Increase in domestic manufacturing to cut Algeria's reliance on imports

Given the Algerian economy’s reliance on the oil and gas sector, manufacturing industries have historically taken a secondary role in the country’s economic development policies. However, since the early 2000s, industry has been the recipient of renewed interest from authorities, who have been looking to counteract rising demand for imports and revamp new industrial chains as a means to support massive public investment programmes geared towards infrastructure and housing.

As a whole, manufacturing industries still play a marginal role in Algeria’s economy, with a contribution of 4.9% to GDP in 2014. Yet the past five years have seen the sector posting steady growth of around 4% – a rate comparable to GDP. Growth has been aided by several key reforms in areas such as taxation, access to land and bureaucracy, with the aim of furthering the horizontal and vertical diversification of Algeria’s industrial fabric, reviving public companies and boosting private initiative.

The objectives of the government have been outlined within a roadmap for reindustrialisation implemented by the Ministry of Industry and Mines (MIM). The roadmap prioritises the development of segments based on three main criteria: the enhancement of natural resources, which includes petrochemicals, synthetic fibres, fertilisers, steel, aluminium and building materials; the densification of the existing industrial base, which concerns mainly the equipment, pharmaceutical, electronics or agribusiness industries, and the promotion of nascent sectors such as automobile and IT.

To do so, authorities are seeking to capitalise on Algeria’s main comparative advantages: low labour and energy costs, proximity to European markets and, since the recent devaluation of the Algerian dinar, a competitive currency. Lastly, despite the global plunge of oil prices since June 2014, Algeria has made the decision to maintain the level of public investment for infrastructure and housing development, which has, in addition, fostered resilience in the manufacturing industries.

History

In the aftermath of independence, manufacturing industries were primarily dominated by large state-led companies put in place to cover domestic needs in convenience and equipment goods. As such, the development of Algeria’s industrial base, and specifically heavy industries, was spurred during the 1960s and 1970s by the injection of public capital emanating from rising oil revenues. However, with the oil-related crisis in the early 1980s, the government sought to gradually shift the economy towards a private-sector-driven model. This was followed by a process of economic liberalisation in the early 1990s, which led to a rapid expansion of the private sector, as well as rising difficulties for public companies, which struggled to keep their position within a new competitive environment.

Governance

In 2014, 87.4% of industry’s added value was generated by the private sector, amounting to $7.2bn, against $0.5bn for the public sector, which has persistently lost competitiveness as a result of lengthy decision-making procedures. In order to give state-led companies more leeway in their management, the government reorganised the industrial public sector in February 2015 by merging the portfolios of all the former state investment management companies into seven public stock companies, dealing with agribusiness, chemicals, electronics, local industries, mechanical, metal and steel, and textiles and leather.

Note that these new entities complement the list of five existing industrial groups, composed of the National Company of Industrial Vehicles (Entreprise nationale de Véhicules industriels, SNVI), Algeria’s Industrial Group of Cement (Groupe Industriel des Ciments d’Algérie, GICA), pharmaceutical group SAIDAL, the National Tobacco and Matches Society and mining operator Manadjim El Djazaïr. The new statutes provide a wider financial autonomy, including the possibility of getting funds through banks or the stock-exchange. More recently, authorities implemented a new code of public procurement in October 2015, whereby a 25% national preference margin was introduced for all tenders to further involve local industries. In that spirit, foreign firms submitting tenders on their own are also required to include a minimum 30% local content rate.

Trade

Algeria’s exports are predominantly driven by oil and gas, which accounted for 95.54% of total exports (€48.1bn) in 2014. Although non-hydrocarbons exports remain marginal, with a 4.46% share of total exports (€2.51bn) in 2014, they have followed a positive upward trend over the past few years, especially in 2014, when they rose 39.52%. They are mainly composed of petroleum derivatives and petrochemicals (80.5%), followed by processed food (11.5%), mining (3.6%) and building materials (1%). Europe remains by far Algeria’s main client, receiving 64% of Algeria’s total exports and 82% of non-hydrocarbons exports. Imports have continuously increased in recent years to total €50.6bn in 2014, mostly driven by industrial capital goods and semi-manufactured products. Algeria’s main provider remains China, with 14% of total imports, followed by European countries, including France, Italy and Spain. So far, industrial exports have remained fairly limited because Algerian companies have prioritised their internal market. Nonetheless, only 40% of Algeria’s requirements in manufactured goods are currently met by local companies, according to MIM.

