2Page 2

In contrast, industrialized countries as a group are largelyindependent of imports for the other major material for the steel indus-try, metallurgical coking coal. The United States is by far the world'slargest exporter, including exports to the most important steel producersamong the developing countries.

Organization of World Steel Industry

In industrialized countries, there is a strong tendency towardsproduction in large and modern units. In 1968, seventeen concerns, withoutputs ranging from 6.1 million tons of crude steel (Hoesch, Germany) to29.4 million tons (U.S. Steel) accounted for about two-thirds of the com-bined steel production of the United States, European Coal and Steel Ccm-munity, Japan, and the United Kingdom. The Broken Hill Company in Australiais the only other steel maker (outside the Communist Bloc) with an annualproduction exceeding 6 million tons.

Most of these large concerns operate several plants. Even in 1965,plants producing ore than 0.5 million tons of crude steel accounted for85% of the total steel-making capacity. The smaller plants make mainlybars and rods or special steels. The overwhelming proportion of flat steelis probably produced in plants with a crade steel capacity of 2.5 milliontons or over. All major new plants are being located on the ocean wherecoal and ore can be received under favorable conditions in giant bulkcarriers.

Cost Structure in Steel

The cost structure for steel is analyzed below with reference tothe steel industry in Europe, the worldb largest steel exporting region.Taking as a point of departure a normal average price for flat-rolled steelof, say, $125 per ton, we may assume furthermore that this steel is producedin a plant with total net assets valued at $150 per ton of crude steel, or,say, $200 per ton of rolled steel Y Under these assumptions, the coststructure might be somewhat as follows:

Iron ore and scrap 16Coking coal and other fuels 19Other raw materials minus byproduct credit 5

Raw Materials 40

Wages and Salaries 27Depreciation (15 years life) 18Return on investment @ 12% 24Other and margin of error 16

Conversion Margin 85

TOTAL 125

We may further assume that gross fixed costs would bq $270/ton of rolledsteel and net fixed assets (after depreciation) $1501ton and net currentassets $50 per ton.

ANNEX 2Page 3

According to this estimate, the major raw materials which would beavailable in most places of the world at a rather similar combined Costwould account for about one-third of the total cost. The other two-thirdsrepresent the conversion margin which is eminently subject to four influences:

- variations in factor prices- economies of scale- comparative efficiencies in production- altermative tschnologies

If our figures are correct, capital charges are roughly 50% higherthan manpower charges in the conversion margin of the European steel indus-try. Under favorable circumstances, a steel plant would cost no more tobuild in a developing country than in an industrialized country but the costof funds would be., say, at least one-quarter to one-third higher. Hence,if one could assume equal efficiencies of capital and labor, the highercapital charges (0.25 times 42 - $10.50) would be roughly offset if wagesand salaries averaged about 40% less than in Europe (0.40 times 27 - $10.80).

For most developing countries, the edge in average wage and salaryrates is substantially greater. Their difficulties and problews lie in:

(i) meeting the assumption of equal investment costs fora plant of a given size;

(ii) attaining reasonable economies of scale;

(iii) attaining reasonable efficiencies of conversion; and

(iv) keeping abreast of technological change.

A fifth problem - the possibility that world export prices forsteel would tend to reflect marginal pricing (i.e. would be below averagecosts, including a reasonable return, to efficient producers) is, re believe,more than offset by the cost of shipping steel from Europe or Japan todeveloping countries.

With respect to wages and salaries, two observations may be relevant.First, a large proportion of the manpower in steel mills (in fact, nearlyone-half) is engaged in various auxiliary activities (maintenance, transport,auxiliary activities, and administration). It would be intereating to studywhether economies of scale are more or less important in these supportingactivities than in the direct production departments. Secondly, as might beexpected, though the proportion of staff to wage-earners is higher in modernmills than in old mills, the difference is not very great (the staff repre-senting less than 15% of the total work force in a modern German steel mill).

Economies of Scale

The U.N. Economic Cowmission for Latin America, a few yearg ago,made a study of economies of scale in integrated steel mills. Their report

ANNEX 2Page 4

suggests that, at the time of the stu4., scale economies for bar and rodmills would be pretty wel exhausted at an output of 500,000 tons offinished steel while they would be significant for flat product mills Up toa level of about 1,500,000 tons, illustrating the well-known differencebetween the production of bars and rods as contrasted with the productionof medium plate and sheets in modern high capacity strip mills. A level of500,000 tons would probagly also be economical for an integrated 4-highmodern heavy plate mill (example - the Swedish Oxelosund Works) but tbiswould require a large market for such plate. According to the ECLA. figures,manpower requirements per ton of steel bars and rods at an annual productionof 500,000 tons would be only 35% of the corresponding requirements in aplant built to produce 100,000 tons. In integrated flat products millB,manpower requirements at a production of 2 million tons would only be 45%of the corresponding requirez.nts for a 500,000 ton mill.

The easiest way to summarize this is probably the observationthat under the assumptions made with respect to interest, profit, and wagerates, the combined manpower and capital costs for a 500,0oo ton integratedbar and rod mill would be about $30 per ton less than for a 100,000 ton milland the combined charges for a 2 million ton strip mill about $28 per tonless than for a 0.5 million ton mill. This might be compared with sellingprices in the range of $1004125 per ton and "conversion margins" (costabove materials) in the range of $60-$80 per ton.

Though we have not seen a critical review of the ECLA. figures, theassumption with respect to the optimum size of bar and rod mills would seemin rough correspondence with the present scale of production in Europeanmills. In an article appearing in a U.S. technical journal as recently asOctober 1969, "selection and sizing of a large integrated steel plant" wasbased on an assumed output of about 2.2 million tons of crude steel (1.6million tons of finished flat steel products). The same article gives the"economic size range" of major steel industry facilities as follows:

Size of Unit Annual OutputTons Million Tons

Coke oven 660 - 1,000 0.25 - 1.75Blast furnace 1.0 - 1.7Direct reduction (Armco) 0.18 - 0.36Basic oxygen converter 115 - 300 1.1 - 2.8 (2 furnaces, 1

operating)Electric furnace 100 - 200 0.23 0.46 (using 60% pre-

reduced pellets)

The possibility of producing crude steel at a competitive price at a lowvolume of output would seem from the above suimary to be intimately tiedto the economics of the direct reduction - electric furnace combination ascompared with the classical blast furnace - converter process.

The figures quoted in the previous paragraphs must be taken withgreat reservations. As recently as 1965, the following proportions of aIl

ANNEX 2Page 5

steel were produced in plants of over 2 million tons of crude steel capacity:

1. Canada 78%2. United States 68%3. Japan 54%4. ECSO 35%5. UK 23%

Given the hectic merger and concentration movement in Western Europe andthe rapid growth in Japanese steel output, it would not be surprising ifat least two-thirds of their output today were produced in plants of over2 million tons crude steel capacity. In the U.S., new steel-making shopstoday seem to be built to the 4-5 million ton level while in Western Europeand Japan, plants now on the drawing board are aimed at a production of10 million tons on ocean-side locations. Apparently, significant economiesof scale will be realized well beyond the two-million ton level.

Comparative Efficiencies in Steel Production in Industrializedand Developung Couries

The dynamics of steel production in industrialized countries viswell illustrated by the Kawasaki Steel Corporation, a substantial borrowerfrom the IBRD and essentially a producer of flat steel (plates and sheets).During the 1960s, the companys crude steel production rose from 2.1 milliontons to 6 million tons, now produced mainly in the Chiba works with an end- 1969 crude steel capacity of 6.5 million tons and in the new Misushimaworks, with an-end - 1969 capacity of 4.5 million tons which will be raisedto 8 million tons at the end of the present eonstruction phase. During tisexpansion, the book value of the compaz0s assets per ton of crude steel 3rose from only about $175 per ton at the beginning of the period to $90 perton (the undepreciated value would be about $40 per ton higher). The employ-ment per thousand tons of crude steel equivalent fell drastically from 11.4men in 1960-61 to 3.5 men in 1969-70. Together, these figures explain thereduction in the company's average selling price from $112.54 per ton ofcrude steel to $96.44 per ton - it is fair to assume that there were alsoverg important quality improvements during the decade (i.e. a higher propor-tion of cold-roll4d steel).

It is a reasonably safe guess that few, if any, steel concerns indeveloping countries have come close to matebing Kawasaki t s record. Theefficiency gap between competitive producers in industrialized countriesand the vast bulk of steel producers in developing countries probablywidened during the last decade. The following factors may explain such atrend:

2/ In Japan, the dynamics was provided through the growth of the economy;in Europe, mainly through restructuring, including many mergers.

Kawasaki's shipments of finished products in 1969-70 were aboat 75% ofthe company's crude steel production.

ANNEX 2Page 6

- High investment costs for planto procured under tiedaid; such as Erdemir Steel in Turkey. While some ofthe difference reflects the lower initial value ofoutput, a large share reflects the bigher costs oftied aid procurement.

- Failure of steel companies in developing countries(for a number of operational, financial or institu-tional jl reasons) to push rapidly towards higherlevels of output; Somisa (Argentina), Ensidesa (Spain),Paz del Rio (Colombia), and several other cases couldbe cited.

- Absence of a competitive environment; in most cases,the new steel companies have been protected monopolies.In some cases, State management may have been anadditional handicap, though it is admittedly difficultto prove how much better private enterprise would havedone in a given situation.

Outlook for Steel Making Materials

In western Europe, in 1965-1968, the consumption of iron ore perton of finished steel averaged slightly above 0.8 tons (Fe content) witha coking coal consumption of approximately one ton of coking coal per tonof finished steel. During the 196 0's the general trend was towards lowerprices for iron ore and an edging upward of prices for coking coals, as maybe seen from the following sumnary:

1960 1965 1970

Swedish iron ore: cif ECSC port 12.75 10.90 8.60Coking coal at mine, Ruhr 15.30 17.40 20.20 (lst half)

Together, tbese price changes more or less offset one another,and had onlya minor effect upon the cost of steel production.

A major factor behind the lower iron ore prices (apart fron atemporary expansion in iron ore supplies as compared with demand) was therevolution in bulk cargo movement Which probably largely explains thefall in iron ore frbi&ts Brazil - Rotterdam from 43s. 9d. in 1960 tol7s.,5d. in 1967. For a 10,000 mile journey, the tranoport cost in a 30,000dwt bulk carrier is now estimated at $10 per ton; the corresponding costfor a 200,000 dwt vessel would be only $4.50 per ton. The trend towardslarge vessels has not been fully consummated. Thus, in January 1970, theSwedish Grangesberg Company, one of the world's leading iron ore shippers,ordered two combined ore/coal carriers, both rated at 266,000 tons dwt.with a total crew of 60 men these two carriers represent a tonnage more thanthree times the whole of the 1950 Grangesberg fleet, numbering 19 carrierswith a total crew of 675.

1 e.g, the Indian decision to build several new steel mills in preferenceto expansion at existing sites.

ANNEX 2Page 7

The world resources of iron ore are enormous, bat a temporaryshortage in the medium term future cannot be ruled out. Iron ore miningis highly capital intensive, particularly if complementary railroad portfacilities are taken into consideration. Financing, therefore, may wellturn out to be a problem.

