Experts' View July 2015

  24 min 38 sec to read

“We anticipate at least a 40 percent growth in cement demand”
Jayendra Chudal, Managing Director, Bishal Cement
Jayendra Chudal
Managing Director, Bishal Cement
What’s business been like for the cement industry?
Currently, business is mediocre. The government has banned design approval of buildings for the time being. This decision has further affected our business after the earthquake. This ban should be lifted for the resumption of construction works at the earliest possible. The industry is also facing short supply of electricity and problems in transportation of the finished product as well as raw material.
With the nation preparing to rebuild hundreds of thousands of houses, the demand for cement will surely rise. Are the Nepali cement manufacturers ready to meet this demand?
Yes, we are prepared for it. Limestone is the major raw material needed to make cement and we have a lot of it in our country. Thus, in terms of raw material, increasing cement production is not a major issue. However, this is possible only if the government provides sufficient electricity and improves transportation facilities.
Don’t you think the recent earthquake has brought about an opportunity for this sector to grow?
Yes, indeed! This is a wonderful opportunity for the industry. But, to grow, any industry needs all sup-porting infrastructures in place. The Nepali cement industry has been able to use only half its production capacity due to the load-shedding. Similarly, the transportation syndicates have increased the transportation cost significantly. These syndicates are so strong that they charge very high prices even for carrying the clinker (cement industry vehicle) from the manufacturer to the actual cement industries. They have increased the price by at least 40 rupees per kg.
By how much will the demand for cement grow in the next few years?
We anticipate at least a 40 percent growth if all the problems affecting production are resolved.
Will the import of cement also rise? 
Within a year, the country will be self-reliant in cement. But right now, it may be necessary to import some cement. However, the government has to ensure that the customers are not cheated. Many people buy Indian cement because they are influenced by the slick adverts. By importing cement from other counties, we are not able to make any significant contribution to our GDP. Despite all the chal-lenges, the Nepali cement industry can make a profit and create employment and be a positive business icon for the country. 
The Nigerian MNC Dangote  is planning to establish a cement factory in Nepal. Will it help the cement industry to flourish?
Yes, we should take it positively. FDI should always be welcomed as it creates employment and acce-lerates growth. I agree that such a huge investment from foreign companies could affect the growth of our infant industries. But at the macro level, it has a positive impact on the economy as well as on the industry in general. The most important point is that Dangote’s entry in the Nepali market will definitely cut down our cement import.
Can Dangote’s entry in the market increase the productivity of the entire cement industry? 
The impact will be significant. However, all the industries in Nepal will face the same problems such as lack of reliable and sufficient electricity, transport syndicate problems etc. Though the proposed Dangote plant will have a huge production output,  it will be difficult for it to run at its full capacity. 
Do you think cement prices will also decrease after Dangote’s entry into the market?
Currently, only 50% of the entire industry’s production capacity is utilized. This is mainly due to the lack of basic amenities. Dangote’s presence in the market can help Nepal become self-reliant in cement.
What does your association expect from the government?
The price of Indian cement is Rs 650 per sack (50kg), but Nepali industries can provide cement at Rs 550, which is much cheaper. What we want from the government is to see an improvement in the basic infrastructure, which is needed for the Nepali cement industry to grow. To sum things up, the major bottlenecks holding things back are the lack of electricity supply, the recent stop to the design approval procedure, the transportation syndicates and also the lack of an effective regulation system to protect our infant industries from foreign companies.
Mahendra Bahadur Chitrakar, President, Federation of Nepal Brick Industries
Mahendra Bahadur Chitrakar
President, Federation of Nepal Brick Industries
“We have the capacity to increase production by 20 to 30%”
Tell us about Nepal’s brick industry? 
Our federation consists of fixed-chimney brick factories. Around 800 to 850 modernised  factories are affiliated with the federation. Besides these, there are 1500 to 2000 clamp-kiln factories in Nepal and around 110 chimney factories are in the Kathmandu Valley alone. 
Brick production is a seasonal business and  needs favourable weather conditions. The actual production capacity of the industry fluctuates due to unskilled manpower and dependence on the weather. Every year we aim to produce between four to five million bricks but production has only been able to reach around two to two and half million bricks. But these figures are not accurate. We are working to systematically collect data on the industry including total production. 
What is the size of Nepal's brick market? What is the annual demand?
The brick industry’s market is always average. And as I said earlier, due to its dependency on labour and  weather conditions, it’s hard to say if the market is very good or bad. The annual demand is also not predictable. Presently, it is expected that the demand is going to increase this year and that we will have to increase our production to meet it. However, we are sure we can meet the demand through our stock that piled up during the earthquake. The earthquake has brought supply to a grinding halt. 
