Capital returns

by Stormy Wylie
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Flour milling in the Middle East is as old as civilization itself. Historians credit the Egyptians with being the first to attempt to crush wheat into flour and develop the leavening process of dough before baking.

In modern times, another natural resource — crude oil — has assumed a more prominent place in the region's history and economy. Much of the Middle East sits atop one of the greatest pools of oil reserves in the world. These massive energy deposits help fuel the world's economies, but have been a source of tension — as well as great wealth — for the region.

"Over the past century, the traditional way of life (in the Middle East) has been irrevocably changed, due in large measure to the British intervention and the rise of the oil industry," according to the Gulf/2000 Project developed by the School of International and Public Affairs at Columbia University in New York City, New York, U.S. "The common bonds of the (Arabian) Gulf peoples have been overshadowed by political differences between the new states. The modernization process, which lasted for centuries in the West, has been compressed into decades, putting great stress on traditional societies."

Depressed oil prices in the late 1980s and early 1990s prompted governments in the Middle East to lessen their dependence on oil revenues by opening up other sectors of their economies, including the milling industry. Private investment is helping to modernize the milling industry by improving efficiencies and increasing capacities.

Tim Burleigh, a former regional director of U.S. Wheat Associates in the Middle East from 1987 to 1993, said the greatest change in the milling and grain processing industry in the Middle East in the past decade has been the emergence of the private sector, which has led expansion and new trends in consumption of grain-based foods.

"The private sector has generally broken the lock held in many countries of the region by public sector entities which were slow to innovate and were unresponsive to consumer preferences," said Mr. Burleigh, who after his work with U.S. Wheat formed Colorado Global Resources with his Saudi partner, Mohammed Al-Mehaizea. The company, based in Lakewood, Colorado, U.S., builds trade and commercial links for grain processing related companies between North America and the Near East and Africa. Mr. Burleigh also was instrumental in founding the Association of Operative Millers' Middle East and East Africa district.

Mr. Burleigh said each Middle Eastern country's market is not as isolated as it once was. Investors and experienced operators within the region, as well as multi-national grain and processing companies, are establishing major facilities and operations, especially in the largest population markets.

"Flour is exported and imported from market to market throughout the region in a very competitive commercial environment," Mr. Burleigh said. "These dynamics speed up the grain processing industry development and investment in ways that could not be generated by the capital available within many countries."

In Egypt, for instance, milling companies have been busy converting existing stone mills into modern roller mills while maintaining the same flour quality, said Enrico Rizzi with Ocrim S.p.A., a milling equipment manufacturer based in Cremona, Italy. "Also, in existing flour mills, capacities have steadily been increased without building modifications but rather by adding new machines and modern technologies," Mr. Rizzi noted. "Several plants have introduced automation of all processing phases. This trend is becoming more and more a priority in the Middle East."

World Grain surveyed milling companies in the Middle East to determine if they have long-range plans for capital spending, how much they budgeted for capital improvements and what kind of improvements were planned for 2000 and beyond. A capital expenditures survey was mailed to readers in 13 Middle Eastern countries in June and July of this year. Responses were received from millers in Egypt, Iran, Israel, Lebanon, Jordan, Oman, Saudi Arabia, Syria and the United Arab Emirates.

The overwhelming majority of millers responding to the survey (67%) said their companies have a long-range plan in place to evaluate capital spending. Of those companies, more than half reported 5-year business cycles for capital planning — a clear indication of confidence in long-term growth and expansion over the next decade. About one-third of companies responding plan their capital investments on a yearly basis.

The majority of companies budgeted less than $1 million (all figures are reported in U.S. dollars) for capital improvements in 2000, while nearly a third earmarked $1 million to $9.9 million. The remaining 14% of companies budgeted from $10 million to $24.9 million for capital expenditures this year.

Over 80% of planned capital improvements for 2000 involve equipment upgrades (81%), while approximately one-third plan facility expansions. Only 19% of companies responding said they planned to build new facilities this year.

Interestingly, while about half of the companies reported that their capital spending budgets had stayed the same over the past five years, nearly two-thirds expect their budgets for capital improvements will increase in the next five years.

About half of the companies expect a five-year return on investment, while about a third expect a return in three years. Cost overruns and training issues were the two issues that caused the most dissatisfaction with capital purchases.

Proper training of workers is important to milling companies in the Middle East. About two-thirds said they invested in "human" capital expenditures, including training and higher education in the Middle East and abroad, short courses and in-house training programs.

