1.1 Introduction
Cement industry is moving towards self-sufficiency in Nepal.The future of cement industry is in prosperous outlook in Nepal.Cement production in Nepal has been growing sharply over the past few years. However, it was only 2033 BS that Nepal started to produce cement form a state funded entity Hetauda Cement Industry followed by Himal Cement Industry in 2039 BS. The industry was still in premature age during Maoist insurgency period 1993-2003 AD. Afterwards, the establishment of cement industries compounded rapidly. Currently we have 50 cement industries (as of 2016 AD) where 14 of them are operating as clinker based and 36 are limestone based according to Mr. Puroshottam Sanghai, President of Nepal Clinker Production Association. According to department of mines and Geology, Nepal has vast limestone reserve over 7000 square kilometers. Government of Nepal has categorized cement industry as industry of national priority. Generally speaking this industry is classified under large scale industry because it needs investment more than 100 million rupees. Before 2003 the prevailing civil war & violence disrupted developmental activities and investment environment. The cement consumption was 1.5 metric ton in average prior to 2000 AD. 80% of total consumption used to be Indian imports. After 2003 AD peace had been restored and there had been significant improvement in investment environment. Infrastructure development & real estate sector was in boom. In span of 13 years 38 cement industries evolved. They have been producing 3.5 million metric ton.
Market of cement is peaking in such a way that current demand is about 4 million metric ton. However due to some constraints like power shortage and fuel shortage the capacity utilization of plant is not to the fullest according to Nepal Cement Manufacturing Association. Upon submission of Initial Environmental Impact and Environmental, cement industry can be registered in Department of Industry fulfilling legal compliance. Bishokarma cement is believed to be first manufacturer of cement as a private company. The company is said to have been leading the market with 10% proportion. With series of major success, this industry has been able to attract foreign direct investment of 1.2 Billion United States Dollar. Chinese counterpart Hongsei has signed a Joint Venture with Shivam Cement of Nepal worth 800 US$ while Nigerian company Dangote has agreed to invest 400 Billon US$ jointly with Reliance cement of Nepal. Cement companies have been reporting that they are supplying their products to small and large projects of national and international repute. Also, quality of Nepalese cement is attracting individual customers significantly.
The companies are optimistic that demand schedule is going to be increased for post-earthquake reconstruction and rehabilitation. Earthquake of April 25 and May 17 caused colossal damage of infrastructures and properties. According to Nepal Cement Manufacturers Association domestic cement industry has an installed production capacity of about 6 million tons annually which is higher than the annual demand of 4 million metric tons. The predicted figures for the country’s cement industry certainly do look bright, with experts estimating annual cement demand to rise to over 5 million metric tons per year for the next few years. There has been impressive 8-10 % growth of industry as a whole in past few years (as of 2015).
It has been observed that in order to market the product, the companies are advertising in national televisions, newspapers and FM radio stations. In addition, they are found to sign contract and sponsor regional and national sports teams and events. Availability of widespread dealers has made cement companies easier to sell product regularly in local, regional and national level. Physical infrastructures development, development of real estate sector, increasing in spending capacity is the vital signals for sustainability of cement industry.
In brief it can be said that cement industry has a successful prospect as it is moving towards self-sufficiency. However recent power outrage is a challenge to utilize plants in full capacity. Some of the existing companies might find it challenging to keep pace with foreign companies that have recently entered in the market with join collaboration.
1.2 Cement Production Process
Cement is an inorganic, non-metallic substance with hydraulic binding properties and is used as a bonding agent in building materials. It is a fine powder, usually gray in color, that consists of a mixture of the hydraulic cement minerals to which one or more forms of calcium sulfate is added. (Greer et al., 1992).
