Global Cement recently visited the Sarbottam Cement plant in Nepal to speak with director Diwas Neupanwe about the establishment of the company, the building of the plant and the current market situation.
The reasons for the location of Sarbottam Cement, which is situated close to the India-Nepal border in south west Nepal, can really be traced back several billion years. As older stars in our local region of one of the arms of the Milky Way galaxy went Supernova, they created vast quantities of heavier radioactive elements, including potassium, uranium and thorium. When our solar system formed, these elements were concentrated into our rocky planet. Along with the heat from the accretion of material onto the proto-Earth, and heat generated from descent of dense iron-rich materials into the core, the heat generated from the radioactive decay of those heavier elements has kept our planet’s interior in a fluid state, with cooler plates literally floating on top of denser material below. The tectonic plates are subject to forces from the convecting Mantle below them, and career around the surface of the plant (albeit on the timescale of hundreds of millions of years), banging into each other, and either being forced under and over each other (like the Pacific plate being subducted under the Andes), or crunching into each other and forcing up mountain ranges at their edges. Around 40 - 50m years ago, the Indian plate crunched into the Eurasian plate, and began to force their boundaries upwards, to form the mighty Himalayan mountain chain, which dominates the northern half of Nepal. The Indian plate is still moving northwards as it slowly decelerates, and still causes massive earthquakes as the mountains continue to rise.
At the same time, geological processes - including glaciation, rockfall, landslip, floods and earthquakes - are inexorably wearing the mountains down. Pre-existing south-flowing rivers have managed to keep pace with the uplift, and continue to pass through the Himalayas, transporting vast quantities of meltwater and sediment to the vast Indo-Gangetic Plain. South of the Himalayas proper are the foothills, and to their south is the Terai, a fertile plain that is intensively farmed and is home to much industry and many larger towns and some cities in Nepal.
And, here, finally, we come to Sarbottam Cement, meaning 'the very best', ideally situated in the Terai, with limestone-bearing foothills just to the north, and close to the border with relatively wealthy and vastly more populated India just to the south. It was at the Sarbottam Cement plant that Global Cement Magazine sat down with Diwas Neupane, director of Sarbottam Cement, and asked him to outline the establishment of the company.
Company history
“The Saurabh Group started in 1964 as a trading business,” said Diwas. “It was established by my grandfather, with just a small shop in Bhairahawa that sold clothing and home goods. The business tended to buy from Hong Kong and Singapore and brought goods into Bhairahawa and Kathmandu.”
“Back in those days, the cement industry in Nepal was organised by the government. Himal Cement had been built on the outskirts of Kathmandu and started to operate in 1975, using German equipment. There was a huge demand for cement and, for a while, it was the only cement plant in the country, with the unfulfilled demand being supplied from India. In 1987 Udayapur Cement Industries and Hetauda Cement Industries were also established. A number of traders set up exclusive deals in the 1990s to import cement from India.”
“Jagdamba Cement, part of the Saurabh Group, realised that there was enough demand for additional supplies. It set about building its first manufacturing unit. This was a 300t/day (6000 bags/day) ball mill provided by Promac Engineering Industries of India. It was located close to Bhairahawa in the Lumbini Industrial Corridor. It is close to the railhead and to the border, and is fairly central in the south of Nepal. Clinker was brought by truck and rail from Madhya Pradesh and Rajasthan in India to the border, and then taken by truck the last 15 - 20km to the plant.”
“The early years were very good and more ball mills were added over the years. Jagdamba Cement now has a subsidiary in Birgunj, known as ‘the Gateway of Nepal,’ that is only 100km away from Kathmandu. The subsidiary now also operates several ball mills, as well as a vertical roller mill (VRM).”
Nepal's tubulent recent history
The development of the company was subsequently affected by a long period of turmoil in Nepal’s history, which is worth recalling. In 1997, the Maoist Communist Party of Nepal started an attempt to overthrow the parliamentary monarchy, which developed into a Nepalese civil war. Then, on 1 June 2001, the King’s son Prince Dipendra opened fire at a family party at a royal palace, killing his father and mother, King Birendra and Queen Aishwarya, and seven other family members, before turning the gun on himself. He survived three days in a coma, before he died and the crown passed to his uncle, Gyanendra. The new king was faced with a country in turmoil, with Maoists having taken over large parts of Nepal. His response was to assume full executive powers, but to little avail. Following several years of unrest, in 2007 a seven party coalition took control of the government, abolished the monarchy and declared Nepal a federal republic. A slow process of constitution reform commenced.