For Boukhalfa Khemnou, former managing director at Algeria’s Exports Agency, the weakness of Algerian exports finds its roots in the lengthy administrative formalities necessary for exporting and the lack of modernisation and support from the local banking system. The non-convertibility of the Algerian dinar, combined with the fact that Algerian companies can only use 20% of their repatriated benefits in foreign currency, somewhat increases the reluctance of companies to engage in foreign markets.

Investment

According to the National Investment Development Agency (Agence Nationale de Dé veloppement des Investissements, ANDI), Algeria has broken an investment record of an estimated $20.2bn in 2014, thanks to the development of 9904 new projects. Although the majority (54.54%) of investment is going to the energy sector, investment has also increased in industrial segments such as building materials (16.92%), steel and electrical industries (9.70%) and agribusiness (7.21%).

The private sector is increasingly serving as a catalyst for growth, being responsible for 97% of the new investment projects and 42% of total investments, with €7.6bn in 2014. As for foreign capital, it still plays a marginal role, participating in just 2-3% of total investments. Since the implementation of the 49/51 rule – compelling each new foreign company to team up as a minority shareholder with local partners – FDI has been halved from a peak of €2.6bn in 2009 down to €1.2bn in 2014. However, there are some advantages to the rule for foreign companies. Guillaume Josselin, managing director of Renault-Algérie, told OBG, “The 49/51 rule can serve as a business accelerator for multinationals as the local partner helps the venture go through complicated administrative procedures and get a better understanding of market dynamics.”

At the same time, the legislation remains a major impediment for smaller businesses and makes access to the Algerian market difficult. While ANDI data reports a rising number of international joint ventures (JVs) – from 65 in 2013 to 105 in 2014 – concerns raised by sector stakeholders have urged the legislator to consider revising the overall legal framework governing investment and loosening the rigidities of the 49/51 rule in a new Investment Code. The new draft is expected to bring new adjustments, including the simplification and acceleration of registration procedures and the modulation of incentives according to the strategic importance of the sector.

Land Access

Algeria currently has a network of 72 industrial zones across a total surface area of 12,000 ha. However, with most of these built in the 1970s, the government is incentivising the creation of new industrial zones. As part of the governmental strategy of re-industrialisation, authorities have adopted incentives to ease access to industrial land, notably through the recent implementation of a €726.1m development programme aimed at building 42 additional industrial parks across 34 wilayas (provinces).

Furthermore, the 2015 finance law introduced new provisions regarding “over-the-counter” state-owned land concessions, which now can be authorised by walis (governors). The measure is designed to counter-act land access issues. According to Ali Boumediene, CEO of Bomare, “Not only is the access to industrial land still difficult and costly but also the application for building permits is still subject to too much red tape”. The 2016 Finance Law intends to further liberalise the sector, allowing for private operators to create, plan and manage industrial zones, with a view to increasing the available industrial real estate and meeting the growing demand in industrial land (see analysis).

Building Materials

Since the early 2000s, the government’s major infrastructure projects have pushed up local demand for building materials, prompting authorities to boost domestic production in order to slash the growing import spending.

In cement, the demand in 2014 reached 26m tonnes, largely outstripping local capacity, which was estimated at 21m tonnes by Global Cement Directory. As a result, cement imports reached €458.1m. Nevertheless, the segment is reaching a turning point, with many large-scale cement production projects coming online in 2015. The state-owned Groupe Industriel des Ciments d’Algérie (GICA), which has a 59% market share, has invested €1.3m, intending to increase production from 11.5m to 18.5m tonnes per annum (tpa) by 2017. GICA owns a network of 12 cement plants, five of which have been partially privatised to foreign investors.

