Algeria works to attract investment in industry and mining, and curb imports

 

Many of the key building blocks for a successful industrial sector, including abundant energy reserves and mineral raw materials, well-developed infrastructure, and proximity to major export markets are present in Algeria. Despite this, the economic contribution of industry is relatively small.

However, some segments such as agri-business are comparatively well developed, and activity in heavy industrial subsectors, including steel and cement production, is growing quickly. Furthermore, authorities are working to increase industrial output as part of ongoing efforts to diversify the economy and encourage foreign investment. This has included establishing incentives for domestic manufacturing firms, as well as restrictions on imports, which have been met with considerable success.

Economic Contribution 

The government is continuing work to increase the role of industry in the economy amid lower oil and gas prices. Industrial output had a value of AD972.5bn (€8.1bn) in 2016, equivalent to 5.6% of total GDP and 6.8% of non-hydrocarbons GDP. These figures compared to 5.4% of total and 6.6% of non-hydrocarbons GDP the previous year. In line with government development plans, industry’s share of economic contribution is rising, though this is partly a result of the decline in the value of oil and gas in recent years.

According to figures from the National Statistics Office (Office Nationale des Statistiques, ONS), industry grew by 3.8% in real terms in 2016, putting it ahead of both total GDP growth of 3.3% and non-hydrocarbons growth of 2.3%. In the first quarter of 2017 year-on-year (y-o-y) sector growth was 3.3%, compared to GDP growth of 3.4% and non-hydrocarbons expansion of 2.5%. This figure rose to 3.7% in the second quarter, at which point overall growth was 1.5% and non-hydrocarbons growth was 2.1%.

The fastest-growing industrial segment in the second quarter of the year in annualised terms was wood, paper and cork at 10.1%, followed by water and energy (8.2%), and agro-industry (3.7%).

Attracting Investment 

With low oil prices imposing limits on state-led capital expenditure, the government is seeking to attract more private sector investment – both domestic and foreign – as part of more general economic diversification efforts, and to reduce the country’s import bill by stepping up local production.

To achieve this, authorities have taken several steps to encourage and facilitate investment in manufacturing. Prominent among these were measures in the 2015 Finance Law introducing five-year exemptions from taxes on corporate profits, corporate revenues and professional activities, as well as a 3% interest rate subsidy for bank loans for companies operating in a wide range of industrial segments, including steel and metallurgy, electrical and electronic goods, automotives, aeronautics, pharmaceuticals, and agri-business.

In 2016 the country passed revisions to regulations aiming to incentivise investment. These included allowing foreign companies operating in Algeria to borrow from abroad, though this is limited to strategic projects and is considered on a case-by-case basis, and lifting foreign exchange surplus requirements. Efforts were also made to speed up the allocation of construction permits to investors.

In addition, the revised code provides incentives for eligible projects: all ventures, except those on a list of around 200 activities, are to be exempt from Customs duty for eligible goods and services imported as part of an investment project, value-added tax for goods and services used to establish an investment, property tax for 10 years, and registration fees. Other incentives include the state covering the costs of infrastructure work for some projects, evaluated on a case-by-case basis, and the provision of land in the Hauts Plateaux province and the south of the country for a nominal rent over a 10-15 year period. The previous year the government also increased the powers of regional governors to allocate land to investors. This served as a solution to one of the key challenges for industrial projects – a lack of appropriately zoned terrain.

In September 2017 the government announced plans to create 50 new industrial zones across the country, though this appeared to be little more than a re-announcement of previous plans, which date back to at least 2012 and have faced several delays.

Restricting Imports 

Authorities are combining these incentives with both formal and informal efforts to reduce imports of manufactured goods. These should work to limit the current account deficit and thus reduce pressure on foreign exchange reserves, in some cases with the explicit aim of spurring the development of local manufacturing capacity. This approach was first applied to pharmaceuticals production: in 2009 the import of medications that were able to be locally manufactured was banned. This model has been relatively successful in the sector, leading to increasing self-sufficiency in basic pharmaceuticals production.