However, a devastating earthquake of magnitude 7.8 shook the country on 25 April 2015, killing around 9000 people and flattening many traditionally-built wood and stone houses, as well as historically-significant buildings. It took until September 2015 to draft and adopt the new constitution, although some ethnic groups protested that their rights had been ignored. After violent clashes over the issue, India suspended some exports to Nepal, citing ‘insecurity and violence,’ but the effective blockade inhibited the ingress of medicines, fuels and earthquake relief supplies. In a series of democratic elections, mainly communist and Maoist politicians have won high office, including the prime-ministership and the presidency. Nepal now has strong political and economic ties with China.
“During the time of the Maoist insurgency,” continued Mr Neupane, “it was difficult to operate. Units would come to the factory to make demands for money and there might be kidnappings and bombings. Following the ceasefire agreement in 2008, the Maoist fighters were integrated into the army, and the situation calmed down. It became a better situation in which to do business.”
A new beginning
“In 2009, my uncle, Bishnu Prashad Neupane, Chairman of the Saurabh Group and Managing Director of Sarbottam Cement, led the decision to build a new integrated cement plant near Bhairahawa. This was in a period of relative stability after the civil war, during which the monarchy was overthrown.”
“Permits were obtained from the department of Mines and from the Department of Forestry to establish the plant, and an area in the forest was cleared while the company went through the procurement process. The plan was for limestone to be quarried in Palpa, in the foothills of the Himalayas, and trucked to the plant.”
“We knew that we had to have the lowest possible operating expenditure, since the level of competition was increasing as other plants were built. We accepted that we might have to have a higher level of capital expenditure to gain that lower level of operating expenditure.”
“We looked at all the main European equipment suppliers. At the beginning, it seemed that FLSmidth was not that interested in the relatively small size of our proposed plant - ‘just’ 1200t/day. However, a collapse in demand for larger plants around that time in response to the global financial crisis, meant that the company took part in the selection process. At that time, logistics were problematic as Nepal recovered from the civil war. A price war meant that imported clinker from India was very cheap - below cost price. We didn’t want to over-leverage ourselves, and we needed guarantees for the energy-efficiency of the new plant. FLSmidth provided the most competitive numbers - 705kCal/kg clinker and 60kWh/t clinker - partly offered since we selected a VRM for raw material grinding, a first for Nepal. We elected to go with FLSmidth.”
Construction phase
“Construction began in 2012,” continued Diwas, “As the ground is sound, relatively little piling was required. The contract was on an EP basis, with civil, technical and electrical contractors from India and all machinery from FLSmidth. It went very smoothly, as FLSmidth had surplus capacity for project management at the time due to the global economic downturn. Commercial clinker production started in 2014, albeit with no clinker grinding on site.”
“Sarbottam Cement has a different set of minority shareholders than Jagdamba Cement, although the Saurabh Group is still the majority shareholder of each. The entities are separate companies, and this corporate structure is intended to ensure that correct market pricing is achieved for the 70% of clinker produced by Sarbottam Cement that is sold on to Jagdamba for grinding. The rest goes to other local grinding units.”
Next steps
Diwas expanded, “Once clinker production was established, Sarbottam Cement built the first VRM for clinker in Nepal. Once again, we wanted to opt for the lowest possible operating cost of such a mill and a VRM offers 40% lower costs than a ball mill. A roller press was also considered, but finally we decided on the FLSmidth Atox vertical roller mill, as the software meshes well with the rest of our system, and service and spare parts from FLSmidth are very good.”
“The construction of the mill presented some challenges, since the Indian trade embargo was still in operation at that time, and some components were held up in Kolkata. A major earthquake also hit in April 2015 and, although we were hit by some strong shocks, the plant was undamaged. Hilly areas suffered huge damage, and rebuilding started with many looking for more resilient buildings and upgrades. Demand for steel rebar and cement soared, but cement was hardly available, especially since no clinker was being imported from India at the time. Prices went through the roof. It was galling that we had to sell our clinker to other clinker grinders while we waited for our VRM to be finished. We really lost an opportunity to build additional brand value due to the delay. Finally though, we built the first VRM for cement in Nepal in 2016, a fact that is celebrated on every one of our cement bags.”
