Annex - Manufacturing industries: prospects for expansion and diversification

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Iceland - Current economic position and prospects (Vol. 2) : Annex - Manufacturing industries: prospects for expansion and diversification (English)
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RESTRICTED Report No. EMA- 1 5a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS TCE LAND (in two volumes) VOLUME II MANUFACTURING INDUSTRIES: PROPSECTS FOR EXPANSION AND DIVERSIFICATION October 31, 1969 Europe, Middle East and North Africa Department CURRENCY EQUIVALENTS August 4., 1961 to November 26, 1967: US$ 1.00 - IKr 43 IKr 1 $0.0233 November 27, 1967 to November 11, 1968: US$ 1.00 = IKr 57 IKr 1 = $0.0175 Since November 21, 1968: US$ 1.00 IKr 88 IKr 1 = $0.0114 TABLE OF CONTENTS VOLUME II - AN_..;: P_jl EXPA1SION OF TRADITIONAL INiDUSTRIES . . . . . . . . . . . . . . 1 Processing of Sheepskins . . . . . . . . 1 Woolen Textiles ..................... Shipbuilding and Ship Supplies . . . . . . . . . . . . . . Furniture . . . . . . . . . . . . . . . . . . . . . . . . Ceramics . . . . . . . . . . . . . . . . . . . . . . .5 Fish Canning . . . . . . . . . 6 . . . . . . . . . . . . 6 Packaging Materialq - - - :. DIVERSIFICATION INTO NEW INDUSTRIES . . . . .7 a.Nat,u-,l RPeso,.ce..... 7 HIydroelectric Power Potent.i.al . . . . . . .U.L. . ...... .*. 7 Geothermal Energy Potential . . . . . . . . . . . . . . . Miinerc' Depo t S4 . . . . . . . . . . . . . . . b. Prospects for De-velopmlent In ....o.. 1 U. m .1.1.1± vL~.JpuL. ..... . . . . . . . . . . . . Diatomite Production ................................ 11 Exploitvation of' Perlite Deposits . . . ....If.. 1 uminkFai g . . . . . . . . . . . . . . .. . . . . . . Possibilities for the Process industries .1.2..... . . Salt .12........... Chlorine and Caustic Soda . . . . . . . . . . . . . . 14 Magnesium . ................... Sodium. ......................15 Silicon .... . ............... .... 15 Phosphorous . ................. ... . 1. Heavy Water .............. .......17 Oil Refinery .... . . . ...1.8. . . . . . . . . lo Seaweed . . . . . . . . . . . . . . . . . . . . . . . 18 M4APS, AIiNEX TABLE AND DIAGRAM MANUFACTURING INDUSTRIES IN ICELAND PROSPECTS FOR EXPANSION IAD I,,VERSIFICATION 1. This report reviews a number of possibilities for the further ex- pansion and diversification of the Icelandic manufacturing industries. These possibilities fall into two categories. First, those of expanding the tradi- tional industries, second, new projects in the chemical and mineral fields relying on specific advantages which Iceland has to offer: the mineral de- posits, power and geothermal energy available in the country are briefly re- viewed in this context. I. EXPANSION OF TRADITIONAL INDUSTRIES 2. Traditional Icelandic industries are related to processing of agricultural products, to supplying the fishing fleet, and to production of food products, textiles and household goods for domestic use; in addition there is a substantial construction industry. Some of these industries which appear to have an export potential are here reviewed. Processing of SheeDskins 3. During the sLuumer, sheep number about 1.7 million head, of which half are slaughtered before winter. Consequently, approximately 900,000 sheepskins are nroduced per year; most of which are exported salted, with- out further processing. Figures relating to the production and major ex- port categories are given in the folloWing table: Production and Export of Sheepskins 1964-1968 1964 1965, 1966, l0r;7 1968 Sheepskin. Production (thousands) 73 809 889 903 881 Exported Salted, with Wool 714 417 777 801 1032 Exported Tonned, with Wool 3 36 39 45 h8 Value of Salted Exported Skins (IKr mil.) 111 80 103 104 207 Val'ue of 'Ianed exported Skins it0 1 1 2 2 SLource: Economic Instit ut e , Mayw I969 4. he average vallue in 1976-8 of a salted, non-processedA shi-eepsk-in was the equivalent of US$3.50, while processed skins fetched the equivalent of abuu tv'oyl.30. If Icln hdpocse ll it.s export-ed shieepskXins in 196,7, instead of only about 5%, export earnings might have increased by the equiva- lent of nearly US$4 million in that year. - 2 - 5. In addition. if larger auantities of tanned skins were available it would be possible to use these skins as a basis for manufactured goods such as suede and lamb-fur coats and iacke1-;. During recent hihitionn of Icelandic products in New York and Scandinavia there appeared to be a big demand for such Droducts but orders had to he declined due to the lack of' manufacturing capacity in Iceland. The quality of Icelandic sheepskins is renuted to be very good. 6. This situation will not ,vpro. until the new tanneJr be ng built by the Federation of Icelandic Cooperative Societies in Akureyri is completed by the end of t.hi year or early in 1970; this new tannery r an one which was destroyed by fire in January. The capacity of this tannery wi-11 not per.mit the tan ing of n'l available sofns al - -- tAnner- in the north is now under construction. 