After witnessing a boom for over half a decade amid reconstruction drive and the government pledge to give a boost to development works, cement industry is now struggling to survive in the lack of markets for its products. The government can weigh in to lower the high production cost that can help cement industries to realise export potential in the neighbouring Indian markets. Doing so will not only help the cement industry bring back from the brink, but also help address the burgeoning trade deficit of the country.
--BY NEWBIZ TEAM
While the manufacturing sector is on a sharp decline, the cement industry is experiencing a boom in recent years that is now eying the nearby markets for export as the domestic demands fail to keep up with the production capacity.
There are very few products that Nepal does not import because it produces on its own. Only a handful of commodities are sold abroad. The gap between Nepal's imports and exports - known as the trade deficit - has been widening at an alarming rate that could tip Nepal into an economic crisis if not addressed immediately. For years, the government has been making efforts to expand the narrow merchandise export basket that is concentrated on textiles, clothing, and agricultural products. There are very few products from the manufacturing sector that Nepal exports.
While the government has been offering various subsidies and facilities to industries to boost exports, they have not delivered desired results. Rather, the manufacturing sector's performance as indicated by its share in the country's gross domestic product (GDP) and export is falling in recent years.
The manufacturing sector's share in GDP dropped to 5.39% in the fiscal year 2020/21 from 9% in 2000/01, according to the data of the Central Bureau of Statistics. However, cement is a bright spot in the economy that has been suffering from years of low production, industrial decline, and stagnant export. Cement has recently emerged as a product that has the potential to change not only the export basket but also the existing economic dynamics of the country. If the cement's potential is harnessed, it can become a major source of foreign currency earnings, spur the creation of jobs and accelerate growth. It can end a long drought of exportable goods. Refined palm and soybean oils are Nepal's top export products. Export of these products was possible not because Nepal produces these commodities, but due to trade preference loopholes. Other major exports are of less value and do not even equal Rs 100 billion in value combined.
In the lack of goods that can be exported, Nepal has been exporting manpower. Experts have been calling for strategies to identify the products that have a competitive advantage and boost their exports. Nepal's cement export potential is substantial, but so are the challenges ahead to tap into it. Investors poured billions of rupees in investment in the cement sector betting on the growing demands amid the reconstruction drive in the country after the 2015 earthquakes and the development appetite of the country.
As the reconstruction activities come to an end and development projects fail to take momentum, cement manufacturers are staring at losses due to a decline in capacity utilisation. Capacity utilisation of cement plants currently stands at 40% which is so low that it threatens their survival, manufacturers say.
Domestic Demand and Capacity Mismatch
Currently, 65 cement industries are operational in Nepal. Among them, 20 have been producing both cement and clinker. Clinker is an intermediary product used for cement production. These cement industries have an annual production capacity of 25 million tonnes, according to Cement Manufacturers Association (CMA).
The volume of production is higher than the current domestic demands which stand at around 10 million tonnes. Cement industries did a brisk business in the last few years when the government intensified reconstruction activities after the 2015 earthquakes. Over half a million private houses and thousands of school buildings, heritage sites, health posts, and other structures damaged by the earthquakes were rebuilt in the last seven years. These rebuilding activities accelerated the demand for cement. Cement industries responded to the surge in the demand by boosting their capacity.
In line with the demand derived from these reconstruction activities along with the government's promise to expedite development projects, new investors entered the market while existing industries increased their production capacity.
Growth in the investment, establishment of more cement industries, and the expansion of existing cement plants helped Nepal to end its reliance on the imports of cement and clinkers. It was after the earthquakes that Nepal started becoming self-reliant on cement products. Barring a small number of imports mainly for projects financed by development partners due to the government's tax waiver, Nepal does not import cement anymore.
The optimism fuelled by the reconstruction drive, however, did not last long.
While the reconstruction activities came to an end after seven years, development projects also did not take pace as expected. Not many new development projects have been initiated in the last few years. The progress of ongoing development projects is also very slow. As a result, the cement industry is now feeling the heat as reflected in the low capacity utilisation after the domestic demand remained stagnant if not subsided.
