AS good times are rolling in for the cement sector, the accident at the company’s plant on May 29 could not have occurred at a more unfortunate moment.

The Fauji Cement Company Limited (FCCL)’s Raw Meal Silos, which stored 25,000 tons of raw material collapsed and damaged the Coal Mill area of Line 2 forcing the company to shut down its 7,200tpd Line 2 (clinker) till rehabilitation of the site.

The Line 2 was a European plant, inaugurated in late FY2011 during the previous round of expansion of

the country’s cement industry. Due to the accident, the FCCL’s line-2 would be rendered non-operational for approximately 5 to 6 months.

It is a major blow that has turned the company’s plans and projections topsy-turvy. “It is too early to give an accurate assessment (of loss). However, the process of evaluation and cleaning the area is in progress and the members will be updated about the precise timeline of start up as soon as possible” the company told the shareholders soon after the accident. A board meeting was also held subsequently but the investors have not been informed of what came to pass.

FCCL was incorporated in 1992. The plant started commercial operations in 1997 after the commissioning of its 3,150tpd cement plant, which was later enhanced to 10,900tpd. The company was listed on the KSE in 1996.

‘The big question is whether the mill would be repaired or replaced with a new one?’

The company’s sponsors include Fauji Foundation, one of the largest conglomerates, which currently owns approximately 631.49m ordinary shares of the company (47.44pc). Besides consistently improving results, the investment in FCCL’s stock is considered to be for risk-averse investors who prefer a flow of yearly payouts. Market capitalisation of FCCL stands at Rs49bn. For the latest released 3QFY2016, the company posted profit after tax at Rs1.56bn, giving net margin of 29.8pc over the net sales at Rs5.25bn. With gross profit at Rs2.50bn, the gross margin worked out at 48pc.

A senior company official, when reached, declined to confirm or deny if the payout of the company would be jeopardised after the accident. Analysts suggested that the company would be required to incur capital expenditure of Rs1-2bn, which could later be claimed from insurers.

‘The big question is whether the mill would be repaired or replaced with a new one?’ FCCL was only operating line-2 at full capacity due to its higher efficiency while line-1 remained closed. ‘Repair and maintenance of the coal mill can be completed as early as four to five months while replacement could take nine to ten months,’ analysts estimated.

Analyst Faizan Ahmed at JS Global was optimistic. He thought that strong dynamics of the cement industry; intact pricing arrangement and strong financial health of FCCL would enable the company to counter temporary headwinds. There were also rumours that the company was in communion with nearby cement manufacturers over the possible procurement of clinker from them.

Clinker procured from the companies could then be processed at FCCL’s plant and the final product be sold in its name. “We expect earnings to remain under duress in FY2017 due to the non-

operation of Line II however are optimistic that from 4QFY2017, the company will quickly regain lost ground”, said a market watcher. Analysts flag key risks for the company as: Lower than estimated recovery from insurance claims; delay in the reconstruction of the cement silo and coal mill; rise in coal/furnace oil prices and inability to pass on the hike in FED.

Cement sector observers affirmed that the country’s cement industry had entered into a paradigm shift due to: turnaround in macroeconomic fundamentals; mega projects under the umbrella of China Pakistan Economic Corridor (CPEC) and a booming private sector spending, all of which were accelerating local cement demand.

An analyst at Topline Securities said in a June 14 report that the margins of cement companies would continue to expand over the next few years due to the pricing power of cement producers owing to contraction in supply-demand gap. ‘Capacity utilization is likely to reach 96pc in FY2018 from 78pc in FY2015’.

Major capacity additions of 19m tonnes (42pc of current capacity) worth around Rs192bn are in the pipeline during FY2017-FY2020. “Despite these additions, we see no price war risk as additional capacities will easily be absorbed due to buoyant cement demand”, asserts the sector watcher.

In the budget for FY2017, the government has charged the Federal Excise Duty (FED) on cement bags from variable five per cent of retail price to fixed Rs50 per bag while duty on imported coal is reduced from six to five per cent. However due to the pricing power, most of the analysts following the cement sector believed that the industry would be able to pass on net impact of Rs33 per bag to consumers.

Published in Dawn, Business & Finance weekly, June 20th, 2016