Kastamonu Entegre pushes ahead with investments despite global crisis

November 11, 2008, Tuesday/ 18:16:00
Kastamonu Entegre A.Ş. (Kastamonu Integrated Wood Industry and Trade Co.), Turkey’s largest wood-based panel manufacturer, has no plans to scale back investment and expansion projects despite the decrease in global demand as a result of the global credit crisis, says the top executive of the company.

The new projects that require financing and credit approval, however, may be put off for a while, he said.

As the guest of “Let’s Talk Business” this week, Haluk Yıldız, general manager of Kastamonu Entegre, explained to Today’s Zaman that unprecedented growth in the wood panel industry in Turkey for the past decade has pushed Kastamonu to adopt new corporate expansion plans to meet the need of its customers both in Turkey and abroad.

Unlike its rivals that concentrate in one region, Kastamonu strategically scattered its five production plants in Turkey and established them either close to client markets or close to timber industry areas. It is also the only Turkish company that has ventured outside the borders of Turkey and invested in the wood panel industry in three other countries.

The industry has an impressive growth record in Turkey. From 2002 to 2006, more than 10 new medium density fiberboard (MDF) and particleboard plants were opened, and more are planned. Turkey is the second-largest manufacturer of MDF panels in Europe, behind Germany, which holds the top spot, according to the European Panel Federation. Thanks to the booming construction and furniture industries in Turkey, Kastamonu has grown 330 percent between 2003 and 2007. The company has grown 15 percent so far in 2008 in comparison with the same period last year.

Yıldız, a native of Samsun, a Black Sea coastal town, holds a mechanical engineering degree from Bosphorus University. He joined Kastamonu in 1992 and became general manager in 2002. Against the wishes of his family, who wanted him to become a doctor, he chose engineering as a major. During those turbulent years, the country was embroiled in street violence. Clashes between left-wing and right-wing students broke out frequently on college and university campuses. “I found my mother and grandmother crying at home when the news of my departure [for university] became certain. They pressured my dad not to let me go, but he was a wise man and did not budge,” he said.

But Yıldız promised to rush back to his hometown once he earned his degree. He kept his word by starting his career at Samsun Copper Works. “I realized it was not what I wanted to do with my life and my career,” Yıldız said. He left once again to pursue a dream far from home. After having worked at the Lassa Tire Co. and the Aksa Akrilik chemical company, he joined Kastamonu Entegre A.Ş. first as a plant investment manager and later as general manager. Yıldız, who loves jogging and long walks in the morning and who packs more books than suits while traveling, has been with Kastamonu for 17 years.

Kastamonu represents a true success story from the heartland of Turkey. Established in 1969 in the northwestern province of Kastamonu, its namesake, the company, originally thought of as a supplier to the local furniture industry, has turned out to be a major global player today. With a consolidated turnover of $750 million projected this year, the company is the top exporter in the industrial forest products sector and is ranked seventh among the top 10 wood-based panel producers in Europe.

With five plants scattered across the country, Kastamonu enjoys 25 percent of the market share and commands the largest client portfolio in Turkey. It has 3 million square meters of open and 380,000 square meters of closed production area. Yıldız pointed out, “We can deliver to our clients anywhere in the country with high speed and low logistics cost.” The company uses rail to transport bulky board products, even to Iran. “It is difficult for Europeans to sell to Iranian clients because of logistics,” Yıldız said. Kastamonu exports 10 percent of its production in Turkish plants to foreign countries, while it supplies the rest to the domestic market to meet the demand in Turkey.

The company’s main product line includes MDF, chipboard, panels, laminated flooring, plywood and door skins. The MDF industry in Turkey had expanded by 45 percent to 3.2 million cubic meters at the end of 2007 from 2.2 million cubic meters in 2006. The capacity is expected to increase to 3.5 million cubic meters with the addition of two installations in Turkey. Kastamonu has three MDF lines in Turkey; the most recent one was built in Kastamonu, the birthplace of the company, as a $130 million investment last year. With a total capacity of 660,000 cubic meters in a year, Kastamonu is the second-largest MDF manufacturer in Turkey.

Developing technology

The company has invested in R&D programs to develop its own low-cost resin -- a glue-type product used in MDF and particleboard. Company technicians have also developed a “cogeneration method” to produce electricity from natural gas and use the heating released in the process to dry particle board. “We were told that this was not possible at the time,” he recalled, “but we kept pressing and succeeded in applying this cost-effective method in MDF lines.” Kastamonu was also the first company in Europe to develop cogeneration technology and started to use this process in its Gebze and Balikesir plants.

Yıldız did not seem too worried about the credit crisis. “We are at the top position in the supplier market and cater to the need of intermediate industry,” he said. “We slash prices and our profit may go down, but the quantity we sell does not change much.” Yıldız also said Kastamonu employs the latest technology in its production plants, enabling them to cut costs dramatically. “We also try to manufacture value-added products, not just the raw board,” Yıldız said, adding that the “variety of designs and different finishes attracts more clients to our products and gives us a competitive edge.”

When asked whether the company chooses the local machinery industry to refurbish its plants, Yıldız said it doesn’t. “First of all, in continuous lines, compatibility is a major issue, and we do not want to sacrifice efficiency in the process,” Yıldız said. He also said the price of local and foreign machinery has leveled off in recent years. “We invest in technology and do not shy away from investing an extra couple million dollars in establishing lines because we know we will recoup the cost in the production process,” he said. The company bought SiempelKamp and Dieffenbacher lines, two German machinery giants, for its plants.

