The demand for construction materials is still yet to recover from the impacts of Covid-19 pandemic. But investment is growing at an astonishing pace signaling that the future looks bright for the sector in Nepal.
At a time when many industries in Nepal are still reeling under the impact of the Covid-19 pandemic with market demand yet to rise to pre-pandemic levels, the construction materials industry is going through a different situation. The production of major construction materials such as cement and iron/steel has increased with new companies preparing to start production and existing ones adding more investment and expanding their activities to produce new types of raw materials.
Take for example Saurabh Group which is preparing to start a new steel plant at Parwanipur, Bara. A company official said that the new plant will not only produce iron bars but also billets, the key raw material to produce TMT steel bars. According to the official, when the plant becomes operational in April-May, it will produce 100,000 metric tonnes of bars and 300,000 metric tonnes of billets. He claimed that it will help to cover about 30 percent of the billet import of the country.
Over 80 percent of the work to set up the factory has been completed with the group investing Rs 3.5 billion till date; the plant will provide employment opportunities to over 500 people. Currently, most of the steel industries operating across the country import billets from India to produce steel bars.
Similarly, Golchha Organisation is also in the process of establishing a ferrous construction materials production plant in Parsa. Sharad Golchha, who is the grandson of late Hulaschand Golchha, is said to have invested Rs 1 billion in the new company which will produce an estimated 80,000 tonnes of pipes, zinc sheets, boulder wire and iron angles. Over 90 percent of the construction of the plant has been completed and production will start within the next two months, according to an official of the company.
Likewise, the Morang-based Aarati Strips is also preparing to operate two new plants related to galvalume and cold rolled (CR) sheets by mid-March with an investment of Rs 4 billion. Galvalume sheets are a new type of roofing material in Nepal; such sheets look similar to ordinary corrugated sheets found in the market but have silicon, aluminium and zinc to give additional strength to the construction. The company, which has been producing zinc-coated and corrugated sheets, aims to produce 30,000 metric tonnes of galvalume sheets annually. According to Diwas Nepal, head of administration at Aarati Strips, once the plant is operational, it will produce such sheets for the first time in Nepal.
He informed that after the CR sheet mill commences operation, the company will stop importing CR sheets to produce corrugated sheets from India.
In the meantime, some new cement companies have opened up while the existing ones are also gearing up to add more investment and expand their activities. For instance, a new company Saurya Cement Industry, is all set to start commercial production of cement and clinker at its plant in Karjanha, Siraha. Established with an investment of over Rs 15 billion, Saurya Cement is a joint venture between four big business houses of the country, namely Golchha Organisation, Ambe Group, Shanker Group and Pioneer Group. The company currently is conducting trial productions of OPC, PPC and PSC cement and clinker and plans commercial production by mid-March.
New Wave of Investment
The above-mentioned examples indicate a new wave of investment in the construction materials production sector. The sector got momentum after the Gorkha earthquake as a result of an increased demand for construction materials caused by the post-quake reconstruction drive, along with the development of large government and private sector funded infrastructure projects getting traction after the end of the 2015 Indian economic embargo.
According to industrialists, industrial areas such as the Birgunj-Bara-Parsa Industrial Corridor are witnessing the opening of new construction materials factories. The major industrial hub of the central Terai has become a hub for the production of construction materials due to its location, they say. “This industrial corridor can be branded as a special area for construction materials production based on the increase in investment volume of business houses in such industries,” says Rajesh Keyal, director of the Birgunj-based Keyal Group which operates steel, cement and corrugated strips plants in the area.
But why is investment in the construction materials production sector growing in such a manner? There is not a single answer to this question. Some see this as an impact of post-quake reconstruction when the increased demand for construction materials drove production activities, while others see this as a positive business environment created by the political stability gained after the promulgation of the new constitution and 2018 elections. It is also strongly believed that Nepal holds a vast potential as a market for construction materials with the development of large infrastructure projects in sectors including hydropower, irrigation, roads and new cities currently being built or being planned for the future.
