The Nepali Cement Industry is now a force to be reckoned with. But a question mark hangs over its long term sustainability and viability. What is now needed is the right set of policies and decisions.

--BY SANJEEV SHARMA

At a time when the country’s industrial productivity has mostly remained subdued, it is a matter of great pride to note that Nepal has become self-reliant in cement production. Over the last few years, this essential construction material has been witnessing a boom in business which, historically, only a few industries in Nepal had gone through.

Currently, Nepal’s annual cement production capacity stands at 10.5 million metric tonnes (MT), up 6 million MT from 4.5 million MT in early 2017. The capacity utilisation of cement factories has reached 70 percent which was 55-60 percent some two and a half years ago. The total number of cement factories registered at the Department of Industry (DoI) reached 114 by the end of the last fiscal year with capital investment amounting to around Rs 300 billion and Rs 1,000 billion in total investment. Similarly, import of cement has come down to 80,000 MT in FY2018/19 from 1 million MT in FY2013/14 with the market being flooded by domestic products. According to Dhruba Thapa, president of Cement Manufacturers Association of Nepal (CMAN), cement imported from India used to meet 90 percent of the demand in the country till 2002-2003.

This figure itself shows how domestic cement production has grown remarkably in such a short interval of time making the cement industry a force to be reckoned with within the country’s industrial fraternity.

The Supply Glut
Another part of this success story tends to the rather daunting side of the narrative. It is because the domestic cement market is becoming unstable with a deepening supply glut engulfing the market. According to cement producers, the current annual demand in the country stands at 10 million MT which is 5 million MT less than the production of the industry.  It is estimated that a large amount of money is due in the market.  

Out of 114 registered companies, 63 cement factories are in operation to produce OPC (Ordinary Portland Cement), PPC (Portland Pozzolana Cement) and PSC (Portland Slag Cement) cement and clinker. Among them, 18 have been producing cement only, while the rest have been producing both cement and clinker. 21 new plants are expected to start production by 2021. While many welcome the opening of capital and labour intensive industries in the context of the country’s industrial productivity, cement producers are worried that the supply glut will worsen if the demand remains sluggish. “The current situation is manageable, but in the next two years the production capacity in both cement and clinker is expected to double which will be challenging for us. If cement demand remains constant at 10 percent, the gap between production and demand will further widen,” said Thapa.

Reasons behind the Problems
Ashok Kumar Baid, director at Shalimar Cement thinks that three factors have played a role behind the current problems in the market. “First, the government issued operating licenses to many cement industries than required. Second, many industrialists are investing in the cement industry without analysing the market prospects,” he said. According to Baid, the expectations of industrialists that the formation of a strong government would expedite infrastructural development which would push the demand for cement encouraged them to invest in the cement sector. “I think the scenario will change only when infrastructural development gathers pace,” he expressed.

Investment in the Nepali cement sector saw an upward momentum after the devastating 2015 earthquake. The massive reconstruction drive created a huge demand for construction materials and industrialists saw cement as a product having high market potential. The statistics related to credit flow shows the extent of increasing investment in the domestic cement sector. In FY2017/18 alone, banks sanctioned a total credit amount of Rs 84 billion to establish new plants and expand existing factories. This amount was Rs 13 billion in FY2010/11. Industrialists think that many people have invested in the sector without better analysing the market. “The current problems are due to weaker market scope and overcrowding of investment in the cement industry,” said Thapa, adding that existing industries also expanded their production capacity after foreign and new domestic investment made its way into the sector.

In general, increased market competition is considered beneficial to both businesses and consumers. However, this principle is not applicable for the Nepali cement industry at present. Such has been the oversupply that producers are forced to sell their products at significantly reduced or even zero margins, which has raised concerns about the sustainability of domestic cement factories. “Consumers are paying almost Rs 100-Rs 150 less for a sack of cement this year. Prices have fallen this year in comparison to last year,” shares Ramesh Thapa, assistant general manager (Sales and Marketing) at Arghakhanchi Cement. According to him, the construction cost of a two and a half storey house, for instance, has been reduced by almost Rs 500,000- Rs 600,000 this year with the decline in cement prices. CMAN President Dhruba Thapa mentioned that besides the cut-throat competition between the domestic companies, regular supply of power and decreasing international market price of coal have contributed to the reduction in the consumer price of cement.  “The profit margin in cement has reduced drastically and some companies are even selling their products at a loss,” he said. It is estimated that a large amount of money has accumulated in the market as distributors have not been able to sell the cement supplied to them by cement producers.

Is FDI in Cement Necessary?
The last 5-6 years have seen cement industry becoming a lucrative sector for both domestic and foreign investors. Compared to other manufacturing industries, foreign direct investments (FDIs) in the cement sector is on the rise. Partnering with Sharada Group of Nepal, the Chinese cement giant Hongshi Group in May, 2018 started the commercial production of cement at its modern plant established at Sardi in Nawalparasi with an investment of Rs 36 billion. It is the largest investment in cement in Nepal till date. Similarly, Huaxin-Narayani Cement is another Sino-Nepali joint venture which is constructing a Rs 15 billion plant at Talti of Dhading. However, the floods which occurred in July this year along with a land related dispute has delayed construction and slowed down the process.

