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Introduction History The use of cement in Nepal as binding material came into effect in Nepal from the beginning

of early 1950's. As no indigenous cement manufacturing industry existed, early users of cement were dependent on imports from India to meet their needs. Gradually, around 1965, the supply of cement was diversified in the form of foreign aid programme. The cement was started to import in commercial scale only in the early 1970's from China, South Korea, North Korea, Burma, Indonesia, Thailand, Japan, Hong Kong and many other countries.

In 1975, the first cement plant, Himal Cement Company Limited, came into being to provide Nepal's first state owned cement manufacturing facility. Its production capacity initially was 160 tpd and subsequently a new Chinese plant with the production capacity of 200 tpd was added making total capacity of 360 tpd. Then two additional plants, one at Hetauda, Hetauda Cement Industries Limited with the production capacity of 750 tpd and other at Udayapur, Udayapur Cement Industries Limited, with the production capacity of 800 tpd were added to the state cement manufacturing capability. Himal Cement Company was dissolved in 2002 due to environmental cause.

Current scenario Nepal is enriched with large and small deposits of good cement g r a d e l i m e s t o n e . Th e l i m e s t o n e d ep o s i t s o c c u r w i t h i n t h e s e q u e n c e o f t h e L e s s e r H i m a l a y a s e x t e n d i n g f r o m t h e e a s t t o west. Limestone is by far the most important mineral resource in Nepal, followed by magnesite, marble, lead and zinc. So far, this is also the most economically viable mineral resource. A total of about 1,250 million tons of cement grade limestone is estimated to exist in the country and the existence of at least 224 million t o n s h a v e b e e n c o n f i r m e d through drillings and dedicated surveys. Even when only a few

deposits are being exploited for commercial production of cement and allied products, limestone still tops the listof the most exploited mineral resources in Nepal At present, in addition to two public sector cement industries and three private mini integrated cement industries, company registration book of the Department of Industries shows 27 mini, medium and large scale integrated cement industries and 17 mini and medium scale clinker based industries are registered. List of registered cement industries is given in Table 1. Table 1: Cement industries registered in Department of Industries Installed capacity (MT) Name of industry S. No. A. 1. 2. Public sector Himal Cement Company Dissolved Hetauda Industries Ltd. Udayapur Industries Ltd. Cement 247,500 Cement 264,000 511,500 Dissolved 259,875 Clinker MT/PA CementMT/PA

3.

277,200 537,075

Sub - Total (A) B. I. 1. 2. 3. Private Sector

Integrated cement industries Maruti Cement Udhyog 150,000 Triveni Cement Udhyog 9,900 Pancha Ratna Udhyog 15,000 157,500 10,395 15,750

4.

Butwal Pvt. Ltd. National Ltd.

Cement

Mills

30,000

31,500

5. 6. 7. 8. 9. 10.

Cement

Pvt. 60,000

63,000 126,000 31,500 126,000 63,000 94,500

Surya Cement Pvt. Ltd. 120,000 Balaji Cement Udhyog 30,000

Kanak Cement Pvt. Ltd. 120,000 Budhha Cement Pvt. Ltd 60,000 Laxmi Cement Industries Pvt. Ltd. 90,000

11.

Manakamna Cement Pvt. 30,000 Ltd. Buddha Industries Gorkhali Udhyog Pvt. Ltd. Sidhhartha Udhyog Cement 300,000 Cement 75,000 Cement 150,000

31,500

12.

315,000

13.

78,750

14.

157,500

15.

Dynasty Industry Nepal 90,000 Pvt. Ltd. Reliance Company Pvt. 150,000 Ltd. Shivam Cement Pvt. Ltd. 150,000

94,500

16. 17.

157,500 157,500

18. 19. 20.

Kalash Cement Pvt. Ltd. 45,000 Dang Cement Industries Pvt. Ltd. Om Cement Pvt. Ltd. 237,600 39,600

47,250 249,480 41,580

..contd Installed capacity (MT) S. No. Name of industry Clinker MT/PA 21. Shyam Mineral 60,000 Industries Pvt. Ltd. Koshi Cement Udhyog 10,500 Pvt. Ltd. KP Cement Industries 43,000 Pvt. Ltd. Jaybageswori Industries Cement 15,000 CementMT/PA

63,000

22.

