Italy, the world’s second largest olive oil producer, has to go shopping for its green gold in Syria, because it cannot keep up with its own demand. The average Italian consumes around 47 cups a year, in comparison with countries like the UK, Germany and the US, where less than one is the norm.

In 2006, Syria produced 205,000 tons of olive oil, much of it of premium grade, which is most in demand on the international market. Syria’s domestic consumption of olive oil accounts for only about 50% of its total production, leaving at least 100,000 tons for export. It stands to reason then that Italy, which also imports the oil for redistribution and marketing to other countries, would be a returning customer with a vested interest in its supplier’s efficient operations.

Evidence of olive cultivation in Syria dates back 5,500 years, extending to all parts of the Mediterranean, where it has become an indispensable item of local cuisines and health food sectors. However, the industry is rife with difficulty.

Despite its status as the sixth largest olive oil producer in the world, Syria is facing backlogs that keep it from moving fast enough into new export markets like China, whose olive oil imports are rising dramatically. Naturally, Syria is keen to break into this emerging market, having already begun exports to other Asian nations. However, with many of its local growers cultivating only small plots of land with old-fashioned methods and much of the oil-processing facilities needing to be upgraded, the plan needs a bit of a boost.

Enter Italy, with its gracious $2.7 million assistance to develop Syria’s history-rich but bottlenecked olive oil production. The cooperation project will be based in Idlib, the nexus of Syria’s olive growing region and provide know-how in addition to funding. The industry will also receive assistance from the International Centre for Agricultural Research in the Dry Areas, supported by funding from the Spanish National Agricultural Research Institute.

But Syrian exporters are not content to rest on their laurels waiting for foreign investment, they have been making appearances at numerous international trade fairs, to promote their product and discuss sector development. These fairs include the 2007 Seoul Food Fair, the Montreal SIAL food fair, and on their own turf in Damascus, Olivex 2007.

Even before the Syrian government started its program of reforms to draw foreign investment, the olive sector had been taking matters into its own hands, forming partnerships with overseas producers and distributors like the East Mediterranean Olive Oil Company, a joint venture between Aceites del Sur of Spain and others.

Another difficulty has been developing tough-to-crack markets in regions like North America where olive oil consumption is nadir, exports expensive and political relations strained. To get around the issue, some Syrian wholesalers allow their clients to package and re-export products under their own labels, opening up markets such as the US that may otherwise be closed to direct sales of Syrian olive oil.

The United Nations Development Program for its part has taken an interest in the olive oil sector from an environmental perspective. The UNDP is addressing the issue in a three-year, Levant-wide program, in partnership with local environment ministries. The project is intended to provide “green” standards, build institutional monitoring and develop financial incentives.

The nomination of Turkey’s foreign minister, Abdullah Gul, as the government candidate for the presidential selection process came as little surprise to those who felt a “compromise” candidate was in order.

However, while many in the political establishment are hoping that his election will proceed smoothly, the past record of Gul and his close association with Prime Minister Recep Tayyip Erdogan have caused concern for some. The secular establishment in Turkey will not go down without a fight, although this may be exactly what Gul and the ruling Justice and Development Party (AKP) are hoping to avoid.

Political expediency

Erdogan’s decision to not stand for the presidency was based on a combination of political expediency as well as popular sentiment. Throughout the months of speculation, the only indication he had given as to who the potential candidate would be was when he declared in February that the next president would be a sitting member of parliament. In effect, Erdogan eliminated the potential for a compromise candidate coming from the judiciary, military or public service. These three institutions are still considered by the government to be unsympathetic to its goals and overly pro-secular, though not universally so. However, while it is easy to paint the political picture as one of a battle between pro-secularists and the conservative AKP over the future direction of Turkey, the picture is slightly more complex.

Almost controls the parliament

While the AKP almost controls the necessary two-thirds majority in parliament needed to elect Gul president in the first two scheduled rounds, set to occur as this article was written, there is no guarantee that the process will run smoothly. The support of the 20 members of the centre-right Motherland Party (ANAP) would be enough to hand Gul the prize, though if they did come to vote with the government they would likely extract a high price. As it stands, most of the members of that political grouping were originally elected to parliament as members of the AKP, including ANAP’s leader Erkan Mumcu. Their distance is not far politically.