With every investment announced to establish new plants or expand the existing ones, competition in the market is intensifying. “There is fierce competition in the cement and steelmarket,” observes Ramesh Agrawal, director of Jagdamba Steels. According to him, the arrival of new players is changing the market dynamics in terms of pricing and the different aspects of supply and demand. But for now, he says, the subdued demand for cement and other construction materials is a challenge for producers.
They say that compared to last year, the production of cement, steel rods and bricks has gone down by 50 percent in the main construction season of the year, particularly due to the sluggish spending of capital budget by the government. Pawan Sharada, managing director of Premier Steel of Duhabi, which has been producing 800 metric tonnes of iron rods per day, is only producing 300-400 metric tonnes daily due to reduced market demand.
This situation of sluggish demand and intensifying competition has added to the difficulties for industrialists. “We are facing difficulties to meet our revenue targets at a time when costs to operate industries have risen significantly,” says Agrawal, while adding, “New players have come to the market seeing the political stability and big development plans that will increase the demand of construction materials, but the market has not grown as expected because of the dismal capital budget spending of the government.” In the first six months of the current fiscal year, the capital expenditure has amounted to a meagre Rs 50.82 billion or 14.4 percent of the Rs 352.92 billion earmarked for FY2020/21.
The market demand for cement and steel was ravaged by the public health emergency. Ramesh Thapa, assistant general manager at Arghakhanchi Cement says that a few cement companies were able to weather the crisis of 2020 to some extent by supplying products to large infrastructure projects. “For us, things began to change a little after mid-May as the construction of some projects of national pride moved on. We supplied cement to the Melamchi Water Drinking Supply Project after May last year,” he mentions. The company has also been supplying cement to other projects such as the reconstruction of the DharaharaTower and the under construction new parliament building.
Though the threat of coronavirus has receded, with lives returning to a sense of normalcy, the economic sluggishness continues which is affecting the demand for construction materials. The demand for new residential houses and commercial buildings is low because of big income losses faced by people. Meanwhile, the ban on land plotting is also hampering construction of residential houses- in early December, the Supreme Court ruled against a decision of the government to open plotting and splitting of land. In September, the Ministry of Land Management, Poverty Alleviation and Cooperatives had decided to end the suspension on land plotting and splitting which was in place since August 2017. “The demand for cement and other construction materials will go up significantly if the ban is lifted,” says Thapa.
According to producers, the demand for cement and other construction materials at present is supported by low bank interest rates and high remittance inflow which have encouraged those people less affected by the economic slowdown to build homes. The relative price stability of construction materials is another factor in this regard. While some fluctuation has been seen in the price of iron bars in the recent months, the price of cement has not increased much compared to a year earlier. For instance, the average consumer price of 50-kg sack OPC cement currently is Rs 700 which was Rs 650 in early 2019. The price increase in TMT bars is higher than in cement; the average price of one kg of TMT bar is Rs 95 which was Rs 75 two years ago. This has also supported the market for construction materials to some extent.
According to the Cement Manufacturers’ Association of Nepal (CMAN), the total annual capacity of Nepali cement producers stands at 11 million metric tonnes which was 4.5 million metric tonnes four years ago. The capacity utilisation of cement factories is currently 50 percent which was 75 percent in 2018.
A total of 133 cement factories have been registered at the Department of Industry (DoI) as of mid-February and out of this number, 67 are operational. They produce Ordinary Portland Cement (OPC), Portland Pozzolana Cement (PPC) and Portland Slag Cement (PSC) and clinker.
As per CMAN, more than Rs 1,000 billion has been invested in the domestic cement plants till date. Similarly, imports of cement has come down to 33,000 metric tonnes in FY2019/20 from 225,273 metric tonnes in FY2015/16. .
Nepal, which became self-reliant in cement some three years ago, is on its way to becoming self-sufficient in clinker. The Nepali cement industry is now seeing a rapid expansion in the production of clinker. Among the plants that are operational, 20 have been producing cement only, while the rest have been producing both cement and clinker.
The production scenario is also positive in the iron/steel front. According to the Nepal Steel Rolling Mills Association, the umbrella organisation of Nepali steel industries, the current demand for steel bars stands at 1.4 million metric tonnes.