11,025

23.

45,150

24.

15,750

25.

Jayakali Cement Udhyog 12,000 Pvt. Ltd. Sagarmatha Cement Pvt. 163,721 Ltd. Shiva Shree Jagadamba 120,000 Cement Mills

12,600

26.

171,907

27.

126,000

Sub Total (B - I) II. 1.

2,376,321

2,495,137

Clinker based cement industries Lumbini Ltd. Cement Pvt. 150,000 157,500

2.

Mittal cement industries Pvt. Ltd. Dynasty Ltd. Cosmos industry

30,000

31,500

3.

Pvt. 30,000

31,500

4.

Cement 90,000 Industries Pvt. Ltd. Pashupati cement Pvt. 132,000 Ltd. Vijaya Cement pvt. Ltd. 90,000 Chitwan cement Udhyog 30,000 pvt. Ltd. Jagadamba Industry Pvt. Ltd. Cement 66,000

94,500

5. 6. 7.

138,600 94,500 31,500

8.

69,300

9.

Narayani Cement udhyog 15,000 Pvt. Ltd. Krishna Cement Co. Pvt. 60,000 Ltd. Brij Cement industries Pvt. Ltd. 60,000

15,750

10.

63,000

11.

63,000

12.

Bishworkarma Pvt. Ltd. Amber Ltd.

Cement 132,000 Pvt. 45,000

138,600

13. 14. 15. 16. 17.

industries

47,250 157,500 63,000 94,500 63,000 1,354,500 4,386,712

Suprim Cement Pvt. Ltd. 150,000 Nepal Ambuja Cement 60,000 udhyog Ambe cement Pvt. Ltd. 90,000 Shree Cement industries 60,000 Pvt. Ltd. 1,290,000 4,177,821

Sub Total (B II) Grand Total (A+B)

Source : Department of Industry Among 27 mini, medium and large scale integrated cement industries in private sector, 12 industries are producing cement. Similarly, out of 17 mini and medium scale clinker based industries, 11 industries are producing cement. The list of industries is shown in table 2.

Table 2: Cement industries under production, installed production capacity and estimated production in 2005/06 Installed capacity Name of industries S. No. Cement (MT/PA)

Installed production Cement (MT/PA)

A. 1. 2.

Public Sector Himal Cement Company 124,740 Hetauda Industries Ltd. Udayapur Industries Ltd. Cement 259,875 Cement 272,200 532,075 Dissolved in 2002 103,950

3.

108,880 212,830

Sub - Total (A) B. I. 1. 2. 3. 4. 5. 6. Private Sector

Integrated Cement industries Maruti Cement Udhyog 157,500 Triveni Cement Pvt. Ltd. 10,395 Pancha Ratna Udhyog Butwal Pvt. Ltd. Cement Mills 15,750 31,500 63,000 4,158 6,300 12,600 12,600 25,200

Balaji Cement Udhyog 31,500 Budhha Ltd. Manakamana Pvt. Ltd. Gorkhali Udhyog Pvt. Ltd. Siddhartha Cement Pvt. 63,000

7.

Cement 31,500 Cement 78,750 Cement157,500

12,600

8. 9.

31,500 63,000

Udhyog 10. Reliance Cement Pvt. Ltd. 157,500 63,000 18,900 68,763 381,621

11. Kalash Cement Pvt. Ltd. 47,250 12. Sagarmatha Cement Pvt. 171,907 Ltd. 954,052

Sub - Total (B - I)

contd Installed S. No. capacity Name of industries Cement (MT/PA) II. 1. Clinker based cement industries Mittal Cement Industry 31,500 Pvt. Ltd. Dynasty Industry Nepal 31,500 Pvt. Ltd. Cosmos Cement 94,500 Industries Pvt. Ltd. Pashupati Cement Pvt.138,600 12,600 Installed production Cement (MT/PA)

2.

