Manufacturing survival

Export and domestic demand are down, adding to Lebanese industry’s troubles

|Greg Demarque|

This is the overview of an Executive special report on industry. The rest of the report will be published here over the coming days.

By any measure, Lebanese industry is doing abysmally. In the first six months of 2014, industrial exports declined by 29.3 percent year on year, whereas the corresponding period in 2013 had witnessed a 5.5 percent increase, according to Lebanese Customs. Excluding fuel exports, which mainly consist of diesel destined for Syria, the drop in H1 2014 was a milder 18.3 percent according to Bank Audi, but this is small consolation since the same measure for the corresponding period in 2013 records an 8.9 percent decrease. In other words, momentum is heavily geared toward the negative.

Fingers are being pointed, most prominently at the country’s continuing electricity crisis and the war in Syria. The latter has had a clear effect, curtailing Lebanon’s sole land export route to the region. As a result, fewer goods go out and those that do are exported at a higher price, since the cost of transport and insurance for transport through Syria has risen dramatically. Alternative routes by ship are generally even more expensive. In addition, exporters face elevated fees for importing raw materials. According to the Association of Lebanese Industrialists (ALI), the cost of clearing trucks carrying raw materials to Lebanon by land used to be some $7 per ton, while clearing them in the Port of Beirut costs some $70 per ton.

[pullquote]“You know what they say: if Syria sneezes, Lebanon gets sick”[/pullquote]

On top of costlier trade, fewer tourists are coming in, dampening domestic demand for manufactured goods. The cocktail of less trade and less tourism has had disastrous consequences for Lebanon’s overall economic growth. While GDP recorded an average annual growth rate of 8.25 percent from 2007 to 2010, Banque du Liban (BDL), Lebanon’s central bank, estimated that GDP growth declined to 2.5 percent in 2013. If BDL in 2013 had not launched its $1.4 billion stimulus package, growth would arguably have been less than 1 percent.

“You know what they say: if Syria sneezes, Lebanon gets sick,” says Avo Demirdjian, a partner and sales manager at Demco Steel, Lebanon’s leading steel manufacturer. “If Syria gets better, Lebanon will boom.”

Steely demeanor

But while far more than a mere sneeze, Syria’s sickness is not the only disease attacking Lebanese industry. “Electricity is too unreliable and [it is] too expensive to produce steel in Lebanon,” says Demirdjian. “We could never be competitive. Demco Steel has a service center for the cutting, leveling and welding of steel. We also have a large steel pipe manufacturing plant, yet our core business consists of importing, stocking and distributing steel.”

A family firm founded in 1922, Demco has an annual production of some 400,000 tons of steel, which represents an estimated 40 percent of the Lebanese market. Other manufacturers include Moussawi Trade (20 percent), Tannous Group (10 percent) and Yared Steel (10 percent), while two dozen smaller firms divide the rest of the pie.

Demco 3Greg Demarque | Executive

Demirdjian says that the term ‘steel manufacturing’ should not be taken too literally. Steel is imported from Turkey, Egypt, China, Ukraine and several other European countries, while some 150,000 tons annually is exported across the region, especially to Saudi Arabia. “Syria has never been an export market, as Lebanese steel just cannot compete with the much cheaper Syrian-made steel,” he says. “However, due to the conflict, we lost some export to Iraq, as our trucks could no longer cross Syria, while transporting by ship proved too costly.”

The conflict also affected Demco’s operations inside Syria. About five years ago, the company gained a foothold in the Syrian market by opening a subsidiary company, Med Steel, in the industrial city of Adra. “As exporting Lebanese steel to Syria is not an option, we thought it a good investment to open a branch in Syria,” says Demirdjian. “Unlike Lebanon, Syria has [implemented] a ban on exporting scrap metal, while the country offers cheap electricity and labor. Due to the conflict, however, we currently operate at only 25 percent of our capacity.”

However, the main problem for Lebanese steel in recent years has not so much been a decline in export, but a gradual decline in domestic demand especially from the saturated construction and real estate markets. An estimated 80 percent of Lebanese steel goes to construction.