Two solutions can address the current glut: domestic consumption and export. The rise in domestic consumption can elevate demands. But, domestic consumption alone cannot absorb the burgeoning supply that industries can make through their existing capacity. The domestic demand for cement currently stands at around 10 million per annum while the current capacity stands at 25 million. There is no possibility of sudden growth in the household or private demands that result mostly from the construction of houses, apartments, hotels, hydropower projects, and other buildings. So, it is the government or public sector that can create massive demands through development or infrastructure projects. But, in the current scenario, it is naive to expect the development projects in the country to gather speed. Nor are there any new mega or infrastructure projects that elevate the demand for cement in the domestic market in a huge quantity.
Cement industry leaders rule out the possibility of domestic demands doubling immediately which can consume additional 15 million tonnes of cement annually. In the existing scenario, the domestic demand or consumption of cement is projected to grow by five to 10 percent which is not sufficient to match the production capacity. So, export is the only 'best and possible' way that can sustain the current cement industry boom, according to cement manufacturers. The excess production capacity in a way represents an opportunity also for the export, they opine. If the export potential is realised, it will not only pull the cement sector back from the brink but also give a much-needed boost to the country's economy. This will also create a win-win scenario for both the industrialists desperate to find the markets for their excess production and the government that is looking for ways to improve its foreign trade balance by boosting exports.
But, exporting cement is easier said than done. It is possible, though. Some markets can easily absorb Nepal's products. Industrialists say that they are ready and their plants have the capacity to churn out cement that can be shipped to the nearby bordering markets. However, there are some problems that can be addressed only through government interventions. If the government helps in addressing those problems plaguing the cement industries, industrialists say that they are in a position to immediately start exporting their products.
Cement makers do not need to go far to find the markets for their products. They are optimistic about the growing opportunity that they see in the neighbouring markets. India is the prime market where demand for cement has been on a continuous rise.
According to rating agency ICRA, the annual cement demand in India is expected to grow by seven to eight percent to around 382 million metric tonnes supported by pent-up demand, rural housing requirements, and a pick-up in infrastructure activity. Though India is the second-largest cement producer after China, Nepal's cement can make inroads into the markets in some Indian states bordering Nepal.
"Due to economic factors, geographical proximity as well as on the practical ground, we can export cement to Indian states bordering Nepal," says Dhruba Thapa, President of Cement Manufacturers Association of Nepal. "In terms of quality, we are at par with the international cement industry if not better. The quality parameter of Nepal's cement is higher and better than that of India," he added.
China's Tibet and Bangladesh are other potential markets for Nepal's cement. There are other markets that Nepal can explore in the long run while catering to the demands of cement in the nearby Indian markets in the immediate future.
According to Thapa, Nepal's cement industries are eying Indian towns that are at a range of 100 kilometres from the Nepal-Indian border points. Stating that the consumption of cement in these areas is higher compared to domestic demands, cement makers say Nepal should leave no stone unturned to tap these markets. Bihar, Uttar Pradesh, and West Bengal are the three Indian states where Nepal's cement has high potential. The lack of limestone deposits in these Indian states put Nepal in a competitive position for the supply of cement.
Limestone is the principal raw material used to produce cement. Nepal's richness in limestone deposits has proven to become a blessing for cement makers. Recent studies show that Nepal may have 2.5 billion tonnes of cement-grade limestone. Out of 65 cement manufacturers, 20 produce clinkers on their own. The huge deposit of limestone in the country does not require cement industries to import clinker as a principal raw material.
Most of the manufacturing plants have been set in locations close to border areas, making it easier to transport cement products to Indian markets. Rupandehi and Nawalparasi have become cement hubs in recent years. Rupandehi, which shares a border with Uttar Pradesh, has over a dozen cement industries. There are nearly a dozen cement factories in the nearby Nawalparasi district. Birgunj, Biratnagar, Ghorahi, and Nepalgunj, among other locations, are in a position to ship cement to bordering Indian states.
