The country seeks to return to its industrial past

In the last 10 years, Algeria has focused on developing local manufacturing industries in order to reduce its heavy import spending, boost employment, increase value addition and export revenues, and diversify the economy. Today the oil and gas industry contributes 97% of export receipts and roughly one-third of GDP, yet it employs only a fraction of the workforce. Over-reliance on the energy sector in the last three decades has siphoned investment away from manufacturing and left the country with high import demand in a number of critical areas, including food supply, machinery, electronics and other consumer goods.

The 2007-08 global financial crisis exposed Algeria’s vulnerability to external price shocks and spurred state efforts to boost local production. Industry’s redevelopment has been somewhat arbitrary in recent years, yet a handful of segments have grown quickly, attracting new sources of foreign direct investment (FDI). Projects recently launched in auto manufacturing, pharmaceuticals, construction materials and agro-industry will help to drive the sector forward in the future. “There is a lot of emphasis on exporting Algerian products, but many companies, for example in the Kabylie region, are too overwhelmed with domestic demand to even consider the export markets for the moment,” Ramdane Batouche, CEO of General Emballage, told OBG.

State efforts to increase the amount of available industrial land and encourage the development of a local subcontractor network should help overcome two of the sector’s main obstacles. For Algeria to reestablish itself as an industrial power, however, authorities will also need to strengthen the logistics network, loosen FDI restrictions, and ease regulatory and fiscal conditions for exporters. Another hurdle is lack of information. “There are not enough performance indicators available in Algeria to really ascertain the potential of industrial growth at a sectoral level,” Paul Magera, CEO of Sika El Djazaïr, told OBG.

Industrial Past

Following Algeria’s independence in 1962, the new government adopted a state-led industrialisation strategy that aimed to diversify the economy and render the country more self-sufficient. Under this policy, foreign imports were restricted and the state channelled rising oil revenues into building up a presence in heavy industry. By the late 1970s, large state-owned enterprises came to dominate most commercial and industrial sectors, such as construction materials, machinery and textiles.

However, the oil-related economic crisis of the 1980s, combined with the inefficiency of a certain number of public enterprises, pushed the government to recalibrate economic policy. Industrial investment slowed and a number of public industrial groups were broken up or privatised. Since the early 2000s, re-industrialisation has been back at the top of the agenda, but progress has been slow. Industry contributed 5% of GDP in 2013, down from 18% in the 1980s.

Re-Industrialisation

In the last five years, the state has introduced a host of measures to stimulate local activity. State-owned enterprises maintain a key role in sectors like manufacturing and agro-industry, and the government has injected capital to boost their capacity and efficiency. One of these, the state machinery firm ENCC Industrial Group, reports that the government is funding a €70m investment programme from 2013 to 2015 to scale up its activities, offer employee training and refurbish existing equipment. State-owned pharmaceutical producer SAIDAL is implementing an AD17bn (€158m) investment programme that aims to double its capacity within five years.

The sector’s future, however, will rely on attracting higher levels of private investment from both domestic and foreign companies. “Bigger corporations have to keep looking for Algerian small producers and subcontractors to further integrate into the domestic value chain,” Moussa Belkacem, managing director of Société Nationale des Tabacs et Allumettes, told OBG. Algeria’s foreign investment environment remains highly regulated, and foreign firms are limited to a minority stake in all joint ventures. The World Bank notes that, since this rule was introduced in 2009, total FDI has dropped steadily, reaching €1.47bn in 2013, with the lion’s share of this going to the energy sector.

Government officials have recently been pushing reforms. A revised investment code was submitted to parliament in mid-July 2014, and will be made public “as soon as the government has approved it”, according to the minister of industry and mining, Abdessalem Bouchouareb. Though details of the proposed changes were not yet available as of December 2014, Bouchouareb said “many articles have been changed... with a view to facilitating investment”, constituting “a profound revision that will give the country new things to showcase”, such as streamlining the procedures for registering and declaring new investments. As for the foreign ownership restriction, he said it was “a transitional measure adopted under particular circumstances in order to protect the national economy. It is bound, sooner or later, to disappear, in any case before 2020.”

