'Small cement companies will find it difficult to absorb the shock'

At the time which marks the start of peak cement season (November to May), the cement industry recorded a setback – a 1% decline in demand. Usually, the annual demand for cement in the country is around 38 million tonnes.

Industry insiders point to the slowing down of the mega projects, the decrease in individual building constructions (from the rising cost of living) and the lack of real estate companies' new investments and projects. 

Moving forward, there are reasons to project a major setback. 

The Business Standard spoke to Masud Khan, Chief Adviser of the Board of Crown Cement Group Bangladesh - one of the leading cement companies in the country - to have a broader understanding of the industry and its future. 

How do you look at the country's overall cement industry when the demand for cement is dwindling? What kind of obstacles is the industry facing now?

Cement is used by three categories of customers in the country. The first category of customers is, conventionally, the individual home builders in rural areas across the country who make their buildings. 

The second category is real estate companies constructing commercial buildings and flats and selling them to customers. 

The third category of customers is the government mega projects. The estimated highest demand comes from individual home builders with a share of around 40%. The real estate companies and government projects hold a share of around 30%.

When Crown Cement asks to open an LC, the bank will happily do it. When a small player wants to open an LC, the bank will say, sorry, we have no dollar. The supply chain has now become critical, even some big traders find it difficult to open LCs. If you cannot open LC, how will you manufacture cement?

Masud Khan

The demand for cement has contracted around 1% on a year-on-year basis. That is from last November till this November. The demand for cement has gone down in the government's megaproject sector the most as many megaprojects are in the ending phase. 

As there are budget constraints, this is the hardest-hit segment. The individual home builders and real estate segments have suffered a setback marginally.

As the cost of living has increased over the last year, many fixed-income groups are spending on food and other necessities, setting aside building construction for the time being. 

The demand for real estate has come down because the economy has slowed down and as a result, no new investment is taking place. The real estate segment is the least-hit segment because there is a scope for people to buy flats with undisclosed money.  

What issues are hampering the growth of the sector?

The biggest negative impact has been due to foreign exchange. If you look one year back, you will see that the dollar rate was around Tk83 for $1 [USD]. The rate has gone up to Tk120-Tk122. People can not open LC with Tk110-Tk112. 

In most cases, businesspeople have to open LC at Tk122-123. The official rate is now Tk109.75 but they will not open LC with the rate. They are taking Tk10 to Tk12 more informally. Most of the raw materials for cement is being imported. So, it is having a serious impact on the overall sector in terms of cost. 

What kind of challenges the industry might face because big companies are expanding their capacity at a time when demand for cement is shrinking?

In Bangladesh, there are 33 cement companies. The market share of the top 10 cement companies stands at around 80%. If you look at the figures from last year, the big companies saw growth and at the same time, the small companies saw a decline. 

When big companies keep seeing growth, they expand their capacity because otherwise, they will lose their market share. For this reason, the big players in the cement industry are expanding their capacity. 

If the capacity of Crown Cement is being compromised, does that mean we will stay put? We have constructed the sixth unit of the factory, which will produce cement from next month (January 2024). The capacity of the newly built unit is around 8,000 tonnes of cement per day.       

The small companies usually do two things. Firstly, they cannot directly import raw materials so, they buy small quantities of raw materials from local traders. As a result, the cost of raw materials gets higher. 

Secondly, because of the dollar crisis over the last year, the banks are not providing small cement companies the facilities to open LCs. There is a matter of influence in the banks too. 

When Crown Cement asks to open an LC, the bank will happily do it. When a small player wants to open an LC, the bank will say, sorry, we have no dollar.  

The supply chain has now become critical, even some big traders find it difficult to open LCs. If you cannot open LC, how will you manufacture cement?    

How are the small companies in more trouble when it comes to bank loan payments?

Be it a big company or a small company, they need to take bank loans to establish or expand the factory. The cement companies have to sell cement to the retailer on a one-month credit. 

However, in times of crisis like now, the big companies can absorb the shock stemming from the low demand for cement.

But the small companies will find it difficult to absorb the shock. The market is very competitive and many retailers delay the payment. 

Big companies can sell their cement and demand cash. But the small companies cannot strongly demand money. When small companies see that they cannot sell their cement, they even sell their cement on credit. As a result, the amount of credit piles up. 

What are the challenges you think you will have to deal with next year? 

You have to understand that there is a relationship between the cement industry and economic growth. When the economy gets stronger, people have money in their hands and they spend it on construction. 

It all depends on a few factors: number one is economic growth, number two is foreign exchange rate, as in how is the rate going to be in the next few years, and number three is inflation. It will be a challenge to tackle inflation next year. 

We will have to take into consideration these three parameters to understand how the cement growth will ultimately be. We do not know what will be the shape of the foreign exchange rate because the reserve is still under pressure. 

As we import the raw materials for cement, there will be an impact on the price of cement, if inflation remains high and the economy remains slow. 

I do not think we will see an economic revival very soon. There is a post-election issue and there is uncertainty in international trade also.

Based on these issues, I think the next two to three years will be very challenging for the cement industry. It may be that the big companies will survive the crisis because they can sell cement and the banks will finance them. 

Small companies will be vulnerable and are feared to disappear. At the same time, I assess that the big companies will see further growth.