These are also the states which are said to be growing at a faster pace. The construction boom and rapid development in the cities close to the Nepal-India border could become an opportunity for Nepal's cement industries to flourish. Sharad Bikram Rana, a trade expert, sees Bangladesh as a lucrative market for cement exports for Nepal. "In the absence of quarrying and mining industries, Bangladesh imports cement to meet its construction needs. Nepal's cement can tap into the development spree of Bangladesh," says Rana, who also served as Executive Director of Trade and Export Promotion Center (TEPC). "For this to happen, Bangladesh should provide a level playing field by providing duty preference to Nepal as it has been doing to other South Asian countries on a bilateral basis. The Nepal government should take this matter with the government of Bangladesh," he added.
Quantifying export potential
According to an estimate by the Cement Manufacturers' Association, the current capacity of cement industries makes it possible for Nepal to export 15 million tonnes of cement annually worth around Rs 150 billion.
This export potential - in the current capacity of the Nepali cement industry without expansion - is nearly equivalent to the current total export receipt. Earning from the export of cement can reduce the trade deficit of the country by up to 15%. In the fiscal year 2021/22, Nepal registered a trade deficit of Rs 1,398.7 billion as the country imported goods worth Rs 1,539.8 billion while total exports stood at Rs 141.12 billion. If the export potential is harnessed, cement could become instrumental in lowering the trade deficit. It is the commodity whose export potential as of now is worth more than the value of all other export products combined.
Since cement is a high-value product in the country whose export basket is limited to agricultural products or other goods with low-value addition, its export has multiple benefits. Cement experts say that it has one of the highest domestic value additions (above 80%). Apart from creating high-paying jobs, cement manufacturing also spurs a virtuous cycle of increased activity in communities across the country. From electricity to transportation to mines and minerals, cement manufacturers fuel other economic activities.
At a time when the deficit of the balance of payment is threatening to throw the economy into crisis, the export of cement can relieve such pressure on the external sector. In the present scenario, cement is probably the only exportable product that can help address Nepal's ballooning trade deficit.
Hydroelectricity is another product that has high export potential for Nepal. Realising the hydroelectricity export potential would take some time as more hydropower projects should come online before Nepal has surplus energy for exports to India or Bangladesh. In addition to that, there are other barriers including India's agreement and the lack of cross-border transmission lines that are not under only Nepal's hands. But, the export of cement is viable or immediately possible provided that the government takes some measures to cut the cost of production to stay competitive in the nearby markets. Addressing the impending hurdles for cement industries from unlocking their export potential is not only the responsibility of the government but also an economic imperative.
High cost of production
The main factor that is inhibiting cement industries from harnessing their export potential is high input cost. The export potential can be realised only if the high production cost is reduced to the level of Indian products if not lower.
According to a rough calculation of the Cement Manufacturers Association of Nepal, the average production cost for the industry is Rs 700 per 50-kg bag while it should be sold at Rs 640 in the market. The cost includes all the prices that the industry needs to bear for the production and supply of its product in the Indian markets including inputs, tariffs, and transportation costs. This deficit between the cost and market price is preventing Nepali cement manufacturers from exporting their products. If the cost of production is slashed by Rs 60 per bag, there are no other reasons why Nepal's cement cannot find its markets in India.
According to cement manufacturers, the cost is so tight that they do not see a space to cut costs. Export at losses is not possible, either. This is where the government has its role. It is only the government's support that can help in lowering the cost of production. If the government is serious about export promotion, it is doable. Doing so neither incurs a huge cost for the government nor does it require a policy shift.
Subsidy is crucial
The government's subsidy to reduce the high cost is crucial for cement industries if they are to export their products. Industry leaders suggest a tax subsidy of 10% that can significantly lower the cost of production. Various taxes become one of the factors contributing to higher cement costs in Nepal.
Direct and indirect taxes that cement manufacturers pay to the government has been a major component of the cost of cement production. One industrialist, who did not want to be named for this article, characterises government agencies as 'profit centres' that seek to collect taxes or royalties for every service it provides.