The private sector is also investing substantially to raise output. South Africa’s Pretoria Portland Cement partnered with Algeria’s Hodna Cement to build a €248m cement plant with a projected capacity of 2.2m tpa. According to MIM, once these investments are completed, Algeria should be able to cover 100% of its needs by 2016 and start exporting surplus by 2017. These recent developments have already paid off, as in mid-2015, when construction materials imports scaled down by one-third, from €887.6m to €593m year-on-year (y-o-y), according to CNIS.

Petroleum Derivatives & Petrochemicals

Undefined in a bid to bring more added value to its hydrocarbons sector and further diversify its export base, Algerian authorities have strived in recent years to boost the development of downstream activities through public-owned company Sonatrach. Since 2011, Sonatrach has engaged in an ambitious development plan to boost oil and gas derivatives, including refinement and petrochemicals. On the refining front, the €8.9bn programme includes the construction of three new oil refineries in Biskra, Tiaret and Hassi Messaoud and the rehabilitation of the Algiers refinery, which altogether would entail additional refining capacities of about 14m tpa. As such, total oil-processing capacities are expected to reach a total of 44m tpa by 2019.

As for gas liquefaction, the authorities have already put in place two new liquefaction trains, the GL1K in Skikda in 2013 and the GL3Z in Arzew in 2014, thus increasing natural gas liquids production capacity by 20m cu metres per year. Similarly, Sonatrach is ready to invest €16.1bn to boost petrochemical production through the construction of five new major petrochemical complexes by 2020. Exports of petroleum derivatives have seen significant growth, increasing by around 61.2% in 2014, totalling €2.1bn. The trend is likely to continue. According to mid-2015 estimates, petrochemicals were posting strong growth in terms of production (+82%) and exports (+33%).

Fertilisers

With global prices for fertilisers going steadily upward in recent years, authorities have embarked on a vast investment programme geared at buoying local fertiliser production with a view to improving the yield of domestic cereals production and boosting Algeria’s exports base.

To this end, Sonatrach has recently concluded three partnerships. Asmidal, a subsidiary of Sonatrach, set up a JV called Fertial with Spanish Grupo Villa Mir. The unit produced 900,000 tonnes of ammonium and 200,000 tonnes of fertiliser in 2014 and aims to raise production capacities up to 1.2m tonnes and 350,000 tonnes, respectively, by 2018. The second mixed company is Sorfert Algérie, a JV owned by Sonatrach (51%) and Egypt’s construction group Orascom (49%). It completed a new industrial plant in Arzew in 2013, which boasts a production capacity of 2200 tonnes of ammonium and 3450 tonnes of urea per day. More recently, Sonatrach also partnered with Oman’s Suhail Bahwan Holding Group to create a third operator, Al Djazairia Al Omania Lil Asmida. Based in Arzew, the €2.3bn plant is set to produce 1.3m tpa of ammonium and 2.3m tpa of urea.

Automotive

Algeria’s automobile sector has undergone profound changes on both the supply side and the demand side. In 2014, Algeria’s car market ranked second on the continent, behind South Africa, with imports amounting to 439,637 vehicles, for a value of €5.7bn However, car sales are expected to decrease by and estimated 30-40% in 2015 following some legal changes. The implementation of new safety standards in April 2015 – in line with those applied in the EU – have somewhat slowed car imports. The depreciation of the Algerian dinar has combined with the introduction, in July 2015, of a tax on all new vehicles to push car prices up by 30%. The ban on cash payments for car acquisition – as well as the new licensing legislation regarding multi-brand importers – has further dented sales prospects.

