Cement production in Nepal has been growing sharply over the past few years. The industry is among the country's most flourishing business sectors as the demand of cement is constantly rising. The vast untapped limestone reserves spread across the country have not only lured domestic companies but also the international investors.
--By Akhilesh Tripathi and Sanjeev Sharma
Nepal’s cement industry has been flourishing despite all sorts of problems. The industry has seen significant growth over the last few years. According to Dhruba Thapa, President of the Cement Manufacturers Association of Nepal (CMAN), the country’s cement industry has been steadily growing at 8-10 per cent annually for the past several years. “The cement industry has seen growing steadily. Its future looks bright,” says Thapa when asked to comment on the current situation of the Nepali cement industry.
“The annual demand of cement in Nepal is about four million metric tonnes of which some 3.2 million metric tonnes is met through domestic production while the rest is imported,” he adds.
The country’s import of cement has been dropping year after year because of the rising domestic production. According to the Trade and Export Promotion Centre (TEPC), the rate of growth in cement imports has declined in the last fiscal year. Nepal imported OPC cement worth Rs 2.99 billion in fiscal 2013-14. In the previous fiscal year i.e. 2012-13, cement imports stood at Rs 3.75 billion. The decline in the import of both cement and clinker reflects Nepal’s progress towards self-sufficiency in cement production.
According to CMAN, the domestic cement industry has an installed production capacity of about 6 million tonnes annually which is higher than the annual demand of four million metric tonnes. But the cement factories currently operational have been able to utilize only about 50 per cent of their total production capacity.
However, this hasn’t stopped the private sector from entering this sector in a big way. Currently, according to the data provided by CMAN, there are 45 cement factories in operation producing 3.2 million metric tonnes of cement annually. Local production fulfils about 80 percent of the requirement and the rest is met by imports from India. Nepal produces OPC, PPC and PSC cement, of which OPC is preferred these days.
Out of the 45 factories, only 12 also produce clinker, a major raw material used in cement production. As early as a decade ago, Nepal used to depend on India for 95 per cent of its clinker requirement. However, with more factories now setting up clinker production units after acquiring limestone quarries, import from India has been declining year after year. Today, almost 60 percent of the clinker demand is met through domestic supply. “The remaining is imported from India. A few factories will start producing own clinker in 2015. That will bring down the import to 20-25 per cent. Nepal will be self-reliant in clinker over the next three years,” says Thapa.
Power shortage because of long hours of load-shedding is the biggest challenge being faced by cement manufacturers in the country. The power crisis has forced them to use diesel power which makes each cement sack costlier by Rs 25. The high import duty levied on raw material, mainly clinker, is another problem, according to cement manufacturers. It has weakened the competitiveness of Nepali cement in terms of price. “The government has been continuously increasing the customs duty on clinker ignoring its effects on domestic cement manufacturers,” complain cement manufacturers. Thapa says all this makes the Nepali cement costlier than cement in any other SAARC country.
The syndicate system in transportation is another big problem for the domestic cement industry. “We are not getting sufficient number of trucks to supply our finished goods to the targeted location,” says Anil Kumar Agrawal, Managing Director of Shree Cement Industries. “The cost associated with transportation is high as well.” Manufacturers complain that even with enough production and demand, they are unable to supply their products to the market due to unavailability of transportation.
“Every commodity has a lifespan; and in the case of cement, it is 30 days,” said Tej Bom, Head of Sales and Marketing at Ambe Cement, “If the finished product is not used within 30 days, the desirable outcome is not achieved.” The need of the hour, according to him, is to effectively end the syndicate system so that Nepali products remain competitive with Indian brands.
