Development of Algerian industry and mining supported by incentives and government efforts

 

Despite the availability of cheap energy and a range of local natural resources, non-hydrocarbons industry in Algeria has been slow to develop. However, amid efforts by the government to prioritise the sector as part of its diversification plans, there are signs that it is beginning to take off, supported by incentives for investment and the planned development of 50 new industrial zones. The country has already become a significant manufacturer of products including electronic goods and cement, and numerous projects in domains such as petrochemicals, steel and textiles are also under way.

Strategy

The nation’s current five-year development plan running from 2015 to 2019 aims to boost domestic production and move the economy away from reliance on oil and gas. Industry plays a vital role in this, and the government’s industrial strategy is based heavily around replacing industrial imports – which it believes grew too rapidly when local industry was opened up to international competition in the 1990s without being adequately prepared – with local production.

To facilitate domestic industry, the government intends to both support existing enterprises and establish new players. It will do this by developing local subcontracting activities to raise integration rates (i.e., the proportion components in industrial goods from local suppliers) and entering into public-private partnerships with both local and foreign investors for new projects. Limiting the influence of the informal sector will also play a part. “The authorities are keen to reduce the sale of finished goods, and import-export activities more broadly, by informal sector activity,” Yacine Guidom, CEO of IRIS Sat, told OBG. “It used to be that informal operators imported the majority of finished products, but with pressure and encouragement we have seen greater formalisation there, with companies in some cases moving up the supply chain.”

Investment Environment

Measures undertaken in recent years to help support local industry have included restrictions on imports in some sectors and the conditioning of foreign companies’ access to the domestic market on investment in local manufacturing capacity. Carrots are also on offer, in addition to sticks. In July 2016 parliament approved a law revising the Investment Code, which alongside general investment incentives and efforts to improve the country’s business environment also offers specific advantages to industrial, agricultural and tourism projects. These include concessionary rates for land for projects awarded for 10 years in the Hauts Plateaux region and “other zones in which development requires a contribution from the state”, rising to 15 for projects in southern Algeria.

The authorities are also working to develop and add value to locally produced natural resources, including the oil and gas output that dominates the economy, but also under-developed mineral sectors such as iron ore and phosphates (see analysis).

Petrochemicals & Fertilizers

With its enormous hydrocarbons reserves and deposits of other minerals such as phosphates, Algeria is well placed to develop downstream commodity-processing activities. Despite this, the sector is under-developed and the country remains a substantial importer of petrochemicals products. However, in late 2014 state-owned oil and gas company Sonatrach announced plans for the construction of six domestic petrochemicals complexes by the end of the decade, in conjunction with as yet-unidentified foreign joint venture partners.

The country is also leveraging its natural resources for fertiliser production. In 2013 a major new ammonia and urea complex, Sorfert, was inaugurated in Arzew, and another complex in the city, known AOA, should open soon. Both are joint ventures between state-owned oil and gas producer Sonatrach and foreign firms. Fertia, the country’s third major fertiliser producer, is also operated as a partnership with Sonatrach. The firm is expanding its facilities in Annaba and Arzew.

Mid-2016 also saw the conclusion of a $4.5bn agreement between Indonesia’s Indorama and state-owned Algerian firms Manal and Asmidal for the construction of three major fertiliser-related projects, namely a phosphate mine, a phosphoric and diammonium phosphate fertiliser complex, and a gas-fed calcium carbonate plant, with plans for several other major fertiliser projects in the pipeline (see analysis).

Alongside new investments, the restructuring of large public companies into groups, including the creation of chemicals producer Chimindus, is an important step in building local added value and achieving the goal of import substitution, especially as the main competitors are importers. A number of segments in the chemical industry offer potential, with paint and hygiene products currently driving demand.

