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Cement makers demand protection By Suren
Gnanaraj The construction
sector fell two percent in the first three quarters of last year
despite the peace efforts, the Central Bank has noted in its quarterly
GDP report. The Sunday Times FT interviewed two key players in the
industry, Holcim Lanka Chairman Manilal Fernando and the joint Managing
Director of Tokyo Cement Company S.R. Gnanam, about the reasons
that have dampened the industry's long-term prospects. Holcim's Fernando was of the view that the Central Bank generally disclosed a conservative figure, and the actual decline in the construction sector was between 7-8 percent. Though there was peace, the economy was still stagnant, and there was a lot to be done in improving the country's economic fundamentals. He predicted
a very drab year, as in 2002, due to the government's move to slash
capital expenditure in the budget allocation for construction and
infrastructure. He dismissed claims that the recent peace initiative
would cause a boom in the construction sector. "In the north
nobody has a house more than two stories high. That's not construction,
that's house building." Airport Gnanam of Tokyo
Cement said that the Prima factory expansion project in Trincomalee
helped the cement industry to survive last year, and with the re-opening
of the A-9 highway to Jaffna and the launch of the Matara-Colombo
highway, he was optimistic about the increase of construction projects
during the year. The decline in 2002 was mainly due to the government
granting approval to several parties to begin construction, without
the Treasury releasing any funds for the commencement of these projects.
Such medium scale projects were essential for the constant growth
in the industrial sector, Gnanam said. FTA Fernando said that profitability was very low in the industry, due to the competition between the 25 brands of cement existing in the market. "Prices may be rising, but profitability is extremely low." A bag of cement ranged around Rs. 360-380. Sri Lanka's total cement consumption for a year was 2.7 million metric tonnes. Fernando said
that the Indian cement companies were domestically paying only six
percent interest on its borrowings and were additionally entitled
to an export credit facility, unlike the local Sri Lankan industries,
who have not received any sort of protection from the government.
Gnanam said that the FTA with India was tailor-made to suit the
two Indian companies, which are allowed to bring in cement at an
import duty of 6.5 percent in contrast to local companies, which
import cement at an import duty of 10 percent. The government has
promised these two Indian companies that quick action would be taken
to bring the import duty to zero percent in the near future. "Sri Lanka
has proved to be the ideal dumping ground for the excess volumes
of cement manufactured by these two Indian firms, for which they
(Indian cement companies) also receive a duty concession,"
he said, adding that the local companies were not given sufficient
notice and time to prepare themselves to compete with foreign players
in the market. Gnanam reiterated
that since cement was a high capital investment industry and every
country attempted to safeguard these industries, and in fact some
countries have five-year rolling plans, the Sri Lankan government
too must have a similar policy so that local industries are protected.
"After all Sri Lanka has its own raw materials and the infrastructure
in place to produce the required cement quantity," he said.
Anti-competitive practices by rival cement companies were on the
rise, Gnanam said, alleging that Tokyo Cement's plans to set up
a cement grinding plant in Ja-Ela recently was quashed due to large
scale protests roused by its competitors. Critical This is a classic
example of a rudderless ship," he said. Holcim invested in
a coal firing plant in Puttalam, in exchange for furnace oil, a
by-product of petroleum, which Fernando says, has slashed its total
energy costs by 40 percent. When asked as to the outcome of the recommendations made by the industry to the government, Gnanam said that the import duty on raw materials, namely clinker, was reduced to two percent from India, and 2.5 percent from other countries. The reduction
of VAT on the service industry from 20 to 10 percent is in the right
direction but this should be further strengthened by offering this
to the core industries like cement manufacturers, he added. Fernando said
that the industry had lost confidence in the government and despite
several discussions, nothing had come out of them. Though the Industries
Ministry had put forward proposals to help the industry, they were
not approved by the Finance Ministry owing to the possible loss
of revenue. Because of
the prevailing peace in the North, Gnanam said that Tokyo Cement
was adopting a 'wait and see' policy as to whether it should pump
in the $40 million necessary to resuscitate the previously shut
down Kankesanthurai plant in Jaffna. Though Holcim initially expressed
their interest in acquiring this plant, Fernando said that the plant
required a lot of capital, and considering the fact that it could
produce nearly one million tonnes of cement, it would raise problems
of selling the excess amount. Fernando said, "When cement just
flows in from India and is bagged, duty free, with no labour charges,
no proper taxes, how can we compete with these foreign companies?"
If the government continued in this trend Holcim would also have
to be just an importer. Gnanam said
that when operating a bagging plant the value addition was only
5-10 percent whereas in a grinding plant (to make cement with imported
raw materials) the value addition is around 40 percent. In an integrated
plant like Holcim Lanka the value addition is around 85 percent.
Gnanam admitted that the danger today is that the incentives offered
under the FTA will encourage bagging plants thereby protecting a
foreigners' industry, instead of providing protection to companies
like Tokyo Cement, who have developed their own infrastructure in
the Trincomalee jetty. At present
Holcim Lanka is the only local company to have its own mining sites
in Puttalam. However, Tokyo Cement has also been looking in to the
possibility of developing its own raw materials. Gnanam said that
attempts were made to find mining sites 20 kilometres from Puttalam,
but they failed due to the limestone reserves not being viable.
