Four cement companies listed on the Nepal Stock Exchange (NEPSE) reported grim first-quarter results for FY 2024/25, with all experiencing revenue declines and three posting losses. Sonapur Minerals, for example, faced a sharp 79.08% drop in revenue, plummeting from Rs 1.63 billion to Rs 340 million, leading to a loss of Rs 80 million during the quarter.

This troubling performance reflects the broader financial struggles faced by Nepali companies producing key construction materials - cement and steel. A combination of external trade barriers, domestic regulatory delays and dwindling demand has brought these once-thriving sectors to the brink of crisis.

Hard-hit by the financial downturn, cement manufacturers raised the price of cement by Rs 100 per bag in the last week of November. Previously priced at Rs 500 per bag, the average price has now risen to Rs 600. Although attempts to increase prices over the past year were unsuccessful due to resistance from large Chinese-invested companies like Hongshi and Huaxin Cement, this time both companies agreed to the hike.

Cement manufacturers stated that the price increase would help heavily indebted companies reach a "break-even" point, where costs align with income. Officials from the Cement Manufacturers Association noted that companies had been selling cement below cost due to "unhealthy competition," a situation that has now been rectified.

A failure to renew the Bureau of Indian Standards (BIS) certification, a mandatory requirement for exporting cement to India, is one of the factors that affected financial performance of steel and cement companies in the review quarter. Despite repeated appeals for renewal, at least 12 cement companies lack this crucial certification, effectively cutting off access to one of their largest markets. This has left production capacities underutilised and revenue streams severely constrained.

On the domestic front, bureaucratic delays have compound woes for these companies. The renewal applications of 34 limestone mining companies, which are directly related to cement production, have been stuck for months at the Ministry of Forest and Environment. This regulatory impasse has disrupted the supply chain and intensified operational difficulties for cement producers. Both cement and steel producers are operating at just 40–50% of their installed capacities. A sharp decline in demand in recent years has forced companies to engage in price undercutting, leading to mounting financial losses. The situation is particularly dire in Koshi Province where 11 cement factories and two steel plants have ceased operation. Only three cement and five steel plants are in operation in the entire province. The situation is no different in Birgunj Industrial Area where four iron and steel companies have shuttered their operations, signaling a broader industrial downturn.

The stagnation in the construction sector has become another major concern for these companies. Delays in releasing payments for completed government projects and a lack of new infrastructure initiatives have brought construction activities to a near standstill. Apart from a few hydropower projects, no significant infrastructure projects have been launched, causing demand for construction materials to plummet. Cement producers say that while the first quarter is typically a low season for construction business, the current decline is unprecedented.

This downturn has compelled companies to operate at reduced capacities, stifling opportunities for fresh investments and job creation. Industrialists say unresolved issues such as the government’s failure to disburse promised export subsidies and prolonged delays in renewing BIS certification have further deepened their challenges.

Once a booming sector, the cement and steel industries are now teetering on the edge of collapse. The situation calls for urgent government intervention. Streamlining regulatory procedures, fast-tracking export certifications, releasing subsidies, and boosting domestic demand through infrastructure projects are crucial measures to stabilise these struggling sectors. Without prompt action, Nepal risks losing a significant portion of its industrial base, with dire consequences for the economy and employment.

While some companies have managed to navigate these pressures through operational efficiencies and strategic adjustments, the majority are grappling with rising costs and an unpredictable market. The industries are in need of immediate support to stabilise and revive their operations.

Although dominant players like Jagdamba Steels, Narayani Ispat and Hulas Steels in the steel sector continue to generate significant revenues. However, mid-sized and smaller firms are struggling to sustain growth, with many operating at a loss.

Sluggish Growth

CareEdge Ratings Nepal, in its recent analysis of Nepali cement industry, highlighted that overcapacity and relatively low demand are likely to lead to a prolonged lull in the sector, as government spending remains underwhelming. "While capacity has grown by about 70%, demand has remained sluggish. Domestic demand has been muted since the COVID-19 pandemic, compounded by slow economic growth. Infrastructure activities have not picked up as expected, and government capital expenditure has been relatively low. Retail demand has also fallen short of earlier projections. As a result, capacity utilisation has remained low, with an average of around 30-40% in 2022/23 and 2023/24," CareEdge Ratings said in its analysis.