With the rise in domestic production, import of foreign cement in Nepal has come down significantly over the past few years. The data compiled by the Trade and Export Promotion Center (TEPC) clearly points to this. The country which imported portland class cement (OPC and PPC) worth Rs 4.31 billion in FY 2090/10 saw the import decrease 30 per cent to Rs 2.99 billion in 2013/14. The rising production has also led to the increase in the import of gypsum, one of the major ingredients of cement. Nepal imported gypsum worth Rs 754 million in FY 2013/14, up 133 per cent from Rs 322 million in FY 2010. But the import of clinker, another key component is seen gradually declining. Import of clinker, which was recorded at Rs 8.03 billion in FY 2009/10, decreased to Rs 5.99 billion in 2012/13 before rising to Rs 6.54 billion in the last FY. The increase is due to the government provision made mandatory for the cement manufacturers to produce clinker they need by 2073. However, producers are seen dissatisfied by the government announcement. "Clinker production means more investment. More than 70 per cent of the investment goes for clinker production. So, mere announcements are not enough. We need a supporting strategy as well," says Anil Kumar Agrawal , Managing Director of Shree Cement Industries.
Despite the fact that use of Indian cement has lessened in recent years, policy hurdles still remain in place to stop the use of Nepali cement in large constructions of national importance. "General consumers are not importing cement from India. It’s the big infrastructure projects run through the international competitive bidding (ICB) process that are importing cement from India," mentions Thapa,. Thapa, who is also the Executive Director of Cosmos Cement Industries, says that a provision in the ICB contract, which exempts the imported construction materials from taxes, is hampering the competitiveness of Nepali cement. "The imported cement gets an exemption of Rs 185 per sack in customs duty. That is why it is cheaper. It has affected the Nepali cement market," he says.
With the increase in production, export of Nepali cement has also risen in the past few years. Though the size of the export is negligible compared to the import, the increasing trend indicates to the possibility of Nepali cement becoming a product of comparative advantage to the country's export. Nepal exported cement worth Rs 3.16 million in FY 2013/14 after starting the export in FY 2012/13 which was logged at Rs 148,700. Nevertheless, it will take time for Nepal to become a net exporter of cement, according to producers. "As we are not being able to fulfill the domestic demand, there is no possibility of export currently. Most factories are selling their products within the country. We can think of exports once we meet the domestic demand," opines Tej Bom, Head of Sales and Marketing at Ambe Cement.
Foreign Direct Investment
Nepali cement industry has turned lucrative to foreign investors in recent years. Big international producers, namely, Dangote of Nigeria, China's Hongshi and Reliance of India are in the process to establish production facilities in Nepal. Lured by the infrastructure boom in Northern India and Western China, the companies are eying to tap Nepal's vast limestone reserves. Their products are expected to be export-oriented while also fulfilling the domestic demand in Nepal. Dangote Group, one of the largest industrial conglomerates of West Africa, is said to be starting the construction of cement factory in the next one year. The company which was granted a USD 500 million FDI approval in November 2013 by the Investment Board of Nepal (IBN) is currently looking for a local partner, according to an informed source.
Meanwhile, the top Chinese manufacturer Hongshi Holding Group has partnered with the Nepali company Shivam Cement to kickstart its business in Nepal. The company in March, 2015 signed a joint venture (JV) agreement with Shivam Holdings Nepal to set up a Rs 30 billion production facility. According to the agreement, Hongshi will have 70 per cent share (Rs 21 billion) and the rest (Rs 9 billion) will be invested by Shivam. The JV which will be named Hongshi-Shivam Cement Pvt Ltd aims to produce 120,000 sacks or 6,000 tonnes of cement per day and has plans to start production in three years.
Similarly, Reliance Cement Industries of India has also received endorsement from the IBN to establish a cement factory in the country. Though much is not known about the progress after the approval of its investment proposal last year, the company has pledge Rs 40 billion in FDI and aims to produce 2.3 million tonnes of cement annually. Collectively, the three foreign companies have received project approvals worth USD 1.2 billion which has been marked among the largest FDI commitments in the Nepali industrial sector for the time being. Likewise, two other foreign companies have also recently expressed their interests to invest in the country's cement industry, according to a source close to the matter.