Is Nepal self-reliant in bricks?
Yes, there is no doubt about that. Due to the earthquake bricks supply has stopped and they have piled up. We think that production should be stopped for sometime as our stock is sufficient.
Hundreds of thousands of houses will have to be rebuilt now. It means the demand for bricks too is going to increase. Do you anticipate a surge in demand?
Nepal has to start rebuilding very soon and it is not going to be easy. Due to the monsoon, construction work will not start until the end of Ashad (Mid July). On top of that the government has declared Kathmandu valley as a crisis-hit zone and thus there is no possibility of reconstruction in Kathmandu. The bricks industry along with other sectors will see  a decline in market potential. The economy has taken a step back due to the earthquake. In our estimation we anticipate a decline in demand for bricks and if we are proved wrong we have the capacity to increase production by 20 to 30%. 
Will the existing brick factories have to increase their production to meet the increased demand or is their current production capacity enough?
For the upcoming season we have sufficient bricks to meet the demand. We will supply the old stock at the same price. As I have already mentioned, only five percent of the total production has reached the market and the remainder lies in stock. This will be enough to meet the demand. And if the demand increases, which we don't expect, we are ready for it. 
How has the earthquake affected brick production?  
Due to the earthquake, almost all workers from Ramechhap, Sindhuli, Kavrepalanchok have returned  back to their villages. Most of them lost their houses. Since supply has almost come to a halt, our income has depleted a lot. We have to pay the work-force upfront but now with the capital shortage, we are not able to pay them regular salaries.
Construction material including brick prices are expected to go up in the days ahead. How relevant do you find this in terms of the brick industry?
We are committed to sell bricks at pre-earthquake prices. The federation does not see this as a time to think about profit and loss. If any of the factories or brick entrepreneurs are found selling bricks to victims at increased prices, then we will take stern action against them. However, we are yet to set the price for our newest batch of bricks, since this will be based on the government’s policy and business strategy.
What are the major problems faced by the brick industry ?
The earthquake has left most of the factories in critical condition. Some have broken chimneys and cracked ducts. Repairing the chimney is very costly as we have only one technician here in Nepal and if we need more we have to outsource them from India. However, labour shortage and lack of capital are major problems for the industry. Due to a decrease in supply, brick factories have been cash strapped and this has made it difficult for them to even pay salaries to their employees. 
What do  you expect from  the government now?
As our customers are going to be earthquake victims, we expect the government to exclude VAT for the next few years. Brick factories have lost around two to five million rupees and to substantiate this loss and to keep these factories afloat we expect financial assistance from the government in the form of grants or soft loans. Along with the government, we expect cooperation from other industrial stakeholders in this critical hour. 
Kavindra Joshi, President, Nepal Furniture and Furnishing Association
Kavindra Joshi
Nepal Furniture and Furnishing Association
“Furniture market wouldn’t go down”
How is the furniture industry doing? 
We don't have official data about the industry’s performance. However, our own internal study points out that the industry has an investment of Rs 25 billion and has been directly employing over 150,000 individuals. 
What kind of impact did the earthquake have on the industry?
The April 25 earthquake and the aftershocks that followed destroyed around five-six furniture outlets in Kathmandu. Though the relief and rescue work has come to an end, people are still homeless and due to this the market has slowed down. Like other industries, we too are losing money.
With Nepal gearing up for the reconstruction and rebuilding, what future do you see for the furniture industry?
The work of furniture and furnishing comes after completing the reconstruction and rebuilding of destroyed buildings and this will take some time. For the next few months, business may be slow but it will pick up gradually. But it does not mean that the market will go down. To address their immediate needs, people will buy cheap furnishing. And we are hopeful that within time our market will get back on track.
How much growth are you expecting? Will the industry be able to fulfil the demand?
We do not expect that the market to grow dramatically and as I said earlier, it will take some time for the industry to bounce back. The domestic furniture industry has the capacity to meet reconstruction needs. There are three-four flooring industries that produce quality flooring products. Nepali furnishing products have a very good market and they have even somehow displaced imports in their categories. Along with our domestic production, we import some products that don't have good domestic alternatives in Nepal. Similarly, we import timber and readymade furniture from different countries like China, Malaysia, Indonesia, Japan, Vietnam, and Myanmar. With the situation in the country getting back to normal, we are confident that the industry is capable of meeting market needs if a proper environment is enabled. 
What are the current problems faced by the furniture industry?
