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Thursday, October 04, 2012

Special Report Lebanese Industry: Keeping alight the spark

Executive magazine




Lebanese industry has been dealt many a bad card in its recent history. Yet when the sector went through a five-year boom, with exports nearly doubling in value from $2.17 billion in 2006 to $4.059 billion in 2010, it seemed as if industry had finally found some playable hands. The sector could raise the stakes, throw out an ace or two, and show the banking, real estate and tourism sectors that industry was an equally important player at the country’s economic big-boys’ table.
But the winning streak was not to last. The global financial crisis — which the sector had managed to bypass for a while — political uprisings throughout the region, and sluggish domestic economic growth all started to affect business in 2011, the second half in particular. In the words of the president of the Association of Lebanese Industrialists (ALI), Neemat Frem, “It was not a slowdown in growth but a complete stop”.
Although 2011 marked a new record in industrial exports from 2010 at $4.064 billion, growth was minimal and hardly comparable to the $729 million jump in exports between 2009 and 2010.
Furthermore, despite export figures being used as a benchmark to gauge the sector’s general health, they do not give the overall picture, given that exports account for only 40 percent of sales in domestically manufactured goods with the remainder destined for the local market.

The glass half empty?


The mood of industrialists certainly reflected the downturn. In the central bank’s quarterly business survey, it showed that by the fourth quarter industrial production had retreated, with a balance of opinion (the proportion of surveyed managers who consider that there was an improvement in a particular indicator and the proportion of those who reported a decline in the same indicator) standing at -11, compared to +18 at the same time in 2010 and zero during the third quarter of 2011. The balance of opinion for overall demand for industrial goods was no brighter, at -14 in the fourth quarter of 2011 compared to +4 in the same quarter of 2010.

To the sector’s relief, 2012 did not start out too shabbily, in exports at least, with first quarter results up 9 percent on 2011 at $808.1 million, according to Ministry of Industry figures. Yet the downbeat sentiment that had prevailed at the end of last year lingered, with the same debilitating factors deteriorating moods further: higher oil prices, more frequent power shortages and the situation in Syria on a slippery downwards slope. By the end of July exports were down 9.5 percent to $1.7 billion, when compared with the first  seven months in 2011.
  Consumer confidence was also in the gutter. A survey conducted in March and April 2012 by United States-based opinion polling think tank Pew Research Center indicated that 53 percent of Lebanese considered that the economic situation in Lebanon was very bad and 35 percent thought it was bad, compared to 12 percent who believed it was good. “Three channels were hit the most: One: the flow of tourists was down, which lowered demand for industrial and agricultural goods; Two: exports through Syria were down, and Three: the loss of foreign investment into Lebanon, including industry, because of the security and political situation and heightened risk,” said economist Mazen Soueid.
Indeed, tourism figures were down 8 percent in the first half of the year. Exports that had gone overland via Syria were down, notably plunging by 40 percent to Turkey and by 15 percent to Iraq. Indicative of reduced investment in industry, imports of machinery were down 12 percent.
While Lebanese industry has long struggled to be price-competitive within the region and other emerging economies, from wages to operational overheads, the sector had another cost to factor in this year when the government raised the minimum wage.
“The increase in salaries has affected us. Our products are customized and cannot be mechanized so we rely on labor. Our prices are up 6 percent, so it’s significant,” said Daniel Abboud, general manager of Carosserie Abillama, which has a staff of 300 to manufacture trailers and other automotive add-ons that are exported to some 27 countries.
“The wage increase from $333 (500,000 LL) to $450 (675,000 LL) is a big jump if you have 150 women working for you. That is the basic minimum,” said Nizar Raad, managing director of Universal Metal Products (UMP), a leading manufacturer of collapsible aluminum tubes for pharmaceutical and cosmetic companies. “It is a big increase in costs for us and we can’t pass that on to customers easily as competition is worldwide, from Pakistan to India and China. And they don’t have the fuel costs we have. We are paying $0.15 a kilowatt while others are paying just $0.04.”
The country’s chronic power shortages, with √Člectricit√© du Liban (EDL) producing only 1,500 megawatts (MW) of electricity and peak demand at more than 2,500 MW, has long been an existential problem for industry. This year the power outages were even more frequent than in the past and were further compounded by oil prices averaging more than $100 a barrel, which has bitten into industry’s margins as well as lowered consumer purchasing power.
Some industrialists want to solve the crisis by developing their own power plants, with excess sold to the grid. They have submitted a proposal to the government but it has been stymied by EDL holding the monopoly on energy sales (see box below).
Logistics costs have also risen, partly due to oil prices but primarily because of the conflict in Syria affecting overland trade, with the number of trailers crossing the border down by around half, from 450 a day last year to 200 to 250 a day, according to Gezairi Transport. Trucking costs are up by around 15 percent to the Gulf due to oil prices and insurance premiums have increased to cover the risk of transporting through Syria. Such factors have prompted a rise in sea freight, but add further costs to companies, with sea cargo to the Gulf around 40 percent more expensive than by land, as well as taking an average of two weeks longer to get to the end destination.
Regional issues are also playing their part, with Saudi Arabia no longer allowing Syrian drivers multiple entry visas — Syrians account for around 80 percent of the truckers of Lebanese products — presumably for political reasons, which adds on more time for visa applications, while the kingdom is also squeezing the Lebanese electricity generator sector.
All in all, industry is facing many obstacles. “I think Lebanese industry is going through its worst period since the end of the Civil War,” said Soueid. “We have never had this agglomeration of domestic, regional and global factors affecting supply and demand. If this continues, and unfortunately the indicators point in that direction, we will see closures of industries in Lebanon.”

