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Jan 2017 Cover Story

Published on: 2017-01-22 15:29:05     1051 times read    0  Comments
CEMENTING THE GROWTH

Indications are that Nepal is close to being self-sufficient in producing cement. However, newer sources of cement demand are also emerging. Thus, prospects of foreign investments are rising and confident Nepali investors have stepped up to increase investment in the cement industry despite various hurdles.

--BY SANJEEV SHARMA

The word ‘self-sufficiency’ has become a well worn cliché when it comes to industrial development in Nepal. Given the steep decline in industrial activities over the past one and half decades due to various obstructing elements, it has become very difficult for many manufacturing sector companies to even sustain themselves let alone thrive. Nonetheless, the Nepali cement industry has been witnessing a staggering growth in recent years bringing Nepal close to self-sufficiency in cement. The growth of the domestic cement market strongly indicates that Nepal can be self-sufficient in the essential construction material in the next few years if everything goes well.  “I hope Nepal can be self-sufficient in cement within the next two years,” expresses engineer Dhruba Thapa, President of Cement Manufacturers' Association, Nepal (CMAN). Similarly, Ashok Kumar Baid, Director of Nepal Shalimar Cement, estimates that the Nepali cement market is growing by 10-15 percent a year. 

With development activities increasing such as building key infrastructures like road networks, hydropower plants, and the rise in the construction of houses and apartments in the urban areas, and the acceleration in post-quake reconstruction works, the demand for cement has also swelled significantly. CMAN President Thapa puts the annual demand for cement in the country at five million tonnes. “80 percent of the demand is met through cement produced by Nepali producers while the rest is being imported from India,” he informs. Amount wise, 4.5 million tonnes come from domestic manufacturers while about 0.5 million tonnes is imported, as per industry data. On an annual basis, the combined production capacity of Nepali cement plants is estimated at 160 million bags.  

Thapa, who is also the Executive Director of Cosmos Cement Industries, is hopeful that Nepal’s closeness to self-sufficiency in cement will enable the country to tame its ballooning trade deficit. “This will decrease the trade deficit by Rs 60 billion,” he opines. 

Towards Import Substitution 
While it may be very difficult for Nepal to achieve the old government slogan of ‘import substitution’ for most of the products it imports, in cement it looks increasingly likely that such an objective can be achieved. The declining import of cement over the past few years indicates this. According to official statistics, Nepal imported cement worth Rs 1.87 billion in FY 2015/16, down Rs 1.6 billion from Rs 3.47 billion in FY 2011/12. 

The data shows that Nepal mostly imports cement from India. The country imported 225,273 tonnes of cement from the southern neighbour last FY. 

The bright prospect, however, has been overshadowed by the lack of proper standardisation of cement, say entrepreneurs. “Our nation is importing cement because domestic companies are not allowed to label their cement higher than 33-grade,” mentions Baid.  Due to this, Nepali producers are not able to supply their cement to large infrastructure projects requiring higher grades of cement. Nonetheless, after long procrastination the government is said to be in the process of revising the cement standardisation policy. The new certification policy, which is expected to come into effect sometime in 2017, will certify domestically produced cement into three categories, namely 33-grade, 43-grade and 53-grade. Presently, Nepali cement producers are producing OPC, PPC and PPC cement, of which OPC is widely used by the consumers. 

Capacity vs Current Output
Despite the brighter outlook, cement production in Nepal is considerably less than the total installed capacity of the industries at present. According to CMAN data, the total installed capacity of Nepali cement factories currently stands at seven million metric tonnes. “The average rate of capacity utilisation of the overall cement industry is around 55-60 percent of the installed capacity,” says Thapa. “However, some plants might be at 65 percent and some at 45 percent.” 

According to industrialists, the overall cement market is divided into three seasons. “First is the off season which starts from the beginning of July and ends in mid-November. Second is the mid-season starting from the second half of November to mid-March.  Third is the peak season which starts from the second half of March and ends in the second half of June,” explains Rishikesh Agrawal, Director of Ambuja Cement. He estimates that the rate of capacity utilisation does not exceed 60 percent on average during the off season. “In the mid season, it jumps to 70 percent and in the peak season, it goes up to around 80 percent. The overall rate of utilisation in a year is 65-70 percent as per my estimation,” he says. 

