The budget for the new Fiscal Year 2022/23 has received applause from the country’s industrial fraternity. While some quarters of the country’s industrial community have complained about the arrangements in the budget due to changes in the import duty structure of certain types of raw materials, those running export-oriented industries are cheerful that the government has announced an export subsidy that they have demanded for a long time.
Surendra Kumar Goel is the Chairman of Shivam Cements Limited, a major Nepali company, which was founded in 2003 and started commercial production of cement in 2011. Goel is also the Managing Director of H.R. Goel Group and is in the cement business for over 27 years. He holds B.SC. in Mechanical Engineering degree from Rachi University, India. In a conversation with the HRM, he talked about the possible impact of the new budget arrangement for cement producers, bottlenecks to exporting cement from Nepal, market expansion of Shivam Cements and his expectations from the upcoming monetary policy. Excerpts:
The government, in the budget for the fiscal year 2022/2023, has announced to provide a subsidy of eight percent on exports of cement and other products. What impacts the new policy will have on the domestic cement industry?
The newly-introduced policy to provide subsidies to domestic industries will definitely help the local industries. However, the government needs to study further the issues related to the export of cement. First, the Indian cities near the Nepal-India border have a market only for PPC cement. But the standard of PPC cement produced in India is different than Nepali cement.
In India, producers can mix 35 percent fly ash in their cement, while the Nepal Bureau of Standards and Metrology (NBSM) permits companies to mix only 25 percent fly ash.
If we are to improve exports, we need to construct separate silos for storing cement to be exported to India. This should be done as the quality standards for cement in Nepal and India are different. Having said that, it is a difficult task to undertake.
Second, the price of Nepali cement exported to India will be almost the same as Indian cement. Even when the eight percent export subsidy is reduced, the price of cement would be the same in both Nepal and Indian markets.
What benefit will the new arrangement offer to Nepal when the price is the same in both domestic and export markets?
The export subsidy will only help to increase the capacity utilization of Nepali cement industries. Similarly, we are still unclear about the payment modality. The Indian side is asking for the supply of cement in credit. How can Nepali industries provide cement in credit to foreign buyers? It will be extremely difficult for Nepali industries to clear payments if cement is exported under a credit system. The study of these issues is being carried out. Likewise, how will the domestic industries get the export subsidy? Will that be in cash? The modality is still unclear.
In what quantity is Nepali cement likely to be exported to the Indian market?
If the subsidy modality is finalized, Nepali cement would be exported to the Indian market in a good quantity. In the bordering cities, Nepali industries can export PPC cement in large quantities. Through the Bhairahawa border, Nepali industries can export cement to Indian cities like Gorakhpur. And through Birgunj and Biratnagar borders, Nepal can export cement up to cities such as Patna and Katihar.
Since the last year, the banking system has faced a shortage of lendable funds. Nepal’s trade deficit is also ballooning and the country’s foreign exchange reserve is depleting. As an industrialist, how do you see the current macroeconomic scenario of Nepal?
The budget announced for the current fiscal year is positive for the industrial sector. If the announcements to promote domestic industries are implemented, then it would help the government reduce the ballooning trade and fiscal deficits. In the first place, The government should identify the products in which Nepal can be self-sufficient. Then proper measures should be taken to support domestic industries to increase the production of such products.
Nepal has a huge potential to be self-reliant in many products. Such products can also be exported to foreign markets. A decade ago, Nepal used to import cement. Now, Nepal is in a position to export its cement production. Though the quality standards may be different, there is no difference in the quality of cement produced in Nepal and India. Our economy needs to be export-oriented to reduce the ballooning trade deficit.
The latest report of the Confederation of Nepalese Industries (CNI) shows capital utilization of industries has declined in the second quarter of the Fiscal Year 2021/2022. What are the challenges faced by industries in Nepal for sustainability?
Let me talk about the cement industry. It is extremely difficult to operate limestone quarries for Nepali cement industries. This has been the biggest challenge. To operate limestone quarries, industries need to get approval from the Department of Mines and Geology. If the government supports constructing roads up to the mining region and helps manage electricity and drinking water, it would be extremely helpful for industries to operate limestone quarries.
Another difficulty is that cement industries have to import coal from other countries. It is transported to industries through roadways. The highways should be upgraded so that transporting raw materials to industries is easy. If all this happens, we can produce cement of high quality from the limestone we have in Nepal. If we produce quality cement, we do not need to worry about exports.
How do you see the cement market in Nepal? What is the annual growth rate of the market?
At present, all big business groups in the country have a significant chunk of their investment in the cement industry. Due to this, the production of cement is almost double the market demand. Similarly, the installed capacity of domestic cement industries is also double the market demand. The installed capacity of industries is 20 million tons, while the demand stands at 10 million tons. Of the total installed capacity, industries produce 40 percent PPC cement, and 60 percent OPC cement.
The consumption of cement is directly linked to the country’s infrastructure development. On the one hand, the capital expenditure is critically low in the current fiscal year. On the other hand, contractors halted construction projects declaring a ‘construction holiday’. In these circumstances, how was the domestic cement market in the last fiscal year?
When I talk about Shivam Cements, the sales have declined this year compared to the last fiscal year. The price has also declined in the current fiscal year. The situation is such that if we do not do capacity utilization, our difficulties in production will increase. If there is no capacity utilization, the production cost increases. For capital utilization, industries increase cement production. But producers are not able to store all the cement they’ve produced. The industries had to send the productions to the market. As all the industries sent cement to the market, the price has declined. The price of cement has come down by Rs 100 per sack at present.
What is the market share of Shivam Cements?
There has been a good response from the market. People like products of Shivam Cements for the high quality we offer and we have met the expectation of consumers. Likewise, we also provide after-sales service to our consumers. Currently, our market share stands at nine %. And, we have been working hard to maintain our presence in the market. Our major market is Bagmati Province. Likewise, we also have a good presence in places like Kalaiya, Parsa, Pokhara, and several cities of Province 1. We are also getting good responses from consumers in Janakpur.
The central bank is preparing the monetary policy for the upcoming fiscal year. As an industrialist, what are your expectations from the monetary policy?
We want the monetary policy to be business-friendly. There has been a severe disruption in business for the last two and a half years due to the Covid-19 pandemic. The central bank should solve the problems industries and businesses are facing.
On what scale do you think Nepali industries can export cement to foreign markets?
We have to compete in India. What is happening in India is that cement producers there have a mutual understanding to maintain the same price of cement in the market. Once Nepali cement is exported to the Indian market, there will be competition between Nepali and Indian cement. In such a situation, if Indian cement manufacturers reduce the price, Nepali industries will not be able to sell cement at the same price. Because the production cost is high in Nepal.
In my opinion, three factors- labor cost, mining cost, and electricity cost– are increasing our production costs. But we can manage logistics at a cheaper rate. There is no limestone in Uttar Pradesh and Bihar. As Nepal has limestone mines, the transportation cost of cement to India can be economical. It will be cheaper to import cement from Nepal.
What should be done to keep the demand for cement in the domestic market moving?
An industry can not sustain itself only by selling cement for the construction of residential buildings. Unless the government does not come up with big road and bridge projects, or hydropower projects, the consumption will not increase. The demand for cement will only increase if the government works on big infrastructure projects. Then, the market will keep moving. Money will come to the market. The government has to increase capital expenditure to bring money to the market.