The glass half full?


While the economic situation is certainly not rosy, with overall growth forecast at 1.2 percent this year by the Washington-based Institute of International Finance, it is not all doom and gloom. Taking the ‘glass is half full’ approach, ALI’s Frem is confident that the sector will prevail, stating that while industrial machinery imports have dropped, they could have dropped more — especially after significant investment in recent years — and this year he forecasts that up to $200 million of newly purchased machinery will go “straight to the expansion of the sector”. Since being interviewed in early September, Frem’s outlook has been somewhat confirmed, with statistics released by the Ministry of Industry showing that industrial imports at the end of July were up 22 percent, to $172.2 million, on the same period in 2011.

Industries not overly reliant on the local market are stoic about the situation. “We have to live up to the challenge, otherwise we shouldn’t be here,” said Raad of UMC, which exports 85 percent of its products. “We will maintain the same figures as last year; not more or less growth.”
“Business is good, despite the situation,” said Asaad Saccal, general manager of generator manufacturer Saccal Industries. “The reason is 85 percent of our turnover is export. Lebanon is good business of course, but small in terms of quantities; we need bigger markets to sell to.”
To Abillama’s Abboud, companies should have anticipated the regional and domestic situation and adapted their business model accordingly rather than whining about the obstacles in place. “This is a problem I see many people complaining about, but they don’t look ahead, taking the punches while sitting down — move!” said Abboud. “The key is not to be static and wait, but to be proactive. As soon as things started to happen in Syria and we saw that the economy might slow down here, that the road to the Gulf might be difficult and we would have to focus on sea export, we put all [our] sales people on West Africa to be dynamic, and it worked,” he added, with Abillama having a “nice order book” for the year ahead.
Indeed, as the saying goes, one man’s loss is another man’s gain. Some exporters have benefited from the current regional crisis by picking up orders that Syrian and Turkish manufacturers cannot fill.
The economic sanctions imposed on Syria by the United States and the European Union (EU) have also been a boost for certain Lebanese companies, with imports from Syria down 8 percent in the first half of the year, and exports to Syria up 18 percent, according to global information company IHS. It would appear, though, that the negative impact on some Lebanese companies in losing the Syrian market and that export route outweigh the opportunities for their industries to fill the gap left by the collapse of Syrian industry.




Government support?

The government is not helping the sector through these trying times, with the Minister of Industry, Vrej Sbounjian — a Utopian at heart — stating there is no cause for concern.

