Call for manufacturers: Authorities seek to increase the sector’s weight and establish new industrial clusters

After decades of heavy dependence on hydrocarbons exports, Algeria has been working to increase value-added activity and local manufacturing, reduce its import bill, provide a buffer against commodity volatility and create more employment opportunities.

GROWTH ORIENTED: Key segments such as pharmaceuticals, construction materials and agro-industry, have seen a steady expansion in recent years and are witnessing an increase in foreign direct investment (FDI), driven in part by the attractiveness of Algeria’s domestic market – which is bolstering new sectors such as car manufacturing and textiles – and also by governmental support.

Many of the challenges the country faces in the expansion of its industrial sectors are connected with years of under-investment. With the focus on oil and gas exports, insufficient attention was paid to enhancing the competitiveness of manufacturing and thus, productivity suffered. According to local media, industry’s contribution to Algeria’s GDP decreased from 18% in the 1980s to around 5% in 2013.

In response, the government rolled out a plan in 2009 to rehabilitate state factories. Progress has stuttered, but the fastest-growing clusters are improving. According to the African Development Bank’s “Algeria Economic Outlook 2013” report, “Recovery in industry seems however to be starting up, as reflected by growth of the general industrial production index, which was 1.2% in 2012 (compared to 0.4% in 2011).”

ATTRACTING INVESTMENT: A series of incentives targeting domestic and foreign investment have been implemented in recent years, with several specifically aimed at increasing capital inflows into manufacturing and processing. The introduction of tax breaks on real estate acquisition and concession, such as the exemption from transfer tax on all real estate deals that constitute investment, as well as cuts to Customs and company registration fees, have been helping to reduce the cost of doing business. A measure implemented by the government in 2011 allows foreign investors to lease land for 99 years through renewable 33-year lease contracts, rather than the previous 20-year limit. Further advantages are directed at foreign firms operating in the country, such as an exemption of value-added tax on imports and additional benefits for companies that employ more than 100 people.

Some aspects of the regulatory regime remain constrictive by comparison to other regional markets, such as the 51:49 ownership rule, which mandates that any foreign investor must partner with a local investor under a minority joint venture arrangement. However, under the current investment climate, particularly given the depressed European economy and the instability still affecting several of its neighbours, the country has been able to maintain an attractive position.

Additionally, the availability of natural gas to be used as a feedstock, given reserves of 4.5trn cu metres, according to OPEC’s “Annual Statistical Bulletin 2013”, is also pushing an increasing number of heavy industry manufacturers to consider Algeria as a base for their operations. The country is working to make use of the favourable conditions to create a more attractive investment climate and reduce bureaucracy.

Moving up the value chain is another priority for the state as it works to foster the development of the industrial sector. Farid Benhadji, the CEO of Manadjim El Djazair, told OBG, “The government is looking to diversify commodity industries vertically and not simply extract raw materials, but rather improve processing capacity – to turn phosphate into fertilisers, for example, which adds value to export sales.”

FOREIGN PROJECTS: In recent years, a host of new projects backed by foreign investors that promise to both expand and diversify industrial output in Algeria have been scheduled for construction. A major newcomer will be the Renault factory close to Oran. The initial capacity of the car production centre will be 25,000 vehicles, but the plan is to increase this to 75,000 manufactured cars a year, directed exclusively at Algeria’s fast-growing car market (see analysis).

A big push for the textiles sector will come through an agreement between Turkish textile company Taypa and Algeria’s state holding company, Société de Gestion des Participations Industries Manufacturières, to build a $900m textile clothing industry cluster in Relizane, in the east of the country. This will include eight garment-manufacturing units producing trousers, hosiery items and t-shirts. The Ministry of Industry, Small and Medium-sized Enterprises, and Investment Promotion expects the project to create 10,000 jobs. Construction on the series of garment factories was set to begin in mid- to late 2013.

Under a deal said to be worth $1.7bn, the UAE-based Tawazun Holding will set up a factory to build 200 armoured vehicles per year for the Algerian army. The new unit will be a joint venture between Tawazun Holding and Direction des Fabrications Militaires, which will be managed by the Algerian Ministry of Defence to produce up to 2500 military vehicles over a period of 15 years to meet the needs of the country’s defence forces. Operations should start before the end of 2014.