Coal requirements could beoome a more serious bottleneck. Thoughworld coal reserves are estimated at 4.6 trillion tons, less than 1 trillionare classified as coking coals, and only about one-half of these would normallybe considered metallurgical grade - with less than 1.25 percent sulphurand less than 8 percent ash. Even after considering a continuing sharpdecline in the coking coal requirements per ton of iron, it is estimatedthat world exports of coal would need to be increased from 136 million tonsin 1969 to more than 210 million tona by 1980. This will cause some diffi-culties since mine expansion has to be planned several years ahead and since,for reasons of pollution, public utilities are becoming increasingly inter-ested in high-volatile, low sulphur and low ash coals which are also usedfor blending with premium grade metallurgical coking coals in producingblast furnace coka. The general energy price level is also being pushed upthrough inflationary wage increases in the U.S. coal mining industry andrecent sharp price increases for Middle East crude oil. In conclusion, anincrease in the price of American coking coal from a recently projectedlevel of $12 per ton to a new freely predicted level of $18 would necessitatean increase in steel prices by a roughly equal amount to which must be addedcost increases for the industry's fuel and energy requirements other thanin the blast furnace. If "direct" reduction were to be introduced on a largescale, the prospects would be somewhat brighter, since direct reduction doesnot require high-grade metallurgical coking coal, but direct reduction is,perhaps, unlikely to become a major faotor inflnuencing steel prices duringthe present decade.

Future Developments in Technology

No revolutionary developments are anticipated in irmn and steelmetallurgy over the next decade. The blast furnace is likely to retainits position as the primary vehicle for iron production. Cost reductionthrough larger furnaces and a faster reduction cycle will be harder tocome by. The optimum size of blast furnaces rose gradually from a 2 mdiameter in 1870 to 8 m in 1950 and then rose very quickly to about 14 mtoday. Only a few years ago, the 10 largest Japanese blast furnaces all haddiameters within the range of 10-11 m.

The iron output from the best furnaces in the world today variesfrom 50 to 68 tons per 24 hours and m2 of furnace area; it could probablybe raised to 85 tons, i.e. about 25% above the present peak performance.This would result both from a more rapid throughput of the burden and alarger volume of iron per unit of coke (i.e. more efficient reduction). Awell operated 14 m furnace would then have a daily output of 15,000 tons,i.e. on the order of 5.5 million tons per year with a total fuel consumptionof 470 kg of coke equivalent. Such a development would call for further

ANNEX 2Page B

improvement in ore and coke qualities, more sophisticated furnace profiles,higher blast te_peratures, oxygen injection, and higher top pressures.Continued progress in automation and instrumentation would also be needed.The difference between producing, say, 50 tonWo m2/day in a 7.5 meter farnaceand 85 tons/m 2 /day in a 14 meter furnace translates into a conversion costdifference as between $25 and $16 per ton. The potential for furtherimprovement suggests that only several years from now when major steel pro-ducing nations have reached a technical ceiling will developing countriesstart closing the gap in iron conversion costs.

However, this dowe xot take into account the possibility that thedirect reduction method may become fully competitive with the blast furnace.The direct reduction method is well adapted to developing countries sinceit is not as dependent upon economies of scale. Furthermore, it is probablyeasier to operate and is more flexible in terms of expansion of production.If one looks to certain developing countries as future suppliers of iron orcrude steel to the world market, they would have a comparative advantage ascompared with iron produced in Japan or Western Europe in the following re-spects: cheap natural gas might be used as the reduction fuel and insteadof shipping 1-1 2 tons of iron ore, the equivalent could be shipped asroughly one ton of granulated iron or pro-reduced pellets.

A recent study shows that, in the United States, a combination ofdirect iron reduction with electric furnaces would show lower productioncosts under certain conditions, than a "claasical" combination of blastfurnace-oxygen converter. This estimate was based on a price for naturalgas of $0.20/mof (i.e. a very low price) and a price for electric power of7 mills per kwh. A major reason for the superiority of the direct reductioinelectric furnace alternative was the assomed gradual build-up of productionto the ultimate level of 2.2 million tons of crude steel equivalent. Thescales are tipped in favor of conventional technology, if one assumes thatthere would be an immediate market for 2 million tons of steel and if onecould take the risk of buildlng one 5,100 ton/day blast furnace instead oftwo 2,550 toi day (e.g. if system reliability could be assured through anotherfurnace within the same concern). One important condition when using anelectric furnace combination is an assured supply of power; thus, in theexample chosen in the study, five 80-ton, 75,000 KVA furnaces would beused with a combined peak demand of 180 Mv.

Crude steel production today is dominated by the oxygen converter.From lesa than 10% of total world steel output in the late 195018, oxygenconversion now accounts for over one-third of the total steel output, ashare that is expected to increase to two-thirds by 1980. Most of theoxygen steel in Western Europe and Japan is produced in vessels of 100 tonsor above while in developing countries the bulk of the installations are 75tons and below. The largest converters presently in operation have acapacity of 350 tons, enough for an output of over h million tons of steelper year. Hence, further major increases in size are not to be expected.Moreover, the difference in conversion cost for steel between a 15-tonconverter and a 300-ton converter, according to the ELCA study already quoted,would be only about $2/ton, with a further $2/ton increase if a 55-tonfurnace were used.

ANNEX 2Page 9

Since economies of scale in individual iron and steel producingunits are likely to become exhausted within the next decade, further gainscould come only from a more continuously flowing operation - no matterwhether the blast furnace/oxygen converter route or the direct reduction/electric furnace route is chosen. It was already pointed out that a substantialportion of manpower requirements in steel mills is accounted for by transportand maintenance work, etc. Changes are possible in both systems through con-tinuous operations which would eliminate many awkward, discontinuous and heavymovements of bulky materials. In this way, total investment cost in steelproduction might be reduced by about one-third, with accompanying major reduc-tions in manpower cost. This type of change is likely to be gradual. Such newsophisticated and possibly capital-intensive systems are likely to be intro-duced more rapidly in industrialized countries thus helping them to maintaintheir competitive edge.


ANNEX 3

ECOLOGY

General

1. Steel plants are frequently criticized for air and water pollutionin the form of dust, smoke and obnoxious fumes, and the discharge of oils9chemicals and other wastes. The Company has already solved many of its pollu-tion problems but others are left. A provision of $5.0 million has beenincluded in the project cost estimate as a general provision for anti-pollutionequipment. It is expected that a new undersea outfall (to carry liquideffluent about 4,ooo ft. out in the Black Sea) would be used in conjunctionwith chemical treatment, sedimentation, oil skimming, and improved collectionfacilities for liquid wastes.

2. Air pollution in the form of dust will be reduced through the use ofimproved venturi scrubbers and bag house filter units at the B.O.Fo shop andlime kilIn respectively.

3. Higher smoke stacks will be utilized at the power plant and lime kilnto reduce concentrations of obnoxious gases at ground level.

L. Smokes gas and dust emission at the coke plant will be reduced throughthe use of design improvements such as self-sealing doors, quenching towerbaffles, improved charging systems, aspirators and smoke seal boxes.

5. The items mentioned above are tentatively included in the project,sibject to more detailed engineering review. The selection of these itemsfor inclusion in the project is in basic agreement with the recommendations ofa team of professional ecologists hired by the Bank to study ecological aspectsof the Erdemir Project.

6. Erdemir is now making an assessment of further specific needs, thecosts of which would be covered under the local currency project budget, andthe budget for routine capital expenditures.

Air Pollution

(a) Dust

7. Serious dust generation can result from BOF and blast furnace opera-tions, and to a lesser degree, from calcining and sgne material storage andhandling operations. The company is recovering most dust through measurescommon in more industrialized countries, but improvement in some areas is stillnecessary. Such improvements are included in the project. No major dustproblems for nearby communities are expected, except possibly during someunusual breakdowns or process irregularities. Other normal plant dust isessentially confined to the plant area.

(b) Noise

8. Some excessive noise results from plant processes such as picklingoperations, rolling mills, and the calcining plant. Additional gas handlingequipment at the calcining plant (in the project) should also reduce noise.

ANNEX 3Page 2

Most noise problems are inside the plant and do not affect the surroundingarea. In-plant noise is reduced as far as possible to safeguard employeehealth.

(c) Smoke and Fumes

9. A potentially troublesome release of sulfur diaxide fumes into theatomosphere from the sinter plant now under construction will be alleviated bya 160 m. high stack which is expected to adequately reduce S02 concentrationsat ground level. Sulfur dioxide emissions also result from power plant opera-tions, primarily due to burning of high sulfur fuel oil. Emissions from thissource will be made less troublesome by use of higher plant stacks. Some smokeand fumes from the coke plant cannot be avoided in the general area of theplant at present levels of technology and eqpipment design, although measuresincluded in the project should reduce emissions to an important degree. Somenormal generation of smoke can be expected from coke plant charging and pushingoperations and irregularities and changeovers of fuels on various plant burnersand combustion systems. Such occurrences, however, should happen only periodi-cally and are not expected to cause any continued serious nuisance to thecommunity. Present indications show little or no apparent damage to crops,plants, trees and livestock from air pollution in areas near the plant.

Water Pollution

10. Picle line waste liquor (dilute contaminated sulfuric acid, H2S04) inow dumped directly into the Black Sea with little or no neutralization or othertreatment. While the exact effect on local marine life is not known, this is asevere poIlutant, and the Company is planning to install facilities for acidrecovery, neutralization and/or use of the undersea outfall mentioned inparagraph 1.

11. Some mill service water is now recirculated with minimal effect ofundesirable effluent. Other systems of mill service water dump directly intoa sall canal leading to the sea. This effluent normally contains some oil,grease, and suspended solids. It would be difficult and costly to avoid suchdumping altogether, but the Company plans to process such water in an oilskimming system prior to dumping into the undersea outfall.

12. Port operations can be expected to cause some water pollution asships dump various wastes at or near the harbor; the plant could provide someship services to minimize this form of poIlution, but the results will bedependent mainly on practices of individual shipping lines and enforcement oflegal provisions in Turkey.

13. Thermal pollution, resulting from reject heat from plant operationsis believed to present 'Very little problems, since the Black Sea can easilyabsorb the quantity of heat required, with negligible effect on local orgeneral temperature levels.

ANNEX 3Page 3

Agreement

14. The Company has agreed to present a specific plan acceptable to theTurkish Government and the Bank for dealizg with air and water pollution, andto implement the specific plan prior to completion of the project. Thespecific plan to be followed will be based on the recommendations of the pro-fessional ecologists previously hired by the Bank.

Industrial Projectg DepartmentJanuary 26, 1972

ANNEX 4Page 1

THE SUPPLY OF IRON ORE AND COAL FOR ERDEMIR

General

1. The availability, quality and cost of the two major raw materialsfor iron and steel production, iron ore and coking coal, is of outstandingimportance to the economics of any integrated steel project. In 1970, costof coal and iron ore used were nearly one-third of Erdemir's sales. Untilnow, virtually all the coal and iron ore have come from domestic sources.The cost of domestic ore and coal, therefore, have a major bearing upon thecompetitiveness of the company's operations.