Products
“When we started to use the VRM, we were grinding our products up to 4500cm2/g according to Blaine, despite the fact that the Nepalese standards say that the products only have to be ground to a minimum of 2250cm2/g. We manufacture OPC, and PPC - Portland Pozzolana Cement - with 70% clinker, 25% fly ash and 5% gypsum.”
“We use our fineness as a strong marketing tool, but the local contractors are rather conservative when it comes to mix design, and they were initially not able to accommodate the higher water demand of our fine cement. We had to go through a process of concrete contractor education, which helped with the adoption of our VRM-ground cements. At the same time we also started to lower our fineness targets somewhat. We also manufacture Portland Slag Cement but we have found that the markets are somewhat challenged by the product - they are not used to it.”
Second line
Diwas Neupane continued “We had left open the possibility to build a second line at the plant. In 2015 the situation looked favourable and we awarded a second contract for a low-opex line to FLSmidth in 2016. The company was familiar with the site and the first line and we had a lot of goodwill. Our first line had been the company’s first project in Nepal, but our second line was FLSmidth's eighth in the country. At this time, Sarbottam Cement was in a strong financial position. We elected again to produce clinker first, and then to add additional clinker grinding capacity. Originally we had thought to install a matching 1200t/day line, but we finally specified a nominal capacity of 1800t/day by uprating the preheater fan and other measures.”
“The civil and mechanical work on the second line was carried out by Ayoki Fabricon Pvt Ltd of Pune, India, with electrical work undertaken in-house. FLSmidth provided the main equipment, including the Atox mill and MAAG gearbox, the software and the control systems. The company also supplied a Jetflex burner, and a Rotoscale rotary weigh feeder for the coal for the burner, the latter of which we are particularly happy with.”
“Our preheater tower was built in record time. The six stages, ranged over eight stories, including the foundations, were built in just nine months. The other contractors struggled to keep up, although the quick decision-making of our teams helped construction. Our second line came online in 2018.”
“We had a very poor power supply at the time of the commissioning of the second line, with some blackouts lasting 16hr. It was worst for industries in the rural areas such as us, since residential electricity was prioritised. Such was the irregularity of our supply that we had to invest in diesel generator sets to keep the plant running. The situation has somewhat improved, but in the meantime we invested in a 5MW coal-fired steam turbine captive power plant, which can power both kilns.”
“The installation of more hydro-power installations in the country has since helped. Much of the new hydro-power is ‘run-of-river,’ where there is no dam. However, this means that in a dry season, the electricity available may be only 30% of that available in the wet season. We have been promised that by 2026 there will be no industrial load-shedding, even in the dry season. Our coal-fired power station is not being used at the moment, since the economics are not currently conducive.”
“In 2015 - 2016, cement demand had spiked, and investors flocked into both the cement and steel sectors. They saw that established companies were making good earnings, but they miscalculated that demand would stay so high - it had been twice as high as before the earthquake for cement and three times as high for steel rebar. At the same time as our second line started, another company opened a 6000t/day plant, which saturated the market and led to the start of a price war. Unfortunately, demand dropped, and it left an oversupply situation.”
“However, with general elections that year came a three-tier elected government consisting of local, state and federal systems, which led to a rebound in demand. The government invested in sewers, the water supply, roads, bridges and other concrete-intensive infrastructure. We experienced strong demand in 2015 - 2020, with demand in 2019 being particularly high.”
And then came Covid-19
“The Covid-19 pandemic was a tough time for everyone in Nepal, as industries closed and we had a severe lockdown, almost a permanent curfew. Many technical workers at the plant had originally come from India, and they went home as soon as they could, although other workers lived entirely at the factory. Production halted and there were no commercial truck movements. Tourism - an important sector in Nepal - collapsed. The second lockdown in the country was not as severe as the first one, and cement demand recovered somewhat. After all, there were many projects that needed to be completed.”
