“Short-term headwinds should never overshadow the long-term fundamentals.”
Overview of Industry
The cement industry is inherently cyclical by nature, marked by periods of rapid expansion followed by downturns. Nepal’s cement industry experienced a prolonged phase of growth from 2010 to 2019, driven by a surge in infrastructure projects and large-scale developments. During this period, over 58 cement plants, including around 25 integrated units, commenced operations or were established (DOI Report, 2021). After a prolonged boom, the sector is now grappling with overcapacity, leading to falling prices and squeezed profit margins. In response, many manufacturers have resorted to cost-cutting measures, idling production lines, and halting expansion plans, choosing instead to wait for market conditions to improve.
Despite these challenges, there is an alternative theme to look at i.e, counter-cyclical investments. Like many developing economies, Nepal continues to require large-scale infrastructure development. From roads and highways to hydropower plants and housing, the medium-to-long-term scope is significant. In such an environment, companies that are financially strong and willing to invest during weak demand phases stand to gain substantially once the next upcycle arrives.
Rather than scaling back, financially strong companies can seize the downturn as an opportunity to modernize operations, upgrade technology, and enhance distribution networks.
This article explores why counter-cyclical investments can be a game-changer for Nepal’s cement industry, transforming current overcapacity challenges into long-term opportunities for those ready to invest wisely.
Counter-cyclical investments
Counter-cyclical investments involve expanding capacity, upgrading technology, or reinforcing distribution networks precisely when the industry is at (or near) a downturn. Most firms, reacting to weak margins, hold back on expansions or cut down on capital expenditures. They do so to preserve short-term cash flows, choosing not to “double down” in what seems like an unprofitable cycle.
Ironically, this environment can favor the strategic investor who:
• Enjoys a healthy balance sheet.
• Can invest in upgrading machinery and adopting new technologies to enhance efficiency and competitiveness.
• Has the patience and vision to see through short-term demand uncertainties.
When demand eventually revives, these companies are best positioned to supply more cement, achieve wider market reach, and enjoy pricing advantages over peers that failed to invest.
Let’s take a look at Nepal’s leading cement producer – Shivam Cements.
Shivam Cement is recognized for being largely debt-free and maintaining robust cash reserves, is in a unique position to turn cyclical challenges into long-term opportunities. With competition mired in overcapacity troubles and less capable of financing expansions, Shivam can press its advantage through targeted investments.
Large CAPEX vs. Focused Improvements
Building a new production line or an entirely new plant can indeed be risky in a sluggish market. For example, leveraged companies like Ghorahi Cement have encountered financial difficulties after increasing their capital expenditures during the current downturn. This situation raises a critical question for all manufacturers: why invest in expanding capacity when the existing supply already outpaces demand? That’s why many companies choose more focused investments that still deliver long-term payoffs:
Key opportunities for counter-cyclical spending includes:
A. Waste Heat Recovery (WHR) Systems
“Investing in power-cost reduction now ensures we don’t lose sleep over fuel price swings tomorrow.”
Investing in Waste Head Recovery (WHR) Systems reduces dependence on grid electricity or expensive furnace oil/pet coke. Lowers production costs and carbon footprint in the medium-to-long run. WHRS is considered as high IRR -focused investments in Cement Industry worldwide which also supports on Green Initiatives.
• Case in Point (from India): Companies like UltraTech and others have ramped up WHR capacity to lower their per-unit energy cost, ultimately improving margins even in lean demand periods.
B. Lead Distance Reduction
“Every kilometer saved in transport is an extra rupee earned on every ton of cement.”
Investing in logistics infrastructure such as in-house fleet expansion, setting up rail-sidings (if feasible), or establishing strategically located grinding units/warehouses. Aiming to bring cement closer to major consumption centers reduces transportation costs and enhances distribution efficiency.
• Case in Point (from India): Cement majors systematically reduce lead distances to ~300-360 km, saving significantly on freight costs and pushing up EBITDA/ton over time.
C. Further Capacity and Clinker Optimizations
“Sometimes, a 10% boost in kiln efficiency can translate to big gains when demand finally rebounds.”
While overcapacity is the industry norm in Nepal, selectively installing new technology or upgrading existing lines can improve output consistency, reduce power usage, or lower the heat rate. Even smaller capacity additions that are cost-effective can yield high returns once demand rebounds, especially if others remain capacity-constrained.