“A few years ago, demand in Lebanon amounted to an estimated 900 to 1,000 tons annually,” says Demirdjian. “In 2013, it decreased to some 800 to 900 million tons annually, while for 2014 I predict some 700 to 800 million tons annually. The last few years have been survival years, which I fear is set to continue for some time to come. At Demco, we can digest a temporary loss, partly because we have diversified our business portfolio by moving into shipping and real estate. It will be much harder for the smaller players on the market.”

Agriculture or packaging?

According to the ALI, base metal and metal goods top Lebanon’s industrial exports at $527 million annually, but prepared foodstuffs aren’t far behind, with $425 million exported each year. A question, however, hangs over how much preparation actually goes into such products on Lebanese soil.

kassatlyGreg Demarque | Executive

“Industrial production in Lebanon is often only a matter of packaging and labeling,” says Roland Riachi, an economist at the Lebanese Center for Policy Studies (LCPS). “For example, there are a lot of agro-food companies. One might think that these companies collect and use Lebanese fruits and vegetables. Yet, they often buy the bulk of their produce abroad, only to can and label them as ‘Lebanese’. Likewise, many pharmaceutical companies buy their pills abroad only to package them here. Even Lebanon’s biggest producer of generators merely imports the parts to assemble them here. In short, one could argue there is often very little ‘manufacturing’ involved in Lebanese industry.”

According to Lebanese Customs, in the first half of 2014 the country exported some 190,000 tons of prepared foodstuffs with a value of $305 million, while in the whole of 2013 a total of 308,000 tons worth $452 million were sent abroad. If the agro-food sector continues to export at its current pace, Lebanon is set to record a total export of $522 million by year’s end.

In 2013, the volume of agro-food exports had increased by some 36 percent. A Blominvest report stressed that, in terms of value, export grew at a pace less than half that rate. Arab countries excluding those in the Gulf Cooperation Council (GCC) topped the list of importers with 51 percent, followed by the GCC states with 21.3 percent.

Into Africa
Africa in 2013 ranked as the third largest market for Lebanese agro-food products. In July 2014, Lebanese poultry firm Tanmia announced it is set to expand operations in Nigeria and Ethiopia. Companies in both markets will be established in October, while construction of the firm’s poultry farms will start in early 2015.
The initial investments are worth some $25 million in each country, yet Tanmia chairman Moussa Freiji announced that future investments could amount to $1 billion. He furthermore praised the low price of fodder, the availability of water, suitable weather and large markets in both countries. Fodder represents some 65 percent of the average cost of eggs and chicken meat.
Founded in 1972, Tanmia is one of Lebanon’s biggest chicken producers. The company already has a presence in Syria, Saudi Arabia, Jordan, Egypt and Sudan. It is expected that in the future the Ethiopian and Nigerian outlets could also supply some of the Arab countries.

However, the volume of exports to non-GCC Arab countries in particular saw a sharp increase: to Syria by 50 percent and to Iraq by 146 percent. It is widely believed the Lebanese food industry has profited from the partial collapse of the Syrian agricultural system, which not only supplied Syria itself, but many other countries in the region.

Africa ranked third with a share of 12.2 percent of total agro-food exports, with Angola as the continent’s surprising top destination. The export of beverages and spirits to Africa showed a particularly sharp increase. Last year, Lebanon exported some 110,000 tons of beverages, spirits and vinegar to the continent.

According to a Blominvest report from late August 2014, 46 percent of Lebanon’s total agro-industrial output in 2013 was exported, primarily prepared vegetables, fruits and nuts (25.6 percent), beverages and spirits (22.1 percent) and other prepared edibles (15.7 percent). The average margin per ton for Lebanese agro-food exports decreased by 13.4 percent in 2013, due to price fluctuations on the international market and the higher cost of transportation. 

According to the 2013 Agro-food Fact Book issued by the Investment Development Authority of Lebanon (IDAL), approximately 18 percent of Lebanon’s industrial enterprises are active in the agro-industrial sector, which represents about 32.1 percent of the industrial sector’s total output. The sector is dominated by small family-owned enterprises employing an average of six workers.