EXPANDING INDUSTRIAL AREAS: Despite the fact that it is now Africa’s largest country by landmass, land has traditionally been a scarce commodity in Algeria. The majority of the land in the vast south of the country is not ideal for industrial activity and, as elsewhere, acreage is largely state-owned. Furthermore, purchasing or leasing land is problematic and an extremely bureaucratic procedure (see Real Estate chapter). As a result, industry tends to be fairly concentrated in the north, close to coastal areas. However, besides increasing the amount of new industry that can create employment, the government is also now pushing to spread the presence of manufacturing to less developed areas.

Much of this will be done through the creation of new industrial zones. Although 77 such zones have been created over the years, some are under-used. The National Agency for Land Mediation and Regulation (Agence Nationale d’Intermediation et de Régulation Foncière, ANIREF) is in charge of a project to create 42 new industrial zones, covering a total of 9.57 ha across 34 wilayas (provinces). The plan will likely help alleviate the lack of available industrial real estate, one of the major weaknesses the sector has had to confront.

Although authorities have embarked on the creation of industrial zones before, with mixed results, the new industrial parks might have more momentum behind them. Thanks to large investments in infrastructure, the zones will be set up close to new highway axes, including the Hauts-Plateaux, East-West Highway and the expanding railway network. Additional transport investments, including into the Port of Algiers and the Port of Béjaïa, will likely reduce operational costs for the manufacturing sector, as well as help encourage a broader geographical spread of activity. ANIREF expects the start of work on the initial seven of the new zones by the first quarter of 2014. Although they will be multi-purpose, allowing for any industry to establish itself, most of them will try to attract industries that already have a track record in their specific regions.

GEOGRAPHICAL SPREAD: “There is a strong emphasis on creating industrial zones outside of already industrialised regions. Of the 42 new zones, 10 will be in the Hauts-Plateaux and five zones in the southern region of Algeria,” said Rachid Reddaf, the advisor in charge of communication and cooperation at ANIREF.

Special conditions apply to less developed areas to incentivise new ventures. In the highlands and the south, land concessions will cost AD1 (€0.01) per sq metre for 10 years, and include a 50% allowance on the annual fee beyond that period. In the southern wilayas of Adrar, Tindouf, Illizi and Tamanrasset, land concessions will cost AD1 (€0.01) per sq metre during the first 15 years and include a 50% allowance on the annual fee after that initial concession period. The development of the new industrial parks is budgeted at $1.3bn, set to come from Algeria’s National Investment Fund. The first zones to be built will be located in Ouargla, Relizane, Djelfa, Medea, Tizi Ouzu, Mostaganem and Aïn Témouchent. The biggest industrial zone, planned at Sétif, will extend over an area of 700 ha.

STEEL: With the amount of public investment that is currently taking place in the country, increasing steel production has become a necessity. These steel projects are intended to help address an expected continuation of the rising demand, driven by the expansion of railway networks and the construction of more than a dozen tramway lines across several cities. In 2012 Algeria imported nearly 4.5m tonnes of steel products to be used in the construction sector. Most steel products imported into Algeria come from European countries, which have installed production capacity but have been strained under sluggish construction markets.

The El Hadjar steel mill in Annaba, majority-owned by India’s ArcelorMittal since 2001, has long sustained all of the country’s steel production. Challenges in the sector, such as manufacturing inefficiencies and labour disputes, caused a reduction in output over the years, from 1.3m tonnes in 2007 to 580,000 tonnes of crude steel in 2012. However, in April 2013 steel production levels in the country rose by some 54% when compared with the same period in 2012, according to figures from the World Steel Association.

The El Hadjar mill is currently 30%-owned by the Algerian state through steel group SIDER, but negotiations have been taking place to increase the government’s share, possibly turning El Hadjar into a 51:49 state majority arrangement. Domestic media reports have stated that the Algerian government will pay around $200m for the deal. Authorities are hoping that an increase in domestic ownership will push forward a plan to bring the mill’s production capacity up to 2.2m tonnes over the coming years.