NEW FLOUR MARKETS. Flour imports to the Middle East region have dropped significantly in recent years, according to the International Grains Council, London. Flour production in countries like Syria, Iran and Iraq has grown rapidly, and wheat food use in the region is up 25% from the start of the 1990s, the grains council said.

The grain handling and processing industries of the Middle East are finding opportunities to supply consumers in Africa, the former Soviet Union and even in parts of South Asia, according to Mr. Burleigh. "This demand from neighboring areas to the region is another factor fueling a trend toward investment in new plant and equipment that is heating up and could really catch fire if and when political and capital market hurdles can be overcome," he said.

The dissolution of the former Soviet Union was a major influence in opening new markets for flour, said Henry Stevens, a former miller and milling instructor now with U.S. Wheat Associates in Portland, Oregon. Millers in the Middle East have been "very active" in this region, especially in the southern FSU republics, he said.

"These new markets have been a major reason that many millers have invested in new capacity," Mr. Stevens said. "In many cases, the new capacity was in the form of state-of-the-art mills and milling techniques at the leading edge of milling technology. As a result, these same millers have widened their advantages through lower operating costs and higher milling efficiencies."

Middle Eastern millers are producing a much wider variety of flours at lower profit margins, he noted. "Smaller, less efficient mills have been disappearing while their competitors have been expanding and renovating," he said. "Old equipment has been replaced with more efficient processes and machinery."

One miller who completed the World Grain capital expenditures survey said, "Older mills must renew their machinery and reinvest in new technology."

Some millers in the Middle East are spending capital expenditures on new bulk trucks for distribution, wheat storage bins for receiving and new milling lines to increase capacities.

ALTERING THE LANDSCAPE. The introduction and proliferation of non-traditional products, restaurants and food service by entrepreneurs in the Middle East for younger populations and tourists has "altered the competitive landscape" in the baking and processing sectors, Mr. Burleigh said, and forced changes in milling grists and flour production standards.

"At this point in time, milling capacity is in surplus overall for the region in terms of tons of daily production; yet renewal and modernization requirements are growing to keep up with the need for an ever-wider variety of flour products for the baking industry," he said. "Trends like home baking of pre-formulated mixes and frozen doughs, which have reached maturity in the United States, for example, are just becoming feasible and are being introduced in the Middle East.

"The bottom line is that consumer demand pull for upstream changes in the milling and processing industries is just getting unleashed in these previously totally government-controlled economies and marketplaces."

Quentin Johnson, president of Quican, Inc., a milling and baking consulting company in Rockwood, Ontario, Cana-da, said Middle East consumers want a variety of baked goods apart from the traditional Arabic bread. "This requires the production of different flours to meet the new types of baked goods," he said. "These flours are milled from different types of wheats and may require the use of flour additives. These flours also need to be milled on different types of equipment, which was not available in the region to the same degree 10 years ago."

World Grain's capital expenditures survey showed that nearly half of the Middle East millers responding to the survey planned new product introductions in 2000. About 60% of these expenditures were earmarked for equipment for new products. The median investment for new product introductions is about U.S.$2.5 million.

Many milling companies in the Middle East also are expanding their operations outside their own countries. The vast majority of millers surveyed (86%) said their companies budgeted expenditures for operations in other countries, with approximately 50% of their capital budgets designated for foreign operations.

Still, capital limitations are the major roadblock to a more rapid pace of investment in new plant and equipment in the Middle East, Mr. Burleigh said. "In general, the banking system in the region is weak and governments are not currently able to do much about it. Capital markets are rudimentary to non-existent as a means of funding business expansion. There are also significant limitations on advertising and promotion of grain-based consumer foods due to government control over the popular media in the region."

He said that while flour milling capacity is overabundant in many parts of the Middle East, storage and logistics are inadequate in virtually every market. For this reason, he expects the most activity in the next 10 years to be in this area of development. "Industrialized meat production to serve a potentially explosive demand for meat protein is not well established," he said. "Feed milling requirements and the capacity to import, store and distribute feed grains as well as food grains should attract capital spending in many countries."

Another active area for investment in the Middle East in the near future will include seaports and strategic storage facilities, Mr. Burleigh said.

Marjorie Troxel is a research specialist for Sosland Publishing Company, publisher of World Grain. She holds a master's degree in psychology, with an emphasis in research methodology.

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