Erdemir's Cost of Iron Ore and Coal, 1970

TL Million Per Cent

Sales 1,105.0 100.0

Value of Iron Ore Used 198.9 18.0

Value of Coal Used 155.1 14.0

Total Iron Ore and Coal Used 354.o 32.0

2. In addition to iron ore and coal, the company uses many otherpurchased materials and services, including fluxes, steel scrap, ferro-alloys, tin, fuel oil, purchased power, sulfuric acid, stools, rolls, moldsand spare parts. In 1970, the cost of these inputs totalled TL 234 miJllion.For various reasons (mainly lmport duties and tied local procurement),Erdemir appears to have a cost disadvantage in tin, sulfuric acid, and moldsand stools which, as a rough order of magnitude, adds some 7 per cent to thecost of sundry materials and services if compared with international prices.

Requirements of Iron Ore and Coal

3. The prospective requirements for coal and iron ore are relatedbelow to the Coapany's projected maximum output of crude steel afterimplementation of Stage I of the expansion program and Stage II.

ANNEX 4Page 2

1,000 Tons1970 1975 1980

Crude Steel Production 7'02 1,557 max 2,000

Iron Production 555 1,650 max 1,900

Iron Ore Requirements 996 2,752 max 2,680

Coal Requirements 770 1,6648 max 2,000

The figures assume that both the two blaBt furnaces and the B.O.F. steelshop would be operated to capacity by 1980, using in 1980 100 percent foreignor equivalent ores. This is higher than the figures used in the financialprojections; according to the latter, iron production would be likely tobe maximized at 1.65-1.71 million tons and steel production at 1.77 milliontons, due to assumed use of predoinnantly domestic ores.

Iron Ore - Supplies and Costs

4. The following figures give an approximate idea of the likely ironore supply and price pattern for 1971. Details for 1970 are shown inTAELE 13.

Prospective Iron Ore Supply 1971 at 1970 Prices/a

Iron f.o.b. Freight, Price atContent Price Insurance Eregli

Quantity D Basi 1970 etc. 1970'000 Tons % TL/UnitFe FB TL/Uit Fe TL/Unit Fe

Deveci 400 51.2 1.21 2.61 3.82

Karakuz 200 54.4 1.30 2.34 3.64

Akdag 300 59.6 0.91 2.05 2.96

Itabira (Brazil) 300 69.3 2.13 2.26/b SLLbZ•k

Total 1,200 58.4 1.42 2.32 3.74

/a In July 1971 railroad freight was increased by TL 28 per ton, raisingthe cost of Turkish iron ore delivered 2regli by about 15 per cent.

/b At exchange rate TL15 per US$1.

ANNEx 4Page 3

The table calls for the following comments:

a. The quality of the Turkish ores is adequate; thehigh SiO2 content of the Karakuz fraction(12.8% SiO2) could be helpful in removing some ofthe high alumina and sulfur content in otherdomestic ores with the slag;

b. The average physical composition of the domesticore as received is very unsatisfactory for directblast-furnace charging, due to the high finescontent. When Erdemir's new sinter plant startsoperating in 1972, all ore will be crushed at aproposed setting of 50 mm, and the fines will beused to produce sinter;

c. Turkish ore would be roughly competitive withimported ore on a pure price basis. Yet, thehigher iron content of foreign ore brings greatadvantages in reducing coke consumption andincreasing the daily output of the blast-furmace.

5. The cost advantage from using foreign ore (under the price andquality assumptions indicated above) was explored in the UEC study at theBank's specific request. This is reflected in a comparison between two cases:

a. 'Domestic Ore" case. Foreign ores added only foressential enrichment of the ore mix. This wouldinvolve the use of 400,000 tons per year in 1974-75,500,000 tons per year in 1976-1980. The foreignore share in the total iron content of Erdemir'sore purchases would generally be in the range of20-26 per cent.

b. "Foreign Ore" case. Exclusively rich foreign ores used.

6. TABLE 14 shows a cost penalty (reduction in the company's profitsbefore taxes) from using Turkish ores in the period 1975-1980 varyingbetween 24 and 59 per cent of the total purchase value of that ore. 1/ Itseems clear that for Turkish ore to become conpetitive, an average reductionin the ore price by at least one-third would be necessary.

7. Turkish iron ore production has expanded from about 700,000 tonsper year in the early 196 0's to about 2 million tons in 1969, approximately

1/ In addition, the domestic ore should probably be burdened with interestand other storage charges occasioned by the need to provide a buffer fora five/six-imnth period when the main domestic mines are closed becauseof climatic conditions.

ANNEX 4Page 4

covering the domestic requirements. About one-half of the production comesfrom the State Divrigi mines operated by a subsidiary to the Karabuk steelmill and the balance from 20-25 small mines supplying mainly Erdemir. Thecentral group of deposits (including Divrigi) contains most of the nation'sreserves and holds the greatest prospects for finding additional ores.They have two disadvantages. They are far from the steel mills (about 840km. by rail from Karabuk, 550 km. from the port of Samaun where the ore hasto be trans-shipped by sea another 491 km. to Eregli, and 550 km. by rail toIskenderun, for which the existing line has limited capacity) and miningoperations are presently carried out only six months of the year because ofcold climate in winter (see map).

8. Assuming a domestic finished steel production of 4 million tonsby 1980, the requirements for domestic iron ore, if 25 per cent foreign ore is usedto sweeten the charge, would be close to 7 nmllion tons, baEis 52.4% Fe.New developments sugge8t that it may be possible to supply this quantity, oreven more, by 1980. Karabuk has a project for expanding the rate of miningat Divrigi from one to four milliJn tons and to build a one-million tonpelletizing plant to process the fines accumulating in the mining process.These plans would become operative if and when presently proven reserves of100-million tons (Karabuk estimate) could be doubled. Meanwhile, hugereserves of ore have been inferred at nearby Hasancelebi. Preliminaryfigures indicate 400-million tons of ore averaging about 30% Fe which couldbe easily processed (magnetic separation) to a concentrate of 60.8% Fe,6.1% SiO2, 0.08% P, 0.03% S and 0.02% Al.

9. According to the time schedule worked out by Karabuk, miningoperations at Hasancelebi could be initiated by 1974, the concentration andpellet plant at Divrigi could be ready by 1975, and the Hasancelebi pelletplant by the middle of 1977. A preliminary and tentative price indicationfor Hasancelebi pellets has been given as $12.80 equivalent c.i.f. Eregli,basis 60% Fe, including freight of $9.50. This corresponds to 21.3 centsper unit Fe as compared with the import price assumed by UBC of $13.95 perton for 65.7% ore, or 21.2 cents per unit Fe. On this basis, in the late1970's domestic ore would be competitive.

10. These optimistic perspectives should be viewed with considerablecaution. Successful implementation of the above program would be subjectto several conditions:

a. Proving of inferred reserves at Divrigi and Hasancelebi;

b. A master plan for developing Turkey's iron ore depositswhich would, as far as possible, take advantage of thesintering capacity now existing or being installed at thethree integrated steel mMills. The Hasancelebi concentratescannot be supplied to the sintering plants; being in theform of fines, they must be pelletized before shipment;

c. Provision of the necessary storage and transport capacityfor the large ore movements envisaged. The capacity of

ANNEX Page5

the Samsun railroad could apparently be increased quiteeasily to 2 million tons, but the capacity of theIskenderun railroad iB limited and might become a bottle-neck;

d. Settlement of ownership conditions. Large portions of theHasancelebi deposit are owned by the Bilfar firm which alsoowns two of the three major mines supplying Erdedmir, namelythe Karakuz and Deveci mines. Most of the remaining areaapparently belongs to the Government;

e. Management of a major midning venture under the State EconomicRiterprise form;

f. Financing the new ventures. The smaller concentrationand pelletizing plant at Divrigi alone is costed atclose to $30 million equivalent.

11. * The iron ore supply for Erdemir would present less of a problemif it could be assumed that iron ore would be freely available on the worldmarket, and Erdemir would be provided with foreign exchange as needed forrational forward planning. Neither of these conditions is fulfilled at thepresent moment. In recent contracts, Erdemir has paid about 29.3 cents per-nit Fe for 69.3% Itabira ore; it has also been offered 63.8% Liberianpellets at 37.6 cents per unit. These prices would seem distinctly higherthan the world market level, reflecting premiums paid on relatively smallcontracts as well as higher freight charges for ore shipped in relativelysmall vessels. They are conpared below with prices under large-scalecontracts concluded by the Japanese steel industry. Japanese saipping costsare low because of the use of very large vessels (on the order of 170,0C0tons). Erdemir uses 40-50,000 ton vessels.

Fe-Content Fob Price Freight Total Cost(per unit Fe) (per unit Fe) (per unit Fe)

Itabira US Cents US Cents US CentsErdemir 69.3 14.2 15.1 29.3Japan 66.0 13.0 5.8 18.8

Liberian PelletsErdemir 63.8 - 37.6Japan 63.0 12.4 5.8 18.2

12. Long-range planning of iron ore procurement is essential to thesmooth and economic operations of a steel mill. The Government has agreed topermit Erdemir to enter into contracts for the importation of foreign ore.

ANNEX hPage 6

Coal - Supplies and Costs

13. Erdemir obtains most of its coal by ship from the Zonguldak coalmine, which belongs to TKI, the State coal company. About 10 per cent israiled from the Armutcuk mine very close to Eregli (see map).

Ooal Prices for Erdemir, April 1 97 1/a

Moisture Ash Sulfur Delivered Price% % (dry) % (dry) TL/Ton

Zonguldak 10.9 10.7 ) 2C7.53) .58

Armutcuk 13.0 10.7 ) 196.96

/a In July 1971 average coal prices per ton were raised to TL 330.

14. Turkey recently sold coal to Japan and Italy at the very com-petitive price of about $13.25, as seen from the following indicators:

Price$ per ton Comment

Uhited States Coal 20.00 c. & f. Western Europe

West Germany, WashedCoking Coal 23.09 ex mine

South African Coal 11.09 c.i.f. Japan (13-yearcontract, with priceincreasing 20 centsper year)

15. The favorable picture is modified by the July 1971 price increaseto 330 TL per ton of coal. This increase had become necessary because ofcertain trends in Turkish coal mining, namely steeply rising wage costs,

ANNE 4Page 7

high operating losses, lagging development and managerial problems. Aprice increase of about EL 40 per ton of coal or 23 per cent alone wouldhave been necessary to eliminate the 1970 operating loss, without allowancefor future cost increases, which, particularly for wages are expected to behigh in this and the next year. The following data give the general picture:

Basic Trends in Turkish Coal Mining. 1965-1970

Output Output/ WagesMillion Total Manshift Excl. Produc- Average Profit

Tons Etloy- Under- Social tion Selling orSalable ment ground Charges Cost/a Price Loss

Year Coal ('000) kg TL/shift TL/ton TL/ton TL million

1965 4.4 32.5 848 31.05 133.73 118.23 -72.5

1966 4.9 34.1 907 35.11 137.77 116.62 -106.0

1967 5.0 33.6 949 36.08 141.54 143.47 1.2

1968 4.8 33.4 909 45.09 187.03 160.52 -115.0

1969 4.7 33.2 885 44.84 175.11 174.69 5.3

1970 n.a. 34.5 n.a. 53.93 214.50 171.46 -202.5

/a Including depreciation and interest.

16. After the July 1971 price increase, Turkish coal is at a slightdisadvantage with imported coal, allowance made for its higher ash contentwhich results in lower coke yields and higher coke consmuption in the blastfurnace.