The major problem faced by the furniture industry, like others, is load-shedding. Furniture made using diesel generators is more expensive than those produced using hydroelectricity. Shortage of both skilled and unskilled manpower and scarcity of raw material are also our major problems. Before the earthquake, skilled manpower was in short supply. Now it seems we are going to face a shortage of even unskilled manpower. We are making furniture from imported timber which obviously increases the cost price of furniture. Amid such a situation, it is surprising to hear news of rampant deforestation and timber smuggling into other nations. We wonder where all that wood goes. Another problem is the government’s taxation policy.
How is the industry preparing to meet the market demand which is expected to rise soon? 
Our industry has not ben able to run at full capacity due to the unfavourable environment. The earthquake has slightly slowed down our business. We are preparing for any possible increase in demand. As always, we expect the demand to surge during the festive season of Dashain this year also. So, we are preparing ourselves for that too. 
Will the import of furniture increase? What about the price? 
We are in the reconstruction and revival phase and as I said earlier for this phase our own domestic products will be sufficient. As far as the import of raw material as well as readymade furniture is concerned, we expect neither an increase nor a decrease. 
Furniture prices will increase if raw material prices increase. This increase also depends on the value of the US dollar. Some entrepreneurs might take undue advantage of the situation and increase furniture and furnishing product prices. But we would like to assure our customers that we are not going to hike the price. And if any entrepreneur does so, our association will take stern action against them by working closely with the government.
What does the industry expect from the government?
Regular supply of electricity to industries and industrial estates is the best the government can do. Along with that, it should re-allocate any unused space within industrial estates to functioning industries. For producing skilled manpower, the government should institute organizations that provide trainings and courses to individuals on a regular basis. It should make sure that the timber produced in the country is distributed and utilized properly and that trees are cut down by maintaining environmental preservation guidelines. And the government should ease customs procedures and lower custom duty on imports.
Sahil Agrawal, Vice President, Nepal Steel and Iron Rolling Mills Association
Sahil Agrawal
Vice President
Nepal Steel and Iron Rolling Mills Association
“Our present production capacity is sufficient to meet market demand”
How are the country’s steel and iron factories doing?
Currently, the market for steel and iron in Nepal is almost negligible. The recent earthquake has affected many dimensions of trade and activities related to it. For example, the government’s restriction on the building design approval procedure, necessary to give continuity to the ongoing construction, has seriously affected the industry. Due to the restriction, even if the steel and iron industries start manufacturing, right now they don’t have a market for their products.
How many factories are operating and what is their total production capacity?
There are around 20 steel and iron factories operating across Nepal.  But, right now, it’s not possible to say who is producing and who is not. Following the earthquake, the production capacity of the industry has declined massively. This sector consists of industries like the rebar industry, corrugated iron industry, and wire industry, among others. Of these, the earthquake has brought the rebar industry, which in normal conditions has an annual production capacity of 1.5million tons, to a grinding halt. The corrugated iron industry with an annual production capacity of 300,000 tons and the wire industry with an annual production capacity of around 200,000 tons, have been partially affected. 
With Nepal gearing up for reconstruction, demand for construction materials like iron rods and zinc sheets are expected to soar high. Is Nepal’s steel and iron industry in a position to meet this increased demand?
Though the earthquake has hit some of our industries and though we need to recover our production capacity, our present production capacity is sufficient to meet market demand. As the rebar industry has come to a halt, we might face some shortage in its supply presently, but we expect this to be addressed within the next eight months.  As for other construction materials we are already in a position to meet the supply gap.
Can this sector now grow in the wake of the destruction caused by the earthquake?
I won’t say that this is a big opportunity for us as most of our industries have been affected by the earthquake. We will need around eight months to regain our efficiency, which in turn depends on many factors like the economic condition of the country, government regulations, and customer choice,  among others. But considering the tremendous progress and development that other quake-hit countries have made during their post-quake reconstruction period, hopefully there will be growth here too. 
What percentage of growth do you anticipate in the demand for iron bars and zinc sheets in the coming few years?
Well, right now the market is mediocre. But a lot of positive changes can happen if the policy is right. As I mentioned earlier, there are many countries, which have accelerated the development process after big calamities and if policies are right, Nepal has a  bright and attractive future ahead. 
Will the import of iron rods and bars also rise?
We don’t have to import any material, as our own production capacity is enough to meet the nation’s demand. However, it would be better if the government could import electricity to meet the industry’s power needs. 
According to the NRB’s first quarter report for the current fiscal year, the steel and iron industry has been able to utilize only 68% of its total production capacity. Why is this? 