The main opposition group in parliament, the centre-left Republican People’s Party (CHP), has threatened to boycott parliament and ask the Constitutional Court to invalidate the election process should a quorum of opposition parties not be present. The CHP’s leader, Deniz Baykal, sees the entire process of electing Gul as the completion of a secret Islamist plot to take over the state and change its secular nature. As he described it, “If Gul is elected and if he keeps his AKP identity, serious obstacles could come from the Constitutional Court before he becomes president.” For the secularist side, the election is far from a forgone conclusion.

Large protests

Opposition groups had also been vocal in their attacks on Erdogan, and held large protests around the country to demonstrate their strength. The largest rally, held in Ankara on April 14, brought together some 500,000 pro-secular activists, and was a strong message aimed at the Erdogan candidacy. In effect, Erdogan demonstrated that he had listened to their opinions, though would still make his own decision in who the next president would be.

Military’s role?

The pro-secular military and its supporters remain a force both Gul and Erdogan need to contend with. The ability of the military to influence affairs has waned under the EU accession process. However, the present coolness on the European front is giving rise to concerns that the military may once again seek to assert its constitutional right as guardians of the secular republic. The unveiling by Nokta weekly magazine of a supposed plot by now retired senior officers to stage a coup in 2004 is a case in point. Although the March 29 article created a political storm in Turkey, the aftermath would appear to reinforce the status quo ante. The magazine has now closed, and rather than charges being filed against the officers involved, the publishers of the magazine are now being charged with “inciting the community to make light of military recruitment.”

Packing public offices

Another worry for the secularists is that with the presidency in the hands of the AKP the party will now have the opportunity to stack public institutions with its supporters. The current president, Ahmet Necdet Sezer, has regularly vetoed governmental appointees to senior posts, though with Gul as president Erdogan will be able to nominate whoever he likes. This stacking of public institutions with political appointees has been common in Turkey’s past, as it is an easy way to reward party supporters. The AKP is unlikely to be able to resist the urge.

Another obstacle in the way of Gul being elected president is the veiled status of his wife. The headscarf issue is still a no go area for members of the secular establishment. For the first lady to be veiled may be more than secular supporters can stand. However, for the AKP side this would be a reward for all of the pro-headscarf supporters in its ranks. The AKP is looking to shore up support among its core members, and this could be one way to achieve this.

Powerless president

Although Turkey has at times flirted with creating a more executive presidential style system, especially during times of fractious coalition governments, the relative powerlessness of the president has been maintained. For Erdogan, becoming president and watching all of the coalition building he had done in the past fall apart would have made his status as president meaningless. Equally, Erdogan needed to take into account that despite his parliamentary majority, the AKP was only elected with some 34% of the vote in the previous national elections. In order to maintain the AKP’s dominance in the upcoming election he knew that he needed to be in the engine room of the electoral process rather than isolated in Cankaya Palace.

Payback time

The selection of Gul by Erdogan can also be seen as political pay back for Gul’s service in the past. Following the 2002 election in which Erdogan was unable to stand, Gul took over the premiership, guided through laws that revived Erdogan’s political career, and stood aside and became foreign minister once Erdogan had been elected to parliament. The presidential prize, in this sense, can also be seen as Erdogan’s gift to the ever loyal Gul. However, it could be that very loyalty that most upsets the secular establishment. If Gul does become president, it is this audience that will be watching his actions in office very closely.

Jason J. Nash is head of research at the Oxford Business Group

Jordan’s insurance industry hits a promising note in 2007

But real estate market still drives risk business

Most land developers purchase insurance outside Jordan for projects

As the real estate market continues to drive growth in the Jordanian economy, the insurance industry is reaping the rewards, with growth of approximately 12% in the first three months of 2007. However, with 75% of these revenues being largely generated by the auto and medical insurance sectors, there remain some areas to be addressed by the industry.

Industry growing strong

The data released by the Insurance Commission of Jordan shows an increase in the January gross insurance premiums by 12%, to JOD29.3 million ($41.3 million). Life insurance premiums accounted for JOD3 million ($4.2 million) and general insurance for JOD26 million ($36.6 million). While gross claims increased by 37%, rising to JOD13 million ($18.3 million).

One area of concern for Ra’ed Raimouny, general manager of the Arab German Insurance (AGI), is the real estate sector’s insurance outsourcing, “With all the considerable property development in Jordan, this should be a profitable area for insurers, yet we are not benefiting from it because many are purchasing insurance outside of Jordan.”

