Nepal’s Cement ExportStrong Growth Potential Amid Challenges

the HRM
Nepal recorded cement exports totaling Rs 779.3 million in the fiscal year 2022/23. Notably, within the initial three months of the current fiscal year, cement exports amounted to Rs 853,071 million, surpassing the total exports to India in the previous fiscal year.

This substantial achievement is noteworthy for Nepal, a country with limited goods and services for international export. The notable growth in cement exports presents a promising opportunity to diversify Nepal’s export portfolio.

A significant milestone was reached in July of the preceding year with the commencement of cement exports to India. Palpa Cement Industries initiated the export of its Tansen brand of cement to the largest market in South Asia. Subsequently, five Nepali cement companies have consistently exported cement, consolidating their foothold in the neighboring Indian market.

In October last year, Arghakhanchi Cement initiated cement export to India. In the initial shipment, the company supplied 1,400 sacks of Pozzolana Portland Cement (PPC).

Chaudhary Group, a leading conglomerate in Nepal, recently forged an alliance with India’s Adani Group for cement business. With this partnership, Chaudhary Group aims to supply cement to the markets in the Indian states bordering Nepal.

These advancements underscore the potential of cement to emerge as a key export commodity for Nepal. Industrialists predict that this trend will continue to gain momentum as cement exports to India are on the rise.

In light of the dwindling domestic demand for cement amid the ongoing economic recession, cement producers are redirecting their focus towards neighboring markets to explore export opportunities.

The current contribution of the manufacturing sector to the economy has declined to approximately 5 percent. Industrialists suggest that implementing favorable policies for cement production by the government could not only alleviate the trade deficit but also bolster the manufacturing sector’s share in the overall economy.

Huge Export Potential
Cement Manufacturers’ Association, Nepal (CMAN) has estimated that the country’s existing cement industry capacity can facilitate an annual export of 15 million tons of cement valued at around Rs 150 billion. According to Dhruba Thapa, President of CMAN, realizing the potential could reduce the country’s trade deficit by more than 10 percent.

In the last fiscal year, Nepal registered a staggering trade imbalance of Rs 1,454 billion. “The trade deficit is huge. But we have to realize the potential of products like cement. Nepali industries can export cement worth about Rs 150 to 160 billion. This amount could double Nepal’s total exports which stood at just Rs 157 billion in the last fiscal year.” In the last month alone, Nepal exported cement worth Rs 450 million to the Indian market.

Cement’s export potential surpasses that of all other Nepali export goods combined, making it a crucial product for Nepal. With a significant value addition of over 80 percent, cement exports not only contribute to reducing the trade deficit but also generate well-paying employment opportunities, say industrialists.

Nepal holds significant potential due to its abundant limestone deposits, a key component in cement production. The neighboring Indian cities have a huge demand for cement. Since these cities lack local access to limestone, importing cement from Nepal is a more cost-effective option, enhancing Nepal’s export prospects in the cement industry.

“Limestone is not available in the neighboring Indian states like Bihar, Uttar Pradesh, West Bengal, and Uttarakhand. These states have to source limestone from distant regions such as Chhattisgarh and Madhya Pradesh, which are not in proximity to the states bordering Nepal. As Nepal has enough limestone reserves, exporting cement to India becomes a viable option due to the feasible transportation costs,” said Pashupati Murarka, Director of Argakhanchi Cement Limited. Argakhanchi Cement has been exporting to the Uttar Pradesh city of Gorakhpur, which is just about 100 kilometers from the company’s production plant in Rupandehi.

Large deposits of limestone have already been identified in places like Udayapur, Dhankuta, Sindhuli, Makwanpur, Lalitpur, Dhanding, Syangja, Argakhanchi, Surkhet, Dang, Salyan, Baitadi, and Palpa. The Economic Survey of 2022/23 has estimated a staggering 1.27 billion tons of limestone deposits in Nepal.

A Question of Sustainability
According to economist Bhim Bhurtel, the rules of trade are not the sole factors that can influence cement export to India. “The future of the cement export relies on how India continues to allow the supply,” he said, “India has historically adopted a counteractive approach to the growth of industries in Nepal at a large scale. It imposed up to 40 percent anti-dumping duty on Nepali clothes in the past.” The Indian approach was evident in the country’s imposition of restrictions on the import of refined palm oil in 2020.

However, the immediate Indian need for cement, according to him, is likely to stay because it needs a huge amount of cement for its ambitious infrastructure projects. CRISIL, an India-based analytics company, has forecast a year-on-year growth of cement consumption throughout India at 11 percent. The increased consumption will be fueled by a whopping 51 percent year-on-year rise in the emerging economy’s infrastructure spending.

Nepal has a logistical advantage, in addition to production in terms of its cement trade with India. In that context, Pashupati Murarka sees opportunities for Nepali cement industries in the long run.