In 2017, Nepal’s cement production was just 4.5 million metric tonnes, while the annual demand stood at 5 million metric tonnes. Today, the sector’s capacity has expanded to 25 million metric tonnes annually. The annual demand, however, remains at only 7 million metric tonnes.

Over the past seven years, production capacity has increased fivefold, but demand has seen only modest growth despite a significant rise in the number of cement industries.

The situation of steel industries is no different. Around 32 steel industries, with a total annual capacity of 3.5 to 4 million tonnes, are currently in operation. However, the annual demand for steel stands at only 2-2.5 million tonnes.

Industrialists claim that Nepal is currently self-sufficient in both iron and steel. But the lack of demand in the market has become a significant issue as construction activities have declined in recent years instead of expanding. Raghu Nandan Maru, President of the Cement Manufacturers Association of Nepal (CMAN), said the industry with a total investment of Rs 300 billion is struggling. "The total cement production capacity is at 25 million tonnes per annum, but consumption has remained at only 7 million tonnes. This huge gap between demand and supply has become a major challenge for cement companies trying to stay afloat," Maru added.

Nepal's construction sector experienced a significant boom after the 2015 earthquakes, driven by the reconstruction of houses and the development of new hydropower projects. This surge in activity led to a sharp rise in demand for cement and steel. Since domestic industries were unable to meet this huge surge in demand, the country was forced to import these key construction materials from India.

This prompted industrialists to open cement and steel plants. As a result, the cement and steel industries started experiencing substantial growth from 2016. As large hydropower projects, government buildings, and housing reconstruction took off, the demand for cement and steel went up exponentially, attracting even foreign cement companies to the market. However, once reconstruction efforts and major projects concluded, demand failed to keep pace. The situation worsened after the Covid-19 pandemic, which brought the economy to a standstill and left industries grappling with severe challenges.

Riddhi Siddhi Cement is currently operating at full capacity, producing 2,200 tonnes per day. However, its annual capacity utilisation stands at only 70%, according to Shiwaj Neupane, a Board Director of Ambe Group. Neupane added that the group’s steel plant, Ambe Steel, is operating at just 50–60% capacity. "As we are not running at full capacity, we are incurring significant losses. We had hoped to turn a profit this year, but that has not materialised," he said. Neupane attributed the slowdown in demand to the weak state of the real estate and construction sectors which directly affect the cement and steel businesses. "Our funds are tied up in the market as clients have been unable to pay us for several years. This is not due to their poor business performance but because their operations have also been severely impacted," Neupane explained.

According to industry people, demand in the steel sector is declining by 25% annually in recent years. “Although the market was expected to grow by 20% per annum, it is instead contracting by 25%. This is an alarming situation as significant investments are at stake,” said Sourav Sharda, executive director of Premier Steels.

The downturn in these sectors has also alarmed Rajesh Kumar Agrawal, Chairperson of the Industry Committee at the Federation of Nepalese Chambers of Commerce and Industry (FNCCI). Agrawal attributes the primary challenge to a lack of market demand, exacerbated by increased migration. “Nepal is not merely witnessing a migration—it is facing an exodus. A significant number of young people are leaving the country which is severely impacting the workforce and the construction sector,” he added.

Agrawal, who operates several construction material industries in Rupandehi, highlights downtown Butwal as a stark example of this trend. “In a single lane, up to 200 empty storefronts now display ‘To Let’ signs. Previously, rents were as high as Rs 200,000 per month. But now, it is difficult to secure even Rs 50,000. The demand for construction materials has declined drastically,” he said. “Even in the government sector, construction activity remains minimal.

Nepal appears trapped in a cycle of migration and reliance on remittances, with domestic demand stagnating. The population growth rate is just 0.92%, and when adjusted for migration, the effective rate is even lower. In such circumstances, how can demand for industrial products possibly grow?”

Falling Revenue and Profits

Nepal’s cement industry is experiencing a period of financial turbulence. Recent financial data highlights significant disparities in revenue and profitability across the sector. Many cement companies in Nepal are grappling with falling revenues and shrinking margins, with larger players such as Sarbottam Cement, Shivam Cement and Hongshi Shivam Cement struggling to sustain their earlier performance levels.