Attracting Investment

Authorities have tried to draw private investment to the sector by other means, including tax breaks for real estate acquisitions and concessions, and a 2011 measure allowing investors to lease land for 99 years through renewable 33-year contracts (up from 20 years previously). Foreign firms are exempt from value-added tax on imports, and other benefits apply for firms with over 100 employees.

Several fundamental factors work in Algeria’s favour, including its large and well-educated workforce, expanding transport network and, most importantly, cheap energy supply. The state is working to encourage local manufacturing across a number of sectors, but particularly those in which import spending is high – namely, agro-industry, automobiles and pharmaceuticals.

WTO Accession

One area that would further strengthen the appeal of Algeria’s manufacturing industry – particularly given the country’s competitive advantages in other areas – is stronger trade links, which would make it easier for manufacturers to import inputs and export finished products overseas. Discussions on Algeria’s accession to the World Trade Organisation (WTO) have proceeded haltingly since it first applied in 1987. Yet the government has made the country’s WTO bid a pillar of its 2014-19 economic plan, and at the latest round of negotiations in March 2014, WTO members praised the country’s “substantial progress” in areas such as IT and intellectual property.

Industrial Parks

The country today has 77 industrial zones, and the northern cities of Algiers, Constantine, Oran and Sétif have emerged as industrial centres given their proximity to port and highway infrastructure. However, available land is beginning to run short. Despite the country’s vast territory, much of the land outside of the northern wilayas(provinces) is ill-adapted to industrial use, and land acquisition in Algeria can be slow and bureaucratic (see Real Estate chapter). To solve this, the National Agency for Land Intermediation and Regulation (Agence Nationale d’Intermé diation et de Régulation Foncière, ANIREF) is building a nationwide network of 49 new industrial zones, which are meant to distribute economic activity and jobs more evenly throughout the country.

The parks will be distributed among 39 wilayas, covering a total of 11,623 ha. While most of them will be set up in northern wilayas, where most of the country’s economic activity is concentrated, at least 10 will be located in the semi-arid Hauts Plateaux region and five in the south. Special incentives will apply in these under-served regions, with land concessions reduced to AD1 (€0.01) per sq metre for the first 10 years in the Hauts Plateaux and for 15 in the southern wilayas, followed by a 50% reduction in annual fees. The zones, all located along major transport lines, will be open to any number of activities, but authorities hope that industrial centres will develop based on regional advantages. In early 2014, development contracts were awarded for the first four zones in Djelfa, Tizi Ouzou, Médéa and Ain Temouchent, and as of mid-December ANIREF was calling for pre-selection bids for the others.

Refining & Petrochemicals

Given the economy’s reliance on oil and gas, downstream processing activities are a cornerstone of local value-added activity. The government is seeking to boost such activity through the construction of five new refineries in 2013-17. The facilities will have a combined fuel processing capacity of 30m tonnes a year, which would more than double Algeria’s current capacity of 22m tonnes. Raising the country’s refinery threshold will help further reduce import spending; Algeria imported AD344.5bn (€3.2bn) in energy products and lubricants in 2013, according to the national Customs directorate.

After oil and gas, which accounted for 97% of total exports in 2013, the second-largest category was petroleum derivatives, accounting for €710.8m, nearly half of all non-hydrocarbons exports. Of the revenue earned in 2013 from these derivatives – which include solvents and methanol – the state-owned oil firm, Sonatrach, accounted for AD997m (€9.3m), an increase in value by 17% year-on-year (y-o-y). The fertiliser producer Fertial contributed the remaining AD294m (€2.7m) from exports of ammonia.