Price of Domestic and Imjorted Coal

Coal Price - c.i.f. Eregli Cost of CoalTL/ton Coal TL/ton Iron

Turkiah Coal, 11% Ash 330 328

Imported U.S. Coal, 6% Ash 397 305

The above conparison does not take into account savings arising from anestimated 8.5 per cent increase in blast furnace output when charging cokemade from imported coal. On the other hand, some future increase in inter-national coal prices is predicted by many observers.

17. The July 1971 price increase by 65 per cent to TL 330 per ton ofcoal was also necessary to help the mines finance their considerable invest-ment programs. Projected future investments at TKI mines are as follows:

Investment Production TargetYear TL Million Million Tons of Coal

1971 518.7 4.8

1972 409.1 4.8

1973 262.8 5.1

1974 217.7 5.4

1975 182.4 5.9

1976 n.a. 6.2

1977 n.a. 6.5

1978 n.a. 6.6

1979 n.a. 6.7

1980 n.a. 6.8

18. The main objectives of the overall investmnt program would bethe following:

a. Mechanization of some faces;

b. Replacement of jigging sstem with heavy mediaseparation, with a substantial increase in washingcapacity;

c. Opening of a now mine at Amasra (80-100 km. eastof Zonguldak), with separate washing facilitiesand an expected initial production of 600 tcns/daysalable coal, to rise rapidly to 2,200 tons/day;

Page 9

d. Profpecting in new areas (betwem Kozlu andArutcuk) shahing prodise of substantial reserves.

19. The up1y of Turldah coal will be sufficient to meet the require-ments Of the Turldsh steel industry. It is eopected that at the end of thedecade the Turkish steel industry il conma the bulk of the presentlyprojected output of 6.8 million tons of coal per year.

Industrial ProJects DepartamtOctober 1., 1971

ANNEX 5

COST OF OPERLTIONS

General

1. The term "cost of operations" denotes all costs involved in receivingmaterials and other inputs, turning them into saleable products, and sellingand shipping thee final products. The main focus of this Annex, however, ison (a) the number of equipment hours and manhours per unit of output, both indirect prodmction departments and in auxiliary services like transportation,general maintenance, etc., and (b) the cost of these hours.

2. Given the prices for labor and equipment use, operating costs will bedetermined by the following factors:

(a) Economies of scale;

(b) Degree of balancing of plant which will be constrainedby original facilities and market structure;

(c) Capacity utilization;

(d) Efficiency of operations which will depend upon theavailability and quality of management and labor, theinstitutional framework, and the "learning curve",i.e., the accumulated experience and know-how.

Economies of Scale, Capacity Utilization and Plant Balancing

3. One of the major advantages of expansion is the extent to which it willhelp reduce production costs per unit of output, both in production departmentsand with respect to general overhead facilities, such as mill buildings, pipes,roadways, port facilities, laboratory. In the production departments, theseopportunities arise both because of the substantial reserve capacity in certainexisting facilitios (hot-rolled and cold-rolled shears, electrolytic cleaningline, pickling liae, tandem cold-reduction mill, etc.) and because the capac-ities of several units can be substantially increased with relatively minor andinexpensive modifications.

4. Normally in a steel plant, capacity is expressed in terms of ingot pro-duction. In major industrialized countries, including Western Europe and Japan,the average crude steel 'operating rate" (ratio of actual production to statedcapacity) over the last decade has been of the order of B0-90 per cent. Thisis an almost inevitable result of cyclical fluctuations in demand. Reductionin the operating rate may also be caused by strikes and equipment breakdown.

5. The unique aspect of Erdwmir's operations is that crude steel-makingcapacity itself, at least in the beginning, would not be a bottleneck, Instead,bottlenecks would be (a) in the combination mill until the new hot strip millcomes into operation and later on in units like soaking pits and annealing

ANNEX 5Page 2

furnaces which could be expanded to cope with riaing demand and (b) in blastfurnace ("hot metal") capacity (Table 10). For that reason, even though theutilisation of ingot capacity in 1975-1980 would be only 76-89 per cent, out-put projections made by UEC are close to maximum attainable outputa. To takeinto accovut losses in production due to cyclical fluctuations, strikes, etc.,the operating rates assumed by UEC were reduced by about 5 per cent in thefinancial projections. A 95 per cent operating rate on Erdemirts key (bottle-neck) facilities may seem high compared to the 80-90 per cent rate achievedin industrialized countries. Nevertheless, it has been adopted in the finan-cial projections for two reasons:

(a) Erdemir's market is likely to remain protected againstoutside competition during the next decade while, onthe other hand, the company would have an opportunityto export temporary excesses of production;

(b) Over the next decade, the company is almost certain toundertake additional investments over and above the pro-ject; these investments are expected to be highlyproductive.

Specific Assumptions with Respect to Operating Costs

6. The operating costs shown in the financial projection are based on thefollowing assumptions:

(a) The present blast furnace, relined to 29' 6", and thenew blast furnace would have capacities of 2,360 tonsof iron per day per furaace when operating on a mixof 43 per cent of domestic ore, 39 per cent sinter,12 per cent of foreign ore (Table 15). Based upon 350operating days per furnace, this corresponds to 1,654,000tons per year for the two furnaces combined. Each blastfurnace would be relined after six years of operation;

(b) After the installation of the third Basic Oxygen Furnace,the Steel Furnace Shop would have a capacity of about2,850 tons per furnace per day with two of the furnacesoperating and the third undergoing refractory repairs orkept in reserve. At 350 days, this corresponds to approx-izately 2 million tons per year. This compares with apresent output of about 2,000 tons per furnace per day.Present production is restrained by the shortage of oxygen,but the attainment of the targeted 2,850-ton level wouldalso require substantial improvement in furnace-chargingpractices. Nevertheless, the projected rates represent arealistically attainable target;

(c) The coke plant yields (tons of coke per ton of coal charged)and steel furnace yields will remain more or less unchanged.On the other hand, the blast furnace metallic yield wouldincrease from about 91.5 per cent at the present moment toabout 95 per cent, reflecting the use of sinter and otherimprovments causing smaller losses of flue dust;

Page 3

(d) As shown in Table Cl (attached to this Annex), rollingyields for individual products are assumed to declinedlghtly as compared with presentl;y achieved rates. Thiswill result fru efforts to bring Erdemir's product qualitymore completely in line with European standards, so as toprovide "prime qualityt plates and sheets of consistenthigh quality, particularly in terms of appearance, freedomfrom damage in handling and packaging and care in coiling;

(e) Reflecting the above assumptions, production would developaccording to the product plan shown in Table 10;

(f) Total personnel is expected to grow as follows:

Present Projected Increase

Corporate and PlantAdwinistration 1,571 t,697 8%

Production 1,138 1,675 47%

Services, Utilities,Maintenance, Shipping 1,478 1,968 2AA

Total: i,187 5,340 3

The direct production labor figures are close to the standardsfor comparable facilities in the United States and assumeessentially only a continuation of present practices at Rrdemir.At the same time they assume strict mnagerial controls and themaintenance of successful labor relations with emphasis onproductivity. The effect on manpower productivity of theseassumptions is shown below:

Man Hourw Ton/Excudig Including

Pig Iron Pig Iron

1971 17.8 17.51972 16.4 16.41973 15.6 13.71974 12.2 12.21975 9.9 8.21976-1980 9.5 8.3

(g) Manpower remuneration, as shown in Table 23 averaged TL 3,655per month for salaried personnel and TL 1, 934 for wage earnersin 1970. This is assumed in the financial projections to in-crease by 18 per cent in 1971 and by three percentage pointsannally thereafter. This reflects the assumption that the

17 Product mix in 1975 and later includes 300,000 tons/year of billets, uhichrequire rqlatively few man hours per ton as compared with fully furnishedproducts (as tin plate).

ANNE= 5Page 4

Turkish steel industry would have to meet wage increasesthrough increased productivity rather than through priceincreases as has been the trend in Western Europe in therecent past and is likely to remain true for the foreseeablefuture.

(h) Depreciation of equipment haa been based on an assumedaverage 15-year economic life for the new installations.Thia is in line with present practice in, e.g., U.K. andJapan; a relatively high depreciation rate is necessarybecause of rapidly developing technology.

7. The operating coats arising from the above assumptions are summarized inChapter VIII, Paragraph 8.01.


Table Cl

E R D E M I R

Ingot to Product Yields, and Other Process Yields

1/ UEC As WedErdemir - Actual Yield (X) Yields- (%)1968 1969 1970 Stage I

Average Average Average Average

Plates 71.78 71.76 72.18 72.4

Skelp 74U70 75.02 74.27 ,73.5

HR Sheets, Unpickled 77.41 76.97 76.30 75.4

HR Sheets, Pickled 74.23 74.80 75.36 73.3

Cold Rolled Sheets 70.83 69.71 69.o8 68.0

Blued Sheets 63.76 64.51 67.41 61.3

Tin Plate 64.83 65.01 67.42 63.8

Black Plate 59.88 63.71 64.69 69.8

CR Coils for sale 77.o6 77.74 75.80 73.0

Other significant yieldsare indicated below:

Operation

BOF Metallic Yield 87.84 87.76 88.08 87.8

Blast FurnaceMetallic Yield - 91.5 - 95.2

Coke Plant Yield(KG Furnace Coke/KGCoal) 64.3 64.6 6h.6 64.6

Note: Major differences in blast furnace yield are related to use ofsinter, different iron ores, use of higher top pressure, lessgeneration of flue dust etc.

1/ Finished product tonnage, as a percentage of ingot tonnage con-sumed.

October 15, 1971Industrial Projects Dept.

ANNEX 6

CONPAIRISON OF ERDEMIR PRICES WITH WORL) PRICES'/

Erdemir's Product Mix

1. Erdemir's product mix in 1970 and the projected product mix for1976, 'when the project is expected to be in full operation, are as follows:

Product Mix

~ ~ 1970219761000 TonsL--- % '000 Tons f

Pig Iron 8.9 1.7 180 12.4Ingots 3.2 0.6 60 4.1Blooms, Slabs 3.9 0.7 -Billets - - 300 20.6plate 112.0 21.6 190 13.0Skelp 68.8 13.3 110 7.6Hot Rolled Products 108.4 20.9 220 15.1Cold Rolled Products 158.5 30.5 305 21.0Tinplate 55.5 10.7 90 6.2

TOTAL 519.2 100.0 l,455 100.0

2. Substantial price increases for a wide range of domestic productswere approved by GOT in mid-1971, affecting coal, rail freights, tax on fueloil and electricity. These, together with a rise in salaries and wageshave increased Erdemir's cog1 of operations. The Company's selling prices,which are controlled by GOTf and had remained unchanged since 1968, were raisedin July 1971 on an average by 25 per cent to offset Erdemir's cost increasesand also help finance its expansion program.

3. The present Government policy is to permit steel imports only tothe extent that demand cannot be satisfied by domestic producers. With amonopoly position for its flat products, Erdemir could charge a price suffi-cient to yield an adequate return on its investment, but the Government haBto take into account the possibly harmful effects upon the Turkish economyof steel prices exceeding the international level.

4. The Bank has consistently stressed the need for a reasonablycompetitive price as a condition for lending. It, therefore, becomesnecessary to compare Erdemir's prices with the alternative cost of importingsteel and with domestic prices in the European Common Market, with which theTurkish economy is expected to start to become integrated within the life of

j The exchange rate of US$1 - TL15 has been used in this annex and theaccompanying tables.