12,600

3. 4.

37,800 55,440

Ltd. 5. 6. Vijaya Cement Pvt. Ltd. 94,500 Chitwan Udhyog Pvt. Ltd. Jagadamba Cement 31,500 37,800 12,600

7.

Cement 69,300 Industries Pvt. Ltd. Brij Cement Industries Pvt. Ltd. Bishwokarma Pvt. Ltd. 63,000

27,720

8.

25,200

9.

Cement 138,600

55,440

10.

Nepal Ambuja Cement 63,000 Udhyog

25,200 37,800 340,200 934,651

11. Ambe Cement Pvt. Ltd. 94,500 Sub-Total (B - II) Grand Total (A + B) 850,500 2,336,627

Note: Cement industries under production are reported by dealers of various cement industries. Source: department of industry

(Researched data) Industry Capacity and utilization

In this study of cement industries 9 samples were taken from the central region which has been diversely operating in the various part of the nation.(refer table 1) Basically the factories lies on the semi urban area of that particular region where the public transport facility are not so easily accessible. This is due to the limestone mines in that particular region and also due to the pollution factor that the cement factory creates. Talking about the promoters, most of them are the well known business tycoons of Nepal and has the huge financial background. All of the promoters have their own business apart from the cement industry like noodles, education, electronic, imports, garments, manufacturing etc. Cement industries are the booming industries in Nepal today. The industries have the great potentiality in the market. Its said that the development of the country depends upon the consumption of the cement in the nation. As the data total capacity of the industries is 24,450 TPD and the utilized capacity is 73%. If we see the trend then there is a high demand in the market but the study shows that the increase in the demand also increased the competition. Many new companies have come into the market like Shivam cement, Kepy cement, Ghorahi cementetc and there is a cut throat competition. The increase in the cement factory (integrated) has created an ease in running the Nepalese clinker based industry which has to be imported from India previously. From the data and information given by various interviewee the cement factory has not much of profit in todays context. The reason behind the decrease in the profit is due to higher competition, power cut off, political instability, and cost of transportation etc. while most of the companies are saying that their sales is going down but few companies within that have different answers. They tend to keep their profit in increasing tend by pushing the sales high in the market.

Company

Dev region

capacity

Capacity utilized %

investments

Annual sales Annual (npr) sales (qty)

kepy cement Shivam cements ghorahi cement Bishowa Karma Cement Jagadamba Cement Agni Cement brij cement Ambe cement CG

Central Central Mid western Central

1500 12500 2400 1000

40 100 50* 75

400000000 4000000000 5000000000 450000000

19000000 4500000000

400000 250000

1800000000

3600000

Central Western midwestern central eastern Total

900 3000 1000 1000 1150 24450

80 65 50* 80 50* Avg 73.33 3000000000 4000000000 600000000 990000000 %= 18440000000 Avg-2808333333

2750000000 228000000

5500000 456000

1854000000

3600000

Annex 1

Investments However the demand for the cement is increasing with the growth of the urbanization and development works. Many business people have seen the market opportunities in this industry. Recently there have been huge investments in cement industry by various business persons. In the clinker based industries the investments are usually low. Depending upon the size of production the capital varies. The minimum investment we found was of 40 corers of keepy cement which was of clinker based and depending upon the size the cost increased up to 99 corers Nepalese currency. In the integrated side the investment is much higher than the clinker based. The investment could not be done by the individual and the owner tie up with various banks for the investment. The investments for the integrated company can be up to 300 to 500 corers.

