Sri Lanka ensures domestic material supply for future construction

A surge in construction activities is in the process of transforming the island’s economy and skylines. However, it will be more likely to achieve sustained success if it is backed up by a ready supply of quality, low-cost, and domestically produced materials.

Upsets & Comebacks

The construction and building materials sector on the Colombo bourse is expected to provide a 46% average return – or an annualised return of 29% – into the first half of 2018, according to a 2016 First Capital Equities report. Increased middle-income housing affordability, lower interest rates and growing urbanisation were listed as the main drivers behind sector growth. In 2017 this is expected to be supported by incentive packages and tax concessions for property and real-estate investments.

Despite the positive projected outlook, however, the domestic construction materials industry has not been without its ups and downs. In June 2016 LafargeHolcim announced it was selling off its Sri Lankan cement business in Puttalam as part of a larger global divestment strategy. The Swiss building materials manufacturer operated Sri Lanka’s sole fully integrated cement plant, with an annual capacity of about 1.3m tonnes, as well as a cement grinding facility in Galle with an annual capacity of 1m tonnes. It also managed three terminals with packing capacities in three ports with a total import capacity of 1.6m tonnes. It was initially thought the factory would remain shuttered for some time; however, in July 2016 Thailand-based Siam City Cement (SCC) signed on to buy LafargeHolcim’s cement company. At a price of $374m, the deal left SCC holding the largest share of the country’s cement market. The acquisition is expected to provide SCC with opportunities to diversify revenue sources and expand to South Asia.

Adding to the domestic supply, in June 2016, the Ministry of Industry and Commerce said that South Korean conglomerate AFKO Group, which specialises in cement projects, is planning to offer $450m as starting capital to reopen the long-dormant Lanka Cement factory in the Northern Province town of Kankesanthurai. The factory had a production capacity of 115,000 tonnes when it ceased operations in 1991 due to the civil war, leaving the area’s abundant natural resources sitting in the ground. According to investment firm Opportunity Sri Lanka, at an extraction rate of 3500 tonnes per day the area’s 80m tonnes of limestone deposits could provide raw material for cement manufacturing for the next 100 years. The company announced it will supply all the necessary machinery and technology for the project, and also expressed interest in participating in cement production elsewhere in Sri Lanka.

Chemical Compound

The domestic supply situation improved further in August 2016, when German chemical company BASF opened its first production plant in Colombo. The company believes the plant will go a long way towards meeting Sri Lanka’s increasing demand for construction chemicals by producing both standard and custom-made construction chemicals. “[The Asia-Pacific region] is one of the fastest growing markets globally, and South Asia is a strategic growth engine of this market,” Himanshu Kapadia, BASF’s Asia-Pacific vice-president, said at the inauguration of the new plant. “With the new admixture plant in Colombo, we will now be able to rapidly supply our customers with admixtures for all cement and aggregate types, whether their construction projects are located in the capital or in remote areas. ”

Bit By Bit

The strong domestic supply is expected to be strengthened by the country’s bitumen market. Liberalised some time ago, it is widely expected to grow on the back of major infrastructure projects, specifically road construction and renovation. The state-owned Ceylon Petroleum Corporation is reportedly in discussions to construct a bitumen plant near Galle. Key private players in the segment include Bitumix, which produces road construction and industrial use products at its Kalagedihena and Homagama plants, and Lanka IOC, the local subsidiary of the Indian Oil Corporation.