In particleboard, Kastamonu has a 1.24 million cubic meter production capacity annually. Yıldız says a new 300,000-cubic-meter particleboard plant will be built over the next two years in addition to the four plants already in operation. In 2005, Kastamonu opened a 500,000-cubic-meter capacity particleboard plant in the western city of Balıkesir to utilize wood supplies from nearby forests as a $110 million investment. In 2007, it acquired a fourth plant, Tever Ağaç, from its bankrupt owner and started to modernize and expand it. This plant will add extra 360,000 cubic meters in capacity to Kastamonu’s production capacity.

Active abroad

Kastamonu also maintains plants in Bulgaria, Romania, and Bosnia and Herzegovina. Yıldız said the company ventured abroad for the first time in 1998 by acquiring S.C. Prolemn S.A. Co., a panel board company, from the Romanian privatization administration and spent $100 million to modernize it. “We completely overhauled the plant and installed new technology and machinery to produce door skins,” he explained. “We are the second-largest company in Europe in this segment and the fourth largest in the world.” He believes they broke the US monopoly in the market; the first three companies in door skin production are American.

“All three US companies offered to buy the plant and, I must say, with good figures,” he said. But board members declined the offer. Kastamonu holds 40 percent of the door skin market in Europe and a 10 percent market share worldwide. “We export 90 percent of products made in the Romanian plant to more than 40 countries,” Yıldız said. The Romanian plant also enabled Kastamonu to become dominant in the Turkish market -- 80 percent of the door skin market in Turkey belongs to Kastamonu.

The company further expanded in 2000 by acquiring Gabrovnitsa A.D, in the Kazanlık region of Bulgaria, and started to install a particleboard line in the factory as a $30 million investment. “It was mostly export-oriented investment,” Yıldız said, adding that 70 percent of products from the plant are exported overseas.

“The Bosnian venture is a different story altogether,” said Yıldız, whose company has entered into a joint venture with Natron Co., the leading cellulose, craft paper and corrugated cardboard producer in Bosnia and Herzegovina. The initial goal was to build an MDF and particleboard plant. “But when we met with officials, they asked us to take over a paper plant, a major timber industry client there. We revised our plans accordingly,” he said. The company invested $90 million in the Bosnian paper factory to increase capacity. “Our parent company, Hayat, was getting into the paper and sanitary products line. So we thought it might come in handy in that line of business,” he said.

A growing market and increasing orders encouraged Kastamonu to build two new MDF and particleboard plants in Adana and Antalya. “Our plants have been operating at full capacity,” Yıldız said. “We wanted to take advantage of booming demand in the region.” The plants, scheduled to be in operation by the end of 2009, will manufacture MDF and particleboard products to capitalize on the growth potential in the hotel industry in a region known as a tourist destination. “Hotels need to be renovated in every four to five years, so it should be a good market for us,” Yıldız predicted.

The company is also planning to build another MDF plant in Russia to manufacture MDF boards using local raw materials there. The nearly half-million square meter site in Krasnodar, a forest-rich region in southern Russia, was allocated for the plant and will be operational at the end of 2010 with a projected annual capacity of 300,000 cubic meters. “We can supply not only to the Russian market from there but also can cater to other Central Asian countries,” Yıldız said.

In addition to being rich in raw materials, the Krasnodar region presents other opportunities for Kastamonu. The area has the third-largest population in Russia. Yıldız said Russians have $20 billion earmarked for the 2014 Winter Olympics to be held in Sochi, close to Krasnodar. Sochi is also a major resort area with many hotels. The recent bad news from the global markets, however, forced Kastamonu to put the project on hold for a while. “Unless we secure a line of credit, we won’t push ahead with this,” Yıldız explained.

Diversifying resources

Unlike its competitors who rely heavily on imported timber, Kastamonu procures most of its raw materials in Turkey from local sources. The plants in Kastamonu and Balıkesir use government-owned pine forests for supply needs, while the Gebze plant imports 65 percent of its supplies from other countries such as Ukraine, Russia, Bulgaria, Canada and the US. The weakening of the Turkish lira recently against the dollar will adversely affect Kastamonu’s rivals.

The government policy in Turkey for the use of local timber requires companies to establish plants near local forestry resources to process timber. Most particleboard companies, however, would rather build plants near consumer markets and use imported timber instead. “The quality of timber is not that high in local forests,” Yıldız said. “That is why we go out and establish plants in other countries. We also encounter a lot of red tape in Turkey as forest villages are given special status under the law. We can’t, for example, introduce heavy equipment and machinery to reduce our cost.”

Instead, Kastamonu has to rely on local contractors who work in conjunction with cooperatives established by forest villagers. Since the villagers represent a voter base of 5 million to 6 million, it is difficult for Turkish politicians to revise the policy.

Timber prices in Turkey are two times higher than US prices and three times more expensive than EU prices. “The prices of raw materials like urea and methanol are determined globally in the commodities market, and energy prices are more or less the same,” Yıldız says. “In timber prices, however, we are in a disadvantageous position.” He explained that acquiring cheap raw materials was one of the driving forces for Kastamonu to expand into overseas markets.

Kastamonu was able to successfully turn past economic crises into opportunity and had grown primarily because it had no outstanding debt and used its own resources to finance projects. “This time, however, we are entering a crisis with two major investment projects ongoing, and we are relying on outside finance,” Yıldız said. He is optimistic, though, that the company can benefit from this crisis as well. In fact, it already has. Kastamonu has bought a bankrupt American MDF plant whose machinery was provided recently by German suppliers. “We are moving whole plant to Romania,” he said. “For now, until the dust clears in the credit market, we have decided to postpone new projects that are not approved for the extension of credit and loans.”

Kastamonu is 80 percent owned by family-owned Hayat Holding Inc., which also owns two separate companies called Hayat Chemicals and Hayat Cleaning and Sanitary Products Co. Although privately owned, Kastamonu has the organizational structure of an institutional company.

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