Here the informal sources are not taken into account and the banks are the primary sources for the funding of the business. (refer table 1)

Cash cycles the raw material for the cement industry is clinker and gypsum which is highly imported from India. Recently some company like maruti cement, Shivam cement etc are producing clinker which is cutting off the imports of clinker in the market. Most of the cement industry relies on the imports of the clinker so the raw materials are purchased from India. Being a import the payments has to be made in 100% advance basis when the clinker is imported from India. Some companies which is dealing in Nepal for the clinker has the benefit of having the clinker in credit too. Usually the credit is up to 75% and 25% payment is to be made by cash. On the other hand, if we see the sales side, the company here is selling the product in credit. Some company sells their product even in 100% credit and some have the benefit of selling the product 25%on cash and remaining on the credit. This shows that the cash flow in the cement industry is low because they have to pay cash and sell their product in credit. the stock average of the raw material is for 23 days which has the average value of Rs 11,58,33,333 in the market. The use of raw material is on daily basis and the stock lasts for 30 days so the re-ordering period on average is about 30days for raw material. Whereas the finished goods have to be dispatched as quickly as possible so the stock average for the finished goods is less which happens to be 10-11 days and the value Rs 4,60,60,000. Since the cement could not be stored for longer period the stock must be dispatched as quickly as possible in the market. The price of the raw material and the finished product vary because the raw material has to be bought at larger quantity and over the time the raw material are transformed into cement as per quantity needed. The value of the finished goods is less compared to the raw material because the data provided is of a lot basis. refer to table 2 and 3

Company

pay suppliers cash% credit% 50

cr (days) advance% 100 0 21

period sell product cash 3 50 credit 97 50 advance

cr period (days)

kepy cement Shivam cements ghorahi cement Bishowa Karma Cement Jagadamba Cement Agni Cement brij cement Ambe cement CG Total avg Annex 2 25 30 75 70 100 50

30 21

100

25

75

30

100

45

90 365 100

25 30

75 70 100

45 180 45

476 119

396 58.5

Company kepy cement Shivam cements

stock avg raw material no of days value

stock avg finished goods no of days value 7 30000000 1 150000000

ghorahi cement Bishowa Karma Cement Jagadamba Cement Agni Cement brij cement Ambe cement CG Total avg 155 23.75 497500000 52 237800000 46060000 20 30 15 30 60 150000000 110000000 200000000 37500000 2 40 1 200000 100000 7500000 1 50000000

115833333.3 10.2

Internal operation of the companies the cement factory in Nepal is highly affected by the political instability. Various strike, bandas and load shedding are the major factors which affects the cement companies. The average factory operating days for the cement factory is 258 days in a year. The factory is closed in public holidays and for maintenance. Under the 258 days too the workers work under the shift basis. Usually company has 2 shifts of 8 hours a day and some time when companies are in pressure to meet there market demand has 3 shifts too. The majority of the companies said that their sales is in increasing trend recently but t the same time majority said that their inventory position is not increasing as the sales. Refer table 4 Company Sales increasing? yes kepy cement Shivam cements ghorahi cement Bishowa Karma 1 1 1 no 1 inventory position yes 1 1 no 255 300 325 300 factory days operating

Cement Jagadamba Cement 1 Agni Cement brij cement Ambe cement CG 4 3 3 4 258(avg) 1 1 1 1 1 1 1 60 310 300

SWOT analysis for the cement industry Strengths Weaknesses Strong demand in Nepal and India has Load shedding and increasing labor pushed up the margin on cement increased. issues managerial skills and experience. Local production of clinker has been Low levels of relevant technical and Significantly, Nepal has large proven Cement demand is cyclical so a high and probable limestone reserves. equity Limestone is generally of good component (D/E ratio of 70/30on avg and quality (48% calcium oxide content). 80/20 at a minimum) is required in any investment. Yet equity financing is extremely difficult to source in Nepal and most firms rely on retained earnings. A time-consuming regulatory process. Opportunities Threats There is large unmet demand in Nepal: 3 Environmental damage from existing tonnes is the global average annual per (poorly capita consumption; in India it is 0.13 tonnes managed) plants will negatively affect the

per capita and in Nepal just 0.06 tonnes. A growing, urbanizing

perception of future cement projects.

population. Need to negotiate land purchase from

Currently 90% of Nepal houses have dirt many floors room for growth. Cement demand is landowners increases transaction costs. growing at an estimated 10% per annum. Currently Nepal imports 40% of its cement substantial transport costs. to demand. natural growth of real estate. Demand increasing for cement is Uncertain royalty payments under from India (over 600 kms), which includes Government Act. Load shedding and unrest in the country production. tariffs also of NR2,200/mt, equivalent to 25%. Nepals ongoing trade reform and WTO Further hydro projects will add massively breaks supply chains and interrupts Increasing rate of urbanization and Sector supported by high ad-valorem

There is possibility that in near commitments are expected to bring these future import of cement from India down. will decrease and most market is expected to captured by Nepali cement industry.