The approach gained momentum after the 2014-15 downturn in oil prices and the accompanying deterioration of trade and current account balances, with Abdeslam Bouchouareb as then-minister of industry and mining, under Prime Minister Abdelmalek Sellal, who served from September 2012 to March 2014 and April 2014 to May 2017. This administration was characterised by trade restrictions to boost local production. January 2016 saw the introduction of an import licence scheme for four products: automobiles, rebar, iron rods and cement. At the same time, permission for car distributors to continue selling vehicles was made conditional upon their establishment of local production activities.

Other more informal elements of the strategy include reported instructions to banks not to issue letters of credit for some categories of goods. This covers a wider range of sectors than the import licence scheme and effectively blocks imports in these areas. The government has also indicated to foreign companies that they should consider establishing production activities in the country.

The strategy appears to have been successful in altering the trade balance: the value of car imports fell from $5.7bn in 2014 to $1bn in 2016, while steel imports dropped by around 1m tonnes in 2016. Overall, imports fell by 9.6% y-o-y in 2016 to $46.7bn, and by another 2.6% during the first eight months of 2017. Between 2014 and 2017 the import bill for some of the products targeted was down by $6bn.

Authorities aim to reduce imports further: in April 2017 the licensing scheme was extended to another 20 items, bringing the total affected products to 24, and in late October 2017 Mohamed Benmeradi, the minister of trade, announced that measures including hikes on import duties would be taken to reduce the value of imports by another 25%, or $10bn, in 2018. He also said that the import of some products would be prohibited completely. Benmeradi did not provide a full list of goods that will be affected but told media that importation of some “non-essential” products – such as mayonnaise and chewing gum – would be blocked. In the automotive segment, rules banning the attribution of car distribution licences to firms that have not established local production facilities came into effect in January 2017, further incentivising local manufacturing activity.

Seeing Results

The strategy appears to be yielding some results, at least with regard to the assembly of some products: several foreign car manufacturers have established joint ventures in the country to assemble vehicles locally. Local firms are also stepping up their activities in certain phases of the production of smartphones, which are also affected by restrictions (see analysis).

However, some observers argue that the model may not work well in industries in which the country does not have strong comparative advantages and cannot reach the economies of scale necessary to compete with major manufacturing bases such as China. In some cases, such as with smartphones, critics say foreign producers are disassembling finished products so they can be reassembled in Algeria, which adds to import costs, as suppliers charge extra to disassemble the products. There have also been complaints that such restrictions have led to the blockage of imports of inputs for certain sectors, stymieing local production efforts.

In order to address some of these concerns, the government is calling for rapid increases in integration rates of industries affected by the import restrictions. Authorities have also noted concerns regarding the potential for companies to veil imports under the guise of local production. In April 2017 Abdelmalek Sellal, then-prime minister, told local media that foreign car manufacturers could not simply bring in almost-finished cars for assembly, saying that this added little value.

Sellal’s successor, Abdelmajid Tebboune, who served as prime minister from May to August 2017, appeared to call the entire strategy into question, with Mahdjoub Bedda, Tebboune’s minister of industry and mining, attacking car assembly operations as “disguised imports”, noting that cars assembled in the country were significantly more expensive than their imported versions. He said that because of low rates of integration, he would put an end to the current production model and suspend all new assembly projects. However, the current government under Ahmed Ouyahia, who is Tebboune’s successor as prime minister and has served since August 2017, appears to be more supportive of the approach.

Agro-Industry 

Agro-industry is by far the largest segment of the industrial sector, accounting for 8.6% of national GDP and just under 40% of industrial GDP in 2016. In real terms, y-o-y sector growth was 5.6%, down from 5.9% in 2015. Agro-industry had the third-fastest growth rate in the industrial sector, after the wood, paper and cork industry, and construction materials. Growth fell to 4.6% in the first quarter of 2017 and to 3.7% in the second quarter of the year, according to ONS figures. The segment has witnessed real growth of more than 5% every year since 2011, peaking at 7% in 2013.

In an economy in which the state continues to play a key role, agri-business is also a notable example of a private sector success story. According to ONS figures, in 2016 private firms generated AD340.8bn (€2.8bn) of industrial sector value added, equivalent to 87.5% of the sector’s total output.