However, he said that a few sites had been identified in Mannar,
and the company was currently awaiting clearance from the Geographical
Survey and Mines Bureau to commence operations. He was upbeat about
the fact that there was a very good source of limestone in Jaffna
and the new technology that is available now is environmentally
friendly, unlike when the Cement Corporation originally set up their
plant in Kankesanturai. Meanwhile,
Tokyo Cement is planning to introduce 'blended cement' within the
next six months, using raw materials such as fly ash (waste from
coal power plants), and slag (waste from steel industries) which
have excellent cement binding properties. Gnanam said, "In
India they use 30-40 percent of these raw materials in their cement,"
adding that it was environmentally friendly. He said that blended
cement is high in quality, but the early strength is slightly lower
than the conventional (ordinary Portland cement) mix, but the final
strength and durability is much greater than the conventional cement. Gnanam said
that the new raw material would significantly reduce manufacturing
costs, especially because these are either waste products or cheaper
material. He also said that Tokyo Cement is to invest in a second
bulk carrier (vessel used to transport clinker) by the end of the
fourth quarter in 2003. Interestingly,
both these companies have established training centres to provide
masons with a quality technical education on the various types of
cement and their application from concreting, plastering, tiling
to other masonry techniques. An examination is held at the end of
the programme, after which the successful participants are awarded
a certificate by the National Apprentice & Industrial Training
Authority. This has not
only brought upon some dignity to the profession, but has also provided
an opportunity for masons to visit the cement manufacturing plants
and witness the various procedures involved in the manufacturing
process. Flat year The industry's long-term decisions will depend purely on the government's policy to promote and protect the country's high investment in the cement industry. Central Bank says trade deficit rose in December 2002 Sri Lankan exports
and imports recorded sharp increases in December, 2002, which was
an improvement largely supported by strong performance of textiles
and garments and petroleum products. Exports earnings
in US dollar terms grew by 27 per cent in December, 2002 compared
to the level recorded in December, 2001. Similarly, expenditure
on imports measured in US dollar terms too increased sharply by
52 per cent in December, 2002 further continuing its upward trend
experienced since July, 2002. However, the increase in export earnings
in December was not sufficient to cover the increase in the import
bill, and, hence, the trade deficit widened to US dollars 132 million
in December, 2002 compared to a deficit of US dollars 21 million
in December, 2001. Despite an
increase in export earnings in December, the overall year saw a
reduction of such earnings by 2.4 per cent, in comparison to 2001.
This was due to the larger decline experienced in the early part
of 2002. Accordingly, as at June 2002, the cumulative decline in
export earnings was at a peak of 17 per cent, but this fell to 8
per cent by the end of September, to 5 per cent as at end November,
and finally to 2.4 per cent by end December, 2002, reflecting the
impact of a positive export growth of 8 per cent and 18 per cent
recorded during the third and fourth quarters, respectively. However,
annual imports increased by 2.2 per cent during 2002. The drop in
annual exports and the increase in imports have caused the trade
deficit in 2002 to increase by 22 per cent to US dollar, 1,406 million,
compared with a deficit of US dollar 1,157 million recorded during
2001. Exports The total export
volume increased by 2.0 per cent, while prices declined by 4.3 per
cent in 2002. Earnings from
textiles and garment exports increased by 21 per cent to US dollars
277 million in December, 2002. This was the combined effect of a
2.4 per cent increase in the unit price and an 18 per cent increase
in the volume. Other industrial exports increased by 56 per cent
reflecting higher exports of machinery, mechanical and electrical
equipment (97 per cent), rubber based products (35 per cent), diamonds
(38 per cent), crustaceans and molluscs and other fish products
(141 per cent), tableware (23 per cent), plastic (33 per cent),
chemical products (5 per cent) and footwear (42 per cent). Earnings
from petroleum products increased by 96 per cent, due to the combined
effect of a 20 per cent increase in the unit price and a 64 per
cent increase in the volume. However, declines in export earnings
were recorded in travel goods (-49 per cent). Earnings from
agricultural products increased by 8 per cent in December, 2002
due to the increase in the export of rubber, coconut and other agricultural
exports. Despite higher prices, earnings from tea, at US dollars
51.6 million, recorded a decline of 1.2 per cent in December, 2002
due to the lower export volume. However, tea production during 2002
recorded an increase of 15 million kgs compared to 2001 due to favourable
weather conditions during the latter half of the year. Earnings
from coconut and rubber recorded substantial increases, while unmanufactured
tobacco, pepper, cinnamon, betel leaves and fruits and vegetables
recorded a moderate growth during the month of December, 2002. Imports The expenditure
on imports, which decreased by 16 per cent and 5 per cent during
the first and second quarters 2002, respectively, turned around
in the second half recording increases of 8.4 per cent and 25.3
per cent during the third quarter and fourth quarters respectively.
Thus cumulative expenditure on imports during 2002 was US dollars
6,105 million, an increases of 2.2 per cent over 2001. The major contributory
factors for the increase of imports was high expenditure on crude
on, non food consumer durables and food imports. The total import
volume recorded an increase of 11.0 per cent, while prices recorded
a decline of 7.9 per cent in 2002. The import of consumer goods increased by 38 per cent in December, 2002. Within this category, food imports recorded an increase of 19 per cent. Imports of non-food consumer goods increased by 59 per cent, mainly due to a substantial increase in the imports of motor cars and cycles, radio receivers and TV sets. Intermediate
goods imports increased by 42 per cent due to higher imports of
crude oil, fertilizer, textiles, other petroleum products, chemicals,
dyes and colouring material, paper and paper products, and diamonds.
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