The primary investment climate constraints for the cement sector in Nepal are upstream. Poor Infrastructure, including roads and power, increase the costs of both plant construction and operation. There are also important regulatory issues which are discussed here including licensing and subnational taxes and payments.

Porters Five Forces Model Threats of New Entrant (Medium) Cement being capital intensive industry creates high entry barriers for new players. On the other hand the existing companies are pushing hard to expand their production capacity to face the rising competition which is also creating barriers for new players. Distribution Network is also weak which deters new entrants.

Mitigates Where scale economies are important, pricing is a key weapon. However, when pricing become predatory regulators tend to step in to protect new entrants. On the other hand government intervention could help in strengthening distribution network. Bargaining Power of Buyers (High) Recently the cement industry is witnessing major change in purchase quantity. Now the share of small purchase i.e. retail purchase have been decreasing whereas bulk purchase has been rising to increase in construction work and urbanization. Mitigates

Driving price far below competitors,causing them to exist,shifting power back to firm.Joint purchase can also help in this case.

Threats of substitute (Moderate) There is no such substitute to cement though some uses timber and mud for building houses but these days people prefer cement. Without cement, construction work is next to impossible as it provides strength to the building. In near future there is more probability that Nepalese cement will capture more market than today and import from India will decrease further. Chances of government increasing the import duty in the near future are very less as Government supports the domestic industries. Due to this there is most likely that Nepalese cement substitute the Indian cement and increase their market share.

Bargaining power of suppliers (Moderate) Bargain power of suppliers is moderate because there exist many players in the market. The buyers can easily switch the product depend upon the price and quality of the cement. With some cement like Hetauda, Udayapur and recently upcoming Sivam cement the supplier can bargain depending upon their quality of cement. In market we can find various similar type of cement so Homogeneity is high. Mitigates Certain strategies, such as just-in-time manufacturing, or even just holding low stocks, increase dependency on suppliers. The operational expenditure of profit and loss account should be presented in a sufficient level of detail to identify major expenditure categories. The bargaining power of suppliers for these services or goods should be addressed in detail, and ideally there should be an analysis of the trend in pricing.

Rivalry among the Firms (High) Large number of players and High degree of product homogeneity creates intense rivalry among the firms. Mitigates The best way to mitigate rivalry among firms could be by taking market share, i.e. competition will intensify until some competitors exit or consolidation takes place.

Consumption of cement The consumption has always been much below the market demand due to low supply situation. The real demand is 10% - 20% higher than the apparent consumption. Moreover, the consumption of cement by foreign aided project is not properly recorded. It is believed that if there is regular supply of cement, donor agencies will also prefer the locally available cement to imported cement. Also 20% - 30% of the total consumption of cement is not recorded in the import statistics due to open border system between Nepal and India. Those are the reasons for the lower apparent consumption of cement. If we consider all above facts, the real demand of cement could be higher by at least by 30%.

Import of cement

The deficit in the supply of cement is met through import. Cement is imported from East Asian countries and India. However, after the decontrol of cement by the then Government

of Nepal, the import has been predominantly from India. Import from other countries is negligible. People find it more beneficial to invest their saving either in gold or in construction of building. Investment in industries and cash deposition in banks are no longer attractive due to recession, conservative industrial policy, non-availability of infrastructures like power and roads and lower rate of interest of the banks. However the trend in the imports is slowing down from India because of the production of the Nepalese clinker and cements. 1.4 Import of cement

The deficit in the supply of cement is met through import. Cement is imported from East Asian countries and India. However, after the decontrol of cement by the then Government of Nepal, the import has been predominantly from India. Import from other countries is negligible. The import statistics of cement from India is presented in the table 7 and table 8.