Steel

There are two major steel facilities. The first is the long-standing El Hadjar steel mill in Annaba, which is run by state-owned firm Imetal after previous owner international steel major ArcelorMittal exited the project in 2015. The second is a 1.2m-tonnes-per-annum (tpa) plant inaugurated in 2013 by Turkish-backed firm Tosyali Algérie. Both are undergoing expansion works: the former will open a 1m-tpa rebar mill in 2017, while the latter aims to raise its capacity to 2.3m tpa.

Construction began in early 2015 on a delayed $2bn steel complex in Bellara in Jijel province. The facility, which will have an initial production capacity of 2m tpa when it is inaugurated in 2017, before rising to 4.2m tpa in 2019, is being built by Sider, a joint venture between the Algerian government and ArcelorMittal with a 51% stake in the project, and Qatar Steel with the remaining 49%. A 49-km rail link between the complex and the deepwater port of Djendjen is currently being built at a cost of AD4.5bn (€37.2m) to serve the plant.

In May 2016 Algerian Bellazoug Group and the UAE-based Bidewi Group also signed a joint venture agreement for the construction of a steel production and processing plant in Relizane worth $300m, due to become operational in 2018. Then in November 2016, Imetal inked a deal with Dubai-based steelmaker Emarat Dzayer Group for the construction of a 1m-tpa steel plant in Annaba, at a cost of $1.6bn, pointing to significant increases in domestic capacity in coming years.

Cement

Domestic production of cement stood at 21m tonnes in 2014. While this ranked the country as the 20th-largest producer in the world and the second largest in Africa (behind Egypt), it was nonetheless below national consumption levels. However, a range of projects under way mean that Algeria is soon to become fully self-sufficient in cement (see Construction chapter). Indeed, in June 2016 Abdesselam Bouchouareb, the minister of industry and mining, said imports would no longer be needed beyond the end of the year.

Producers seeking to increase output include state-owned Groupe Industriel Public des Ciments, which is working to raise capacity from its current level of 11.5m tpa to 18.5m tpa in 2017 and 23m tpa by 2019, investing AD154bn (€1.3bn). As well as serving the local market, it plans to launch exports in the near future. Another state-backed firm, Société des Ciments de Aïn El Kebira, is aiming to boost its annual capacity to 16m tpa by the end of 2016. Hodna Cement Company, in which South African firm Portland Cement took a 49% stake in 2014, is also building a 2m-tpa plant, due to be completed by the end of 2016.

Automotive Industry

Algeria has a long-standing automotive industry, dating back to the establishment in 1957 of a local heavy vehicles subsidiary by a French company. This subsequently became the state-owned Entreprise Nationale des Vehicles Industriels (SNVI), which continues to produce vans, trucks and buses.

Spurred by a combination of supportive measures from the government and investment by international automotive majors, the sector is now developing rapidly, as underscored by the inauguration of a Renault assembly plant in Oran in 2014. The facility, built by a joint venture between the French manufacturer, the state-run National Investment Fund and SNVI, can build up to 25,000 vehicles a year, expandable to 75,000.

More international producers are set to follow Renault. In July 2016 Bouchouareb said that talks with French car maker Peugeot for the establishment of a factory in the country had made substantial progress, while in late November 2016 Volkswagen and local group SOVAC signed an agreement for the assembly of vehicles at a factory in Relizane, with production due to begin in mid-2017. Also in November 2016 the government and state-backed UAE-based investment fund Al Aabar agreed to establish a facility to produce and maintain Mercedes vehicles. Hyundai and its local distributor, the Takhout Group, are also building a plant in the country, and dealer Elsecom has submitted an approval file for an assembly plant for Daewoo industrial vehicles. Ferhat Settouf, general manager of the dealer, told OBG the facility will have an initial capacity of 500 units a year, rising to 1500 further down the line.

Drive On

The rapid development of the industry follows government moves to condition car manufacturers’ continued access to the 40m-person market on investment. Companies have been given until the start of 2017 to develop industrial activities in the country if they wish to maintain their licences. Settouf said the approach had merits but faced a number of obstacles.