In construction and civil engineering term, cement is used to bind structural members for construction of buildings,pavements, bridges, tunnels, roads and highways. Cement has been categories as the first fundamental constructive material. In the modern society, cement is one of the most reliable and important constructive material. Throughout history, cementing materials have played a vital role. They were used widely in the ancient world. The Egyptians used calcite gypsum as cement. The Greeks and Romans used lime made by heating limestone and added sand to make mortar, with coarser stones for concrete.The Romans found that cement could be made which set under water and this was used for the construction of harbors. The cement was made by adding crushed volcanic ash to lime and was later called ‘pozzolanic’ cement, named after the village of Pozzuoli near Vesuvius in 1845, Isaac Johnson made the first modern Portland cement by firing a mixture of chalk and clay at much higher temperatures, similar to those used today. At these temperatures (1400C-1500C), clinkering occurs and minerals form which are very reactive and more strongly cementations. (Wikipedia, 2016)
Fuel costs are the single largest variable production cost at cement plants. Variable costs are typically about 50% of overall operating costs, so energy is frequently the single largest production cost, besides raw materials. Labor is relatively small at a cement plant. A cement production plant consists of the following three processes.
Raw material process
Clinker burning process
Finish grinding process
China stands alone as world top cement manufacturer with annual production of around 2482 million metric ton. It might have been because china is the most populated country in the world. India is producing far less than China but is second biggest producer with around 300 million metric ton per year. Other countries like USA, Iran, Indonesia, Brazil, Turkey, Russia, and Vietnam accounting for 80 to 60 million metric tons per year respectively. More than 50% of world cement output is produced by China alone.
2.1 Introduction of industry
The industry involve activities like extracting lime stone form reserve, carrying to factory, processing raw material, making cement clinker, making cement dust, getting final cement, packing, storing, selling to distributors. Government of Nepal has classified cement industry as a large scale industry because it requires capital more than 100 million rupees. There is need of several skilled, unskilled and semi-skilled labors and administrative work force to produce market and sell the final commodity. Various distribution channels are used in order to achieve end result. Currently there are 50 cement manufacturing industries in Nepal with 82 product brand lines.
2.2 Firms in Nepal
There has been significant increase in number of cement companies in last 10 years in a healthy growth rate of 8-10% in last few years. According to Nepal Cement Manufacturers Association a total of 50 cement manufacturing companies are operating in Nepal by obtaining Nepal Standard certificate for production. Product lines out of these 50 companies are 87 brands have taken 'Nepal Standard' certificate of which 39 are PPC types, 39 OPC and 9 PSC cements. Association forecasts that product lines or brands will reach more than 100 in upcoming years. Capacity of cement production has reached more than 5 million metric ton. However the current consumption is 3.5 million metric ton where 80% is covered by domestic production. Some Indian companies are also fulfilling the demand. Nepal recorded 1st instance of cement production form Hetauda Cement Industry form Makwanpur, Hetauda in 2033 BS. Afterwards Himal Cement Industry was said to have been established in 2039 BS. In the span of 39 years, 42 cement companies are operating in different parts of Nepal. Some of the key players of the industry are as follows
Key players of cement industry in Nepal are Jagadamba cement,Heutauda cement, Ambe cement, Bishokarmacement, Shivam cement and Argakhanchi cement. Jagadamba is the only company in Nepal which produces Portland Slag Cement and also has 6 different product lines. Jagadamba has dominant market share in Nepal followed by Hetauda cement, Amba cement, Shivam cement and Argakhanchi cement. Despite of cut throat competition basic fundamentals is driving the market i.e ‘cement sells’. There is huge demand of cement in Nepal. The demand and sales cycle fluctuate by quarter to quarter. Numbers of new companies are also emerging. Unpublished reports reveal that around 40,000 people are employed in Nepalese cement industry directly or indirectly form factory workers to dealers to top level executives.
Among the industries Hetauda cement is one of the oldest & trusted cement brands perceived by the people. Meanwhile, Jagadamba and Bishowkama are one of the initiators as private companies to produce cement and they have dominant market share of 12% and 10% respectively. On the other hand, Shivam cement is making stand as one the biggest cement companies in terms of investment. Shivam recently signed a joint venture with Hongsei, one of the biggest conglomerates of China worth US$ 800 million. Similarly Reliance cement of Reliance Group has also been pledged foreign direct investment of US$ 400 million form Nigerian counterpart Dangote. Some of the Indian companies are also operating in Nepal like Jaypee, Maruti, Reliance, Ultratech and Birla. Other key players are Gorahi, Siddhartha, Udayapur, Trishakti, Ambe and Gorkha cement.
