July 2005
Sectoral

Cement SWOT

The cement industry in Nepal seems already crowded with two state-owned and 18 private sector units in the market. But a look through the trends indicates that there is still space for some additional factories in this sector

Nepal's annual demand for cement is estimated at 1,100,000 MT and the production capacity installed in the two state-owned and 18 (it may be even more) privately owned cement factories is above 1,900,000 MT. Still, the domestic industry is fulfilling only about 40 percent of the demand (see tables).

Will there be space for new entrants in this seemingly crowded market? A SWOT analysis of the industry shows there will.

Strengths

Cement consumption depends on the construction projects - infrastructure or housing projects. Though the major construction projects are at present suspended (e.g. Mid-Marshyangdi Hydroelectricity Project and Melamchi Drinking Water Project), the housing construction business has not been slowing down much and the overall outlook for the construction industry is satisfactory as the remittance flow is still not that bad (a major chunk of such money mostly goes into construction of houses) and the infrastructure projects will be started as soon as the country's situation becomes normal.

More importantly, there are a number of small power projects already under construction and in the pipeline ensuring the steady demand for cement. Most important among the hydro-projects to boost the demand will be the 750 MW West Seti Hydroelectricity Project which is nearing financial closure.

Equally important is the fact that the cement industry is not technology-intensive. Therefore, the threat of technology being obsolete is not present in this industry.

Weaknesses

Despite the fact that the number of domestic manufacturers has increased in recent years and they are gradually substituting imports, Indian cement is still occupying a very important market share in Nepal - nearly 60 percent. The Indian brands of cement have good acceptance in the Nepali market. This makes it difficult for the Nepali manufacturers to compete with them.

Moreover, Nepali cement units are dependent for the main raw material - clinker and gypsum - on the same Indian companies that are selling cement in Nepal.

Though the installed capacity is much higher than the existing domestic demand, the demand is seasonal, concentrated in the mid-January to mid-July period when most of the construction activities in the government projects are undertaken due to delay in sanctioning the expenditure in early months of the fiscal year. Also the retail price of the product changes according to the off and peak season.

Another important weakness is that the product is perishable in nature and thus cannot be stored for long periods. Similarly, the other weakness of the industry is caused by the volatile nature of the state-owned cement units. They are frequently closing down and reopening, making it difficult for the other units to predict the market situation.

Thus the capacity utilisation in the Nepali cement industry is very low.

Opportunities

Though there is competition in the market with the imported Indian cement, the Nepal-made cement is still cheaper. Since the Nepali government still has a policy to support the domestic industry through various means, there exist opportunities for the Nepali cement manufacturers to substitute the Indian cement by their product provided they are able to establish and maintain their quality image and price competitiveness. Most importantly, the growth prospects for this industry are satisfactory as the product is used primarily in development constructions and every government that comes to the power in the country has to focus on development construction.

It was only recently that the clinker-based cement units were established. Till then, most of the cement demand in the country was being fulfilled by imports - mainly from India. This has not changed much as about 60 percent of the total supply is still imported. Thus, even with so many manufacturing units, the domestic production is still grossly inadequate to fulfil the demand. This too indicates to the opportunities available to the existing as well as new entrants into this industry.

Threats

In case the government raises the import duty on clinker and gypsum and reduces it on cement, it will be extremely difficult for the Nepali cement manufacturers. Another threat is due to the overdependence of Nepali manufacturers on the Indian companies for clinker - the main raw material.

Most of the private sector cement units in Nepal are dependent on clinker supplied by the large cement manufacturers of India, such as Lafarge, Grasim, L&T, Satna, Jaypee, Diamond etc. They are also the suppliers of cement to Nepali market.

If the Indian clinker suppliers form a cartel and increase the price of the clinker or decide to stop clinker supply so as to remove the Nepali competitors, the Nepali cement companies may have to close down. Equally important is the possibility of excess capacity created by the frequent entry of new manufacturing units into this industry attracted by the present opportunities. Since, the new unit can be based on clinker which can be imported, the entry barrier in the form of huge initial capital investment required for mine-based units will not be there. This may intensify the competition among the domestic manufacturers and can affect the profitability.

Another possible threat to this industry is from the environmentalist lobby, which is quite strong in Nepal. And the cement industry is generally perceived to be a major polluter.

Risk Mitigators

However, all the risks (as mentioned under the weaknesses and threats sections) can be easily mitigated.

Take, for example, the import risk - competition from imports and the threat of the import duty on the clinker and gypsum being increased. A detailed analysis shows that Nepal-made cement will still be competitive even with a marginal increase in the import duty on clinker. Moreover, the government's broad policy framework to support the domestic industry goes in favour of the domestic manufacturers. A further hike in the import duty in the clinker and gypsum is not foreseen in the near future. Even if the import duty on clinker and gypsum is increased, it is most likely to be accompanied by an increase in the cement import duty, thus not changing the relative position of the domestic and imported products.

Similarly, the likelihood of a cartel among the clinker suppliers of India is ruled out because the production of these materials in India is presently adequate and is expected to continue to be so.

Another risk associated with this industry is the environmental risk as this industry has a bad image among environmentalists. But in the case of clinker-based units, the initial phase of the processing activities is cut short. As a result, the primary activity will only be the grinding of clinker. Also the use of water will be limited to the cooling of the plant/machinery. Such water can be easily made to re-circulate within the factory premises.

Though the particulate emission during the grinding process will be significant, dust collectors and bag-filters can be installed in the grinding section and this is being done by the existing units. The finished products are transported in close conveying system and this system is stated to be as per the standards accepted in South Asian countries.

Most importantly, the environmental risks are mitigated by the Initial Environment Impact (IEI) report that the applicant is required to submit to the government while applying for the licence. Thus once the unit is licensed, it will not face adverse actions from the authorities on environmental grounds as long as the factory observes the licensing conditions.

Success Factors

However, despite the opportunities and risk mitigating measures available, the success of existing players and new entrants into the sector will depend on how they can distinguish themselves in branding, distribution network and quality.

Since the Nepali private sector units use the same clinker as is used in Indian cements, their quality is almost the same as that of the Indian competitors. Therefore, the brand strength of the company will play a very deciding role.

Similarly, cement is such an item in which the brand selection is made at the point of sale. Therefore, a strong distribution network, merchandising innovation, creative advertisements and good relations with the retailers play a key role. The companies should also opt for quality certification (e.g. NS Quality Mark) to assure the purchaser.