“Assembly of cars is feasible; however, the government is pushing companies to achieve high integration rates by, for example, manufacturing spare parts and components here as well, which is technically difficult,” he told OBG, saying that it would take time for the sector to build up expertise. “The regulatory requirements refer to an integration rate of 40% within five years, which is very optimistic,” he argued, adding that companies’ efforts to develop local facilities had been held up by the government preventing firms from going ahead with their respective projects until regulatory requirements for assembly plants were published. This was due to take place in March 2016 but occurred several months late, leaving companies short on time to get their operations ready, Settouf told OBG.

The requirements have been preceded by a range of other restrictions on vehicle imports implemented in recent years, partly with an eye to stimulating local production. A new system of import quotas for car dealerships that came into effect in May 2016 itself followed the introduction in 2015 of a new set of regulatory requirements for the car industry. Ostensibly aimed at improving road and vehicle safety, the new rules have also been viewed as an attempt to reduce imports, partly in order to stimulate local vehicle production. The government has also banned cash purchases of vehicles, and in July 2015 introduced a new tax that pushed the price of new vehicles up by around 30%.

Rail Assembly

The assembly of rail and light rail vehicles and equipment is another burgeoning industrial arena in the country. In 2010 a joint venture between French company Alstom and local firms Entreprise Métro d’Alger and Ferrovial was established to assemble trams supplied by Alstom. The initial focus of the company, known as Cital, has been to supply the growing network of urban tram systems, but the firm is also looking to launch exports sometime in 2019.

The company is now branching into train assembly works as well, having signed an agreement with the rail operator National Company for Rail Transport in April 2016 for the production of Alstom’s Coradia model of diesel inter-city train, which will be used domestically.

In a sign of the market’s potential, Cital’s establishment was followed in 2015 by an agreement between the government and a Chinese company for the establishment of an assembly plant for metro, tram and train carriages, and in 2016 by at least two joint venture agreements to manufacture various other items of railway equipment (see Transport chapter).

Agri-Business

Agro-industry is the best-developed non-hydrocarbons industrial sector in Algeria by production value, and it continues to grow. Output of the industry stood at AD353bn (€2.9bn) in 2015, according to the National Statistics Office, up from AD214.1bn (€1.8bn) in 2010 and equivalent to nearly half of the value of non-oil industry. Some of Algeria’s largest private companies – including Cevital, the biggest private conglomerate in the country, and beverage producer NCA Rouiba – have emerged from the industry. “Household consumption in Algeria is increasing and you can see that in the visibility of companies: these days more than 50% of the country’s advertising spend is generated by two sectors: telecoms and agroindustry,” Mourad Hadj Said, CEO of Avenir Decoration, told OBG. However, the country still continues to import the large bulk of agro-industrial products consumed, and observers say there are still improvements to be made. “There is a need to develop Algerian agri-business using local agricultural produce, rather than for example importing orange juice concentrate and adding water to it,” Ahmed Tibaoui, general manager and CEO of the World Trade Centre Algiers, told OBG.

Hichem Lehiany, managing director at Mondelez International, said that the availability of locally produced ingredients is improving, but producers need to boost efforts to reach international quality standards. Availability of locally produced ingredients should improve further as farming develops in the country.

Others agree. Philippe Monestes, general manager of Nestle Algeria, told OBG, “The authorities have a vision for the agro-industry sector, which they are working to promote based in part on the concept of import substitutions. It is also the responsibility of companies to accompany the government in this policy and to develop the necessary facilities and products locally.”

Electronics & White Goods

Algeria is also emerging as a significant regional producer of electronic and household goods. Key players in the market include local firm Condor Electronics, part of Algerian Benhamadi Group that produces goods such as air conditioners, domestic appliances, and audio-visual, IT and communications equipment (including smartphones, which it assembles at a production unit in Bordj Bou-Arréridj).