2.3 Type of product
Cement is an integral part of construction and hence has utility of one or two times for a
particular individual. It is a bonding material manufactured with fairly uncomplicated manufacturing process. More than 90% raw material of cement is lime stone and balance 10% are also very common additives like gypsum, (plays role of retarder which helps regulate initial setting time of cement) clay, silica etcwhich are used to balance quality requirement of lime stone. Cement is a capital intensive industry which means that in order to produce the product huge capital investment is required and once it has reached its optimum production capacity in order to increase its production new investment have to be made.
In Nepal, manufacturers offer two major types of product lines.
2.3.1 Ordinary Portland Cement (OPC)
Mostly OPC cement is produced is produced, offered and used in Nepal. It might have been because OPCis the most common type of cement in general use around the world. Constitute ingredients are concrete, mortar, stucco and most non-specialty grout. During manufacturing process a fine powder produced by grinding Portland cement clinker (more than 90%), a limited amount of calcium sulfate (which controls the set time) and up to 5% minor constituents. All 42 companies in Nepal offer OPC cement which is widely used for construction of buildings of industrial institutional, residential as well as commercial type. Any cement manufacturer has to obtain a Nepal Standard certificate. OPC is preferred to use in huge apartments, skyscrapers, hydroelectricity dams where external environment is challenging. Leading manufacturing can be taken as Hetauda cement, Jagadamba cement, Bishokarma and Shivam Cement. OPC cement is selling at Rs 620 per sack which weighs 50 Kilogram. This type of cement is highly used in Nepal.
2.3.2 Portland Pozolana Cement (PPC)
PPC cement is manufactured by intergrading Portland Clinker and Pozzolanic material like fly ash and volcanic powder. Since it uses very unique ingredient volcanic ash it has higher resistance to chemical agents present in surrounding atmosphere. Off late many Nepalese companies are also offering PPC cement. PPC cement also has to be recognized by Bureau of Nepal Standards. This particular type of cement is found to be used in RCC works like column, beam, and slab foundation in residential and commercial buildings.It also imparts more durability to the structure .Nowadays almost all cement manufacturers produce PPC sement and it’s selling at Rs 540 per sack weighing 50 Kilogram.
3.1 Performance Analysis
According to Cement Manufacturers Association of Nepal the cement industry of Nepal is growing at 8-10 % in last few years. World cement output was only growing at the rate of 3-4 % in that period. Cement consumption is around 60 Arab of Nepalese Rupees according to NCMA reports. Emerging economies in the world are striving to meet rapid infrastructures and housing sector development. It is said that cement industry in the world is growing as rapidly as oil or steel industry. Development of organized housing and physical infrastructures triggered development of cement industry in Nepal in last 10 years. Consumption of cement has mounted to 3.5 million metric ton per year in Nepal. Domestic companies are capable to cater 90% of the demand. Due to abundant reserve of lime stone and economy in operation due to technological advancement it is been maintained that about 5 million metric ton per year is the production possibility of Nepal. At present key players have plant capacity of around 60 thousand metric tons. Consequently, they are producing 46,000 sacs or 23,000 metric ton a day. Annual sales turnover is observed to be 1 crore 20 lakh sacs.
Development of cement industry facilitated rapidly after 2000s. Prior to 2000 only few companies were operating and huge institutional demand was fulfilled by Indian imports. Nepal is located between 2 of the major economies in the world i.e. China and India. Consequently they are also the first and second largest producers of cement in the world. On the other hand, cement industry is receiving overwhelming corporate sector investment. As being managed by the leading corporate sector like Jagadamba group, Aambe Group, Chaudhary group: competitive workforce has been attracted to cement industry. It is evident that productivity has been increased.