D. Regional Diversification and Brand Building
“Market presence established during a downturn often cements loyalty—no pun intended—when the boom arrives.”
Strengthening distribution networks in regions set to undergo major infrastructure developments (e.g., highways or hydropower belts) can help Shivam ride future demand spikes. Building a robust brand in new or under-served rural markets can boost tertiary consumption, especially as rural construction picks up.
Lessons from India’s Cement Industry: A Comparative Lens
Extracts of recent earnings call from Indian manufacturers underscore why many of them keep investing when times are tough:
• Confidence in Infrastructure Pipeline – India’s massive surge in road, metro, and rural housing projects is not dissimilar to Nepal’s long-term needs (think: highways, tourism hubs, cross-border trade routes, large hydropower projects). – Companies that anticipate future demand remain less likely to scale back expansions during short-term demand lulls.
• Financial Preparedness – UltraTech Cement, for instance, consistently highlights its ability to raise funds at competitive rates and maintain a solid balance sheet—key to financing expansions or acquisitions during industry downturns. – Shivam Cements, similarly, sits on healthy cash piles, providing a buffer to fund major projects and technology upgrades.
• Reduction of Fuel and Power Costs – Indian cement players actively build up renewable energy assets, including solar plants and WHR, to reduce volatility from coal/pet coke price fluctuations. – This aligns perfectly with Shivam Cements’ potential strategy—embedding cost savings in production now, so that when industry picks up, profit margins expand quickly.
“A healthy balance sheet isn’t just about numbers—it’s about being able to act when others hesitate.”
Companies with low debt and strong cash reserves are better positioned to secure favorable financing or self-fund expansions, while weaker competitors are forced to stand still.
What can Unleveraged Players do in this “overcapacity” situation?
For many, the label of “overcapacity” in Nepal’s cement industry suggests chronic underutilization and a price war scenario. However, a debt-free flagship like Shivam Cementts can tap into this surplus capacity environment to:
• Acquire or lease underutilized units at attractive prices and modernize them.
• Negotiate favorable terms with machinery suppliers or engineering contractors, who might be short on clients during cyclical downswings.
• Expand marketing presence in markets where others are forced to retreat due to financial constraints.
This capacity “glut” can actually become a strategic advantage for those few players with strong capital discipline—allowing them to scale up or modernize more cheaply and break out ahead when demand does come surging back.
The Tipping Point: Industry cycles eventually turn. Infrastructure projects gain momentum, seasonal and political uncertainties abate, and consumer demand for housing and commercial spaces revives. This is particularly notable in countries like Nepal, where government-led infrastructure gain further impetus from foreign investment or cross-border trade expansion.
Shivam Cements, by choosing to invest in capacity expansions, WHR, lead distance reduction, or advanced automation during the lull, will be fully primed to supply new demand efficiently and at competitive cost structures.
That translates into:
• Higher EBITDA/ton due to reduced energy and freight costs.
• Faster market share gains if peers remain operationally behind.
• Better brand connect if marketing investments were also made in a subdued advertising environment.
It’s a bit like planting seeds in the off-season—others may wait for the perfect weather, while those who plant early reap rewards first when spring arrives.
Conclusion
Counter-cyclical investments may seem audacious—why spend money during a slump? But the history of cyclical industries, from cement to steel to automobiles, is filled with examples of bold companies emerging as market leaders because they chose to act when everyone else stood still.
For Nepal’s cement industry, focusing on targeted tech upgrades (like WHR), logistics efficiencies, and selective capacity enhancements can turn a challenging market into a game-changing opportunity. Overcapacity doesn’t have to be a dead end; for the financially prepared, it can be the launchpad for greater market reach, stronger cost advantages, and a lasting competitive edge.
“If you don’t sow seeds in the off-season, you’ll have nothing to harvest when the sun finally comes out.”
By planting these seeds—careful investments that trim operating costs and expand market presence—cement firms can transform a cyclical downturn into a strategic springboard. And when the inevitable upswing arrives, the rewards can be swift and substantial, proving that sometimes the best time to invest is exactly when everyone else is backing away.
#CementIndustry #NepalEconomy #CounterCyclicalInvesting #ShivamCements #BusinessStrategy #MarketResilience
Disclaimer:
The viewpoints expressed in this article are solely those of the author and do not necessarily reflect the official stance of any organization.