2/ Government of Turkey.

ANNEX 6Page 2

the prosent project. Such a comparison is also crucial in determining theeconomic justification for the project (Chapter X).

Methodology for comparing Erdemir Prices with World Prices

5. A comparison of Erdemir prices with world prices raises thefollowing issues of concept and methodology:

a. Import prices vs. domestic prices in the Common Market.The main standard of comparison is with projected importprices. The alternative standard, namely domestic pricesin the Common Market is relevant only in the context ofevaluating the damage done to Turkish export industriesthrough a high steel price. It might also become rel-evantin the future if, after Turkey's association with theCommon Market, pricing rules were established which tiedTurkish prices to Common Market basing points (a somewhatunlikely and not necessarily desirable arrangement) YIdeally, in-ternational division of labor should perhapsoccur strictly according to comparative advantage. Yet,a country making a decision to enter the steel industrywould need to consider whether world market prices wouldbe either higher than justified by comparative advantage(monopolistic pricing) or lower (due to "marginal cost"pricing or export subsidies in whatever form). Itsessential guiding star should be the probable price, withsupply reliability as a subsidiary criterion. In onerespect, present prices for Common Market steel importedinto Turkey is not a good standard. A special discountof $10 per ton is granted in the Eastern Mediterraneanarea to meet competition from Eastern Europe. For thepresent purpose, it is assumed that this discount is atemporary phenomenon and has been disregarded.

b. Point of delivery. The ultimate cost of steel to theTurkish consumer is represented by the landed price forimported steel or the price f.o.b. Eregli, plus inlandor coastal transportation. The Bank asked the company tocompare its actual outbound freights on steel shipmentswith the inland or coastal freights which would have been

1/ With a view to an orderly and transparent price system, ateel prices inthe United States and in Western Europe are generally quoted f.o.b.-selected basing points,with a freight charge added from the basing pointto final destination, independently of whether or not this correspondsto the actual physical movement of the ateel.

ANNEY 6Page 3

payable on imported steel. This comparison showed averageoutbound freights of IL 75.14 per ton on actual shipmentsfrom Eregli, as oompared with hypothetical freights ofTL 63.75 per ton from the port of Istanbul. The lattercharge may be a slight over-statement since some steelcould presumably be imported directly to Izmir or Adanawithout trans-shipment via Istanbul; in any case, the totalinland freight differential in favor of imported steelwould average at the most TL 15 or $1.00 per ton.

c. Landing charges on iMorted steel. The major comparison isfor purchases by large consumers who would take deliveryin railroad car or truck at the steel mill or on the quayat the port of importation. In the former case, there areno charges above the mill price. In the latter case (apartfrom import duties and taxes), there are certain miniimucharges for handling and other services, such as warehousingwhich are passed on to the buyer (even assuming that theimporter, for large "direct deliveries", would serveessentially as an agent whose commission would be paid bythe seller). It is estimated that landing costs on importedflat steel would be of the order of 3 per cent of the c.i.f.price, and letter of credit and other financial charges andwarehousing costs would amount to another 7 per cent of thec.i.f. price, making the price of imported steel deliverede-swarehouse Istanbul, equivalent to c.i.f. plus 10 per cent.Steel users are known to be prepared to pay a premium of over20 per cent of the c.i.f. price to obtain steel supplies oncall from Erdemir. Because of the impossibility of quanti-fying landing charges in any precise manner, prices forimported steel have been shown either on an f.o.b. or c.i.f.basis, with an approximate allowance for landing chargesmade only in the final aggregate comparison between Erdemirprices and world prices.

d* Base Prices and extras. Regularly quoted export "baseprices" show the price for a base dimension (or range ofdimensions) and quality when delivered in certain minimumlots. Over and above the base price, "extras" are chargedfor other dimensions or qualities, smaller lots, or addi-tional service. The extras normally remain unchanged fora considerable period of time. Erdemir extras differsignificantly from "Continental" ewtras.

Tables Used in the Price Comparisons

6. A full comparison of Erdemir prices with equivalent import priceswould be a very time-consuming t#sk since it would mean a virtual re-invoicingof Erdemir's sales according to the Conmon Market export price lists. Forthis reason, shortcuts were evolved taking into account the following elements:

ANNEX 6Page 4

a. The distribution of actual sales realization as betweenbase prices and extras for 18 different categories offlat steel distinguished in the company's sales statistics(Table Pl). 1/

b. A cciparison of Erdemir and Comron Market dimensionalexport extras based upon a sample drawn from Erdeir 'sfirst half of 1969 finished product deliveries andrepresenting about 37 per cent of these deliveries.This sample included all specifications sold in largevolume plus a representative number of other specifica-tions (Table P2).

c. As a rough check on method (b), a complete catalogue ofdimensional extras for cold-rolled sheets, hot.frolledaheets, hot-rolled skelp, and hot-rolled heavy--agdmedium plates, without an attempt, however, to weightthese extras with the respective sales for each dimen-sion (Table P3).

d. A comparison of quality extras based upon statisticsfrom the steel shop regarding the nuimber of heats ineach quality (Table P4).

e. A list comparing Erdemir and ECSC "quality and deliveryextras" for cold-rolled sheets (Table P5).

f. Complete comparioon of Erdemir and world prices fortinplate (Table P6)o

g. Comparison of quantity rebates and extras for smalllots (Table P7).

h. Comparison of representative prices for pig iron,ingots and billets (Table P8).

Results of Comparison (Finished Steel)

7. The final comparison is shown in TABLE 27 and suumiarized below.Istanbul was chosen as the point of delivery to compare Erdemir's deliveredprices with delivered import prices. $2 per ton was added to Erdemir'sf.o.b. mill prices to cover freight Eregli-Istanbul. Import prices c.i.f.

1/ Tables P1 to P8, attached to this Annex, are based on Erdemir's pricesbefore July 1971l

ANNEX 6Page 5

Istanbul were increased by 10 per cent to cover landing charges, warehousingand letter of credit and otnier financial charges. The weighted average pricefor Erdemir's flat products, delivered Istanbul is 12.7 per cent above importprices

for flat products landed Istanbul. The weighted average price for Erdemir's

total iron and steel products delivered Istanbul is 11.7 per-cent aboveirport prices landed Istanbul. These percentage differences are acceptablefor the Turkish econamy.

Erdemir's Prices Delivered Istanbul Compared with Imported Steel Products>

(Index: Inported Steel Products Delivered Istanbul = 100)

Billets 108.6Plates 107.4Skelp 109.3Hot Rolled Coilsj Unpickled 127.8Hot Rolled Sheets, Unpickled 102.0Cold Rolled Coils, MMIl Edge 118.5Cold Rolled Sheets 120.0Tinplate 106.0

Total Flat Products 112.7

Total Steel ProductsA. 111.7

/a With all due reservation for the difficulties andmargin of error involved in this type of conParisonwhich should be apparent from Tables P1 to P8.

/b Including pig iron.


ER D E M I R

D I S T R I B U T I O N O F EREGLI B A S E P R I C E A N D E X T R A S

T O T H E T O T A L D E L I V E R I E S I N 1 9 7 0

P R o D U C T I O N T A X I N C L U D E D P R O D U C T ITO N T A X EXCLUDED

TOTAL BASE TOTAL SALES TOTAL TOTAL SALES SELLING TOTAL SALES AT BASE TOTAL SALES TOTAL TOTAL SALES SELLING TOTAL SALES ATP R 0 D U C T DELIVERY PRICE AT BASE PRICE EXTRAS AT EXTRAS PRICE SELLING PRICE PRICE AT BASE PRICE EXTRAS AT EXTRAS PRICE SELLING PRICE

(TON) (TON/$) (W) (TON/$) Cs) (TON/$) ($) (ToN/$) ($) (TON/$) ) (TON/$) ($)

I TINPLATE 49.122 240 11.789.000 15 737.000 255 12.526.000 205 10.070.000 13 639.000 218 10.709.000

II BLUED BLACK PLATE 5.931 179 1.062.000 59 350.000 238 1.412.000 149 884.ooo 5o 297.000 199 1.181.000

III BLACK PLATE COILS 15.312 179 2.741.000 54 827.000 233 3.568.000 149 2.281.000 46 704.°00 195 2.965.ooo

IV COLD ROLLED SHEETS 76.908 179 13.767.000 14 1.077.000 193 14.844.000 149 11.459.000 11 846.ooo 160 12.305.000COLD ROLLED BLUED SHEETS 9.625 179 1.723.000 30 289.000 209 2.012.000 149 1.434.000 25 241.000 174 1.675.000

v COLD ROLLED COILS- NOT TRIMMLED 32.733 179 5.859.ooo 7 229.000 186 6.088.000 149 4.877.o00 6 196.000 155 5.073.000- NOT TRIMMED - BLUED 1b9 179 27.000 20 3.000 199 30.000 149 22.000 17 3.000 166 25.000- TRIMMED 2.037 179 365.ooo 18 37.000 197 402.000 149 304'000 15 31.000 164 335.000

VI HOT ROLLED PICKLED 29.796 14b 4.291.000 20 596.ooo 164 4.887.000 121 3.605.000 16 477.000 137 4.082.000

VII HOT ROLLED UTNPICKLED 33.854 144 4.875.ooo 6 203.000 150 5.o78.000 121 4.o96.000 4 135.000 125 4.231.000

VIII HOT ROLLED COILS- NOT TRIMMED it.710 144 678.000 17 80.000 161 758.ooo 121 570.000 13 61 .ooO 134 631.000- TRIMMED 27.723 1L4 3.992.000 3 83.000 1b7 4.075.ooo 121 3.354.000 2 56.ooo 123 3.410.000

IX SKELP 67.259 130 8.744.oo0 10 673.000 114 9.417.000 109 7.331.000 8 538.000 117 7.869.000

x FLAT PLATES- NOT TRIMMED 60.5i6 108 8.q56.ooo 6 363.000 i51 9.319.000 124 7.504.000 3 182.000 127 7.686.000- TRIMMED 9.723 148 1.439.o00 42 4o8.ooo 190 1.847.000 124 1.206.000 35 34o.ooo 159 1.546.Ooo

xi COIL PLATES

- NOT TRIMMED 7.864 1h8 1.164.000 16 126.000 164 1.290.000 124 975'°°° 13 102.000 137 1.077.000- TRIMMED 2g.899 148 3.833.000 8 207.000 156 4.o0o.ooo 124 3.211.000 7 181.000 131 3.392.000- TRIMMED - PICKLED 693 148 103.000 20 14.0oo 168 117.000 12b 86.ooo 17 12.000 141 98.000

TOTAL PRODUCTS 459.854 75.408.00o 6.302.000 81.710,000 63.269.ooo 5.o4t.ooo 68.310.000

Source: Erdemir Steel Mill, July It, 1971.