Fertial, a joint venture between Spain’s Grupo Villar Mir (66%) and Algerian firm Asmidal (34%), also produces phosphate fertilisers for use on the domestic market. Algeria used an average of 12.7 kg of fertiliser per ha of arable land in 2009-13, well below Morocco (39.1 kg) and Tunisia (40.4 kg). The government subsidises 20% of the cost of fertilisers, and demand is expected to grow as Algeria works to increase agricultural output. Sorfert, an Oran-based joint venture between Sonatrach and Egypt’s Orascom Construction Industries, began production of chemical fertilisers in 2013, and will reach an annual capacity of 2m tonnes per year, much of which will be dedicated to exports, according to local media. The state also announced in 2012 that it would invest €102.9bn to set up three more fertiliser production units by 2020.

Steel

Algeria will need to scale up production of steel to meet demand from its ambitious building programmes in public housing, roads and railway networks. Algeria imported €1.37bn in steel products in 2013, down 11% from €1.54bn in 2012, according to the Ministry of Finance, but steady demand in the coming years will weigh on import spending. “Steel consumption in Algeria, both imports and locally produced, is mainly used for the construction of large-scale projects,” Boudjema Talai, CEO of Batimetal, told OBG.

Algeria’s steel production is currently dominated by the El Hadjar plant in Annaba. India’s ArcelorMittal acquired a 70% stake in the facility when it was privatised in 2001, but the state re-acquired a majority (51%) stake in October 2013 via the state-owned steel firm Sider. The plant now employs 5000 people and has a production capacity of 2m tonnes per year, supplied by iron ore from Algerian mines.

However, the unit has grappled with under-investment and labour disputes, which pushed output downwards from 1.3m tonnes in 2007 to 600,000 tonnes in 2012. Following the change in shareholding, the government announced that it would invest in infrastructure upgrades to raise annual capacity to 2.2m tonnes, although machinery failure and labour strikes interrupted production in mid-2014.

Several new projects are in the works. In June 2013 a €551.3m steel plant developed in partnership with the Turkish group Tosyalı Holding was launched in Oran, adding 1.25m tonnes of annual capacity. A second facility is under construction in Jijel as a joint venture between SIDER (51%) and Qatar Steel International and Qatar Mining (49%). The €1.47bn unit is set to begin operations in 2017 with an initial capacity of 1.5m tonnes of steel rebar and 500,000 tonnes of wiring rod.

Agro-Industry

To reach Algeria’s goal of meeting 70% of food consumption needs through local production, large capacity increases are required. Algeria is one of the world’s largest cereal importers, buying €2.43bn worth from abroad in 2013, up from €2.42bn in 2012, according to the Ministry of Finance.

The government has taken a number of measures to boost domestic output, such as creating sector-specific professional groups, opening up agricultural land to private and foreign firms, and subsidising the use of irrigation equipment, fertilisers and agricultural machinery. The creation of crop-specific trade committees, in particular, has helped to encourage aggregation practices and spread the use of modern tools and techniques – for example, by making communal machinery available to farmers and subsidising the use of fertilisers (see Agriculture chapter).

Small average farm size and insufficient modernisation are two of the primary obstacles. The presence of private industrial groups, however, such as Algeria’s Benamor, Cevital, SIM and several private dairy producers has helped to increase production efficiency by reducing waste and spreading best practices.

Automobile

Over the past decade, automobile sales have boomed in Algeria, providing a valuable new source of revenue for vehicle importers. New vehicle sales by Algeria’s main dealerships jumped 50% y-o-y in 2012, peaking at more than 600,000 units after several years of sustained growth. This came despite a ban on consumer credit in 2009-13, and low household credit – at 8% of the total in 2012, according to the IMF. However, sales dipped by 1.9% in 2013, and continued to slide by 28% y-o-y in January-May 2014.

Auto dealers attribute this dip to a temporary shift of consumer spending towards public housing, and expect the market to pick back up in 2016. Algerian authorities are particularly keen on developing domestic automobile production in an effort to ease import spending; imports of new vehicles amounted to AD256.5bn (€2.4bn) in the first half of 2014 alone. French auto manufacturer Renault is in the final stages of constructing a production plant near Oran, a major step forward for the sector. The plant will produce 25,000 vehicles per year in an initial stage, which could be scaled up to 75,000 per year in the future, all of which will be dedicated to the domestic market.