Newcomer, DARKOM, is launching a housing loan insurance company in the second quarter of 2007, to provide financing tools, filling a much-needed gap between lender and borrower. The strategy is to offer mortgage insurance that will guarantee the portion of the housing loan, approximately 25% that the bank is unable to cover. DARKOM, which falls under the umbrella of the United Arab Investors Company, believes its method will alleviate some of the pressures brought on by the housing boom.

Life insurance has plenty of headroom

Field experts see room for improvement in other sectors, such as life insurance, which in Jordan accounts for only 14% of the total market income, standing in contrast to the country’s immediate neighbors with 20%-30%, and an astounding 60% in developed economies. The numbers signal a need to explore these untapped sources of wealth in the insurance industry.

A burden and a blessing

Jordan’s insurance industry difficulties are both a burden and a blessing, for where there is demand, such as in life and real estate insurance, there is also opportunity for savvy entrepreneurs like DARKOM, to step up to the plate and offer a solution.

Mega construction projects are popping up everywhere in the Middle East: towers, hotels, shopping malls, artificial islands and space age luxury dwellings are appearing, not only the GCC countries, but in the Levant and North Africa as well. This boom in real estate comes hand in hand with a cost explosion for construction materials from steel and cement to bathroom fixtures and ceramic tiles.

The huge cost increases, which have tripled or quadrupled expenditure projections for some major industrial construction projects in the region, are partly related to international price pressures stemming from demand in China and elsewhere. But they are also linked to local supply bottlenecks and insufficient production capacities that have led to a region-wide race for building new state-of-the-art construction material factories to service the demand.

“Shortage of material is why construction prices have increased dramatically for the last couple years,” Elie Kfoury, the managing director for DG Jones’ Dubai branch, told Executive. DG Jones is one of the biggest construction cost control and quantity surveyors in the region. “Projects are becoming bigger and bigger—the Middle East has had a big boom in the last two years. Factories weren’t expecting this.”

Last year, regional business information platform Zawya estimated that ongoing MENA real estate investments totaled $387 billion compared to the regions’ combined GDP of $804 billion—a 48% ratio. Supply is at maximum capacity in most Middle Eastern countries, with demand swelling due to population increases and growing foreign direct investments.

As rising energy costs and increasing construction demands strain construction material supply in the Middle East, more local factories are being set up to slash import costs and to stabilize the growing prices incurred from undersupply. Syria opened up its cement sector in 2005 to private investments and granted licenses to private operators, which are expected to begin operations by 2009.

Steel prices have doubled in the GCC since 2003 with transport costs rising as much as 200% in recent years, prompting Oman to step up investments in steel factories to bolster production over the years. The region’s largest steel making group, Egypt’s Al Ezz Steel, also recently said it is looking at building a $700 million steel mill in Algeria, in addition to significant capacity expansions in Egypt. 

But considering that many countries are building their own construction materials factories to service local demands and that exporting these bulky goods is costly and an integral reason why local factories are emerging, who will benefit from an oversupply once construction stops?

Challenge for the Levant

For the Levant, the challenge is to keep Gulf cement and other materials out of their market as GCC factories receive subsidized energy, feeding lower production costs.

“The imbalance between supply and demand should not last much longer as many new cement plants are emerging in Jordan and the GCC. Within 18 months, I think there’ll be an oversupply in the region independently if the construction boom stays strong or weaken,” Pierre Doumet, CEO of Cimenterie Nationale (CN) cement company in Lebanon, told Executive. “Then, I think, the regional cement prices will decrease because there will be an oversupply.”

Apart from capitalizing on the short term opportunity that undersupply currently presents, the long term gain for CN and other companies is securing future competitiveness.

“We are using the boom years we have now to renew our equipment and be ready for the bad years, that’s why we are [expanding] our site. We are building a state-of-art site and reducing operational costs—especially energy—to withstand the lean years,” Doumet says.

CN is the second-largest cement producer in Lebanon, but will soon be the first, Doumet says, with factory expansion and energy-efficient plans near completion.

Energy prices for production are the main concern of building materials manufacturers. Other than cutting down on this cost via alternative energy sources, quality is the only other advantage.