7. Production and sales of coats and jackets from tanned skins with or withou+ wool sho ud also be sti-mulaed. The Cooperative -ocieties in Akureyri are already training workers to do this and some private enter- priesin that part of fthe co-try have also so--wi an ±itere-. A-n effec- tive marketing effort and a close coordination between the build-up of production. -and s-oleS is o eurd Woo'len Textiles 8. Icluad has govu quality wuuol exports of woul and wool products are already significant but further expansion should be possible. Production of scoured wool irn 1968 was l,110 tons of which 22 percent was exported as such while the remainder was used as raw material and underwent further pro- cessing for both the domestic and export markets. 9. One of the two largest woolen mills employs 110 people, has 360 spindles and produces blankets, carpets and a loosely twisted wool called lopi used for hand knitting. Some of the products are sold to tourists and marketed in Western Europe and the U.S. The company had run into financial difficulties, partly as a result of management and marketing problems. With the appointment of a new general manager the plant is now operating two shifts 5 days a week, and is reputed to have reached profitable operations again. 10. The largest woolen mill employs 250 people on two shifts. It manufactures blankets and worsteds as well as spun wool for associated com- panies, and uses 300 tons of Icelandic wool per year, augmented by about 100 tons of Australian wool and synthetics. The woolen mill is associated with a knitting mill (150 employees - 3 shifts) which produces 140,000 knitted woolen sweaters per year, as well as work clothes based on imported cotton cloth. Total exports from these operations were around US$1 million in 1968, mainly to the USSR under trade agreements. -3 - 11. Bth +~ text,ile m, I s produc a ood qulty product and in- part icul ar the largest appears to be efficiently laid out and run. The other has a very IUJU~ Li ).L LI.LLLL6 k .LUJLL LUUA. .L k W=0.V .LL Lb 'JJ :.LOc L-'.JLL ~ I4 L'J~ L. i 4 .AJ ModerL spinnir. sectio bu 'is weeaving op-*atons are Ihoused in _4 4otb-st- l buildings over 50 years old which will need reliLacement. The recent devalua- tions have considerably assisted both comrpanies to secure prolitable foreign orders. 12. It would appear desirable to increase the output of one or both mills in order that a larger proportion of wool produced in Iceland would be exported as manufactured products rather than just scoured, baled wool. On the basis of the recent wool export figures it would appear that there would be room for another plant capacity approximately the size of the Alafoss operations, provided markets could be developed. Shipbuilding and Ship Supplies 13. The shipbuilding industry appears to be in serious difficulties. Some of the yards were established or expanded as a result of the large de- mand for fishing vessels which existed in the early 1960's and which was met by purchases in foreign yards. However, at the time when the domestic yards were ready to start operation the herring boom was over and few new boats were ordered. 14. A typical case is the shipbuilding and repair facility in Akureyri. The town council has installed a marine railway with a capacity of three ships of 2,500 tons each; in addition there is a similar installation which will hold 16 ships of up to 150 tons. This equipment has recently been installed at a cost of IKr 50 million but there appears to be only small demand for hull repairs and a substantial financial loss is being incurred on this venture. 15. Close by is the shipyard of Slippst8din. This yard has a single slipway, completely enclosed to permit construction under all weather con- ditions and has the capability of building ships of up to 2,000 tons. This new yard was completed in 1966 and has since built only two small fishing vessels one of 300 and the other of 500 tons. The yard was threatened with closure due to the lack of work and in order to salvage it, the Government gave it an order for two coastal vessels of 1,000 tons each for delivery in 1969 and 1970. Employment has however been cut from 200 to 140. and at pre- sent the engineering staff is under-employed as no new orders have been forth- coming. The yard will require 1,500-2,000 tons of new construction per year to operate profitably. 