Dungsam outsources plant operation

Humboldt Wedag India Private Limited will operate the plant for two years at a fee of Nu 52M

DCCL: The Dungsam Cement Corporation Limited (DCCL) has outsourced its plant operation and maintenance to an international firm because of the technical complexities and immediate need to increase the plant’s production capacity.

Humboldt Wedag India Private Limited, an international firm with over 155 years of experience in the cement plant technology, equipment, and services, has already taken over the plant beginning this month.

The board of both DCCL and Druk Holding and Investments (DHI) took this decision following two plant audits conducted by an independent international firm.

DHI’s officiating chief executive officer, (Dr) Damber S Kharka said both the audit findings suggested that the plant could reach 65 percent of the total installed capacity if managed properly. “Given our own technical capability at this point of time, such a huge jump in production is extremely difficult,” he said.

The average age of DCCL employees is 26, which he said is fairly a young group of people with few experienced employees from Penden Cement. “The board discussed with the technical team and was not confident with the confidence level of the team,” he said.

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It was also found that the technology that Penden Cement uses is entirely different from the one DCCL uses.

Although reaching 65 percent with DCCL’s own team was doable, an official explained that within a short time, it was not possible.

After reviewing proposals from two firms, Humboldt Wedag was awarded the operation and maintenance of the plant at a fee of Nu 52M for two years.

“Their (Humboldt Wedag) performance is tied to both carrot and stick,” said (Dr) Damber S Kharka.

This means that Humboldt is required to enhance capacity utilisation to 60 percent within three months, 65 percent in six months and 90 percent in a year.

For every five percent underachievement of capacity, there is a penalty of one percent of the contract fee and the same incentive applies for overachievement.

The firm also assured maximum energy saving while enhancing the capacity. An official from the DHI said the Nu 52M contract fee would be saved from the reduced energy cost.

Humboldt has brought in 18 experts to manage the plant and transfer the knowledge to local employees.

The officiating chief executive also said that enhancing the capacity would bring down average cost of production and make the price of cement competitive in the market.

Currently, DCCL is forced to sell at a lower price even though its average cost is higher.

Market prospects

While the DCCL’s efforts to enhance production is on, it is also essential to study the absorptive capacity of the market.

Hydropower contractors have agreed to procure cement from DCCL and there would be a major demand from the projects, once dam construction gains momentum from October onwards.

An official from the DHI said that the daily requirement of each contractor is being closely monitored to match the demand and to ensure timely supply. “Need based visits are made to the project sites to sort out issues and improve communication,” he said.

Even at the current capacity, 65 percent of cement produced is consumed in the domestic market, of which 64 percent were supplied to hydropower projects.

“The market in hydropower sector is secured,” said (Dr) Damber S Kharka.

Regarding the exports, the DCCL is going as far as North Bengal and Assam in creating a supply chain.

To date, 35 distributors have been appointed in neighboring states of India and sales promotion is underway to enhance brand image and pricing.

Restructuring the finance

The DCCL suffered a loss of Nu 1.1B last year. Officials attribute the loss to the financing cost of Nu 671M and depreciation of Nu 415M. The actual operational loss was Nu 42M.

About half of the high interest bearing INR loan has been serviced through issuance of series of corporate bonds and inter-corporate borrowing at cheaper interest rates. The outstanding INR loan is a little over Rs 1B.

This is why the DCCL has managed to reduce the cash flow burden by Nu 300M annually and saved Nu 85M on interest.

On why this move was not taken earlier, (Dr) Damber S Kharka said that raising capital from local market and financial institutions would add on to the INR shortage the country faced then.

To again service the outstanding INR loan and improve cash flow, DCCL is currently in negotiation with NPPF and Dratshang Lhentshog for private placement of shares.

To float an initial public offering (IPO) of shares, the rules and regulations on IPO mandates a company to make profit for at least two years. This disqualifies DCCL to go for IPO.

Restricting the cost of financing is one of the keys for DCCL to breakeven, which however again depends on the production cost and sales.

For the coal, which accounts for 60 percent of the raw material cost, DCCL made a short-term arrangement with Coal India limited. But in long run, (Dr) Damber said the State Mining Corporation has been allocated two coalmines in Bangtar and Samrang, Samdrupjongkhar.

The company meanwhile, hopes to generate profit by the end of 2016.

History

Between 2009 and until its commercial date of operation in January 2014, the DCCL witnessed 501 days of strikes in neighboring Indian states, delaying the activities.

Accounting for inflation that averaged 7.6 percent during the construction period, cement price alone increased by 44 percent, TMT bars by 29 percent and structured steel by 22 percent. This escalated the cost of project to Nu 10.5B from the initial estimate of Nu 7.1B.

Frequent floods and geological surprises also aggravated the cost.

The project also had to procure additional items and works not included in Bill of Quantity and DPR.

By Tshering Dorji

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