Table 7: import of cement from India Import of cement from India (MT) Fiscal year 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/01 2001/02 2002/03 2003/04 2004/05 152,680 218,115 281,138 296,995 403,175 468,256 616,409 619,179 1,264,803 1,379,817 1,329,574 931,541 1,085,920

Source:

2005/06 646,207 Import and export data published by Department of Custom, copy in

2008. As import figures from 2000/01 2005/06 were not published these were copied from the records of Department of Custom.

Table 8: Cement imported from India

Quantity Fiscal year 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 Cement (MT)

Amount Price/tonne (Rs. in '000) (3) 5,400 5,500 5,660 5,940 6,360 6,960 trend. It is due to

Quantity (MT) (4 = 2/3) 389,784 470,622 477,790 367,880 389,293 221,773 increase in

Total quantity (MT) (5 = 1 + 4) 1,264,803 1,379,817 1,329,573 931,541 1,085,960 646,207 construction of

(1) (2) 875,019 2,104,835 909,195 2,588,424 851,784 2,704,291 563,661 2,185,209 696,667 2,475,907 424,434 1,543,542 import figure show increasing

residential buildings. People find it more beneficial to invest their saving either in gold or in construction of building. Investment in industries and cash deposition in banks are no longer attractive due to recession, conservative industrial policy, non-availability of infrastructures like power and roads and lower rate of interest of the banks. But importing of cement from India after the fiscal year 2002/03 shows erratic decreasing trend due to conflict between GON and Maoists. People instead of investing money in building construction, invested in gold and other trading activities. 1. Apparent consumption of cement Based on tables 5, 6, 7 and 8 the apparent consumption of cement has been derived and presented in table 9 below.

Table 9: Apparent consumption of cement Domestic production Public Fiscal year 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 Source: * Private Total domestic Import *** Total apparent consumption

sector * sector ** production

(A) (B) (C=A+B) (D) (E=C+D) 247,891 91,822 339,713 152,680 492,393 315,514 91,822 407,336 218,115 625,451 326,839 93,659 420,498 281,138 701,636 309,466 133,860 443,326 296,995 740,321 226,681 341,878 568,559 403,175 971,734 139,080 443,518 582,598 468,256 1,050,854 190,588 434,277 624,865 616,409 1,241,274 205,835 397,317 603,152 619,179 1,222,331 215,098 378,837 593,935 1,264,803 1,858,738 233,000 415,797 648,797 1,379,817 2,028,614 255,171 1,482,190 1,737,361 1,329,574 3,066,935 279,412 1,256,638 1,536,050 931,541 2,467,591 277,736 1,578,854 1,856,590 1,085,960 2,942,550 212,830 1,289,161 1,501,991 646,207 2,148,198 Economic survey, 2005/06 & 2006/07, Economic & export survey, statistics, 2005/06, Department of

MOF. MOF. Custom.

** *** Import

The consumption has always been much below the market demand due to low supply situation. The real demand is 10% - 20% higher than the apparent consumption. Moreover, the consumption of cement by foreign aided project is not properly recorded. It is believed that if there is regular supply of cement, donor agencies will also prefer the locally available cement to imported cement. Indian aided projects brought cement from India which is not recorded in custom points. Also 20% - 30% of the total consumption of cement is not recorded in the import statistics due to open border system between Nepal

and India. Those are the reasons for the lower apparent consumption of cement. If we consider all above facts, the real demand of cement could be higher by at least 30%. The total apparent consumption as depicted in Table 9 shows erratic trend in the cement consumption. In order to remove distortion in consumption trend moving average method is adopted which shows increased in cement consumption from 6% in 1995/96 to 52% and 65% in 2000/01 and 2002/03 respectively and similarly, cement consumption declined to 3% in 1999/2000 and 20% in 2003/04. However, the overall average consumption growth rate comes to 17%. But for the purpose of consumption projection the growth rate of 10% is adopted which is very conservative. This growth rate though lower will not affect the validity of the market study.