16. The quality and workmanship of the vessels under construction at Slippst8din appear to be good. However, there seems to be a lack of initi- ative to shop around for new orders even for trawlers, for which a demand is expected to develop in Iceland within the next few years. The Government in cooperation with the fishing industry should perhaps promote the use of a standard design for fishing vessels (in line with nlans which are now in - 4 - hand): Slippst8din and other yards should auote Drices for such vessels based on limited series production. If the yard could plan for the production of say ten vessels over a 2 tn v year neriod costs counld probahlv hp nuuoted At such a level that not only would domestic buyers become interested but export nnrkets too coulld be developed. So far there appears to have been no export of vessels to other countries. 17. There is no reason why Iceland could not be competitive in certain specinlized ~ ~ ~ ~ ~ ---- desgn ofsisDatctalyfs4gvses ue to _t geo= graphical position the country will always have a disadvantage in respect to freight costs of steel; on the other hand, since it has no steel industry of its own and is not bound to any specific supplier, it might have access to relativelDy ch-eap r'aw mas.eri%La . Tabor --05tS, i which amon.t to 30 percent of the construction costs of a ship, are reasonable after the devaluation and producti vit4y ar..s satisfactory. The Faero Islands4 have been aul. to build up a reasonably competitive shipbuilding business with exports to the 0Scandi -.,iL Countries T_) oSA ... 4 S A, 4-- - - _; _ _P-_ ___- vA~LU.4.fl4te.V .J.C U L V L L ; 4.'...aJ. , W.L. 111 . UQ VWJ.J c a i ± L, . .L~ L 1i6 ±L1UUZ bL- and its knowledge of fishing vessels and equipment, should be able to do as well SoeGsern assi'starce in provi:-ng meudiwurr-term financing -or potential buyers of ships may be required. 18. Similar arguments can be advanced for the manufacture and export o _.a au _-_ u_ _ 4_ u_ a1 L_ _ -- _- _ L -_ - v± auw s ± ,y qu |.LP UJaU ±u- ULlt . XU.LX1.LL1 I _Ls*C,u such as Ie65ts W.l11(±nes, Iloats, etc. Although it is unlikely that Iceland will ever produce the basic raw materials used, such as nylon for nets, it is quite likely that tne sewing and design of nets could prove to be a profitable operation. Small net manu- facturing operations are in existence in the country and a concentrated ef- fort by all manufacturers to capture export markets might be considered for this and similar products. Furniture i9. Icelandic furniture follows the Scandinavian styles, and appears to be comparable in quality and finish. There are about ten furniture fac- tories employing 10 or more workers, all serving essentially only the home market of 200,000 people. The industry is, therefore, too fragmented. It is protected by a 90 percent import duty, but has to pay a 40 percent duty on its raw materials and a 25 percent duty on equipment. 20. Two furniture factories were visited. These well-equipped facto- ries employ about 40 people including office staff, and are probably the second and third largest furniture manufacturers in the country. The re- cent devaluation, which has increased the cost of the wood and thus of the furniture and the general fall in demand has a marked detrimental effect on furniture sales. Partly for this reason both factories have run into dif- ficulties. 21. Both manufacturers expressed interest in establishing meaningful export markets. As the plants are well-equipped, the workers skilled and - 5 - the wages are comparable to or lower than those in the Scandinavian industry, there appears to be no reason why Icelandi: furniture could not be sold a- broad. Although the country does not prodc_ie any wood, the same situation exists in Denmark, and all Scandinavian counti -'s have to import the hard- wood veneers. 22. One of the factories visited had received a large export order from the U.S. but did not accept the contract since production capacity was not sufficient. Apparently no effort was made to contact other manufacturers and to try to handle the order on a work-sharing basis; this in spite of the fact that the factory was facing serious financial difficulties. 