Bangladesh Cement Industry: Optimistic Despite Challenges

    LightCastle Analytics Wing
    LightCastle Analytics Wing
    Bangladesh Cement Industry

    Bangladesh’s cement industry has experienced some of the fastest growth in recent years: the industry experienced an approximately 11.5% growth rate over the last decade.[1] Backed by the country’s economic development, rapid urbanization, government infrastructure projects, and real estate sector growth, manufacturers are optimistic about the future prospect of the industry. The quick rebound of the sector from the COVID-19 pandemic testifies to their positive outlook and the sector’s resilience. Although the sector has suffered from overcapacity and government levies, companies are continuing to invest. 

    The expectation of future demand leading to overcapacity

    Since the start of domestic production, cement manufacturers have produced more than the national demand. In 2019, the effective capacity of the industry stood at 58 million metric tons while annual demand was 31 million metric tons.[1] With overcapacity and high competition, manufacturers try to sell their products at the lowest possible price. As a result, the profit margin is narrow for most cement companies. Despite such low profitability, these companies continue this trend. 

    At 187 kg, Bangladesh has one of the lowest per capita cement consumption in the world compared to the world average of 563 kg.[1] The supply chain head of a leading cement manufacturing company informed LightCastle that the low consumption of cement in the country as compared to the global average leads manufacturers to believe that there is still massive growth potential for cement in the country. Manufacturers also believe they should produce more so that they can meet this potential demand when it rises up in the future. Such expectations have led to overcapacity in the sector. 

    Bangladesh Cement Industry
    Figure: Per capita Cement Consumption (in kg) 2018/ Source: EBL Securities

    COVID-19 affected market growth

    The COVID-19 pandemic lockdown from March to May hugely affected the cement industry in terms of market growth, supply, and sales. The supply chain head interviewed by LightCastle informed that the annual growth rate of the cement industry was 10 to 12 percent before. But the lockdown has slowed down the growth rate at an estimate of 3 to 6 percent. The fall of the growth rate can be attributed to the following reasons:

    • Unavailability of raw materials: The cement industry of Bangladesh is completely dependent on imports for the supply of clinkers, limestone, and other raw materials. But the government imposed public holidays from late March to May and closed down all ports in the country. As a result, manufacturers were not able to procure their necessary raw materials. Factories were thus not able to operate. Exports were restricted as well.
    • Missed sales during peak season: The situation was made worse as the lockdown coincided with the peak demand season consisting of the months March and April. As factories were required to be closed down, manufacturers were not able to meet the peak demand. 
    • Cessation of government mega-projects: Adding to the problem was the fact that government mega-projects, except the high priority ones like Rooppur Nuclear Power Plant, were stalled. These mega-projects contribute 35 percent of the national cement consumption.[1] Companies, thus missed out on earning revenue from a key source.
    • The slowdown of real estate activities: Loss of income due to business shutdown meant many urban dwellers were unable to pay rent or forfeited flat purchases – the source of income for real estate developers. Moreover, ongoing projects were forced to a halt for two months. The combination of these two meant real estate constructions and investments have come to a slowdown. The real estate downturn translated to less demand for associated sectors including the cement industry.

    According to the interviewee, sales in the cement market collapsed to 30 percent of the pre-COVID level in April. The sales level reached 40 percent and 50 percent of the pre-COVID level in May and June respectively. 

    Beyond the shutdown, COVID-19 can create an impact on demand in the long run. Demand may remain stagnant over the next two to three years before rising to the pre-COVID levels. Sensing this situation, the MI Cement Factory Limited (also known as Crown Cement) has decided not to invest in expansion worth BDT 60 billion.[2] 

    Govt taxation and charges adding to costs

    In FY 2019-20, the government imposed an Advanced Income Tax (AIT) of 5 percent on the import of raw materials by the cement industry. It was later reduced to 3 percent at the beginning of the year. Manufacturers must pay this tax whether they make a profit or not. Moreover, the National Board of Revenue (NBR) charges a fixed import tariff of USD 50 per ton of clinker, the main raw material for cement production. As the charge is fixed, manufacturers need to pay more tariffs when the international market price of clinker drops.[3] 

    The imposition of such tax and tariff puts a burden on an industry already facing low-profit margins. As all raw materials need to be imported, cement manufacturers need to incur the charges for ensuring their operations. In general, the AIT and tariff are untenable and thus need to be rationalized by policymakers. Domestic manufacturers face more cost pressure than multinational manufacturers. Multinational cement manufacturers like LafargeHolcim have sister foreign concerns in neighboring countries that produce clinkers. As a result, these companies do not need to import clinkers unlike domestic ones, and thus do not need to pay taxes.[4] The tax and tariffs, thus have harmed domestic companies the most.

    Rising exports seeing fall by COVID and competition

    Bangladesh exports cement to India, Myanmar, Sri Lanka, Nepal, and the Maldives. The northeastern states like Assam and Tripura represent the biggest market for Bangladeshi cement companies due to the remote location of these states from the manufacturing hubs of India.  Exports have seen double-digit growth over the past few years. Despite the rise, the export volume makes up less than 1 percent of the total production. The Accounts and Finance manager of another leading cement company interviewed by LightCastle informed that annually Bangladeshi companies produce around 65 million bags of cement from which only 400 to 500 thousand bags are exported.

    Bangladesh Cement Industry
    Figure: Bangladesh Portland Cement Exports (in USD millions)/ Source: Export Promotion Bureau

    Exports have seen a fall in FY 2019-20 as ports were closed down during the general holidays, barring trade. Although this decline may be seen as a one-time event, there are other reasons to believe that exports will fall in the long run. Competition from Indian companies due to the granting of transit facilities will threaten the future potential of cement exports to the northeastern states of India. Moreover, Bangladeshi cement exporters also incur high transportation costs which disincentivize exports. 

    V-shaped recovery and continued optimism

    Despite the disruption caused by the shutdown, Bangladesh’s cement industry has been able to recover and continues to be optimistic about the future. Sales recovered due to the resumption of government mega-projects and real estate activities. There has also been an increase in construction in rural areas as a result of increased remittance inflow and the return of expatriates with their savings. All of these have led the cement industry to achieve a V-shaped recovery. 

    Optimism still abounds in the cement industry despite the sector’s overcapacity. Companies are pouring heavy investment into the sector to increase capacity. Bashundhara Group is investing BDT 1,000 crore for the installation of a third cement production unit.[5] Moreover back in July, Bangladesh Chemical Industries Corp (BCIC) and Saudi-Arabia based Engineering Dimension International Investment (EDII) agreed to build a cement plant under the name of Saudi Bangla Integrated Cement Co Ltd.[6] 

    These investments and the swift recovery – all point to the fact that cement manufacturers have faith in continued growth in the construction and infrastructure development of the country in the coming days. 

    Farhan Uddin, Content Writer and Saif Nazrul, Senior Business Consultant at LightCastle Partners, have prepared the write-up. For further clarifications, contact here: [email protected]

    References

    LightCastle Analytics Wing

    LightCastle Analytics Wing is the research division of LightCastle Partners. It is tasked with producing periodic reports on the different sectors of the economy, analyzing trends in markets and making methodical, thorough and intelligent analysis to improve strategy and drive business growth.