Various factors are contributing to capacity underutilisation at cement factories. “The main problem is the lack of electricity due to which the industries are not able to fully capitalise their potential,” shares Anuj Keyal, Director of Star Cement Udhyog, adding, “Problems in supply of raw materials and issues related to labour and transport also hinder us from time to time.”

According to PK Sarkar, Vice-president of Jagadamba Cement Industries, only a very few Nepali cement plants are operating at full capacity. “This is basically due to the established brand names and consumer demand for the brands,” he mentions. 

Lack of Clinker : A Major Roadblock 
A total of 84 cement industries have been registered with the Department of Industry till date. However, only 48 are operational. Among them only 14 have their own clinker production units. Clinker is an essential raw material for cement, that comes from limestone.  With the increasing demand for cement, the import of clinker has also risen in recent years. According to TEPC data, Nepal imported clinker worth Rs 9.83 billion in FY 2015/16, up Rs 3.24 billion from Rs 6.9 in FY 2011/12. Figures from the past five years show that the import of clinker has been constant during FY 2011/12 to FY 2013/14. But there was a big jump in such import in 2014/15 and 2015/16. 

Similarly, a staggering 674 percent spike in clinker imports in the first four months of the current fiscal year also shows that imports of this essential raw material for cement will follow an upward trend in the coming days. During the period, clinker imports totaled Rs 6.58 billion compared to Rs 850 million in the corresponding period last year. “So, it appears that self-sufficiency in clinker is still a long way off,” says PK Sarkar.

Imported clinker fulfills 70 percent of the demand in the country which hovers at four million tonnes annually. According to industry sources, The estimated yearly output of clinker producing plants in Nepal has reached around 2.3 million tonnes from 1.7 million tonnes in 2014.   

The government has directed all cement producers to produce all the clinker they need by 2073. Entrepreneurs, however, disagree with the government directive. “Making announcements and implementing them successfully are two different things,” says Keyal. He says that meeting the directive will be very hard for cement producers due to various hurdles. “Establishing clinker plants demands high investment. We have not been facilitated with mining sites, road access and transport facility to the sites alongside proper arrangement of energy and communication,” he mentions. Ashok Baid agrees with Keyal. “Many industries are not able to produce clinker due to geographical, political and environmental issues,” he shares.  

Rising FDI Potential
Nepal is among the nations with a high limestone concentration in the South Asia region. As per the Department of Mines and Geology, Nepal is home to an estimated 1.7 billion tones of limestone reserve totaling an area of 7,000 sq/km across the country. This enormous limestone availability has led Nepal to become a lucrative investment destination for foreign investors. The Investment Board, Nepal (IBN) which has been facilitating the foreign investments, has received FDI commitment amounting to USD 1.45 billion till date. Currently, the Nigerian industrial group Dangote, Indian conglomerate Reliance along with the Chinese Hongshi Holding Group and Huaxin Cement are the major foreign companies in the FDI race in the cement sector in Nepal. The proposed combined factory output of the companies is 22,000 tonnes per day.

Dangote has pledged USD 550 million, while Hongshi is investing USD 360 million and Huaxin USD 140 million. Reliance is said to be investing USD 400 million to set up cement plants here.  Among them, Hongshi has already been active in constructing the Hongshi-Shivam Cement plant in the Nawalparasi district with its local partner Shivam Cement which is investing USD 140 million in the project. Upon completion, the Nepal-China joint venture aims to produce 4.3 million tonnes of cement providing direct jobs to 1,000 people while employing 10,000 indirectly. In the meantime, Dangote, Huaxin and Reliance have production targets of 2.1 million tonnes, one million tonnes and five million tonnes respectively. Dangote and Huaxin are in the process of registering their plants. Though they have already registered their companies here. Meanwhile, Reliance, which has only pledged an investment, has been unable to register its company in Nepal due to the changes in management at its Indian headquarters. 

Analysts say that the increasing foreign investor interest in the Nepali cement industry has ultimately increased the possibility of Nepal becoming a cement exporting nation in the future. According to them, the large foreign companies have been looking to tap the potential for exports as large scale development activities have sharply increased demand of cement in the neighbouring Indian states of Bihar and Uttar Pradesh and China’s autonomous region Tibet. 