NEW ENTRANTS: Other producers are joining the fray. A recently completed Turkish-Algerian joint venture will further add to production levels in the country: Tosyalı Holding inaugurated its $750m steel plant close to the western city of Oran on June 2013. The annual capacity of the plant is expected to reach 1.25m tonnes of molten steel per year from iron waste.

The steel market is also set to get a boost from other projects. A joint venture between Qatar and Algeria is building a new steel production unit, scheduled to commence operations by 2017. The 1000-employee unit, to be located in the Jijel region east of Algiers, will have a total production capacity of 4m tonnes of steel rebar and wiring rod per year. The initial phase of the project, budgeted at $2bn, will equip the unit with a production capacity of 1.5m tonnes of steel rebar and 500,000 tonnes of wiring rod. The unit will be 51%-Algerian-owned under SIDER. The remaining 49% of the plant will be shared equally between the Qatari partners, Qatar Steel International and Qatar Mining.

CEMENT: The massive amount of construction taking place is also pushing cement consumption upwards. In an effort to stem rising cement imports, the government has established a programme to raise production through capacity increases at the Groupe Industriel des Ciments d’Algerie (GICA) with several production units, since most of the state-owned cement factories are outdated or in need of a revamp.

Through the restructuring and extension of existent production lines, and the building of additional cement units, the government expects to bring its current production of 11.5m tonnes of cement a year to about 25m tonnes annually by 2017. The government’s AD150bn (€1.43bn) plan consists of increasing capacity in five cement production sites, including Beni Saf, Zahana, Meftah, Ain Kebira and Oued Sly. It also outlines the construction of four new cement production units in Ségus, Béchar, Relizane and In Salah, with a combined capacity of 5m tonnes of cement.

On top of GICA’s annual production, the market receives another 7.5m tonnes produced by the cement group Lafarge and 2m tonnes accounted for by smaller producers, bringing the total nationwide production capacity to about 21.5m tonnes of cement each year.

Besides planned improvements at GICA’s cement works, Lafarge is also expanding capacity. Through a partnership with local private group Sagremac, the French cement producer will build two additional units in the country. The first one, in Biskra, is expected to be operational by 2016, with a capacity of 3m tonnes. The second unit is set to be built at a later stage, close to Constantine, on the east side of the country.

Demand for cement is rising at about 5% per year, but with domestic supply frequently outstripped, the need to look elsewhere to cover the shortages has been steadily mounting. According to cement industry journal International Cement Review, Algeria imported 1.3m tonnes of cement during the first four months of 2013, which represents a 116% increase when compared to the level of imports over the same period in 2012. Total imports for 2013 are expected to reach 3m tonnes. Lack of construction materials leads prices in the Algerian market to be volatile. However, the current situation in Europe has helped lower the price of cement, prompting contractors operating in Algeria to import cement and other materials from Europe.

PHARMACEUTICALS: Algeria’s pharmaceuticals market is the third-largest on the African continent in terms of global expenditure after South Africa and Egypt, with a total of $80 spent per capita annually (see analysis). With imports of pharmaceuticals growing rapidly, the market has been attracting foreign operators to either sign contract provisions with Algerian authorities or set up manufacturing units in the country. The government is keen to increase domestic production, which accounts for about 30% of current needs. According to local media reports, in 2012 Algeria imported $2.2bn worth of pharmaceuticals products. This represents a 13.6% increase compared to 2011 figures, which reached $1.9bn. In terms of volume, imports showed growth of more than 45%, from 24,468 tonnes in 2011 to 35,540 tonnes in 2012.

In an effort to stem the rising import bill and encourage local production, authorities have been trying to attract manufacturers, hoping to cover domestic needs through local production by 2020 (see analysis). In April 2013 state-owned manufacturer Groupe SAIDAL inked a deal to build three generic production facilities at a total investment of €100m. The new units, to be located in Algiers, Constantine and Cherchell, will increase the group’s capacity by 75% and are expected to start manufacturing operations by 2015.

International drug manufacturer Sanofi Aventis is also completing its €70m production facility, which will be its biggest production unit on the continent. “The development of the pharmaceuticals sector will help the country avoid the shortages experienced by the Algerian market in past years and finally reduce the dependence on foreign suppliers,” Mohamed Houssam Soued, the vice-president of pharmaceuticals company El Kendi, told OBG.