“If we want to be competitive across the Gulf and Middle East, it’s not easy anymore. Gulf prices are cheaper but the quality is not good,” said an official with a Lebanese ceramic company who wished to remain anonymous. “What we are trying to do is improve quality and design and convert to cheaper energy to keep Gulf products out of our market.”

To remain competitive, companies are becoming creative in the energy department. Jordan Cement Factories (JCF) is looking into shale oil production as a way to trim down operational costs. Shale oil is a sedimentary rock with enough organic minerals that when distilled, yield oil for energy uses. JCF hopes to start tapping into its shale reserves by the end of 2007, once it receives a permit from the Ministry of Environment.

Turning to diesel and heavy fuel

For Lebanese construction material factories, diesel and heavy fuel are replacing natural gas to slim down costs for the likes of the Lebanese Ceramic Industries Company (Lecico).

The rising costs of exporting local production are also burdening oil-poor Levant countries. Rising oil prices are stimulating increased freight fares for bulky cement exports and growing energy production costs.

Lebanon is one of few MENA countries with an oversupply of cement, but exporting to multiple destinations is not monetarily feasible. The county does export to neighboring Syria and Iraq. But Syrian cement demand is so strong there’s a thriving black market for Lebanese cement, which Lebanese producers say account for 40% of their product.

For other countries, liberalization is a necessary step to keep up with already open and booming markets. Syria liberalized its cement sector to cut down on rising cement import costs. Syria’s cement sector has reached its maximum capacity of 5 million tons per year (tpy) but demand is at 8 million tpy with 5% increases per annum. Hassan Al Osh, production director at state-owned General Organization for Cement and Building Materials said last month that Syria hopes to become a cement exporter by 2010-2011.

In contrast to the Levant, the plan for the GCC is not only to satisfy domestic demand but to export elsewhere.

Gulf advised to invest more than $5 billion

The Gulf Organization for Industrial Consulting released a report last March advising GCC countries to invest more than $5 billion in iron and steel industries in the next three years to meet growing regional demand—as they expect imports to increase 19.6% annually until 2010—and then begin exporting. The report stated that the GCC supply-demand gap for iron and steel will persist until 2008. The 2008 surplus will lead them to find external markets due to internal saturation, to become a global center for iron and steel production.

“Factories have been under pressure from his highness in Dubai and in Abu Dhabi to focus on factories as real estate is situated in a way where it cannot be sustained for a long period unless there is a continuation of work from exports, imports and factories. So the UAE is very heavy on the drawing plans for glass, steel and aluminum factories,” Kfoury said. “This is the second thought—the first was to build up a tourist country and now it is to turn the tourist country into an industrial country.”

These countries can sideline the energy worries of the Levant by subsidizing the energy costs associated with producing and exporting such bulky materials. Saudi Arabia accounts for just over half of all GCC cement, but the country faces local shortages as exporting regionally yields higher prices and transportation costs are minimal due to oil wealth. Saudi’s largest export market is now Japan, mainly for refined oil products but also for commodities like cement.

Undersupply slowing down work

For most of the Middle East, current local undersupply is currently stimulating construction lags.

The CEO of the construction materials company Madar Emirates, Sameh Hassan, said at a company event in April that the biggest challenge for construction companies is getting raw materials on time. Hassan said he expects construction prices to increase by 30% this year.

Also, with the competitive edge the euro has over the dollar, many steel and wood imports go to service the construction boom in Europe, increasing the costs of these materials regionally.

As the construction materials industry is both capital-intensive and highly cyclical, whether or not building or revamping factories to bolster production will pay off has yet to be seen. Certainly, construction material costs need to go down and one way to do so is through government subsidies. Lebanese contractors threatened to suspend projects in April, unless the government alleviated some of their costs. At the moment, the burden of these rising costs rests squarely on the shoulders of all Middle Eastern construction companies.

Levant to GCC: Keep out

As building material factories swell in scope, GCC factories’ dreams of exporting large quantities throughout Asia may be not be as fruitful as they hope. As oil prices continue to rise, and East Asian countries experience further construction booms, they may have to seek local construction material alternatives.

Yet with a close-enough proximity, the Levant may have to keep an eye out for GCC competition, unless they can tap into alternative energy sources such as shale like Jordan, or for all regional countries, the undeveloped solar energy sector. The latter is not a saving grace, but any slight reduction in energy costs can help the Levant battle GCC products out of their turf.