“Algeria’s car market experienced exceptional years since 2010, with a peak of 600,000 cars imported in 2012, driven by massive salary raises in the Algerian public service and the wide credit facilities delivered by the National Agency for Youth Employment (Agence Nationale de Soutien à l’Emploi des Jeunes, ANSEJ). As such, we expect that the market will return to a cruising speed of about 300,000 vehicles per year,” Josselin told OBG.

In November 2014, an assembly unit near Oran was set up by France’s car manufacturer Renault in partnership with Algeria’s SNVI and the National Investment Fund (Fonds National d’Investissements, FNI). At the time of writing, the manufacturer had sold 14,000 cars and prospects looked encouraging. In 2015, its production is expected to reach 20,000 vehicles, before scaling up to 75,000 vehicles by 2019. Similarly, as part of contractual terms, Renault Algérie is expected to raise its local content rate from 16% to 42%, by subcontracting locally for upholstery, wiring or window grates.

Algerian authorities are now looking to capitalise on Renault-Algérie’s experience to attract new manufacturers. New international partnerships involving major Italian manufacturers were announced in September 2015, on the occasion of the signature of a memorandum of understanding between Algeria’s MIM and Italy’s Ministry of Economic Development to create a joint Industrial Cooperation Committee. The arrival of Peugeot was announced by French President François Hollande during his official visit in June 2015. Hollande highlighted the upcoming construction of a new assembly plant with an expected capacity of 75,000 to 100,000 units per annum in Oran, in line with the MIM’s ambitions to build a large automotive cluster in the region.

Agro-Industry

Agro-industry is Algeria’s second largest sector after oil and gas, with 17,000 industrial companies employing 140,000 workers. Some 95% of Algerian agribusiness companies are private, including a handful of large firms such as Cevital, Groupe Benamor or Groupe SIM. The scope for development in the sector is wide, with Algeria still importing 28% of its food needs, especially cereals and milk, which constitute the bulk of food imports. “It would be great to use local products as it would be a boost to the national economy and help profitability but currently there is no domestic agricultural supply that could replace imports,” Slim Othmani, CEO of NCA Rouiba, told OBG.

There is also increasing interest from food companies to use Algeria as a springboard to conquer European and African markets. Nestlé, for instance, opened a brand new production line of milk powder, instant coffee and chocolate powder product with a €1.9m investment and a view to supplying the domestic market and exporting production surplus to Tunisia, Morocco or Europe. “

Household Appliances

In recent years, the fast growth of the local electronics and appliance sectors have been driven by the increasing number of international partnerships between local and foreign companies. Most of the developments occurred in the new industrial zones of Setif or Bordj Bou-Arréridj with private players such as Cristor, Condo and Samsung. FagorBrandt-Algérie, a subsidiary of Cevital, recently announced it is to launch its first plant producing air conditioners in Setif. On the back of a $300m investment, the plant will produce 400,000 units before end 2015, with 90% directed to exports.

The domestic smartphone market also offers significant opportunities, with an expected 5m units to be moved in 2015. As such, it has attracted an increasing number of players, including Algeria’s Bomare company, a firm that teamed up with LG to produce TV devices and more recently with Hisense to begin producing smartphones in November 2015. According to Boumediene, “the introduction of a 30% import duty levied on electronic devices by the new Finance Law 2016 is set to foster an endogenous growth of domestic electronic production, concerned with product quality and safety norms, against the unfair competition of low-quality imported products.”

Outlook

Following on from the reorganisation of the industrial public sector in February 2015, decisive steps are now being taken by the authorities towards reducing Algeria’s reliance on imports in a number of manufacturing segments, including automotive, fertilisers, petrochemicals and smartphones. The size and extent of the role that is played by foreign investment in the sector will depend on whether the government chooses to revise the 49/51 rule, which at present would appear to be deterring overseas businesses that are looking to make investments in the Algerian market. Moreover, the Electronics and automotives production segments have extremely bright futures, with the strong performance of Renault and the new Finance Law 2016 ready to provide strong encouragement to domestic production.

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The Report: Algeria 2015

Industry & Mining chapter from The Report: Algeria 2015

The Report: Algeria 2015

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