Among the major players, Sarbottam Cement has seen a pronounced decline in both revenue and profitability. After peaking at an operating income of Rs 8.95 billion in FY2021, Sarbottam’s revenue fell to Rs 6.42 billion in 2023/24. Its EBITDA margin also dropped sharply, from 27% in FY2020 to just 12% in FY2024, reflecting a significant contraction in profitability.

Similarly, Hongshi Shivam Cement, which earned Rs 17.46 billion in revenue in FY2021, has faced profitability challenges. Its EBITDA  margin declined from 27% in FY2021 to 13% by FY2024. The performance of Shivam Cement has been even more concerning. The company’s operating income plummeted from Rs 9.62 billion in FY2021 to Rs 3.52 billion in FY2024. Its EBITDA margin also fell steeply, from 22% to a mere 3% during the same period, underscoring struggles with both revenue generation and cost management.

Smaller companies have also faced considerable strain. Brij Cement saw its revenue drop from Rs 2.99 billion in FY2021 to Rs 1.19 billion in the first nine months of FY2024. Similarly, Jagadamba Cement has seen its revenue decline from Rs 2.92 billion in FY2021 to Rs 1.45 billion in FY2023. Its EBITDA margin also contracted from 9.3% to 3.5% over the same period. Despite this, the company has managed to retain a foothold in the market, albeit at a reduced scale.

Some companies, however, have performed notably well. Shaurya Cement emerged as a standout performer this year, reporting an EBITDA margin of 35.16%, the highest among its peers. Palpa Cement also displayed strong financial health, maintaining an EBITDA margin of 29% in the first half of FY2024.

The steel industry has also faced declining revenues and profitability. Jagdamba Steels, the largest player in the sector, saw its revenue drop from Rs 49.74 billion in FY2022 to Rs 40.17 billion in FY2023. Similarly, Hulas Steels experienced a decline in operating income from Rs 15.65 billion in FY2022 to Rs 12.44 billion in FY2023. Mid-sized players like Ambe Steels and Sarbottam Steels have managed to remain steady, consistently generating revenues in the Rs 8–10 billion range. However, Shree Steels, which saw its revenue peak at Rs 7.47 billion in FY2021, has observed its revenue decline to Rs 5.01 billion in FY2024 due to market pressures. Siddhi Laxmi Steels experienced an even steeper drop, with revenue falling from Rs 4.08 billion in FY2022 to Rs 1.97 billion in FY2023.

The financial struggles have also affected firms like Hama Iron and Steel, whose revenue plummeted from Rs 3.81 billion in FY2022 to Rs 696 million in the first half of FY2024. Panchakanya Steel sawa revenue drop from Rs 10.10 billion in FY2022 to Rs 7.86 billion in FY2023.

According to CareEdge Ratings, as prices have dropped, profitability and debt service coverage for cement manufacturers have significantly weakened in FY23 and FY24. EBITDA margins have fallen from over 20% in FY21 to around 10% or lower in FY24. Companies that have recently undertaken major debt-funded capacity expansions are particularly struggling to service debt due to low margins and high debt levels.

In case of some industries, operational cash flow may not be sufficient to meet scheduled debt obligations. Additionally, cement producers that operate only grinding units have been hit hard, with some forced to shut down operations.

Overproduction Spurs Unhealthy Competition

Between 2016 and 2020, growing demand in Nepal led to a significant increase in cement and steel production. The country began producing twice its domestic requirements, with production capacity steadily expanding. Two major Chinese cement companies, Hongshi and Huaxin, also entered the Nepali market which intensified the competition further.

“Currently, the cement industry is overcrowded, resulting in significant overcapacity. The demand in the market is less than 50% of the total production capacity. The supply side is heavily oversaturated, preventing any company from operating at full capacity due to this massive oversupply,” said Neupane.

Industry stakeholders contend that bringing foreign investment into a sector already capable of meeting domestic demand has created significant challenges. “By 2017, Nepali cement companies had sufficient capacity to fulfill the country’s requirements. Despite this, large-scale foreign investments, particularly from companies like Huaxin and Hongshi, entered the market. This influx was unnecessary, as the domestic industry was already meeting demand. It has only intensified competition in an already saturated market,” said Naveen Prakash Adhikari, General Manager of Shubhashree Agni Cement Udhyog Limited (Pyuthan Cement).