Exchange Rate US$1 = TL15

ERDEMIR

COMPARISON OF ERDEMIR AND WORLD PRICES

Summary for Plates, Cold Rolled and Hot Rolled Sheets, Tube Strips-i

(US$/ton)

ECSC f.o.b. Selling PriceErdemir f.o.b. Selling Price April 1971 including size

including size extras extras excludingexcluding quality extrasL2 quality extras

Base Extras Total Base Extras Total

Cold Rolled Sheets 149.30 9.87 159.17 132.00 3.79 135.79

Hot Rolled Unpickled Sheets 121.20 1.63 122.83 120.00 3.24 123.24

Hot Rolled Tube Strips 109 3.71 112.71 110.00 5.41 115.41

Heavy and Medium Plates 124 4.42 128.42 129.00 10.13 139.13

/ In the calculation of the above weighted averages the following sample was drawn from first half 1969deliveries. These include all the most current dimensions plus a representative nuiber of other dimen-sions:

Cold Rolled Sheets 29,937 TonsHot Rolled Sheets 13,233 "Hot Rolled Tube Strips 18,960 oHeavy and Medium Plates 13,373

75,503 Tons

/2 Excluding 20 per cent production tax.



ER D EM I R

C O M P A R I S O N O F P R I C I N G S T R U C T U R E - E R D E M I R vs. E. C. S. C.

D I M E N S I O N A L E X T R A S ( GA U GE, WI D T H, L E N G T H)

A. C I L D R O L L E D S H E E T S

1000 kg / Dollar

(Dimensions mm)

E R D E M I R E X T R A S TOTALP R O D U C T E. C. S. C. E X T R A S ESC EXTRAS

I T H O U T P R O D U C T I O N T A X AS % OFTOTAL

TOTAL BASE FOB TAL BSS FOB CIF ISTAM ERDEMIRTHICK WIDE LONG THICKNEI;S WIDTH ILIGTH EXTRAS RICE SELLING THICKNESS WIDTH LENGTH BASIS SELLING PLUS t EXTREXTRAS PRICE ~PRICE EXTRAS PRICE PRICE CHARGIS2.00 850 3750 (8.40) 2.80 1.70 (3.90) 149.30 145.40 Base 2.00 0.70 2.70 132.00 134.70 161.37

12D0 2400 (8.40) Base (8.40) 149.30 1!10.90 Base Base Base 132.00 132.00 158.401400 (8.40) 13.90 5.50 149.30 154.80 Base 5.50 5.50 132.00 137.50 164.45 Same

1.50 1200 2400 Base Base Base Base 149.30 149.30 Base Base Base Base 132.00 132.00 158.40 Base1500 Base 13.90 13.90 149.30 163.20 Base 11.00 11.00 132.00 143.00 170.50 72.1

1.25 870 4000 3.35 2.80 2.80 8.95 149.30 158.25 Base 2.00 1.40 3.40 132.00 135.40 162.14 38.01200 21400 3.35 Base 3.35 119.30 152.65 Base Base Base Base 132.00 132.00 158.40 ECSC Base

1.20 1050 2550 3.90 Base 2.80 6.70 149.30 156.00 Base Base Base Base 132.00 132.00 158.40 ECSC Base1200 2400 3.90 Base Base 3.90 149.30 153.20 Base Base Base Base 132.00 132.00 158.o40 ESC Base

1.00 700 5.00 3.35 8.35 149.30 157.65 Base 4.15 4.15 132.00 136.15 162.97 49.71104 2500 5.00 Base 3.90 8.90 11l9.30 158.20 Base Base Base Base 132.00 132.00 158.40 ECSC Base1200 2400 5.00 Base Base 5.00 149.30 154.30 Base Base Base Base 132.00 132.00 158.40 ECSC Base

0.90 708 3840 10.00 3.35 3.90 17.25 149.30 166.55 3.45 6.20 3.45 13.10 132.00 145.10 172.81 75.91200 21,00 10.00 Base Base 10.00 119.30 159.30 3.45 Base Base 3.45 132.00 135.45 162.20 34.51216 11476 10.00 1.68 Base 11.68 149.30 160.08 3.45 1.40 Base 4.85 132.00 136.85 163.74 41.5

c.80 896 13.50 3.65 17.15 149.30 166.145 3.45 2.75 6.20 132.00 138.20 165.22 36.21200 2400 13.50 Base Base 13.50 1149.30 162.80 3.145 Base Base 3.45 132.00 135.145 162.20 25.51282 13.50 2.80 16.30 1411.30 165.60 3.45 2.75 6.20 132.00 138.20 165.22 38.0

0.75 700 15.00 3.65 18.65 149.30 167.Q5 5.50 6.20 11.70 132.00 143.70 171.27 62.71200 2400 15.00 Base Base 15.°O 149.30 164.30 5.50 Base Base 5.50 132.00 137.50 164.45 36.70.70 1200 2400 16.75 Base Base 16.75 119.30 166.o5 5.50 2.75 Base 8.25 132.00 140.25 167.48 49.3

o.60 1°00 2000 20.15 Base Base 20.15 149.30 169.45 6.90 Base Base 6.90 132.00 138.90 165.99 34.2

o.50 610 3600 23.50 6.15 5.60 35.25 119.30 1814.55 11.00 6.20 5.50 22.70 132.00 154.70 183.37 64.41000 2000 23.50 Base Base 23.50 149.30 172.80 11.00 Base Base 11.00 132.00 143.00 170.50 46.8

0.40 914 30.20 30.20 149.30 179.50 14.45 4.00 18.45 132.00 150.45 178.70 61.1100)0 OOO 30.20 Base Base 30.20 149.30 179.50 14.45 4.00 Base 18.45 132.00 150.45 178.70 61.1

Source: -'demir Steel Mill, Jully 4, 1971. aMD-

Exchange Rate US$1 TLIS

E R D E M I R

C 0 M P A R I 5 0 N 0 F P R I C I N G S T R U C T U R E - E R D E M I R vs. E. C. S. C.

D I M E N S I O N A L E X T R A S ( G A It G E, WI D T H, L E N G T H)

B. HIO T R O L L E D S H EE T S

1000 kg / Dollar

(Dimensions nn)

E R D E M I R E X T R A SP R O D U C T E. C .S. C . X T R A S TOTAW I T H O U T P R O D U C T I O N T A X -ESC EXTRAS

AS % OFTOTAL BASE FOB TOTAL BASE FOlB CIF ISTAMBUL TOTALTHICK WIDE LONG THICKNESS WIDTH LENGTH EXTRA5 PRICE SELLING SIZE LENGTH EXTRAS PRICE SELLING PLUS 10% ERDEMiR

PRICE PRICE CHARGES EXTRA

2.00 1000 2000 3.93 Base Base 3.93 121.20 125.13 1.40 Base 1.40 114.00 115.80 140.58 35.62.50 1000 2000 2.80 Base Base 2.80 121.20 124.00 Base Base Base 114.00 114.00 138.60 ECSC Base2.95 1000 3.93 Base 3.93 121.20 125.13 Base Base Base 114.00 114.00 138.603.00 1000 2000 Base Base Base Base 121.20 121.20 6.co Base 6.oo 119.00 125.00 150.70 Erdemir Base1160 Base Base Base 121.20 121.20 6.oo 6.0o 119.00 125.00 150.703.10 1096 1644 Base Base Base Base 121.20 121.20 6.o0 8.00 14.00 119.00 133.00 159.501120 Base Base Base 121.20 121.20 6.0o 6.oo 119.00 125.00 150.703.50 1000 2000 Base Base Base Base 121.20 121.20 6.oo Base 6.oo 119.00 125.00 150.704.00 900 1220 Base 2.23 Base 2.23 121.20 123.23 9.00 8.00 17.00 119.00 136.0o 162.80 762.31000 2000 Base Base Base Base 121.20 121.20 6.0o Base 6.oo 119.00 125.00 150.70 Erdemir Base1250 Base o.56 0.56 121.20 121.76 6.00 6.oo 119.00 125.oo 150.70 714.21500 Base 6.73 6.73 121.20 127.93 12.00 12.00 119.00 131.00 157.30 178.34.50 1150 Base Base Base 121.20 121.20 4.00 4.00 119.00 123.00 148.50 Erdemir Base1350 Base 3.37 3.37 121.20 124.57 4.00 4.00 119.00 123.00 148.50 118.714.75 654 2.80 2.29 5.24 121.20 126.44 11.00 1 1.00 119.00 130.00 156.20 209.91000 2000 2.80 Base 8.80 121.20 124.00 4.00 Base 4.00 119.00 123.00 148.50 142.9

C. H O T R O L L E D T U B E S T R I P S

2.25 51 2.81 14.03 (3.37) 13.)47 109.00 122.47 6.40 110.00 116.40 139.05 47.52.50 63 2.81 7.86 (3.37) 7.30 109.00 116.30 6.40 110.00 116.40 139.05 87.72.50 80 2.81 7.86 (3.37) 7.30 109.00 116.30 6.40 110.00 116.40 139.05 87.73.00 99 Base 7.86 (3.37) 4.49 109.00 113.149 4.70 110.00 1114.70 137.25 1014.7102.5 Base 6.73 (3.37) 3.36 109.00 112.36 3.50 110.00 113.50 135.85 104.2127 Base 6.73 (3.37) 3.36 109.00 112.36 3.50 110.00 113.50 135.85 104.2138 Base 6.73 (3.37) 3.36 109.00 112.36 3.50 110.00 113.50 135.85 104.2145 Base 6.73 (3.37) 3.36 109.00 112.36 3.50 110.00 113.50 135.85 104.2155 Base 6.73 (3.37) 3.36 109.00 112.36 5.50 110.00 115.50 138.00 163.73.40 181 Base 6.73 (3.03) 2.80 109.00 111.80 5.50 110.00 115.50 138.00 196.41914 Base 6.73 (3.93) 2.80 109.00 111.80 5.50 110.00 115.50 138.00 245.5230 Base 6.17 (3.93) 2.24 109.00 111.24 5.50 110.00 115.50 138.00 245.5245 Base 6.17 (3.93) 2.24 109.00 111.24 5.50 110.00 115.50 138.00 245.53.80 270 Base 6.17 (3.93) 2.24 109.00 111.24 5.5o 110.00 111.50 138.00 245.5288 Base 6.17 (3.93) 2.24 109.00 111.24 5.50 110.00 115.50 138.00 329.914.20 346 Base 5.33 (3.93) 1.40 109.00 110.40 5.50 110.00 t15.50 138.00 Erdemir neg.365 Base 3.33 (3.93) (0.60) 109.00 1o8.1o0 5.5o 110.00 115.50 138.004.50 145o Base 3.33 (3.93) (0.60) 109.00 108.40 5.50 110.00 115.50 138.00528 Base 3.33 (3.93) (0.60) 109.00 108.40 5.50 110.00 115.50 138.00

Source: Erdemir Steel M1ll, July 4, 1971.

Exchange Rate US$I = TL15

E R D E M I R

C O M P A R I S O N O F P R I C I N G S T R U C T U R E - ERDEMIR vs. E. C. S. C.

