Thursday, October 04, 2012

Special Report Lebanese Industry: Exports in mayhem


Executive magazine

Syrian industry has been seriously hit by the ongoing conflict, suffering from a lack of raw materials, workers, energy and capital amid heightened risk. Multinational companies such as Proctor & Gamble that sold fast-moving consumer goods exited the Syrian market last November when European Union sanctions went into effect.
Turkey has not filled any supply gap, with exports from Turkey into Syria dropping from $2.3 billion in 2011 to just $302 million in the first five months of this year. However, exports from Lebanon to Syria have risen by 18 percent to date on 2011, to $126 million, while for the first time in years Syrian products headed the other way have fallen, by 8 percent to $142 million, according to Lebanese Customs data. Are Lebanese industries stepping up to fill an apparent supply and demand gap?
The short answer is: not really. Firstly, demand for non-essential items in Syria has plummeted as prices have risen, people’s finances have been squeezed, and stores are infrequently open, if at all. Take for example the sales of Lebanese cosmetics firm Ch. Sarraf & Co., part of the Malia Group, in Syria. When the group started a distribution company there in 2008, sales quickly reached the same volumes it had taken 10 years to achieve in Lebanon. It was a good market. But since the uprising began in March, 2011, business has dropped.
“We are facing export difficulties so a few months ago we put aside stock as a preemptive measure, but demand [for cosmetics] is about half of what it used to be as purchasing power is down,” said the company’s general manager Joanne Chehab. “People are only buying products of first necessity, although shampoo is still one.”
A second factor is that demand for more life-sustaining essentials has also not risen. According to a report in As Safir newspaper, the Lebanese Farmers Association said that exports to Syria have dropped by two-thirds on last year. Demand has equally not risen for items more suitable for life under a siege than fresh fruit and veggies — tinned and packaged foods. According to the head of a leading Lebanese agro-industry company who asked to remain anonymous, there has been no marked demand by Syrian companies or traders.
One necessary product that is facing production shortages in Syria is pharmaceuticals, yet while there may be demand, potential increased exports from Lebanese pharmaceutical companies are complicated by the borders still being under the regulation of the Syrian state.
“Until now, exports from Lebanese pharmaceutical companies to Syria are subject to regulations by the Syrian authorities; that is why it’s not as easy as one would think [to export],” said Neemat Frem, president of the Association of Lebanese Industrialists. “But in areas that are unregulated, that is completely different, and we might see more in those areas.”

Cash flow curbs

While generator manufacturer Saccal Industries has witnessed a 100 percent growth in demand for generator sets due to power shortages, Syria is not as lucrative a market as one would expect. “We are selling more but there is the problem of cash flow. People are afraid of spending money in the current environment,” said the company’s general manager Asaad Saccal.
The United States sanctions banning the use of Visa and MasterCard, as well as transactions in dollars, and the considerable depreciation of the Syrian pound are both major contributing factors to the squeeze. “We are selling for cash not credit as the currency is fluctuating a lot,” said Chehab. “We sell in Syrian pounds and then transfer on the spot.”
Compounding the situation is problematic  distribution, which has become more difficult. Traders are looking for higher margins to cover inflated insurance premiums and container hires.

A little silver lining

So what has caused the up-tick in exports to Syria reported this year? Data is not broken down by category, but one reason for the increase is a 25 percent spike in exports of machinery, spare parts and engines due to international sanctions, according to economist Kamal Hamdan.
Another factor is fuel. Subsidized Syrian fuel used to be smuggled into Lebanon; but as the conflict dragged on and shortages emerged in Syria, this flow has reversed, causing Lebanese imports of fuel from abroad to jump, both to make up for lost supply to the domestic market and to feed the export and smuggling markets in Syria. Lebanon’s imports of oil and mineral fuels have surged 89 percent year-on-year, to $3.2 billion. Non-hydrocarbon imports on the other hand have grown just 1.8 percent, according to Byblos Bank data.
In addition to fuel exporters and smugglers taking advantage of the conflict, some other companies are also directly and indirectly benefiting from industry shutdowns in Syria. Aluminum tube manufacturer Universal Metal Products (UMP) has noted an increase in orders from Saudi Arabia, which the company does not attribute to the closure of three Syrian manufacturers in the same field — they did not have the ISO specification required in the kingdom’s market — but rather the drop in Turkish trade with Syria.
“Due to the broken trade links with Turkey we are picking up slack from Turkish business they have lost,” said UMP’s general manager Nizar Raad. On the labor side, for manufacturers such as Carosserie Abillama, the closure of Syrian manufacturers provided the Lebanese firm with skilled workers that had been laid off.
All in all, there is little silver lining to the Syrian crisis for Lebanese industry, with the situation causing more damage to the sector than any potential sales up-ticks due to shortages over the border.
Where industry may well experience an upside in the near future is if goods that have been hoarded away start running out. Otherwise, it will not be until the conflict is over, when the rebuilding effort in Syria creates a massive demand for materials and products.

Box: Saudi Arabia Squeezes Lebanese Manufacturers

Saudi Arabia is not making life easy for Lebanese manufacturers. Riyadh has stopped issuing multiple entry visas to Syrian truck drivers, who account for an estimated 80 percent of truckers from Lebanon. This means that Syrians have to apply for a new visa every time they have a cargo at the Saudi Arabian embassy, which can take up to 12 days. It is not only causing transportation delays but also a shortage of available drivers, as other nationals are not willing to take the risk of driving valuable cargoes through conflict-ridden Syria.
While this is causing a logistical headache, Saudi Arabia is trying to protect its generator manufacturing business from the recent surge in Lebanese imports. “Over the past two years the Lebanese have invaded the Saudi market and they don't like it as we're cheaper. It is not about labor costs but about scale as Saudi manufacturers have small volume capabilities,” said Asaad Saccal, general manager of Saccal Industries, which has the largest generator manufacturing facility in the Middle East.
Under the Greater Arab Free Trade Agreement (GAFTA), imports are supposed to be tax free if a minimum of 40 percent of a product's value was made in the originating country. But Riyadh is playing with taxation rates by claiming Lebanese-made generators do not meet GAFTA's criteria and have instead slapped on a 12 percent import tax. 
“They don't consider our generators to be Lebanese, as value added has to be 40 percent. It is not true, we can prove it and we have lawyers and the Economy Ministry working to prove it,” said Saccal, adding that 10 percent of the company's exports are to the kingdom. “It is a war on Lebanon by Saudi businessmen.”



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