Industry observers expect a significant cement production loss as Fauji Cement Company Limited (FCCL) reported an accident that left one of the company's silos damaged on Sunday. No human loss was reported. "The Raw Meal Silo structure which contains about 25000 tons of raw material, collapsed and it has damaged the coal mill area of Line 2," said a company spokesman Brigadier Zafar Iqbal (Retd) in a stock filing on Monday.
Installed in 2011 by a reputed German cement manufacturing firm M/s Polysius, the installation of Clinker Line 2 increased FCCL's production capacity to 3.43 million tons from 1.16 million tons. Also, the accident reflected adversely on the listed firm's shares price which ebbed 2.1 percent to its lower limit of Rs 40.31 on Pakistan Stock Exchange on Monday. "Fauji Cement (FCCL) closed at its lower limit as one of its cement silos collapsed," said analysts at Topline Research.
A preliminary assessment, FCCL spokesman said, suggested that as of now the 72000 tons per day (TPD) facility would remain shut for 5-6 months. "However, dispatches out of stock will continue as cement mills are operating normally," he said. Deeming it "too early" to give an accurate assessment on supply side, the retired army officer said Line 1 of 3700 TPD was already under "planned maintenance" to be operational soon. The company's dispatches, he said, would be at a "lower rate."
Market observers foresee a significant loss of cement production in the months ahead. "This translates into (a) temporary cement production loss of around 1.36 million tons based on six-month assumption, we estimate," said an analyst at Topline Research. Tahir Abbas at Arif Habib Limited Research estimated the impact to be "significant" as production had halted from Line 2.
The analyst said that while repair and maintenance of the Coal Mill could take 4-5 months its replacement could take 9-10 months with an estimated cost of around Rs 700 million. The replacement time of coal mill would be crucial for estimating the production loss as it can be prolonged to 10-12 months, he said. "As far as cement silo is concerned, we believe that erection of silo (4-5 stories building) will be completed in 4-5 months with an estimated cost of Rs 200-300 million," Abbas said.
The analyst believes that while insurance proceeds would be sufficient to cover replacement cost, the asset depreciation cost would be borne by FCCL. This would mean a negative impact of Rs 0.25 on FCCL share ie Rs 350 million at the total expected replacement cost of Rs 700 million for coal mill with 50 percent depreciation charge assumed. "We believe that loss of production will be carried forward to compensate FCCL's production loss," he said.
Citing a sensitivity, the analyst said, for every one-month closure of Line 2 would have an adverse after tax impact of Rs 0.19 per share on the bottom-line. Amid closure of the damaged line, he said, demand was expected to be diverted to other players in the northern region. Topline analysts believe that the accident would erode the company's FY17 cement production by around 42 percent, 1.36 million tons, from its FY17 production estimates of 3.24 million tons.
"This translates into bottom-line impact of around 40 percent, assuming no exports," they said. Consequently, they said, FY17 EPS would now clock-in at Rs 3.1 per share against the previous estimate of Rs 5.2 per share. "We do not expect any impact on FY16 dividend payout as the company has sufficient cash in hand (Rs 4.2 billion as of Mar 2016 accounts,)" they said. However, they said, FY17 dividend payout would likely be curtailed by around 42 percent from Rs 4.5 per share on the back of decline in earnings.
Other cement players like Bestway Cement, Cherat Cement, DG Khan Cement, Fecto Cement, Flying, Kohat Cement and Maple Leaf Cement were the likely key beneficiaries of the development in short-run with increased off-take owing to plant proximity. However, these would have to adjust their quota downwards in FY18 onwards to accommodate FCCL's production loss.