Encouraging more use of Nepali cement in domestic infrastructure projects and devising an effective export strategy can stop an imminent downturn in the Nepali cement industry.
--BY SANDEEP DHAKAL
For a country like Nepal which is struggling to increase its industrial GDP, the cement industry has outperformed. In 1975, Himal Cement, the first state-owned cement manufacturing facility was established with an installed capacity of 160 tonnes per day.
Before its privatisation, there were only three cement companies: Himal Cement, Hetauda Cement and Udyapur Cement with a combined production capacity of around 1,000 tonnes per day. After Himal Cement’s privatisation, licensing became easier and most of the business groups invested in cement production.
More than 100 cement industries were registered in Department of Industry till the fiscal year 2017/18 but only around 60 companies are in operation at present. Rupandehi district is the major hub for cement production with more than a dozen cement factories located there. Similarly, Nawalparasi, Hetauda, Mirchaya and Birgunj are the other major hubs (ref. accompanying map).
Figure 1: Major cement hubs of Nepal
Note: Blue spots represent existing hubs and black spots represent upcoming plants
Nepal has become almost self-sufficient in cement production with an installed capacity of around 13 million tonnes and capacity utilisation of around 70 percent. The government has projected an industrial growth target of 12.7 percent in the 15th plan prepared by the National Planning Commission (NPC). Cement production could be the catalyst for this growth. In 1975, our total GDP was Rs 16.6 billion and installed capacity of cement was 58,400 tonnes per annum. Since then, the GDP has increased by 181 times to reach Rs 3,007 billion in FY2017/18 and cement production capacity increased by 222 times to 13 million tonnes in the same period. Many cement plants belonging to groups like Chaudhary Group, Muktishree, and Chinese companies such as Huaxin are in the pipeline and most of the existing plants are in the phase of expansion. The value addition to GDP from cement production is Rs 120 billion (Rs 150 billion minus Rs 30 billion of clinker import). This is a contribution of around four percent to Nepal’s GDP.
Even though our cement industry is growing rapidly, our production is almost insignificant in comparison to global production. Global Cement reports that “There are around 159 countries that produce cement with capacity of 2.69 billion ton, excluding China. United States Geological Survey (USGS) gives the capacity of 2.5 billion tonnes for China and some other sources place Chinese production as high as 3.5 billion tonnes.” China, India, USA, Vietnam are the major producers of cement. The figure below highlights the cement production of major cement producing countries:
India is the second largest producer of cement, producing around 285 million tonnes per annum which is 32 times Nepal’s production. Cement is produced by grinding clinker, there are around 15 integrated plants in Nepal that produce clinker. However, the domestic production of clinker is not enough to meet the demand. Although some newspapers are writing that clinker imports have stopped, data from the Department of Customs does not support the claim. The import volume of clinker is around 3 million tonnes per annum worth of Rs 30 billion (excluding duty). The figure shown below represents the time series data of the import volume of clinker in Nepal:
The import of clinker has significantly grown after FY2015/16. The import of clinker grew from 1.5 million tonnes to 3 million tonnes. The reconstruction activities, residential housing, government and private projects were the major reasons behind the significant growth of cement demand resulting in the increment of clinker import.
The domestic cement industry has a sizable contribution to the country’s economy. It has created employment for more than 40,000 people, increased industrial GDP, substituted the import of cement and it has also become a good source of tax revenue for the government. Apart from the above mentioned benefits, cement industries are also providing good business for banks. The flow of credit to cement industries has significantly grown in the last few years. The credit sanctioned to cement industry was Rs 12.2 billion in FY2010/11 which increased to Rs 84 billion in FY2017/18. There was double-digit growth of credit every year except in FY2015/16 due to the earthquakes and economic blockade.
My interaction with Aditya Sanghai (Director, Ghorai Cement), Dr Tara Prasad Pokhrel (MD, Agni Cement) and Manoj Dhakal (GM, Riddhi Siddhi Cement) and other representative from different companies, helped me understand the upcoming scenario of the Nepali cement industry. According to industry experts, the cement industry will grow to 15 million tonnes per year from the 9 million tonnes per year in 2018/19. The production will be higher than the demand and the cement industry may not be lucrative after 5-6 years. Furthermore, chances of exporting to India are very low because of the cost disadvantage to Nepal.
The Cement Manufacturers Association of Nepal (CMAN) is worried about increasing investment in cement industries as there is a high chance for market saturation in the near future. After a couple of years, when production exceeds demand, unhealthy price competition may arise affecting profitability and even survival. The collapse of the pashmina and carpet industries, for instance, because of unhealthy competition and over supply, is not an unknown occurrence to us. Either government intervention or policy support has become indispensable. CMAN also requested the government and the Investment Board Nepal (IBN) not to approve any further investment in cement companies. However, no concrete move has been taken by the government. If the government wants more cement industries to open, it has to support the industry. It can come up with a series of programmes like compulsory use of concrete brick in construction of residential and non-residential structures instead of clay bricks, urbanisation programmes and use of concrete in strategic and local roads. As per brick manufacturer associations, the volume of brick production is 4 billion unit per annum. To produce 4 billion units of concrete bricks you need around 3 million tonnes of cement which could be a big growth driver for the industry. Similarly, use of concrete for road construction not only drives the cement industry. More importantly, concrete roads are highly durable. In Mumbai, the cement concrete roads built 20 years ago are still in good shape. The use of concrete for road construction not only increases the demand for cement but also reduces the outflow of money in the form of imports of bitumen for road construction. Every year, Nepal constructs thousands of kilometres of roads and if concrete roads can be constructed, then we can save large amounts of money used for importing bitumen. Similarly, the government’s move to address the issue of cement industries will be vital, which is reaching a point of saturation.
The author is Assistant Manager, Strategy and Business Development at Sipradi Trading. He is also an MPhil scholar at Katmandu University.