Adhikari highlighted the disparity in experience and financial strength between Chinese and Nepali cement companies. “Chinese cement companies bring a century of expertise to the industry, while Nepali companies have only 15–20 years of experience. The challenge for Nepali industries is that Chinese firms are financially robust enough to sustain losses over extended periods. Domestic industries cannot afford such losses, jeopardising the investments of banks, industrialists and the public,” he added.

CMAN President Maru, however, offers a different perspective. “Nepal attracted foreign investment during a time when the construction and hydropower sectors were thriving. However, once this foreign investment entered the market, the construction sector stagnated, leading to market disruptions and compounding challenges for the cement industry,” he added. 

Many industries have reported selling products below production costs. Promoters of these industries say they are forced to operate factories at low capacity and sell products at any cost to stay afloat.

False Promises

Industrialists are now raising concerns over what they call the government’s “false promises,” warning that recent policy shifts have severely impacted the cement and steel industries. They argue that policies that once incentivised investment in these sectors have been reversed, placing billions of rupees in investments at risk.

Three years ago, the government introduced a policy waiving customs duties on imported sponge iron and raw materials from India to boost domestic billet production. As part of the 2022/23 federal budget, the policy also imposed a minimal excise duty of Rs 2.50 per kg on imported finished billets while eliminating customs duties on pig iron scraps.

The policy was initially praised as a forward-thinking step towards reducing import dependency and fostering self-reliance in steel production. It attracted substantial investment, leading to the establishment of new factories and the adoption of melting furnace technology by rolling mills. Over three years, the number of melting furnace plants surged from five to 18, generating thousands of jobs and significantly boosting production capacity.

However, recent policy reversals have unsettled the sector. Former Finance Minister Barshaman Pun announced a hike in the customs duty on sponge iron from 1% to 2.5% and reinstated a 1% duty on imports of pig iron scrap and silico magnesium—critical raw materials for melting units. Simultaneously, the excise duty on billet imports was scrapped.

Agrawal expressed frustration over the abrupt policy reversal, calling it a “policy flaw”. He criticised the government for not consulting the private sector or conducting thorough studies before implementing the changes. Agrawal argued that such unpredictable policies discourage investment and stifle the growth of industries crucial to the country’s economic development.

“With the waiver on sponge iron imports, the government effectively encouraged industries to establish melting furnaces. At that time, there were only four melting furnaces; now, there are 18, with an investment of at least Rs 30 billion,” Agrawal said.

Neupane, another industry representative, said the cost of importing and producing billet locally is nearly equivalent now. Why encourage heavy investment in melting furnaces if the policy is going to favor imports? Industries relying on imported billets are benefiting, while those producing billets locally are suffering,” he added.

Despite substantial investments in melting factories and repeated calls for the government to revisit the policy, no concrete actions have been taken. Neupane pointed out that the tax increases have resulted in a Rs 1.50 per kg rise in production costs of steel. “If we produce 80 million kilograms annually, this Rs 1.50 increase translates to a loss of Rs 120-150 million every year,” he added.

In the cement sector, producers initially welcomed the government’s announcement of an 8% subsidy on cement exports, hoping that it would help the struggling industry. However, they say that the promised subsidy has not been disbursed. Similarly, electricity bill discounts of 2-15%, announced as part of the same initiative, also remain unimplemented. “Nothing has been delivered as promised. We have now lost hope,” said Maru.

The government still owes over Rs 6 billion in cash subsidies to industries across various sectors. However, officials have recently signaled an intention to withdraw from the export cash subsidy policy, citing budget constraints and inefficiencies. During the 10th Industry Day celebrations, Minister for Industry, Commerce and Supplies Damodar Bhandari acknowledged that the subsidy scheme’s intended objectives had not been met. Commerce Secretary Govinda Karki further elaborated that delays in disbursement of subsidies have hindered competitiveness of industries. “We now need to consider alternative measures,” he added.

billion in cash subsidies to industries across various sectors. However, officials have recently signaled an intention to withdraw from the export cash subsidy policy, citing budget constraints and inefficiencies. During the 10th Industry Day celebrations, Minister for Industry, Commerce and Supplies Damodar Bhandari acknowledged that the subsidy scheme’s intended objectives had not been met. Commerce Secretary Govinda Karki further elaborated that delays in disbursement of subsidies have hindered competitiveness of industries. “We now need to consider alternative measures,” he added.