Authorities hope this new project will stimulate the development of a local subcontractor network. To this end, 20 ha of Renault’s 150-ha site have been set aside for small and medium-sized enterprises (SMEs). In addition, the state introduced several measures in the 2014 complementary finance law that aim to direct more investment into the domestic auto industry, and also rolled back a five-year ban on consumer lending, which should help stoke domestic demand (see analysis).

Pharmaceuticals

The pharmaceuticals sector is another area where the state aims to reduce imports. Algerians spend on average €59 per capita on pharmaceuticals each year, making it Africa’s third-largest consumer market for medications after South Africa and Egypt. Expenditure is supported by rising incomes as well as favourable government health programmes, which cover 80% of the cost of many medications.

Rising consumption has attracted a number of international firms to set up local processing operations, yet spending on pharmaceutical imports continues to rise, increasing 25.8% y-o-y in the first half of 2013 to reach €882.1m. To counteract this trend, the government banned imports of around 800 different molecules used in key medications in 2008, although this resulted in nationwide shortages of key medications as local producers were unable to meet demand.

Today, the domestic market has 55 producers, most of them performing late-stage processing. However, several projects on the horizon stand to boost sector output significantly. French drugmaker Sanofi Aventis is building a €70m plant near Algiers, which will be its largest facility in Africa. The state-owned manufacturer SAIDAL Group is also working to build three generic production plants in Algiers, Constantine and Cherchell for a total investment of €100m (see analysis).

Household Goods

Algerian industry is also expanding into electronics, appliances and other consumer goods. Public and private companies in the electronics sector make a variety of products, such as HB Technologies, which produces SIM and credit cards, and Condor, a maker of mobile handsets. However, most primary materials must be imported, which puts pressure on operators’ margins.

Cevital produces household appliances from its factory in Sétif in partnership with Samsung. In a rare move for an Algerian firm, Cevital CEO Issad Rebrab announced in June 2014 that the company expects to generate half of its turnover from foreign markets by 2025. In 2013 the group acquired Oxxo, a French window-maker, and plans to produce 2m windows per year at a new factory in Bordj Bou Arréridj. In April 2014, it bought the multinational household appliance firm Fagor-Brandt for €200m, taking over its 1600 patents. The firm plans to start up a second factory in 2015 in Sétif that it expects to be one of the world’s largest production units for household electronics; at full capacity, it is set to create 7500 direct jobs.

According to Rebrab, Cevital will rely on Fagor-Brandt’s existing distribution network to export appliances around the world starting in 2016. These international acquisitions, relatively rare in Algeria, should help to spur knowledge transfer and establish ties with foreign markets, which will be necessary to increasing the country’s non-hydrocarbons exports in the future. Until now, Algerian firms have been restricted from sending capital abroad to invest in foreign activities; however, the Bank of Algeria moved in late 2014 to ease these restrictions for companies wanting to invest in operations that fall within their primary area of activity.

Outlook

Algeria’s re-industrialisation efforts stand to increase employment opportunities, diversify the economy and reduce import spending in the medium term, and given the country’s strong infrastructure network, comparatively large and robust domestic market, and range of affordable inputs – including labour and energy – it is an attractive prospect for potential investors in manufacturing. To increase the weight of non-hydrocarbons exports, however, Algeria will need to ease fiscal and regulatory restrictions. As things stand, potential exporters face a number of obstacles, including delays in obtaining fiscal benefits, short deadlines to repatriate foreign receipts, tight foreign currency controls and administrative red tape.

The new network of industrial zones should help provide more structure to a sector that has developed somewhat on an ad hoc basis, and distribute its activity more evenly. The presence of large industrial groups is helping to drive the sector forward, and authorities hope this will support the development of a dense network of sub-contractors and SMEs, which will be necessary to support higher activity levels in the future.

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The Report: Algeria 2014

Industry and Retail chapter from The Report: Algeria 2014

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