Nepali cement producers say that foreign investment is unnecessary as there is already large domestic capital invested in the industry.  “There is no need for additional FDI in the cement sector at present. We have a situation where the production of existing companies and those coming by 2021 will be sufficient for the next 10 years. If the internal consumption does not increase and we are not able to export our products, the capacity utilisation of Nepali cement companies will come down to 60-65 percent,” said CMAN President Thapa.

Baid of Shalimar Cement thinks that the need for foreign investment depends on the capacity of domestic investors. According to him, while FDI in the sector is good, it is equally important to ensure a healthy competition in the market to provide a level playing field to all producers. Baid is of the view that the government should only allow those FDI investors who bring full investment from outside. “The norm of any foreign direct investment (FDI) is to bring capital from other countries. If foreign investors take loans from domestic banks to invest here, then such investments don’t have any meaning,” he opined. “This will create more difficulties in the market.” The FDI investors in the cement sector have been taking loans from Nepali financial institutions to establish their business in Nepal. For instance, out of the total investment of Rs 36 billion, Hongshi-Shivam has borrowed Rs 17 billion from different Nepali banks and Rs 2 billion from the Employment Provident Fund.

Domestic Consumption
The difficult situation in the market has pushed the industry stakeholders to find ways to increase the internal demand for cement so as to make the business sustainable and viable. Despite the significant rise in production, the per capita consumption of cement in Nepal has not increased noticeably; it is 300 kg at present. “Countries in Asia-Pacific where infrastructure development has gathered big momentum, the per capita consumption of cement has gone up to 1,500 kg; in some gulf nations it is 2,000 kg. If we are to follow the pace of development of those countries, our annual demand for cement should grow by at least 20 percent,” said CMAN President Thapa, adding that maintaining this rate of demand is also important to sustain the domestic cement industries.

One of the ways to boost internal demand is to expedite the government’s capital expenditure, say many experts. “If the government prioritises capital expenditure, there is a bright future for the cement industry. For example, the Narayangarh-Butwal segment of East West Highway is being upgraded and the work on the Kathmandu-Tarai Expressway is being expedited. We also have West Seti, Budhi Gandaki among other proposed hydroelectricity projects in the pipeline,” said Ramesh Thapa of Argakhanchi Cement. Nepali producers claim that domestically produced cement is of international quality to meet the standard set by the government for use in the construction of large infrastructure projects. As per the rules, such projects can only use cement above 33-grade. In July, the Nepal Bureau of Standards and Metrology (NBSM) introduced a policy to provide quality certification to Nepali cement producers for 33-grade, 43-grade and 53-grade cement. This new quality certification provision will come into effect from November 16. “While this is a welcome step, we have been asking that the bureau to set the standard of cement at par with the Indian standard which will help us to compete with Indian products,” said CMAN President Thapa.

There have been discussions to replace the existing asphalt roads with concrete ones which, according to manufacturers, will be one of the most viable ways to increase internal consumption. As expanding connectivity has become a key focus of all three tiers of the government, there is currently a road widening and construction spree taking place across the country. “Domestically produced cement can also be used in the construction of roads replacing the conventional blacktopping method. Not only will the concrete roads last longer compared to the asphalt roads, cement use will also increase,” mentioned Baid. Stakeholders say that concrete roads will not only ensure the longevity of roads but Nepal can also save a large amount of foreign currency which is being used to import bitumen.

Investment Commitments Declines
As the domestic cement industry gets overcrowded, investment commitments in the sector have declined.  In the last fiscal year, investment in the sector decreased by 56.52 percent, according to data published by the Department of Industry (DoI).

In FY2018/19, eight industries were registered at DoI with investment commitment of Rs 21.76 billion, and all of the registered industries have domestic investors.  In FY2017/18, 13 industries were registered at DoI with investment commitment totaling Rs 50.05 billion.  The statistics of the department shows that no foreign investment commitments were recorded in the last fiscal year. Of the eight industries registered at the department, two have proposed producing both cement and clinker while six will be producing cement only. In terms of investment, Synergy Cement topped the chart with an investment outlay of Rs 9.78 billion. The company has plans to annually produce 990,000 metric tons of OPC, PPC and PAC cement.

Exploring the Export Potentials
As the country has become self-sufficient in cement and the production capacity of Nepali manufacturers has exceeded the domestic demand, there have been calls to explore potential to export surplus cement. “Indian states bordering Nepal can be a viable export market in the beginning. We have an advantage over the Indian cement producers in that the distance between their limestone mines, factories and markets is large which increases their cost of transporting raw materials and the final product,” said Thapa. However, according to him, it is the high cost of production that has hindered Nepali producers to realise this export potential. There are several factors that contribute to the increase in the cost of production of cement; high cost of transportation, bank interest rates and electricity tariff are among the factors playing a role in this regard, say producers. According to them, bureaucratic hassles to establish plants also add to the already increased cost of cement production.

Conclusion
As a sector which has a value addition of 70-80 percent to the country’s GDP, the cement industry holds great potential. But some big problems have surfaced putting a question mark over the sustainability and viability of the domestic cement industry which has generated employment opportunities for over 40,000 people. The time has now come to act in order to make this industry sustainable with the right set of policies and decisions.