The current measures taken by the country to control the COVID-19 pandemic are vital to sustain the nation’s economy. In the interest of the country’s economic growth, any suspension or temporary ban placed on the importation of essential and non-essential goods which can be manufactured locally will help immeasurably in currency stabilization, boosting of local employment levels and supporting the local economic recovery. Therefore, adopting ‘the home-industry-first’ approach is critical when re-opening the domestic economy to fast track post -pandemic recovery.
In the construction industry, nearly all the Asian countries are capable of manufacturing cement to meet their demand. Sri Lanka & Maldives are the only countries who are importing substantial percentage of their cement requirement. Whilst Maldives does not have cement manufacturing plants, Sri Lanka has more than adequate manufacturing capacities to cater to 100% of the existing annual cement consumption need of 6 mio tons in a normal year which we estimate to be around 3.7 mio tons in 2020 due to Covid-19 impact with its local production capacity of 7.3 Mn tons per annum.
Furthermore, a new local cement manufacturer is ready to enter the market with 2.3 Mn tons capacity plant being built with a 75 mio USD investment in the South, bringing the total local cement manufacturers capacity up to 9.6 mio tons per annum. The new plant is likely to open in another 3-6 months period in Hambantota port. This would increase the shared value created by the cement producers and ensuring that the local manufactures have enough capacity to cater to the demand leaving no room for a cement shortage in the country for the next few years even with a reasonable positive growth.
The island-wide strong dealer network ensures product availability in all areas as its assets are spread around the country in close proximity to all the markets and therefore both local manufacturers have sufficient capacity to cater to the countrywide demand. However, currently the supply is being impeded due to curfew and inter-district transport restrictions rather than lack of capacity.
Capacity of the local manufacturers can be verified through BOI as most investments are BOI approved or anyone can visit the manufacturing facilities and verify the accuracy of these facts. This information is also provided to the statistical department of the Central Bank of Sri Lanka on quarterly basis for the compilation of national economic indicators.
Both local cement manufacturers are providing a large amount of revenue to the government through various direct and indirect taxes, lease payments, royalties utility payments etc. and the value of investments made to build these factories exceeds adds to over LKR 115 Bn. In comparison, the total asset value of all cement importers is less than LKR 2 Bn.
Commenting on the shared value created in the industry, Nandana Ekanayake, Chairman / CEO of INSEE Cement Sri Lanka, stated, “Being the only fully integrated cement manufacturer, we produce best quality products essential for extensive infrastructure projects. Today, INSEE Cement maintains around 40% share in B2B project segment due to high and consistent quality. We are also capable of customizing products based on project requirements. The contribution made to boost national economy by locally manufacturing quality cement is immense.”
Cement manufacturing in Sri Lanka is a very much capital-intensive business where assets value of all cement manufacturers adds up to LKR 115 Bn sans the new entrant’s investments. Cement is imported in two types to the country, in bag and bulk form. Cement import in bag form does not need to do any investment for assets wherein, for cement imported in bulk form requires to have local packing plants where investment of such plant would be less than LKR 1 Bn.
Meantime, Sri Lanka remits 180 mio USD per annum for cement imports to neighboring countries, causing LKR to depreciate. By suspending imports, it can reduce foreign currency outflow which will reduce the devaluation of LKR. Furthermore, the import ban would carry a positive message to investors looking to invest in Sri Lanka.
Domestic cement markets in Pakistan and India are severely impacted by COVID-19 epidemic, making a serious demand-supply imbalance in their local markets leading into huge excess supply. Such excess supply is then sent to Sri Lanka which appears to be the easiest target for cement dumping due to the country’s close proximity and its limited import restrictions.
The UAE has just announced a 67.5% duty on cement imports to protect its local industry and to ensure that national production facilities are well utilized rather than destroying employment and national income improvements. India does not allow imports from Pakistan. The reason is clear as India attempts to increase its local production and value addition. It is imperative that Sri Lanka also makes this a priority with utmost urgency as it can be easily achieved with the local manufacturers.
It is also important to note that in cement imports the government can charge VAT only for packaging (for 50kg cement bags, value addition would only be for distribution). Whereas local cement manufacturers pay VAT for raw material production, cement grinding and packaging & distribution, increasing the percentage of value addition compared to bag importers. In implementing the import ban, the Government tax revenue will increase as local cement manufacturers volumes increases.
Opportunistic traders in Sri Lanka saw this opportunity and brought cement under various brand names which were then sold within the country. They can export these products at lower prices as Indian government is giving subsidies on cement exports. Those products meet minimum quality requirements, if at all, and Sri Lankan consumers consume products which are more than one month old. More so, no quality assurance mechanisms are available in Sri Lanka for those bag cement importers whereby, consumers in Sri Lanka are unable to evaluate the quality of the product. Currently no large projects consume these bag cement products due to this concern on product quality. Whereas local manufacturers undergo stringent quality assurance process and could supply fresh cement to the market. Yet, Bag cement importers earns enormous profits while putting zero efforts even though local manufactures can provide better quality and value for money.
Corporate Social Responsibility by the local cement producers have also been one of the key areas that has empowered and enriched the livelihoods of communities for over 50 years. These include supporting the educational needs of school children, providing free cement for house construction needs of economically underprivileged families. More Covid-19 relief measures have also been taken to support Sri Lankan healthcare workers, military heroes, and communities in their efforts to fight against the currently prevailing pandemic situation. In addition, academic-based research and development support is provided for the young academics, engineering university students, and Technical Officers to create a knowledge sharing collaborative culture in the industry. However, the importers, both, bag, and bulk cement, have not made an investment nor provided any relief support for the country.
The recent COVID-19 pandemic situation, has caused a significant decrease in cement demand and local cement manufactures are struggling to sell to cover their minimum fixed cost. In a situation where cement manufacturers are struggling for survival, this may lead to a negative impact on the people and their livelihood. Currently local cement manufacturers provide direct and indirect employment for around 25,000 individuals and more than 3,000 local suppliers are dependent on these manufacturers. If Bag cement imports continue as usual many Sri Lankans will lose their jobs while our consumers money is directed to the wages of workers in India and Pakistan.
By producing the total demand for cement within the country, the local cement manufacturers can significantly contribute close to 0.5% to GDP growth. Hence, facilitating an environment to boost local manufacturers across all industries is very vital for developing economies. This will further uplift the national economy and open a dynamic, high growth profitable market, cementing into power a stronger and sustainable Sri Lanka.
To discredit local cement manufacturers, bag cement importers have stated that local government officials have been misled. The national pride embraced by the local cement manufacturers would forbid this. Local cement producers have always put the nation’s interests first, to see Sri Lanka flourish and growing in a global economy.
It must be clearly noted that, in addition to the significant higher value addition to the country, local cement producers are aimed at building Sri Lanka and the futures of Sri Lankans. Even during challenging times, when the local cement industry faced losses, they continued to support local employment.
The Covid-19 pandemic has constituted a more challenging implication on all local industries and livelihood. Going forward the economic situation is expected to worsen by the fall in local demand, combined with tighter financial conditions. It is now, that an approach must be taken to put country’s and local producers needs first. The country needs to produce a faster rebound now, than in a general economic recovery.
Historically the world has seen faster economic recoveries when the local industries prosper, and its economic needs are put first such as United States and UAE. In these countries’ the national development and the interest to thrive the local economy is visible. Sri Lanka too must adopt the country first approach, and build the nation by building the local businesses and caring for its people.