D I M E N S I O N A L E X T R A S ( G A U G E W I D T H, L N G T H)

D. H E AVY AN D ME D I U M P L A T ES

1000 kg / Dollar

(Dimensions mm)

E R D E M I R E X T R A SP R O D U C T E . C. S C. E X T R A S TOTAL

W I T H O U T P R O D U C T I O N T A X EGSO EXTRASAS % OF

TOTAL BASE FOB TOTAL BASE ~~~~FOB CIF ISTAMB1Y TOTALTHICK WIDE LONG THICKNF.SS WTDTH LENGTH TXTRALS PRICE SERIC SIZE LENGTH ETRAS PRICE SELLING PLUS FO% ERDEMIR

PIEEPRICE RICECELLN PLURGS 1 EXRA~I

5.oo 1000 2000 8.40 Base 0.85 9.25 124.00 133.25 28.00 3.00 31.00 124.00 135.00 159.50 335.11200 2400 8.140 Base 0.85 9.25 124.00 133.25 28.00 3.00 31.00 124.00 135.00 159.50 335.1

6.0o 1000 2000 6.15 Base 0.85 7.00 124.00 131.00 19.00 3.00 22.00 124.00 146.0o 171.60 314.21500 6000 6.15 1.40 2.80 10.35 124.00 134.35 18.00 Base 18.00 124.00 142.00 162.2, 173.9

7.00 1500 6000 4.50 1.10 2.50 8.10 124.00 132.10 14.00 Base 14.00 124.00 138.00 162.80 172.88.00 1200 2400 2.25 Base Base 2.25 1214.00 126.25 11.00 3.00 14.oo 124.on '38.00 162.80 622.2

1500 6000 2.25 1.10 2.50 5.85 124.00 129.85 9.00 Base 9.00 124.O0 133.00 157.30 153.810.00 1000 2000 Base Base Base Base 124.00 124.00 10.00 3.00 13.00 132.00 145.00 170.50 Erdemsir Base

1500 6000 Base Base 1.95 1.95 124.00 125.95 9.00 Base 9.00 132.00 1141.00 t66.10 461.512.00 1200 2400 Base Base Base Base 124.00 124.00 10.00 3.00 13.00 132.00 145.00 170-50 Erdemir Base

1500 6000 Bpse Base 1.40 1.40 124.00 125.40 9.00 Base 9.00 131.00 141.0o 166.1o 642.915.00 1500 6000 Base Base 1.40 1.40 124.00 125.40 5.00 Base 5.oo 132.00 137.00 161.70 357.116.oo 1500 6000 Base Base o.85 o.85 124.00 124.85 5.00 Base 5.0o 132.00 137.00 161.70 588.2

20.00 1000 2000 Base Base Base Base 124.00 124.00 9.00 3.00 12.00 132.00 144.00 169.40 Erdemir Ba-R1500 6000 Base Base o.85 0.85 124.00 124.85 7.00 Base 7.00 132.00 139.00 163.90 823.5

25.00 1500 6000 3.35 Base 0.85 4.20 124.00 128.20 7.00 base 7.00 132.00 139.00 163.90 166.7

30.00 1500 6000 5.60 Base Base 5.60 124.00 129.60 9.00 Base 9.00 132.00 141.00 166.1o 160.7

40.00 1500 6000 8.40 Base Base 8.40 124.00 132.40 14.00 Base 14.00 132.00 146.oo 171.60 166.7

50.00 1500 6000 8.40 Base Base 8.40 124.00 132.40 14.00 Base 14.00 132.00 146.00 171.60 166.7

75.00 1500 6000 8.40 Base Base 8.140 124.00 132.40 19.00 Base 19.00 132.00 151.00 177.10 226.1

95.00 1500 6000 8.40 Base Base 8.40 124.00 132.40 24.00 Base 24.00 132.00 156.oo 182.60 285.7

100.00 1500 6000 8.40 Base Base 8.40 124.00 132.40 24.00 Base 24.00 132.C0 156.00 182.60 285.7

Source: &rdemir Steel Mill, July 4, 1971. (D


Table P 4EDIR

COMPARISON Or QUALITY RITRAS, ERDEMIR vs ECSC

1970 Erdemir Production ZCSC

ERDa4IR NUMBER CORRESPONDING QUALITY TOTAL QUALITY 3QUIVALEIT 3CSC TOTAL QUALITYQUALITY OF QUANTITY FXTRA EXTRA CHARGED STANSDARD EXTRA EXTRA CHAROGL

NO. H3ATS TON/$ ($) _ TON/$ ($)

1000 27 2430 Base Base Base Base1009 429 38610 it ASTM A .53 GR. A1110 2561 230490 If DiN 1623 US$ - 10 5 I,

1112 28 2520 13.35 33.642 " " S$ - 12 2.75 6.9301113 13 1040 20.0C 20.800 0T US$ - 13 7.60 7.9001110 91 8190 28.00 229.320 T TI US$ - 14 10.00 114.6601237 14 1260 4.00 5.140 DIN 17100 US$ - 37. L0.o0 5.0401281 18 1620 10.00 16.200 " " " " (Copper) 12.00 19.4042005 99' 892820 Base Base Tinplate Base Base2009 954 85860 Ti IT Skelo201^, 19 1710 3AE 101030C9 18 1620 5.39 8.731 GE Lamination (I) Unknown3010 37 3330 Base Base SAE 1010 Silicon killeS 5.00 16.6503233 942 84780 11 ti DIN 17100 ST 33.2 Base Base323L 29 2610 5.39 14.067 DIN 17100 07ST 34.2 10.00 36-5403237 477 42930 4.00 171.720 DIN 17100 RST 37.2 9.00 386.3703242 120 10800 8.oc 86.400 DIN 17100 HST 102.2 14.00 151.2003250 17 1530 13-30 20.349 " " ST 50.2 18.00 27.540326C 20 1800 21.35 38.430 " " ST 60.2 26.00 46.83037c'Ž * 17 1-530 16.15 20.709 ABS GR. A (1) Unknown3337 260 23400 0.oc 93.600 DIN 17100 03T 37.2 14.00 327.6004242 62 5580 8.o0 44.640 5' N OLST )12.2 18.00 100.4404908 76 6840 16.00 109.440 Ocrliken st andard (1) Unkno,m -5237 15 1350 14.40 19.440 DIN 1 7 ln 0 ST 37.3 20.00 27.0005283 12 1080 20.0C 22.032 (0oi-er) 28.00 30.240611L 51 4590 33.0C 151.475 DIN 162S ' 7ST 14 22.00 100.9806242 10 900 25.35 22.815 DIN 17100 ST 42.3 (fine) 33.00 29.70062,2 78 7020 40.00 285.800 DIN 17100 ST 52.3 30.00 238.6806341 20 1800 26.60 07.880 DIN 17155 H II (.1) Unknovn -635c 21 1890 33.0C 62.370 CB 2 French 0

tandard (]) ,,

3amoledHeats 7297 656500 23.20$ 1,523.895$ 25.50$ 1,673.710$

rotal weighted weightedHeats 7516 average ave rage

p_er ton per ton

(1) Quality extras unknown. In order to keep balance these are not incluled in conductingthe weighted averages for both Erdemir and EC,0C.

Source: Erdemir Steel Mill, July 4, 1971.


fRDEaER

COMPARISON OF PRICING STRUCTUREERDEMIR vs ECSC

Quality and Delivery Extras for CRS

1000 kg/Dollar(Unless otherwise stated)