The most influential company in the segment is Cevital, Algeria’s largest private sector player. In addition to numerous local firms, international players are also active in the industry, including US-based Mondelez, which operates an LU biscuit factory, and Nestlé, which produces infant formula, instant coffee, powdered chocolate and dairy products. The latter firm also opened a new coffee and cereals production unit in Algiers in 2015.

The beverage industry also recorded notable growth in 2015 of 14%, according to figures provided to OBG by the Algerian Drinks Producers Association (Association des Producteurs Algériens des Boissons, APAB), an industry body with 33 members representing around 85% of the local market. The subsegment produces around 4.4bn litres of drinks per year, according to APAB figures from 2014. At 2.15bn litres, carbonated drinks account for around half of output, with bottled water production at 1.45bn litres. The majority of other output is of fruit juice and fruit-flavoured drinks. The beverage industry is performing in line with government plans to reduce the import bill: it covers the bulk of local demand – around 98%, according to APAB figures – and also has some exports.

Petrochemicals 

Despite its hydrocarbons wealth, the country lacks major petrochemicals and basic plastics production capacity, and remains heavily reliant on imports of such commodities. An industrial complex operated by state-owned hydrocarbons firm Sonatrach in Skikda that produced ethylene, polyethylene and polyvinyl chloride was considered small by modern standards and closed in 2014 after running below capacity for several years. The firm still operates a methanol plant in Arzew on the northern coast near Oran, which produced around 78,000 tonnes in 2013.

However, in January 2017 the firm awarded a contract to restore the 120,000-tonnes-per-annum (tpa) ethylene plant, auguring a revival in production. One month earlier Sonatrach also announced that it was in discussions with unnamed partners to license technology to construct a number of petrochemicals projects, including a 1m-tpa ethylene plant, a 600,000-tpa polypropylene plant, and a 1m-tpa methanol and methanol derivatives complex. Shortly afterwards, Sonatrach and French oil major Total signed a preliminary deal, under which Total would conduct a feasibility study for a modern petrochemicals facility in Algeria. The two signed a further agreement in April 2017 confirming the settlement of previous disputes, strengthening their partnership and enhancing cooperation in various areas, including petrochemicals. In December 2016 Sonatrach also signed agreements with contractors to undertake studies for a 75,000-tpa methanol plant to help expand its refining activities.

Fertilisers 

In contrast to petrochemicals, the country already has a robust fertiliser segment. Fertial – a joint venture between Spanish company Grupo Villar Mir, state-owned fertiliser producer Asmidal and private Algerian firm Entreprise des travaux routiers, hydrauliques et bâtiments Haddad (ETRHB Haddad) – operates ammonia fertiliser factories in Arzew and Annaba, with a 2.5m-tpa capacity, including an ammonia capacity of 850,000 tpa.

ETRHB Haddad acquired its 17% holding in Fertial from Grupo Villar Mir in November 2016, reducing the Spanish firm’s stake to 49%. Fertial produced below capacity at 705,000 tonnes of ammonia in 2016. This was partly attributable to blockages of exports around the end of the year, due to problems obtaining the proper authorisations. In 2014 the firm launched a five-year, €250m expansion programme to reduce production costs and raise ammonia capacity to 1.23m tpa.

Sonatrach and Netherlands-headquartered chemicals and fertilisers producer OCI also operate a fertiliser joint venture in the country, Sofert Algerie. The firm runs a gross anhydrous ammonia and urea plant in Arzew, with production capacity of 1.6m and 1.2m tpa, respectively, of the two commodities. In 2008 Sonatrach and Omani company Suhail Bahwan Group established a joint venture, the Algerian-Omani Fertiliser Company, for the production of ammonia and granular urea. The plant was due to be inaugurated 2015 but has had several delays. However, in April 2017 Forbes Middle East reported that the facility was nearing completion.

Electronics & Household Goods 

Electronics and white goods manufacturing is another notable industrial segment in the country. Major players include Algeria’s largest private company Cevital, which is active in the segment through its unit Brandt, a French firm acquired by Cevital in 2014, and Condor, a unit of the Benhamadi conglomerate. In mid-2016 Cevital announced plans to build an 8m-unit-per-year Brandt electric goods factory in Sétif, where it already operates another plant at a cost of €250m. The plant was scheduled to open in the first quarter of 2017, but by the end of 2017 there had been no reports of its inauguration.