Export Woes

The cement industry holds immense potential with Rs 150 billion worth of annual export capacity. However, this potential is hindered by various challenges. In the previous fiscal year, Nepal exported PPC cement worth Rs 1.97 billion. However, exports earnings fell to Rs 496 million over the first four months of 2024/25, compared to Rs 585.78 million in the same period of the previous fiscal year.

A major obstacle to cement exports is India’s refusal to renew the BIS (Bureau of Indian Standards) certification for Nepali cement industries. Since 2020, the Indian government has enforced strict quality standards for imported goods, aiming to curb the entry of Chinese products through neighbouring countries. This move has directly impacted Nepal, with at least 12 cement industries, including major players like Arghakhanchi Cement, Sarbottam Cement, Palpa Cement and Balaji Cement, awaiting renewal of their BIS certification. Arghakhanchi Cement's certification, which expired on September 25, has yet to be renewed. 

Industrialists believe this issue is linked to Nepal’s ban on Indian dairy products. In February 2024, former Agriculture Minister Beduram Bhusal imposed a ban on Indian milk imports to protect domestic dairy farmers. The ban covers skimmed milk, unsweetened milk, butter, ghee, and unprocessed cheese. Some industrialists argue that India’s delay in renewing BIS certifications is a retaliatory measure in response to this ban.

Nepal’s cement industry has strong export potential due to its abundant limestone reserves. Neighbouring Indian states like Bihar, Uttar Pradesh, West Bengal and Uttarakhand lack local limestone deposits and must source it from distant regions such as Chhattisgarh and Madhya Pradesh. With Nepal’s limestone reserves being closer, the transportation cost advantage makes its cement more competitive in these markets.

Industrialists emphasise the need for the government to take proactive measures to resolve the certification issue and secure the industry’s future. “The government must engage through diplomatic channels to convince India to resume import of Nepali cement,” they say

Some also criticise the government for inviting substantial Chinese investment into the cement sector without ensuring stable export markets. They claim this has disrupted the industry, which was previously performing well. Indian authorities, they say, are suspicious that Nepali industries are using clinker produced by Chinese-invested factories, further complicating the export process. Without immediate intervention and strategic policy measures, industrialists warn, the cement industry risks a significant downturn.

What Can Be Done?

According to the Federation of Contractors’ Association of Nepal (FCAN), the government currently owes contractors around Rs 45 billion. The amount is growing with each passing year due to ongoing revenue shortfalls. One potential solution, given the lack of increased demand from the public, is for the government to boost capital expenditure by initiating new projects. As of the first quarter of 2024/25, only 8.3%, or Rs 29.37 billion, of the total Rs 352.35 billion capital expenditure allocation had been utilised.

"Regarding the BIS certification issue, the government must take proactive steps, particularly through the Ministry of Foreign Affairs, to resolve these challenges and facilitate exports," said Agrawal.

Neupane also believes an increase in government expenditure will stimulate market demand, creating a new chain of economic activity. Adhikari also points out the weaknesses in capital expenditure, emphasising that contractors' payments have been pending for years. "The industry is facing a severe cash flow crisis which is further worsened by these delays. Additionally, despite applying for BIS (Bureau of Indian Standards) certification over a year and a half ago, the approval is still pending," he said. He also cautioned that relying solely on the Indian market in the long term could be problematic, particularly as India has introduced a quota system for products like vegetable oil which has limited export potential.

"Earlier, when vegetable oil exports surged, India imposed a quota system. We must be prepared for similar challenges when production increases. The government must use diplomatic channels to find new markets for Nepali cement," he added.

Nepal’s infrastructure remains inadequate in many areas. Kathmandu lacks flyovers and a metro system, highways have insufficient crossings, and national parks lack proper infrastructure for accessibility. If the government prioritises spending in these areas, it would not only enhance infrastructure development but also stimulate domestic demand for cement. Investing in these sectors is crucial for the long-term growth of the cement and steel industries.

(This news report was originally publihsed in December 2024 issue of New Business Age Magazine.)