ERDEMIR _DIVERY & ERDEMIRQUALITY W/O TAX ECSC INSPECTION W/O TAX ECSC

Ordina- Quality Base Base _tandard Packing Base/Net Weight Base/Gross weight About 2%Morderate Drawing/iGeneral Purpose 13.35 2.75 Normal works certificate BaseDeep Drawing/General Purpose 20.00 7.60 Coil form Length extra not Length extraExtra Deep Drawing/Ageing 28.00 14.00 included (+) rebate not incluidedExtra Deep Drawing/Non-Ageing 33.00 22.00 in relation to the

- ~~~~~~~~~~~~~~~~~~~~~correspondingCopper Content 0.25/0.35 6.oo 8. 0O sheet applied.Guaranteed Enamelling Grade 6.65 9.65Full Finish 6.65 5.50 Trimmed coils Trimming extra 5.00

is i-ncluided atthe Base Price.

Pickling and Oiling (Hr Sheets) 12.00 6.oo"1 "1 .", (Hr Strips) 12.00 12.50

Tensile Test 6.00 per test 6.00 per testBending Test 2.00 per test 5.00 per test

DIN 17100 ST 33.2 Base Base Impact Test 200 C 6.00 per test 9.00 per test37.3 V,.4n 20.00 0 c 8.00 * 13.00 "42.3 24.35 25.00 -10° C 9.00 " 13.00 "50.2 13.30 18.0052.3 40.00 3h.00 Homogenity Test 2.50 " 5.0060.2 21.35 26.00 Hardness Test 1.75 " 2.0070.2 40.0O 28.00 Macro Test 3.00 9.00

Nicro Test 5.00 " 12.00RST 34.2 5.35 14.00

37.2 4.00 9.00 Chemical Analysis (per element) To be agreed 5.00(Complete) 13.00

UST 34.2 5.35 8.oo37.2 4.0o 4.0042.2 8.0O 9.00

Method of De-oxydation Can be Cannot beOrdered ordered

Killed or Semi-Killed Extra No extra 5.o |Fine Grain Extra 4.00 8.oo _ ___

Source Erdemir Steel Mill, July L, 1971. 0F

Exchange Rate US$1 TL15

ERDR

COMPARISON OF ERDEFIR AN. WORLD MABKET PRICES FOR TINPLATE

Average prices for 49,050 tons of TinDlate order, booked for delivery in 1970

(TL/ton)

0.25 LB/BB 0.50 LB/BB 0.75 LB/BB 1.00 LB/BB Total IEquivalent

Volume: (29,965 tons) (12,403 tons) (3,108 tons) (3,574 tons) (49,050 tons)

(a) Erdemir Prices

Base Price 3,600.00 3,600.00 3,600.00 3,600.00 3,600.00 240.00

Tin Coating 20.64 165.55 341-04 584.46 118.67 7.91

Gauge 189.00 87.17 7.99 290.35 159.16 1 10.61

Dimension 1.70 5.09 1.5 2.69 2.22 0.15

Total: 3,811.34 3,857.81 3,950.56 4.472.12 3,880.05 258.67

(b) OECD Base Price of $10 per BB,with OECD Extras

Base Price -- - 3,142.80 1 209.52

Tin Coating - 140.25 271.95 455.10 85.80 5.72

Gauge 139.35 63.60 5.85 217.65 117.45 7.83

Dimension (Not irnportant) - - - - - -

Total TL: 3,282.15 3,346.65 3,420.60 3,815.55 3,345I75 1 223.06

Footnote see next page.


Table P 6Page 2

/ Tinplate and blackplate prices are traditionally quoted per "base box",a unit of area equivalent to 112 sheets of 14" x 20", or altogether31,630 in 2 = 20.232 m2 . More recently, the European Coal and Steel Com-munity has started quoting tinplate per 100 m2. The British steel industryquotes per "standard area of tinning" (S.A.T.), equal to 64,516 m2.

Assuming a specific weight of 7.87 for the steel used in tinplate, abase box would weigh about 105 lbs for 0.3 mm uncoated sheets. Hence,the following conversion factors were used:

Weight forEquivalent 0.5 mm sheetsbase boxes kg

Base Box 1.0 47.63

S.A.T. 3.1888 151.88

100 m2 4.943 235.44

The tin coating is applied either by "hot dipping" or electrolytically.The thickness of the coating is measured either in lbs per base box(Anglo-Saxon countries) or grams per m2 . Common electrolytic coatingsare 0.25, 0.50 and 0.75 lbs while the ECSC standard hot-dip coating is1.25 lbs, respectively 5, 10, 15 and 25 grams per m2.

Recent ECSC base prices are as follows ($ per 100 m2 ):

Hot-dipped Electrolytic25 gr. 5 gr. 10 gr. 15 gr. Blackplate

Germany 66.39 47.96 50.01 52.06 43.62 Basis Siegenor Neuwied

France 62.68 51.27 53.17 55.80 45.29 Basis Thionville

Belgium 65.50 55.50 57.70 59.90 50.00 Basis Fl1malle-Haute or Seraing

Export - 49.43 51.63 53.70 - (Erdemer indication)

Erdemir Price - 56.83 59.11 61.86


ERDEMIRt Table P 7Page 1

COMPARISON OF ERDDMIR PRICES WITH WORLD PRICES

Quantity rebates and extras for small lots

1. Prices quoted differ according to (a) the quantities of eachorder and (b) the total annual tonnages taken by each buyer. As shownbelow, substantial extras are charged for items ordered in small quant-ities; these small lot extras are clearly the main basis for theexistence of wholesalers.

ECSC extras for small quantities 1/

($ per ton)

Heavy Medium Hot-rolled Cold-rolledPlates Plates Skelp 2/ sheets sheets-coils

c< 1 t 16

1 - < 2 6 3.60 30 30oH'.20

2 < 2.5 t 6 3.60 15 15

2.5 < 3 2 3 60 15 15~7.20

3 < 5 t 2 l.oO 10 10- 3.060

5 < 7 t Base Base 7 7

7 < 10 t 5 5

10 < 15 t 3 3

15 < 25 t Base Base

25 + and up (3)

1/ In this context, the word 'quantity? refers to the quantity of onegauge, one size, one grade and one quality, on one order form forone delivery.

2/ The order size classes for skelp are 1 <3 t and 3".C. 5 t. Thefirst figure refers to lower than 100 mm widths, the second to100 mm widths and up.

3/ Extra to be agreed between buyer and seller.

2. In the ECSC export business, the following rebates are presentlygiven based upon annual tonnages (for wholesaler-importers or, under "directdelivery" to large customers).

l0 .z20,000 t/y 2.5%.20-' 50,ooo t/y 5%50,000 t/y and up 7.5%

3. No similar rebates and extras are practiced by Erdemir, the com-pany following a one price policy. It is of interest, however, to ex-plore what rebates the company would have given if they had followed theECSC practice with respect to large annual tonnages. This may be seenfrom the following summary:


Table P 7Page 2

Distribution of 1970 Salesby Customer Classes

Customer Class Total Per cent Number of(annual tonnage) tonnage of total customers

th.

Up to 100 t 25.4 5.2 855

101 - 500 t 54.3 11.1 239

501 - 2,500 t 130.2 26.6 114

2,501 - 12,500 t 132.1 27.0 25

Over 12,500 t 147.5 30.1 5

Total 489.5 100.0 1238

4. According to the above tabulation, perhaps ten customers are ofa size where they would qualify for an annual rebate, by ECSC standards.It is not known how many customers order more than 20,000 tons per year andhow many, if any, order more than 50,000 tons. Purely as an illustration,one might assume the following distribution:

Annual RebateCustomer Class Nr. Tonnage %

10 20,000 6 82.5 2.5

20 C 50,000 4 120 5.0

On this basis, quantity rebates would reduce the average equivalent importprice by about 1.65 per cent, or not quite $2.50 per ton finished steel.


COMPARISON OF ERDEMIR PRICES WITH WORLD PRICES

Representative Prices for Pig Iron, Ingots and Billets

Pig Iron

a) CECA Domestic Prices

June Jan.1970 1971

Orig. Exch. U.S. $ AnalysisCurr. rate

W. Germany DM 278.00 3.63 76.58 79.89 2-2.5 Si 0.08-0.12 P Basing point Oberhausen (deducting "loyalty rebate" of DM 32.50)

France F.Frs. 390.00 5.52 70.65 79-90 ?.5-3 Si 0.08-0,12 P Basing points Longwy-Isbergues

Belgium B.Frs. 3455 50 69,i0 ( 8 2 .10)L/ max 3 Si 0.06-0.08 P Basing point Monceau3300 66.oo 0.08-0.12 P

Italy Liras 46000 629 73.13 82.67 0.08-0.12 P Basis Trieste/Piombino

U.K, 4 28 2.40 67.20 max. 0.08 P Delivered buyer

Turkey Lira- 1600 15 106.67 2.30-3.0 Si 0.15 P F.o.b. Eregli, incl. 20 per cent production tax.

1 Marcinelle-Etablissements Raccordes still quoted 65.00 for same quality (same price as June 1970).

^/ Erdemir eharges the same price for five types of iron containing 0.15 P, varying 1.00-2.00 E, varying 0.90-3.00 Si soand max. 4.5 C. The only variation indicated in C.M. price lists is a rebate for 2.12-0.16 P as compared 0.08-0.12 Pof roughly $1.00 per ton. -I

Exchange Rate US$1 = TL15 m

Industrial Rroj ects DepartmentOctober 15, 1971

Table P 8Page 2

b) World Market Prices

There is a surplus of pig iron on the world market, andprices in recent years have been very low. Major exporters includeUSSR, East Germany, and South Africa. Other exporters are (a)smaller specialized blast furnaces generally combined with foundriesand (b) foundries producing pig iron as a co-product with the treat-ment of non-ferrous ore - i.e. Lilbeck and Duisburger Kupferhutte inGermany, iron-titanium dioxide combination in Canada.

Present c.i.f. import prices in Western Europe of $70-72 per ton said to be high in relation to estimated production costs,including depreciation,of only $38-h3 per ton which is also said to havebeen import range a few years ago.

c) Turkish import prices

Recent Turkish import prices (March 1971) are given bythe company as $72.25 per ton c.i.f. (including ocean freight andinsurance at $11.25).

Major customers are located at Istanbul. The equiv-alent world price f.o.b. Eregli would therefore be $72.25-4.33(coastal freight to Istanbul) = $67.88.

d) Assumed export prices

The UBC Study assumes export sales of pig iron totalling250,000 tons per year out of assumed total sales of 150,000 tons.Consistent with point (c) above, one would assume an export price of$61 - per ton. Nevertheless, this is subject to two reservationss

- as pointed out under (b), until the recentupturn in steel prices, pig iron was availableon the world market at prices well below $61per ton

- on the other hand, Erdemir would benefit from anexport subsidy on the order of E25] per cent ofits f.o.b. price which, with a conservativelyestimated world price for pig iron of, say, $51per ton, would yield a net sales realization tothe company of $ (51 + 12.75 =) $63.75 per ton.

Table P 8Page 3

Ingots

The UEC study gives a price for "special quality" ingots; ex-cluding production tax of TL 1,700/t. The study indicates that there isa growing market in Turkey for special grade ingots but has not ind-icated what grades would be produced by Erdemir except for a sugges-tion that the company might sell ingots for spring steel and weldingrods to Karabik. These grades are not presently produced at Erdemir(see Table P 4).

Applying the ECSC quality extras to Erdemir's 1970 outputone derives an average quality extra of $25.50. This reflects thehigh grade of steel used for flat products and it is doubtful whethera much higher quality extra could be charged for ingots. In anycase, no allowance was made in the UEC study for the cost of prod-ucing ingots of qualities higher than those presently produced byErdemir.

According to the UEC estimates, the average cost of pro-ducing ingots excluding depreciation and excluding selling, general,and administrative expense would be about 95.5% of the correspondingcost for continuouseycast billets. Applying the same "mark-up"on Erdemir's ingots as on billets (in the absense of world marketquotations for an unknown specification of ingots), one would arriveat a competitive ingot price, f.o.b. Erdemir of $91 per ton forspecial grade ingots. In this case, no allowance was made forfreight absorption by Erdemir since the main markets were assumed tobe in Central Anatolia (Karabik, Kirikkale).

Billets

The UEC study shows a price oI TL 1573 /t., excluding prod-uction tax.

The CECA (March-April 1971) export-prices for billets was$85 per ton with a similar price for Dec. 1970. The followingdomestic prices for CECA countries were quoted in January 1971:

Orig. U.S. $Curr. equiv.

Germany 395 108.81 Basis Oberhausen

Belgium 5,000 100.00 Basis Seraing

Luxemburg 4,300 86.oo Basis Esch/Belvai

France 510 92.39 Basis Thionville

526 95.29 Basis Caen

Italy 50,000- 80.0o- Basis Brescia/Lonato52,000 83.2058,ooo 92.80 Basis Novi Ligure

In 1970, Karabik imported 25,000 tons of billets at a c.i.fprice of $100.72 ($89 f.o.b.). This price is unexpectedly high butis explained by the contract date (Sept. 15, 1970), at which time theEuropean export price had reached a ten-year high of $90 per tonf.o.b. On the other hand, it would not seem (at least not at thatdate) that Turkey qualified for the same competitive discount of $10per ton on billets which was granted on rolled products to meet

Eastern Europe competition.


I

BELGIUM: QUOTED EXPORT BASE PRICES FOR STEEL PRODUCTS (PLATES AND SHEETS)(U.S. DOLLARS PER TON f.o.b. ANTWERP) REAL PRICES (IN U.S. DOLLARS OF 1968 PURCHASING POWER)

220 -q - - - - 220

JO, ,

200 200_ - _ I _ _

12 0 l _ -T - - 1 01

140 j H R SHEETS ICg ANX | v>__ GAVANIED SEET

N,~~~~~~~~~~~~L

\ Z ACqII ~~~~~~~~~SHEETS, 17-20o,

120 ¢-<-,, <>R< i\ 120

100 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~)4§ 100tw^*38X >'

I, ~~~~~~~~~~~~~~~.

, HEAVY PLATES ' I

16 ------ -- -------_-~- 10

of ~ -- i -i -K--I- lts tf

I1959 1WO0 t951 19W2 1953 1954 1965 1956 1t"7 1W88 1969 1970 1971 1972

SOURCES: 1966-1969 CNTINETL IRON AN. STEEL TRADE REPORTS,TE NAGUE,

I 959-1965 MET. ULLETI,LONDONE. -

Wor ld Bank - 4692(R)

LOCATION OF STEEL MILLS IRON ORE DEPOSITS AND COAL MINESB U L G A Y I A t'

'- J ~ 'SS

r = -d s , e ¢ /r = , S w e ' AU~~~~~~~~~~~~~~~~~~~~~~~~~~~~RGUL 7_

(' G ~~DEMIRKOY \. ,.IN .- >

~~$TAN8UL IZMIT MASDZECBAI1

CANAKBALE I >N RA S4 ;> <IZ E

CACAY EDRMIT DRALIKECiR A. I YA a

DIVI~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~(;* XeEGMIF ~~~~~~~~ ~~~KUTAHYA gKA.a _ UNIOUK1t\DeETC1 A 7 (A

I SI * , A' T a , A S 0% CIIE 0 0

-i5vGPGaV~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~up TIUKS A ts X 4I

,ts A en S ° S TERO NSTR U

GDLU RBAKIR~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ILMTR

froJBmkAli4'}FT:e -r INTERNATIONAL BOUNDARY

JANUARY 1972 IBRD 3827

Documents

INTERNATIONAL BANK FOR RECONSTRUCTION AND ......the U.S. Export-Import Bank Loan 18. Restructuring of Existing Loans 19. Projected Sales Proceeds - Stage I 20. Projected Income Statement