"Government agencies are expected to play the role of facilitator in addressing problems faced by businesses or industries. However, in Nepal, they act in a way that we feel like they are here only to collect taxes or royalties," said the cement industrialist, requesting anonymity.
"If we want Nepal's cement to become an exportable product that benefits the economy in the long run, such a mindset of the government must change. It should think in a way that a little bit of subsidy for cement exports may affect revenue immediately, but it will bring multiple benefits for the economy in the long run," he adds.
Rather than the tax burden for cement industries going down, some indirect taxes and royalties have gone up in recent years. For example, the Nepal Bureau of Standards and Metrology recently raised the fee for providing Nepal Standard (NS), a quality mark certificate, for cement brands to Rs 100, 000 from Rs 7,000 each year. While this looks like a small amount for a cement manufacturer that has millions of annual revenue, it is representative of numerous taxes, royalties, or fees that are eventually passed on to the consumers. According to a financial analyst working in the cement industry, the cost of the NS mark for a small cement manufacturer that has five or six brands of cement would amount to nearly one rupee per bag.
Limestone royalty was also raised from Rs 60 to Rs 120 per tonne recently. There are talks within government agencies to raise it further to Rs 200 per tonne. Such an increase in the raw material cost does not help in lowering the price of the end product. The royalty for limestone leads to a cost of Rs 5 per bag of cement, according to a back-of-the-envelope calculation.
On average, 25% of the price of a bag of cement constitutes direct or indirect taxes collected by the government. "If this cost can be either reduced or subsided to lower cost, we can export our products to the nearby markets," says Thapa.
Lower electricity tariff
Likewise, electricity tariff as energy cost is another major driver for the cement's price. Again, this is where the government's generosity can help in cutting costs. Electricity is not only costlier but also unreliable in industries. Ensuring an uninterrupted supply of electricity is a prerequisite for production. Stating that the electricity tariff is very high, cement manufacturers call for lowering the charges. On average, cement industries are currently paying Rs 9.5 per unit as electricity tariff. This is very high and must come down to make cement's price competitive. Nepal Electricity Authority (NEA), a government-owned electricity company, must revise the tariff. The growing generation capacity of electricity should be reflected in the lower electricity tariff, according to private sector leaders.
"We are talking about exporting electricity now. But, the supply of electricity to local industries must be prioritised over the export of energy. Supplying energy at a low cost for export-oriented industries makes more economic sense over exports," said Dhruba Thapa. He added that cheaper electricity will substantially lower the cost. "The government is seeking markets to export electricity for Rs 4 to 5 rupees per unit. We are asking the government to provide the electricity at the same cost. We are okay even if the reduced tariff is only to the extent of export quantity, not for domestic consumption," said Thapa.
Rana, former executive director of TEPC, also agrees. "Energy costs can go down for cement industries if the government reduces the tariff. This is also economically feasible as Nepal is having surplus energy," said Rana.
A tax subsidy of 10% along with halving the electricity tariff can help to resolve the difference between the cost of production and the competitive price for the exports. These two actions reduce the total cost by Rs 60 per bag and make export competitive, say cement makers. According to Thapa, 10% of export subsidy would lower cost by Rs 40 per bag while cutting the electricity tariff to Rs 5 per unit will push down the cost by Rs 20 per bag.
Government officials also acknowledge the potential of cement exports. According to a joint secretary at the Ministry of Industry, Commerce, and Supplies, the government plans to introduce some incentives for the cement industry through the budget for the upcoming fiscal year 2022/23 to harness its export potential.
"When the economy is suffering from the balance of payment position due to widening trade deficit, this is the appropriate time to prop up export-oriented industries including cement. We have proposed that the Ministry of Finance introduce some tax subsidies and incentives through the budget. There will be some good news soon," says the joint secretary, requesting anonymity as he is not authorised to share the discussion on the budget.
In a recent budget of 2022-2023, Finance Minister Janardhan Sharma has announced cash incentives of up to 8 percent for products like clinker, cement.