A growing subsegment is the mobile and smart-phone market, spurred by new restrictions on some device imports that have been applied as part of the wider move to limit purchases of manufactured goods from abroad. Electronics firms Condor and IRIS have already established production units, and a number of other firms are currently building facilities of their own, including local company Bomare, which was set to begin production of LG-branded smartphones in November 2017.

Steel & Steel Products 

The steel, metal, mechanical and electrical industries accounted for 12.3% of industrial production in 2016. Steel output for the year stood at 2.5m tonnes and is forecast to reach 3.2m tonnes in 2017. There are currently two major steel producers active in the country. The longer-standing operator is the El Hadjar steel complex, which is currently undergoing a renovation programme launched in 2015 to bring production capacity back up to the nameplate figure of 1.2m tpa of liquid steel by 2018, after actual output had fallen to 300,000 tonnes prior to the project’s launch. The plant was previously a joint venture between state-owned firms and international steel major ArcelorMittal, but has been fully owned by the state-owned firm Imetal since 2016.

The other is the Turkish-owned company Tosyalı Algerie, which operates a plant in Oran. This facility was launched in 2013 and has a capacity of 2.9m tpa. According to reports in local press, the facility is currently producing below capacity due to difficulties obtaining inputs such as scrap iron. The firm is currently working to expand capacity to 5.6m tpa, due to be completed in 2018.

The country is expected to see a third major producer enter into operation, a steel complex under construction at Bellara in the province of Jijel. The $2bn complex – which will have an initial production capacity of 2m tpa and an expandable capacity of up to 4m tpa – is being developed by means of a joint venture between Imetal, with a 46% stake, the Algerian National Investment Fund with a 5% stake and Qatar Steel with 49%. After years of delays, construction on the project began in 2015, and in July 2017 the Ministry of Commerce announced production was set to begin in the near future.

Other projects are also in the pipeline, including a 450,000-tpa steel products plant, set to begin production in 2018. There are also several projects that have been approved by the authorities but have not broken ground, including a joint venture project agreed upon in May 2016 between Algeria’s Bellazoug group and Emirati firm the Bidewi Group to build a 1.12m-tpa steel billets, profiles and reinforcing rods plant in Relizane, at a cost of $300m, as well as a plan by ETRHB Haddad to build a 2. 1mtpa plant for the production of various steel products. Tosyali also has plans for a further 2.1m-tpa expansion project to produce steel plates and other products, while fellow Turkish firm Karataş İnşaat intends to build a 150,000-tpa iron profiles plant.

As a result of such projects, in January 2017 Bouchouareb told local media that the country would soon be self-sufficient in steel. In October 2017 the Ministry of Industry and Mining forecast that steel production would rise to 12m tpa by 2020.

Pharmaceuticals 

Another well-developed industrial segment is pharmaceuticals production. Following the 2009 imposition of restrictions on the import of goods that can be produced locally, national output has been growing rapidly, leading to rising levels of self-sufficiency. According to figures from the Ministry of Health, by value, 45% of pharmaceuticals consumed in the country were produced locally in 2015, up from around 23% in 2009; the government has announced it aims to raise this to 70%. In 2016 local media reported that the Ministry of Health believed this could be achieved within one to two years, thanks to a large number of new pharmaceutical manufacturing projects under way.

However, some industry players believe that growth in local production and self-sufficiency is likely to level off in coming years. “Local production is dominated by classic pharmaceuticals and moves to increase production of these will reach market saturation at some point,” Boumediene Derkaoui, former CEO of state-owned pharmaceuticals manufacturer Saidal, told OBG. “Furthermore, some imports are reliant on new production technologies that Algeria has not yet mastered, in fields such as oncology, and these tend to be the most expensive drugs. Therefore, there are limits as to how much the import bill can be reduced.” He added that the country needed to prioritise the development of pharmaceutical technologies such as biosimilars.