AGRO-INDUSTRY: Despite its potential to develop a strong agro-industrial sector, the country still imports around 70% of the food needed to meet consumption demands each year, making it one of the continent’s biggest food importers, though there are plans targeting 70% self-sufficiency by 2014 (see Agriculture chapter). Cereal imports for the 2012/13 season are expected to have reached roughly 5.8m tonnes.

Agriculture accounts for about 10% of GDP, and despite the potential to grow and process more food domestically, the government has identified that links between producers and food processors need strengthening. The average size of farms is also a deterrent to investment. The government is putting in place plans to not only increase agricultural production but also to better link producers with processing and marketing capabilities. In 2012 a special AD50bn (€475m) fund was announced to help finance skill and equipment upgrades for companies in the sector. Authorities are also establishing production plans to better coordinate with agro-industrial manufacturers.

Improving efficiencies in the agricultural sector will certainly help Algeria cover more of its food needs domestically. Continued support might also encourage the sector to increase exports. According to local media reports, agro-industrial exports from Algeria reached a modest $300m in 2011, mostly from food oils and refined sugar.

PETROCHEMICALS: Efforts to diversify revenue sources will also focus on enhancing downstream capabilities in energy sector, as the country aims to expand value-added activities (see Energy chapter). A major investment plan is set to more than double Algeria’s refining capacity over the next four years, through the building of five new refineries by 2017. The fuel-processing units are expected to have a combined capacity of 30m tonnes. This will do much to secure refining capacity, especially after upgrades at the country’s Skikda refinery have occasionally interrupted normal operations during 2012 and 2013. Four of the five new refineries will have a capacity of 5m tonnes per year, while the fifth one, which the government expects to build offshore to facilitate exports, will have a capacity of 10m tonnes of crude oil per year. Algeria’s refining capacity is estimated at some 22m tonnes annually. Raising refining capacity will also help reduce imports of petroleum products, which reached 3m tonnes in 2012, according to the national press agency, Algérie Presse Service. Most of these imports were petrol and fuel oil.

Additionally, government officials have mentioned the possibility of investing in a large petrochemicals cluster at Skikda, which would involve up to 20 manufacturing units and a focus on chemicals production for the paper, pharmaceuticals and painting industries. The new production zone would employ 1000 workers. However, no specific details for the beginning or completion of the project were publicised at the time of press. Industrial investment will also be spurred by new fertiliser production. The government announced in 2012 its plan to invest $140bn to set up three fertiliser units before 2020. This is expected to have a positive impact on agricultural production as well as create more jobs for its industrial sector.

CHALLENGES: Industrial exports across a range of segments face constraints that have slowed progress, including the issue of logistics. According to Ali Boumediene, general manager of electronics manufacturer Bomare, “Currently in Algeria, logistic charges, reaching up to 7%, heavily weigh on Algerian production costs, which also undermines export competitiveness.”

Another issue that will increase in importance as Algeria works to boost its non-hydrocarbons exports is that of quality control, according to Jean-Francois Roche, managing director of SGS Algeria. “As Algeria's export capacity increases in areas like manufacturing and agro-industry, so too will the need for proper checks and balances on quality controls to ensure international competitiveness, “ Roche told OBG.

OUTLOOK: In spite of decades of under-investment, Algeria’s industrial sector offers significant potential for growth in the medium to long term, especially given the range of accessible inputs – including hydrocarbons, electricity, land and agricultural products – and new industrial zones and regulatory reforms. Although the country has been able to attract investment into its industrial sub-sectors, competing with others in the Mediterranean basin will be harder as the region stabilises. Continuing to attract FDI will depend on the country’s capacity to strengthen the competitiveness of its manufacturing industries and upgrade human skills. Ramdane Batouche, the CEO of General Emballage, told OBG, “Algeria must invest heavily in human resources and further capacity building for youth. Buying machinery is not sufficient; it must come with a commitment from suppliers to provide technology transfer as well.”

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The Report: Algeria 2013

Industry & Retail chapter from The Report: Algeria 2013

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