Demand situation of cement The table 10 demonstrates that there will be tremendous shortages of cement in the country which is supported by the demand for and supply of cement. As discussed earlier too, the performance of the public and private sector both responsible for cement production is rather erratic and one can say that their performance may further deteriorate because of reasons stated above.

Company

future expansion ye s no 1 1 1

if yes

country demand as per interviewee

shortsell

tentative investment 25000000 40% less 40% less 3000000000 5000000000 100000000 high 40% less shortsell

kepy cement Shivam cements ghorahi cement

Bishowa Karma 1 Cement Jagadamba Cement Agni Cement brij cement Ambe cement CG 1 1 1 1 1

200000000

no idea

40

270000000 3000000000 5000000000 2000000000 2700000 no idea 2260000 129960000 42566666.67

30% less

20%less 20%less

18470000000 2294000000

Demand and supply situation of cement The table 10 demonstrates that there will be tremendous shortages of cement in the country which is supported by the demand for and supply of cement. As discussed earlier too, the performance of the public and private sector both responsible for cement production is rather erratic and one can say that their performance may further deteriorate because of reasons stated above. Table 10: Demand and supply situation of cement In '000 MT

Balance Deficit surplus to be (+) Annual projected Fiscal Public sector Private sector Total existing (-) fulfilled import Deficit by

consumption production production production (E=A- (%)

year * (A) (B) (C) (D=B+C) D) (E/A) 2007/08 3,080 239 1,450 1,689 1,391 45 2008/09 3,388 266 1,611 1,877 1,511 45 20089/10 3,726 266 1,611 1,877 1,849 50 20010/11 4,099 293 1,772 2,065 2,034 50 20011/12 4,509 293 1,772 2,065 2,444 54 20012/13 4,960 293 1,772 2,065 2,895 58 20013/14 5,456 293 1,772 2,065 3,391 62 20014/15 6,001 293 1,772 2,065 3,936 65 20015/16 6,602 319 1,933 2,252 4,350 66 20016/17 8,262 319 1,933 2,252 6,010 73 20017/18 9,088 319 1,933 2,252 6,836 75 20018/19 9,997 319 1,933 2,252 7,745 77 20019/20 10,996 319 1,933 2,252 8,744 79 Note: * Projected by Arun Valley Hydropower Development Company Ltd.

Cement demand situation Demand data are not available for projection. In the absence of data, cement market is projected based on apparent consumption. So, projection given in this proposal is not demand projection but consumption projection. As per consumption projection, the total market for cement in Nepal is 3,080 million tonnes which is higher than the installed capacity of operating cement industries. Even if the cement industries are in the position to increase capacity utilization of existing plants to anywhere near their maximum potential, the shortfall in demand and domestic production is very wide that is 1,391,000 tonnes. It shows that 45% of expected consumption has to be fulfilled by the import mainly form India.

If one looks at the demand of cement in table 10, it is apparent that the market for cement in Nepal is very much one of seller's market. However, it is also interesting to note that customer preferences exist in relation to source of supply. Udayapur cement being the most preferred as far as Nepalese cement is concerned, followed by Hetauda. Outside Kathmandu valley, Indian cement is often first choice, not for reason of quality but because of price and availability. 1.6.2 Cement supply situation The domestic production both from public and private sector, and import from India and other east Asian countries are the sources of supply. The public sector industries produce only 239,000 tonnes which is 45% of total installed capacity of 532,075 tonnes. Himal Cement Company is excluded. It no longer produce cement. At present public sector industries are operating below 50% and they will utilize 50% of their capacity in 2009/10. they will maintain 55% of their capacity during 2010/11 to 2014/15 and 60% during 2015/16 to 2019/20. similar is the case with other private sector integrated and clinker based mini, medium and large scale industries (refer table 4). As per the capacity utilization of existing cement production industries published in economic survey, 2006/07, the production capacity was utilized 62% maximum in 1994/95 and it was 40% in 2005/06. Therefore, examining the complex problems of cement industries in the country, they will maintain only 60% of the capacity in the coming decade. Besides inefficient management and adequate and timely arrangement of technical requirements for production, the power load shedding severely affected the production. The maximum supply of cement from public sector (319,245 tonnes) and private sector (1,082,731 tonnes) will be 1,401,976 tonnes in 2015/16 which is not even sufficient to meet present projected consumption of 3,080,000 tonnes no to talk of fulfilling demand for 2015/16 which will be 6,602,000 tonnes. At this consumption projection point domestic production will fulfill only 34% of the expected consumption rest 66 % has to be satisfied through import. So there is wide scope of market to justify the establishment of proposed Surkhet Cement Industry of 1500 tpd capacity. This study focused market analysis based on the production of two public sector industries, twelve private sector integrated industries