“In 2021 the public was using its savings to buy cement for domestic projects, while the government still had funds available for projects. However, 2022 was a different matter. There was suddenly a banking and liquidity crisis and fears of a recession started to impact the markets. The government had lost tax revenues during the pandemic, and started to delay projects. At the same time, a number of new clinker projects came on-stream, so there was further clinker oversupply. In February 2022, Russia invaded Ukraine. While far away, the conflict has affected Nepal, since steel prices rose and led to uncertainty in construction project pricing.”
“Demand is now down to 60 - 70% of what it was, pre-Covid-19. The fact is, we have around 46,500t/day of clinker production capacity in the country (equal to 15.4Mt/year on a 330-day/year production basis), compared to a demand now of around 25,000t/day (8.3Mt/year). You can see why prices are under pressure.”
“At the same time, the price of our coal - which was from Richards Bay, South Africa, and which came to us via Kolkata, firstly by rail and for the final miles by truck - shot up from US$60/t to US$400/t, although it has fallen back to US$250/t today. We have switched to buying Indian coal - it is much cheaper than coal from South Africa, even though we have to deal with some quality issues, particularly with the delivered coal having a lower calorific value than paid-for.”
“Margins are being continually squeezed, and the socialist government is unlikely to declare a mandatory floor price for political reasons. On the other hand, the government could stimulate demand by stipulating the use of concrete in infrastructure, but it does not have much cash currently available to fund the projects.”
“A number of factories may shut down in this situation. Indeed, all of the vertical shaft kilns that previously operated in the country have long-since closed, while some of the 40 - 45 grinding units may also be temporarily shuttered. The integrated factories have economic advantages and economies of scale that they can use. Mergers and acquisitions would also help the market by bringing some more price discipline to the sector. Unfortunately that’s not likely to happen. Many factories are run by the investors themselves, and their business model may not be entirely rational. Running a cement plant can be a matter of pride, and closing it would mean a loss of face.”
Current plant situation
Diwas Neupane went on, “Line 2 has now been de-bottlenecked and can now run at 2400t/day, with a one-day record of 2600t of clinker. The total capacity of the plant is now 3600t/day, with a one-day record of 3800t of clinker. Since 2019, we have been using alternative fuel for precalciner firing, using a double-airlock valve to introduce alternative fuels (AF) up to a 5% thermal substitution rate (TSR). Fuels used include rice husks, non-recyclable plastics and multi-layer plastics (such as noodle wrappers). Burning the plastics at high temperatures in the precalciner safely decomposes them and avoids emissions of toxic gases. The AF is bought from aggregator companies which are funded by NGOs that have contracts with cement companies so that there will be demand for their AF products. We have tried using shredded rubber tyres, but unfortunately the supply is currently limited - there is no widespread collection system at present. However, a lot of local municipalities are supportive of safe handling, collection and disposal of waste materials as AF with Sarbottam Cement.”
“In terms of the future, the company has been working on an initial public offering on the Nepal Stock Exchange, and we are looking at the possibility of moving into other building materials, potentially including ready-mixed concrete. However, we will be careful not to become over-leveraged.”
“I would say that Sarbottam Cement has a reputation in the market for innovation and for quality. The Saurabh Group is a big player, with around 20% of the supply of both cement and steel into Nepal and a great reputation for quality. Our chemical laboratories are equipped with some of the latest equipment. We want to export our cement and clinker to India and, since the Nepalese standards are more stringent than those in India, we are confident of certification. Indian states just over our borders have a population of more than half a billion people - all demanding infrastructure - so there is plenty of opportunity for growth.”
Future prospects
“For us, our priorities are to continue to decrease the cost of production. Good Nepali engineers are easier to come by than in the past. We have taken inspiration from Manchester United’s academy system, and we are nurturing our own crop of home-grown future engineers.”
Diwas Neupane concluded, “We had a new government elected in Nepal in November 2022, and we think that cement demand should increase as a result. The fact is, Nepalis love to build, build, build. We have a young demographic, with a big housing requirement. Many expatriate workers send remittances home from countries like Malaysia, South Korea and the UAE, and a lot of that money is put into the Nepali Dream - of building a home.”
About Diwas Neupane
Diwas Neupane was born and raised in Kathmandu, one of the grandsons of the founder of the Saurabh Group. He studied in Nepal and at the University of Virginia, majoring in finance and mathematics, with minors in economics and philosophy. He has been involved in the family business since 2015.