In span of 15 years Nepalese cement industry has increased significantly. In 2000 production of cement was only 1.33 million metric ton per year as economic activities were very limited. There has been slight decrease in cement production in the years 2003 and 2007. Afterwards, cement industry is growing ever since. Number of cement industries has reached 50 currently and they are offering product brand of 87 different types according Nepal Cement Manufacturers Association source close to the matter. Growth rate of cement industry as a whole is 8-10% per annum facilitated by development of real estate sector, increase in construction of physical infrastructures, sound availability of banking and financial institutions. As large scale industries they are bound to pay 20% corporate tax. Due to this reason government has been able to generate revenue significantly. It is also observed that Nepalese cement industries are able to cater 90% of the demand in country. Hence, it is accepted that cement industry is moving towards self-sufficiency in Nepal. Major economies largest producers of cement in the world China and India are also attracted by the growing demand and market. Therefore, they have made foreign direct investment and joint venture with cement industries of Nepal. More than 40,000 workforce are employed by the industry when country has unable to stop overflow in foreign employment purpose. Overwhelming corporate sector investment is a positive vibe for the economy.
In spite of the staggering growth rate of the sector, acute power shortage, strike, labor strike and trade embargo has restricted the capacity utilization of plants to 40%. Meanwhile, Chinese and Indian counterparts are reaching around 90% of the capacity utilization. Economy in operation is a vital thing to bring efficiency in production as told by cement manufacturers.
4.1 SWOT Analysis
4.1.1 Strength
More than 7000 kilometers of vast lime stone reserve is a boon for Nepalese cements industry. Investment form corporate sector is added advantage. Skilled workforce is already availing inside the country. Besides that domestic companies are able to fulfill 90% of demand. Most importantly cement industry is growing at sustainable 8-10% last few years. Strength and weakness are exhibited pertaining to internal environment of business. Major strength of cement industry happens to be the competent work force.
4.1.2 Weakness
There has been increased overview of cost of production due to power shortage and fuel crisis. It is being hard to maintain economy in operation and hence increasing cost of production. Indian counterparts are selling their product between 230 to 350 Indian Rupees Per sack whereas cost of per sack is Rupees 530 to 650. As majority of cost goes in producing clinkers companies are forced to import clinkers form India which increases the cost on production. Similarly, poor capacity utilization of 40% is decreasing production and supply. Housing sector is stagnant due to some tight policies of banking and financial institutions and it is decreasing the demand. Furthermore, they are not able to extent their market in high hills and mountain region.
4.1.3 Opportunities
Cement industry is one of the few industries in Nepal which is moving towards self-sufficiency. Nepal is still an undeveloped country where economic growth very slow. There is a huge opportunity that domestic cement industries will be able to cater demand for physical infrastructure development. With the promulgation of new constitution, developmental activities are believed to be smoothening. Many projects of national and international repute are shaping up like Pokhara regional Airport, Nijgadh International Airport, Kathmandu-Nijgadh fast track, West Seti Hydroelectricity, Hetauda Kathmandu Tunnel, expansion and upgrading of national highway. Furthermore, country is prepared to make reconstruction in amount turnover 620 Billion US$ due to recent April 25 earthquake. 700,000 houses are estimated to be damaged. Majority of amount is going to be spent on reconstruction. This is opportunity for cement industry to pace facilitate reconstruction of houses and physical infrastructures. On the other hand, foreign direct investment worth 1.2 Billion US$ has been approved form Chinese and Nigerian companies to establish a joint venture cement plan in Nepal. The future of cement industry is in prosperous outlook in Nepal.
4.1.4 Threats
Due to massive tragedy of earthquake there has been colossal damage in life, property and economy. Further tragedy has been fueled by unofficial blockade and fuel shortage. World Bank has foretasted a slower rate of economy of Nepal. This unbearable damage is bound to slow down the economic activities and spending capacity of the government. Indian cement industry is 2nd largest in the world growing Indian presence in Nepal means that Nepalese companies have to give up market due to comparative cost advantage. Maruti Cement an Indian brand operating in Nepal is selling at Nepali Rupees 630 against Nepalese counterparts, Nepali Rupees 650 (as of 2015). Similarly, growing Nepalese companies are competing with each other to capture market. Various incentives, prizes, gifts, foreign tours, impressive awareness is increasing value and putting pressure one upon another. Acute shortage of power and low capacity utilization is another major threat to this industry.