and eleven private sector clinker based industries. It is mentioned earlier that the Department of Industry has registered forty three private industries both integrated and clinker based. For the time being let us assumed that all industries registered under private sector will go into production by the year 2011/12. the total production capacity of cement will be 4,386,712 tonnes. Also it is assumed that they will maintain 55% of their capacity. The expected production will be 2,412,692 tonnes whereas the projected annual consumption will be 4,509,000 tonnes resulting the deficit in the supply of cement will remain 2,096,308 tonnes. Even in this situation, the establishment of cement industry with an annual cement production of 504,000 tonnes (1,500 tpd) is fully justified. 1.7 Cement supply source

In the main, the manufacturers sell the largest proportion of their production via National Trading Limited, who in turn sell on to smaller dealers. They also sell directly to dealers. Ex - works sales to the larger construction companies also occur, although in the majority of cases tenders for the supply of cement for major contracts and to meet expected shortfalls are taken up by Indian suppliers who are able to compete with lower prices against the government fixed selling prices of Nepalese cement. The supply of cement throughout Nepal is based entirely on 50 kg bags of cement packed in jute bags or more often than not, poly bags which can be supplied from Nepalese sources or from India. Typical loads are 200 bags of cement (10 tonnes). Small orders are referred direct to a dealer outlet. 1.8 Future of cement industries

The future for Nepal's cement industry is reported to be very favorable. The market is substantial relative to current production capability and installed production capacity. It is a seller's market. Fourteen industries including two public sector industries have access to limestone resources which are of cement quality and have sufficient reserves to meet increased capacity and demand in the future. The market is growing. At present domestic production is fulfilling 55%. This share will gradually decline as per our projection. The domestic production will fulfill 53% in 2008/09, 35% in 2014/15 and 21% in 2019/20. The

cement industry needs to improve its efficiency by dealing first with the shortcoming of its present manufacturing facilities and then increase the current capacity to the higher level. It is noted that the present 12 integrated cement industries do not have their own mines to supply limestone except Maruti, Triveni and Panch Ratna Cement Udhyog. These industries were give license to commence production of cement on the condition that they will arrange their own mines within five years of operation. None of the industries were fulfilling the conditions. Therefore, to increase the production of cement the GON must extend five years condition and at the same time pay attention to revive sick industries and give incentive to those industries which are still not under operation. If the GON is not serious in talking the problems faced by these industries, the cement supply situation is very bleak and Nepal has to depend heavily on the import. This will create problem of timely availability of cement, hampering construction activities and ultimately adversely affect the development work of the country.

Future of cement industries The future for Nepal's cement industry is reported to be very favorable. The market is substantial relative to current production capability and installed production capacity. It is a seller's market. Fourteen industries including two public sector industries have access to limestone resources which are of cement quality and have sufficient reserves to meet increased capacity and demand in the future. The market is growing. At present domestic production is fulfilling 55%. The domestic production will fulfill more share in future and the competition will decrease the imports of cement from India. For this cement industry needs to improve its efficiency by dealing first with the shortcoming of its present manufacturing facilities and then increase the current capacity to the higher level.