According to IDAL, the sector employs 20,607 people or 24.9 percent of the industrial sector’s total workforce. However, if that is correct, the industrial sector employs less than 85,000, while IDAL elsewhere on its website claims the sector employs a total of 140,000 employees. Again, it seems figures and statistics are not Lebanon’s forte.

Drinks can solve your problems

One of Lebanon’s leading agro-food and drinks manufacturers is Kassatly Chtaura, founded by Akram Kassatly in 1974. He started by producing wines, yet the outbreak of the Civil War forced him into the production of jallab, flower extracts and syrups, before expanding into liqueurs. In 2000, the family firm went on to introduce the vodka-based drink Buzz, followed by the non-alcoholic, carbonated fruit beverage Freez. In 2005, the wine Chateau Ka was added to the company’s beverage portfolio.

“Today, Freez represents some 60 to 65 percent of our sales, and Buzz some 20 to 25 percent,” says export manager Reem Kassatly Ragy, who declined to provide hard figures on the company’s annual production and turnover figures. “Freez comes in 20 flavors and is huge in the Gulf. But even in European countries, such as France, Sweden, England and Holland, demand is growing.”

Kassatly Chaura’s export has also been affected by the outbreak of the Syrian conflict. “To Syria, Iraq and Saudi Arabia we used export by land,” she says. “Especially for most of 2012 it was impossible to cross Syria. We once had a driver who waited and slept in his truck for 10 days. We now ship most of our products [by sea], even though the situation in Syria has improved. In fact, Syria has ordered its first cases of Beirut Beer.”

On July 21, Kassatly Chtaura inaugurated a new $15 million brewery with an annual capacity of 2 million cases of Beirut Beer. “We invested because we believe there is a demand,” Kassatly Ragy says.

Kassatly’s biggest obstacle is not diminished exports to Syria or via Syria, but the high cost of energy in Lebanon. “Our operation is almost 100 percent generator driven to accommodate the huge energy requirements of our equipment,” she adds.

Looking for solutions

Demco 2Greg Demarque | Executive

One thing everyone does agree upon is the fact that Lebanon hardly offers a welcoming climate for industrialists. “First of all, the Syrian crisis has made export by land a very costly and dangerous affair,” says Christiano Pasini, representative of the United Nations Industrial Development Organization in Beirut. “In addition, the presence of over 1 million Syrian refugees has led to a rise in unemployment. Political insecurity is also an issue. To attract investors to help develop the sector, stability is a must.”

Demco Steel’s Demirdjian says that because of the lack of affordable energy it is impossible to produce steel in Lebanon, while Kassatly’s operations in Lebanon are nearly 100 percent generator driven. And research has shown that in Lebanon’s paper and packaging industry the price of energy amounts to up to 30 percent of the cost base.

But “a relatively new way of looking at the state of Lebanese industry is its ability to innovate,” says Riachi’s LCPS colleague Lina Srour. “Between 2000 and 2008, some 40 new products were launched in Lebanon. In most countries, you will then find a correlation with a change in industrial public policy. However, in Lebanon there has not been such a thing. Having talked to some of the industrialists involved, I was always told a story of individual entrepreneurial skill in combination with having the right social contacts. I think, this may really be a defining feature of Lebanese industry.”

Pasini agrees. “There are a lot of obstacles facing Lebanese industrialists, and yet there is a lot of potential,” he says. “In the little time I’ve spent here, I’ve seen a lot of entrepreneurship and creativity.”

He furthermore points to Lebanon’s excellent human resources and education system and calls for international partnerships to be established in order to launch new products and reach new markets. He also envisions a role for the government to boost the sector.

“To improve things, the government will have to formulate a strategic plan,” he suggests. “The government can work on removing obstacles by simplifying procedures and help ing to lower the cost of production. It could also create industrial zones. However, to formulate a sound plan, the one thing you need is reliable statistics.”

Correction: The print version of this article, which appeared in October 2014’s issue, contained a box on the Beirut River Solar Snake project. In the box, we erroneously claimed that once all 10 phases of the project are completed, it will produce 10,000 megawatts — a ridiculously high figure. The actual number is 10 megawatts. Very sorry.

Peter Speetjens

Peter Speetjens is a Dutch journalist & analyst based in Beirut since 1996.

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