4.2 Porters 5 forces model
4.2.1 Bargaining power of customers
There is not much of product differentiation for cement as cement has to be manufactured with standard operating process of input, processing and output. Individual customers do not have bargaining power at all. Most of the cement is selling at same price range. It is often said that cement do not have layers of margin. However, institutional customers, bulk buyers and infrastructure project may receive some incentive.
4.2.2 Bargaining power of suppliers
Cost of input and processing such as wage, coal, fuel, electricity, clinker, automated process is higher and thus it reduces possibility of high margin of profit. Suppliers also don’t have a commanding bargaining power. Cost of handling and transportation is also high in Nepal. Overall increase in cost means customer will substitute the product for another. There are widespread distributors who are there to make product accessible all year round. On the other hand,the companies who import clinker form India also have competitive cost advantage because there is also excess production in India. However, there is dealers’ incentive if they achieve pre-determined mutual objectives.
4.2.3 Threats of new entrance
Number of cement manufacturers is growing in Nepal. Still 20% of demand is fulfilled through Indian imports. Existing companies find it difficult to cope with recent entrance of foreign joint venture companies in terms of product line, networking, branding, quality and distribution channel. Besides that commencement of new industries will affect key players significantly low. However, penetration of new product in the market is more likely to reduce sales of struggling or companies with small market share. New companies are supposed to lower price to penetrate into market.
4.2.4 Threat of new substitute product
No substitute product of cement has been discovered in the world. Cement is an integral part of concrete and construction. With the rise in awareness in earthquake safety infrastructures, consumers will be rather conscious on quality of cement.
4.2.5 Competitive Rivalry
42 cement manufacturing companies and 77 product lines dedicated that there is cut-throat competition in dominating market share among them.Different strategies are used like dust free packaging, bulk discount, gift hampers, tours, incentives, brand ambassadors for advertisements, corporate social responsibility, dealer incentives in order to brand their product.
5.1 Conclusion
Cement industry is growing at a healthy double digit when economy is confined to 4% and further shrinking to 1%. Cement industry in the new sector of industrial sector of Nepal. It has passed only 39 years. The trend of growth and performance of cement industry rapidly increase day by day after 2000 AD .It is found that the production and sales of the cement increased in span of 16 years. Domestic companies are able to capitalize on vast lime stone reserve which abundant in Nepal. They are capable of producing around 5 million metric tons and are fulfilling 90% of the demand.
6.1 Recommendations
There has been cut throat competition between cement manufacturers to dominate the market share. For this reason, they have to prepare right strategies for distribution channel, product positioning & promotion. Cement industries make environment and health vulnerable. As a reason they should direct their effort to take care of environmental protection. Some of the companies are accused of producing low quality. There should not be any compromise on such a sensitive issue like quality. On the other hand, OPC cement whose 90% of the input being limestone is produced more in Nepal. This is exhausting limestone reserve. There should have been shift from OPC to the PPC cement for sustainability in the future. Surprisingly, some of the producers are penalized by government for using forged bills and evading taxes. Ethics and social responsibility of business should be top priority. Lastly, the government should provide special incentive to Nepalese cement brands for international projects and bidding process.
References:
Central Bureau of Stastics (2015).Statistical book.Kathmandu: Department of Printing.
Greer, D., Writz J., &Frow P. (1993).Engineering of Cement. Bristol: UB Publishing
Nepal Cement Manufacturing Association. 2013 Annual Report
htpp://www.wikipedia.com/manufacturing-of-ppc-cement-2016.html
htpp://www.wikipedia.com/top-cement-manufacturers-in-the-world/ind&newsId=345672
'Construction Special', 2016, Naya Patrika Newspaper, December 7, 2016 issue, page E
'Infrastructure', 2016, Kantipur National Daily , July 15, 2016 issue.
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