I think the capacity utilized is much lower than the reported 68%. It may actually be around 48%. The main reason for this is electricity shortage, which is available only 12 hours a day on average. This automatically cuts down the production capacity by half. Production booms when electricity is available round the clock. The Nepali steel industry can easily meet supply demands and there is no point in producing more steel, as it could lead to an over supply in the market. 
Will meeting the increased demand be as easy as you said?
We don’t need to worry about the rise in demand. We will be able to produce as much as the market demands. A few industries may take some months to recover from the earthquake but collectively, our production will be enough to meet the increased demand.
How is this association planning to manage the labour market?
It all depends on how the construction sector moves in the days ahead. If there is a growth in demand, there will be a growth in labour demand as well. If you compare the last five to ten years, there has been a huge supply gap in the labour market. Skilled manpower has gone abroad and this has created a shortage of skilled workers here which, consequently, has been increasing labour costs.
Will steel prices rise? 
The simple economic principle that, an increase in demand with supply shortage will increase the price, may not always hold true. If we are short of supply then some people may take undue advantage of the situation. But as I already mentioned, we have sufficient production to meet the demand so we don't expect a price rise as such. So, whatever changes in price occur, they will be because of the fluctuation in the international market. 
What do you expect from the government?
We expect the government to focus on increasing the development budget along with starting the reconstruction and rebuilding process and resuming the design approval procedure by making appropriate changes. Another major thing we expect the government to do is to provide adequate electricity even if it means importing it from India. 
Satya Prakash, Country Head, Kansai Nerolac Paints Nepal
Satya Prakash
Country Head, Kansai Nerolac Paints Nepal
“Opportunity has come through sorrow”
How do you assess the current situation of the country’s paint industry?
In the last one and a half months, all industries including the paint industry, have incurred heavy losses. This is supposed to be the biggest natural tragedy which Nepal is trying to overcome. A large number of real estate companies have been affected. Thousands of private homes and buildings have collapsed or developed cracks. They need to be rebuilt or repaired. But the rebuilding process or even repairing for that matter will not begin as long as the aftershocks keep coming. And as told by experts, the aftershocks will come for some more time. So, in my opinion, it will take at least two to three months more for the people to come out of this situation and think about reconstruction or repair. That will certainly create a big business for construction material like cement, iron rods, bricks and of course paints. You can say opportunity has come through sorrow. 
What was the growth rate of the paint industry before the earthquake? To what extent is it likely to increase? 
In my rough estimate, I think the paint industry was growing by about 12-14% before the earthquake. But the supply of paint and other related material has come to a standstill for the last one and half months. This situation is likely to continue for the three-four weeks. Therefore, I don't see us meeting our growth rate for this fiscal year. So, this fiscal year is not going to meet the expected growth target. But in the next fiscal year, may be from the second quarter onwards, the growth rate of the paint industry will double this fiscal year’s growth rate.
Will the paint factories in Nepal be able to meet the increased demand?
See, so far as Kansai Nerolac paint is concerned, our manufacturing facility is prepared to meet the increased demand. And this will remain true even if the demand grows by 20-25 per cent. We have a huge production facility in Birgunj. I have heard that some paint companies in Nepal are facing problems in terms of production due to the damage to their production units but as far as Kansai Nerolac paint is concerned, we are in a good position to meet the increased demand. We expect the paint demand to go up from the second quarter of the coming fiscal year. 
Does that mean you are also going to increase your production in the coming fiscal year?
See, there are two things. If the demand increases, we will certainly increase our production. We have additional production capacity to fulfil the increase demand, so stocks will not be problem for us. 
Do you think the import of paint will also increase?
I don’t think so because Nepal already has some big paint manufacturers who have been able to meet the national demand. So, I think, there won’t be a need to import paints, either for quality or for quantity. Nepal is self-reliant in paints and can handle any growth in demand. 
What is your assessment of the quality of paints in Nepal?
Nepal will require huge amount of paint in the days ahead and while catering to this need we should focus on lead-free and zero VOC paints.
What is your company’s growth rate expectation for the next fiscal year?
For the last two and a half years, Kansai Nerolac Paint has been among the fastest growing paint companies in Nepal. In the next fiscal year, when county comes out of the mental trauma left by the earthquake, we expect our present growth rate to double. And I am sure that is going to happen.
As a businessman, what growth prospects do you see for the construction industry in the coming years?
The demand of construction materials is certainly going to increase. The demand will come from reconstruction as well as construction of new buildings. But the growth will take place only if there is a reasonable flow of capital in the market. Many people have lost the means of their livelihoods and ensuring capital flow in the market will ensure that they are employed again.

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