Another major domestic company active in the sector is Cevital via its electronic and household goods firm Brandt, a French company acquired by the Algerian conglomerate in 2014. In addition to a number of production units in France, it has two factories in Algeria, both located in Sétif, and in June 2016 unveiled plans to build 110-ha industrial park in the city at a cost of some €250m, which is due to be completed in early 2017.

The sector is one of the major emerging success stories of Algerian industry, having already become a significant exporter and achieving high integration rates. In mid-2016 Condor said it expected to achieve $300m worth of exports for the year as a whole, while 90% of the output of Cevital’s existing factories in Sétif is exported. Additionally, local electronics and white goods producer Iris boasts integration rates as high as 90% in refrigerator manufacturing.

Textiles Relaunch

The local textile manufacturing industry is dominated by state-owned firm GETEX, which was created in 2015 through the amalgamation of three companies active in the sector, respectively specialised in basic and industrial textiles, confection and clothing, and leather and footwear. GETEX has a local market share of around 4% (out of a domestic market worth approximately $4bn), with most local consumption comprising imports.

The industry is set for renewed development following a government decision to invest AD21.2bn (€175.4m) in GETEX to take measures such as paying off debt and upgrade its ageing equipment, around 80% of which has been replaced. The company is aiming to raise its market share by targeting the local mid-range market in particular, as Chinese competition in the lower end of the sector will be difficult to displace.

The sector is set for a further major boost in the form of a large textiles complex under development in Relizane by GETEX (with a 34% stake in the project) and Turkish textiles firm Tay Group, to be known as Tayal. The complex will be made up of eight factories, the first two of which are due to enter into operation before the end of 2016, with all set to be in place within four to five years. Most of the production from the complex will be in the form of jeans, with around 40% of output to be sold locally and 60% exported.

Pharma

The pharmaceuticals industry is another sector in which development has been catalysed by import restrictions, which were first introduced in 2008 and expanded in 2014 (see Health chapter). According to the Ministry of Health, Population and Hospital Reform, the industry produces 45% of drugs consumed domestically, a figure authorities aim to raise to 70%.

The largest firm active in the sector is state-owned Saidal, which produces 215 different drugs and has production partnerships with international pharmaceuticals majors including French Sanofi, Denmark’s Novo Nordisk and US-headquartered Pfizer. A number of other international players such as the UK-based GlaxoSmithKline and British-Swedish AstraZeneca have also established local production facilities.

Providing Land

One of the most frequently cited challenges specific to the development of industry in Algeria is the difficulty of acquiring land for industrial development. To address the issue, the 2015 Finance Law increased the power of provincial governors to provide investors with land. This followed government plans announced in 2012 to build 42 new industrial zones. However, the initiative has faced delays. In November 2016 Bouchouareb said that construction work on the zones, the proposed number of which has since been expanded to 50, would be launched by March 2017. A draft of the 2016 Finance Law also proposed allowing private firms to establish industrial zones of their own, providing they are not located on agricultural land. The proposal did not make it into the final version of the law, but the authorities indicated in October 2016 that it could be revived for inclusion in the 2017 iteration of the law. Tibaoui said the situation, though still problematic, is improving. “There is very little land left around Algiers, but in other areas large surfaces are available, often near the East-West Highway, which provides for ease of access from the capital,” he told OBG. However, Settouf said that such areas were not always well suited to industry’s needs. “Many of the zones under consideration are in fairly remote areas, which is problematic for labour availability,” he said, adding that many companies preferred to be close to the capital for this reason.

Outlook

The large number of projects under way provides strong evidence that sector development is set to take off, supported by state efforts to replace imports with local production and new incentives for investment. Plans to increase output of locally produced raw materials will also develop better-integrated local production chains, helping to generate employment and reduce Algeria’s reliance on oil and gas earnings. While the country had a large domestic industry that employed around 250,000 people as recently as the 1990s, the liberalisation of the domestic market at the end of the decade saw production shrink dramatically, with the sector now employing less than 10,000 people.

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The Report: Algeria 2016

Industry & Mining chapter from The Report: Algeria 2016