Industrialists suggest that even if the demand from the Indian market declines, Nepal can still utilize its cement domestically due to the substantial need for infrastructure development. Nepal’s annual per capita cement consumption stands at 303kg compared to India’s 195kg. Considering the current pace of growth propelled by infrastructure initiatives and housing developments, the domestic demand for cement in Nepal is projected to reach 25-30 million tons by 2025, they say, claiming the boom in cement production is sustainable for Nepal.

The Production Problem
Although cement export has increased, production of cement has not increased significantly over the years. Between the fiscal years 2019/20 and 2022/23, the production capacity of Nepali cement industries increased by a mere two million tons while the number of active cement manufacturing industries stood constant at 26, according to the Economic Survey.

The cement industry in Nepal is currently facing a big setback with a sharp decrease in production by as much as 70 percent. This drop can be attributed to a significant decline in market demand, primarily caused by the economic downturn and the sluggish development expenditure of the government. Thapa said the severity of the situation, explaining that the decrease in demand. has directly led to a considerable reduction in production capacity as cement companies are operating at only 25 to 30 percent.

“The production cut became necessary following a substantial decline in cement sales,» he said, adding that the potential consequences of this prolonged situation, and warned that if the current trends persist, more than a dozen cement industries might be forced to shut down within a year. “This situation needs swift interventions and strategic measures to stabilize the cement industry and stimulate demand in the market,” he said.

Another problem with cement production is that Nepali industries still rely on coal as a major source of energy for the production of cement and clinker. According to producers, subsidized electricity coupled with the shift in production technologies can reduce the cost of producing cement in Nepal.

Recently, the Hetauda Cement Industry has suspended production due to its inability to procure coal in a timely manner, owing to financial constraints. The company’s plant consumes 3,600 metric tons of coal per month. Basanta Raj Pandey, General Manager of Hetauda Cement, said that the plant had been operational before the onset of the Dashain festival holiday, producing 300,000 sacks of cement during that time. Pandey said the economic crisis was the reason they were unable to procure coal from third countries, leading to the current production halt.

Capacity utilization also stands as an obstacle in bolstering the production of Nepali cement. The Economic Survey of 2022/23 estimated the capacity utilization of Nepali cement industries to be around 70 percent, but that figure has been contested frequently by producers. According to CMAN, the capacity utilization of cement industries in Nepal currently stands only at around 30 percent.

The Usual Suspects
There are opportunities, but heaps of challenges also exist for cement companies in Nepal, say industrialists. “Difficulties in attaining quality certifications from India pose a hurdle for the growth of Nepal’s cement trade,” said Thapa. “The government can and should use its diplomatic channels to facilitate the regulatory issues.”
Brand identity is a primary hurdle for Nepali cement in India. If the cement is branded properly, the buyers can place their trust on Nepali cement, making the export trend more sustainable, he said.

Acquiring the ISI mark for export to India poses significant challenges. Industrialists say the quality of Nepali cement is better than that of Indian cement, but obtaining the mark remains an obstacle. They ask the government to proactively engage diplomatic channels to address this issue.

The government had announced cash subsidies and discounts on electricity bill for cement exporting industries in the last fiscal year’s budget. Up to 8 percent cash subsidy on cement exports in addition to a discount of 2 to 15 percent on electricity bills is a lucrative incentive for a growing industry. But, the incentives have not gone beyond the papers, say cement producers. “The cement exporting industries have not received incentives as committed by the government. It should be timely for the trend to thrive,” said Thapa.

Another hurdle of domestic industry is that the Nepal Electricity Authority (NEA) provides electricity to industries at a high rate. “If NEA provides electricity to cement producers at the same rate as it is being sold to India, the product will be more competitive in the market.”

According to Thapa, the average production cost for the industry is around Rs 700 per sack. “If the cost of production is slashed by Rs 60 per sack, there are no other reasons why other Nepal’s cement cannot find its markets in India. For that, there should be a subsidy in electricity and other royalties and taxes,” he said.

According to Murarka, the Nepali cement industry faces cost challenges, particularly with the high expenses of coal importation from distant sources like Australia and South Africa, as Nepal cannot directly re-import materials via Indian importers from third countries. “Upgrading roads connecting mining areas will help to lower transportation costs for cement industries,” he mentioned, adding, “These measures, if implemented, would alleviate production expenses and enhance the industry’s competitive edge.”

Lessons from Bhutan
Bhutan exported USD 15.6 million worth of cement in 2021, all of which left for India. That’s equivalent to more than Rs 2 billion, which is a large quantity for a small nation like Bhutan. In that same year, cement was the fourth most exported product in Bhutan, accompanied by other natural products such as steel/iron, mineral oil, etc.

Bhutan’s Dungsam Cement Corporation Limited, a state-owned enterprise, entered the Indian market in 2014 and has seen plausible success ever since, particularly in the North-East states, North Bengal, and East Bihar. The company produces over 4,000 tons of cement daily and targets to supply 70-80 percent of its cement to the Indian market. Bhurtel explained how Nepal can get out of the trade deficit loop with the help of its natural resources. “There may be few examples as good as Bhutan in the utilization of natural resources,’ said Bhurtel. “They are producing high-value materials one of which is cement.”

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