The largest domestic pharmaceutical producer is Saidal, which had a turnover of AD10.2bn (€84.6m) in 2016, based on production of 119m units, up 9% from the previous year. The firm operates six production divisions and three distribution centres, as well as a research and development hub and a bioequivalence centre. It aims to raise production capacity to 300m units, generating annual turnover of AD30bn (€248.8m) by 2019.

New Production 

As part of such plans, the firm intended to launch three new generics production lines over the course of 2017. These would take the form of a 25m-unit facility for the production of dry-form medications in Cherchell, a 55m-unit line also for dry-form products in the Zemirli district of Algiers and a 28m-unit line to produce liquid products in Constantine. In July 2017 the firm’s management told local media that in the second half of the year it would also be working with its technical partner – Danish firm Novo Nordisk – to start producing insulin for the first time on a new production line at its Constantine factory.

Work on the line started in 2015, and the firm reportedly plans to start selling the drug in early 2018. The line will have a production capacity of 2.5m 10-millilitre units. The firm is also building an insulin pen factory in Blida, which is due to be finished by the end of 2018. Furthermore, Saidal is considering manufacturing oncological drugs together with a Kuwaiti partner, with a planned production capacity of 25m units per annum.

Developing Exports 

With total exports dominated by oil and gas – which accounted for 93.8% of the national total in 2016 – the value of industrial exports remains relatively small. Nevertheless, many sectors are developing sales abroad.

Regarding heavy industry, Fertial is one of the biggest exporters of ammonia fertiliser in the Mediterranean region, and nitrogen fertilisers and anhydrous ammonia together accounted for 43.3% of total non-hydrocarbons exports in 2016. The cement segment should also soon have substantial export capacity in the near future (see analysis).

In the electric goods field, Brandt exports around 90% of the output produced by its Sétif factory. Meanwhile, in 2016 Condor was targeting exports of around $300m and is continuing to develop markets in Africa, having recently opened showrooms in Mauritania and Senegal. However, some believe that exports could be challenging for electronics firms.

“We are prevented by law from sending free parts worth more than $1000 abroad, and have been unable to resolve the issue with the government, which is a hindrance to our after-sales service. We have also had trouble with plans to open a showroom in France, as transferring funds abroad to acquire foreign firms or pay staff is difficult under current laws,” Ali Boumediene, CEO of Bomare, told OBG.

Agri-business also has high levels of exports, dominated largely by cane and beet sugar, which accounted for 13% of non-hydrocarbons exports in 2016. According to APAB figures, the beverage industry exported $38m of goods in 2015, mainly to Middle Eastern and African markets.

Most pharmaceuticals export activity is undertaken by private sector firms selling basic products to African markets. In early 2017 Saidal told media that it had signed a contract with a distributor for the export of its products to 13 African countries. However, some believed that the outlook for further development of such exports was uncertain. “There is a need for Algerian banks to develop networks in main export markets to support exporters,” Derkaoui told OBG. “The outlook will also depend on factors such as operators’ ability to obtain certification that they meet European and US standards, as many producers increasingly realise that they need these to gain credibility abroad.”

While there is still progress to be made, other industry players believe the country’s industrial export potential is strong. “Algeria has a well-trained workforce, fairly low wages by regional and European standards, and low energy costs, so it can act as an export base for the region that could be attractive to European manufacturers,” Alexandre Kateb, founder of consultancy Competence Finance and a former member of an economic task force advising former Prime Minister Abdelmalek Sellal, told OBG. However, he added that logistics infrastructure needed to be improved. “The Trans-Saharan Highway is almost complete, but it needs to be upgraded into a proper motorway and supported by logistics bases, rest stops and so on along the way to support exports to Africa. There is a will to address such issues, and the launch of the new deep-water port in Cherchell will also facilitate maritime exports when it is completed in a few years.”

Outlook 

Heavy industrial activity is growing rapidly in Algeria, with plans for large-scale expansion in a number of segments, such as steel and construction materials. Manufacturing industries – including automotive and electronic goods assembly – also appear set for growth as foreign and domestic firms, spurred by import restrictions, build production units in the country. However, the success of these industries will depend on how quickly they can build effective and profitable local ecosystems, increase integration rates and generate economies of scale.

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The Report: Algeria 2017

Industry & Mining chapter from The Report: Algeria 2017