Nepali Companies in Expansion Drive
The overall investment in the Nepali cement industry is believed to be at around Rs 80 billion. With the rising prospects of market competition increasing after the entry of big foreign players, domestic producers are planning to scale up their production capacity. In June 2016, Agrakhachi Cement announced expansion plans to increase its daily factory output to 3,000 tonnes from 1,200 tonnes by the end of 2017. Similarly, Agni Cement Industry is also in the process of expanding its capacity to 1,200 tonnes which is 300 tonnes at present. Likewise, CMAN President Thapa’s Cosmos Cement Industries has also been working to scale up the daily production capacity to 2,000 tonnes from 800 tonnes. 

The expansion drive of the Nepali cement industry is also getting some good financing from banks. Argakhachi Cement, for instance, has received a consortium loan pledge of Rs 2.89 billion from six commercial banks led by Nabil Bank. The total investment of the project is estimated at Rs 4.13 billion, of which the remaining Rs 1.24 billion will come from its promoters. Meanwhile, Riddhi Siddhi Cement Company also entered a consortium loan agreement of Rs 4.58 billion headed by NMB Bank last July. The new producer which aims to start production in early 2017 is investing a total of Rs 6.11 billion inthe cement project.

Though the expansion of the Nepali cement industry is regarded as being good for the country economically, there are concerns over the sustainability of the cement business as the market will be flooded by products exceeding demand. “Within the next four years the total installed capacity of Nepali cement industries will be approximately 8.5 million tonnes. Meanwhile, the estimated cement demand will be 6.5 million tonnes only,” predicts Sarkar. “So, in that scenario, it will be difficult for producers to sell their products. Export to India, is not a possibility as the production cost is higher here,” he adds. That means other export markets need to be searched. 

Captive Hydropower Plants: Possible or Not
One of the major reasons for low factory output is the lack of electricity. It affects all aspects of the cement business starting from extraction of the limestone to grinding and packaging which is ultimately reflected in the high price of cement in the market. Cement in Nepal is considered to be costliest in the entire South Asia region with the deficiencies in the availability of power, among other factors, largely contributing to this. Cement plants are among the most power intensive industries with a single factory consuming 5-10 MW, according to their production capacity. This situation has started a debate regarding the possibility of cement companies having their own captive hydropower plants to fulfill their energy needs. 

However, such a proposition seems to be an unreachable objective for many entrepreneurs. “Setting up captive hydropower plants would cost us a lot and the direct effect will be seen in the cement prices,” says Anil Kumar Agrawal, Managing Director of Shree Cements Industries. He is hopeful of getting uninterrupted power from the grid in the next few years as the government has announced to make the country free of power outages. “However, if the long hours of power cuts continue, we need to work on it,” he mentions. Rishikesh Agrawal has a different view. According to him, cement plants demand more electricity during the peak seasons. “Hence, the electricity produced during this time can be used by cement mills. But if the government purchases electricity produced from these hydropower plants at a genuine price during mid-season or off season these projects can be viable,” he opines. 

Major Problems
Besides the insufficient power supply, the Nepali cement industry also faces a range of other problems. The current duty structure does not let Nepali cement become competitive, say entrepreneurs. “The customs duty is a maximum five percent for raw materials used by industries of other sectors while it’s over 25 percent for raw materials for cement,” informs Anil Kumar Agrawal.  “Though the price of raw materials fluctuates in the international market, the government never reduces the duty rates.” The highly syndicated transportation system, meanwhile, is another problem. The producers at times are unable to find enough trucks to transport the finished products to the market from their factories. 

Similarly, acquiring land to set up plants is another problem area for cement producers. “Getting approval from the government to acquire more than the permitted area of land (i.e. haadbandi swikriti) is also a very hard task,” says CMAN President Thapa. Likewise, getting approval from the forest department to run the mines is another challenging task, according to him. “A lot of local problems have to be faced by all industries because of non-compliance to the rule of law. A non-conducive labour law and frequent and irresponsible strikes called by different political parties are also major hurdles,” he points out.

Experts Views on the Cement Industry in Nepal


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