23. It would appear that furniture manufacturers should pool their re- sources for the promotion of export markets. Each relatively small factory should specialize in a few products, rather than manufacture a full range of furniture as is done at present, and produce the selected products in larger ouantities. A marketing organization might be established which would quote volume prices on the different products, and would arrange visits by foreign buyers and particination at trade shows abroad. flermni rs 94. T'here is one Lefl-estnhlished plant in Revkiavik. Its products are based on clay from the geyser areas, mixed with crushed lava and sup- plemented by some im-ported clay to enhance the quality nf the final pro- ducts. They have a great appeal for foreign tourists and some of the cera- msc products are exported. The management believes there is a sihqtnntial market for its products abroad, and is contemplating expansion from the present 50 tons per year capacity to 360 tons per year. 25. ±&CtCbTJChe CdevelopmentJ of this inustrywthis be strongly encouraged if the results of the market study being undertaken continue uo be as fav,orable as the first indications. After expansion the company should have an output with a value of about $1 million per year, LIs oA which uill,- be exported ; proviSiOn-al estira+es i ndi cateinetns of $0.6 million will be required to achieve this goal, of which less than half will be foreign exchanrge. 26. In addition to this already established cer-amics output there might be possibilities for the production of utility and industrial ceramics. Czechoslovakia, for exam:ple, produces large quantities of superior floor tiling for industrial environments made out of re-molten lava; similar types of 'lava exst in IcelandAf.rt A f h ner srv ey and evaluation of available clay deposits would also help to establish whether a larger conventional ceramics production cou±u bJe sustLLai.nedu. -6- Fish Canning 27. Five Tcelandic fish canning companies are proposing to form a joint marketing and purchasing group to promote tihe !xport of canned fish, and to centralize the purchase of fish and nackazinw materials. The idea of forming an export organization for canned fish products appears sound; similar ar- rangements have been successfLul regarding the exnort of frozen fish. salted fish, and dried fish. Increased exports of canned fish would give a higher added value to Icelandic raw materini and thus improve export earnings. Moreover, unutilized canning equipment is already available and could be em- ployed for far greater production than is achieved at nresent, Pronections prepared by the sponsoring companies show export sales could reach $8 million per year five years after implementation of the project, as compared with a total of only $0.5 million in 1967 for all five participating canneries. Packaging Materials 28. There are one large and a few smaller companies producing packaging materials. The largest of these companies employs 130 people and produces cardboard and corregated boxes, waxed board boxes, toilet paper, hand towels, and simIllar products. ~Al th,,ough the coprysplias the doelstQic market,- most of its packaging materials are sold to companies which export their products. 29. ThIe com-pary h'as modern equipmlent, includAir.g smmulti-co-lor printing equipment and operates without protection and in direct competition with im- ports. Nevertheless, the company has at present about 85 percent of the market in its line in Iceland. In addition some trial export orders from Greenland, the Faeroe Islands and Norway have been recently received. 30. The company is expanding into production of plastic containers; a new addition to the plant to house this production is nearing completion. As after devaluation labor rates in the industry have become more competitive with those of neighboring countries, it is expected that a limited export industry of boxes and other packaging material could be built up. Tnis is in addition to the indirect export of the company's products as packaging material for Icelandic exports. 31. One other company produces similar products, while numerous com- panies produce tin cans. One company in Reykjavik specializes in the manu- facture of tin cans but does not manufacture a full range; for example, can tops are not yet produced and have to be imported. Several fish canning companies also produce limited quantities of certain type cans for their own use. However, if the desired increase in the export of Icelandic canned fish products should materialize, additional can making capacity may have to be installed to meet the demand. At that time it might also be possible to consider production of a complete line of cans, thus reducing import require- ments. -7- II. DIVERSIFICATION INTO NEW INDUSTRIES 32. The resourc
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