“We don’t have any complaints concerning the economy or industry... We need to be more realistic and enjoy life a little bit. We don’t have to make money every year,” he told Executive.
The ministry itself could certainly do with more money, with a budget of just $5 million, just more than half that of the Ministry of Youth and Sports, at $9.7 million, and a third of the tourism ministry’s $14.6 million.
“The ministry’s share in the budget seems way too low to me,” said Abillama’s Abboud. “There should be more than just enough to pay salaries.”
“The ministry should be able to afford promotion programs and to fund delegations from the ministry to visit seminars and industrial meetings with specialized bodies in the Arab League, the EU  or others,” he added.
There have also been no steps made to set up dedicated industrial zones despite government pledges over the years to do so. As Frem observed, “Forget about it, there is a complete paralysis on the economic zones.” Industry, as in the past, is being left to its own devices to stay alive, not even getting governmental contracts to bolster domestic sales.
However, the Ministry of Industry has put its, albeit limited, weight behind a joint scheme launched in September with the ALI to promote Lebanese products under the slogan “Your industry your identity: Buy Lebanese.”
While a promotional campaign may help, industry needs more than just marketing, it needs solid support from the government and for the ministry to tout the sector at international exhibitions, just as other countries do. A bigger industrial sector would, after all, help to lower unemployment and boost the overall economy.
“It is not that Lebanon cannot be industrial, but that it should be seen as a sustainable sector,” said Abboud. “It is great to have an ad agency here, but they could leave tomorrow; industries can’t get up and leave like that. Industry should be a priority and not be seen by the government as a cash cow. Industry is a social contributor as well as a fiscal one. In the past, industry was looked at as a polluting sector or as exploiting the masses — this is not the case anymore.”
To economist Soueid, the government needs to implement any of the economic plans drawn up over the years, whether by external actors such as the World Bank, or by ministries and economists. “Industries in Lebanon don’t need a ministry, they need an economic policy that supports industry and reforms in power, infrastructure and telecoms,” he said.
Given the rough ride this year, Lebanese industrialists could use some better cards to play.

Box: Local Power Generation Solution



When the Ministry of Energy and Water concluded two years of talks with a Turkish power company to provide 270 megawatts (MW) from two electricity-generating ships, the June agreement was generally welcomed by the public. With the country short by at least 1,000 MW, any increase in energy was viewed as a plus, even if the electricity from the ships – once they arrive - will initially be used to offset the shutting down of a power plant for an overhaul.
The industrial sector however was not as enamored with the deal struck with Turkish Karadeniz Holding, at a price tag of $390 million for three years.
I'd have preferred the ministry had used local companies not a foreign one, as Lebanon has generator companies,” said Asaad Saccal, general manager of Saccal Industries. “And if they bought locally it would be of great benefit to the local economy. We're installing a 40 MW generator in Baghdad for the Iraqi government. If we can do 40 MW, we can also do 100MW. Why is the government not contracting Lebanese companies?”
Saccal added that his company could provide 180 MW, and that Lebanon's second largest generator supplier, Caterpillar Jallad, some 90 MW, just short of the Turkish ships' output. “All private power generation plants are ready to connect to the grid, if the government would allow it. But it needs a law,” he said.
Under Lebanese law, the state-owned Electricite du Liban (EDL) has the monopoly on power production, sales and distribution. For private companies to provide electricity to EDL the law would have to be amended, despite the fact that Lebanese are forking out over $1.7 billion a year on subscription fees for private generators to survive the power outages, according to estimates by the Energy and Water Ministry.
The Association of Lebanese Industrialists (ALI) is also not happy with the deal with Turkey, and has submitted a proposal to the government for industrialists to set up private power plants for not only industrial demand but also to sell to the grid. “As industrialists (we would like the) same contract and conditions as the government signed for the Turkish power ships; this is nothing but fair. What the government gave to a Turkish company should be starting conditions for Lebanese industrialists on the ground to sell electricity to the grid,” said Neemat Frem, president of the ALI (see Q&A). As Executive went to print the ALI is still waiting for the Industry Ministry to submit its proposal to the Cabinet.

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