Gujarat cement prices, which have stabilised in recent months after dipping to a historic low of Rs 80 per bag, may slip again as the demand-supply scenario appears to be delicately balanced at this stage. Cement prices in the western state are currently ruling at around Rs 120-125 per bag.

"Expansion projects by cement companies in Gujarat are being negatively viewed as the relative price increase, witnessed in recent months, is relatively fragile. The demand-supply situation is just delicately balanced, and even relatively small capacity additions may drive down the price," said an institutional source.

The fear of a demand-supply mismatch has come to the fore, as Saurashtra Cements has quietly taken up a Rs 200-crore expansion project, which will raise its cement capacity at its Ranavav plant to 2.32million tonnes. Besides, exports are also low due to the rock bottom international prices for cement.

The cement company has split the project into two modules: First, the capacity expansion at the existing site, and second, to set up captive jetties at Pipavav and Mumbai, and procurement of ships to streamline the transportation process. The first module, which is due for commissioning by mid-2000, will have a debt-equity ratio of 2:1, while the second module will involve a total cost component of Rs 85-90 crore.

"The debt requirements for the first module has already been tied up with the financial institutions, and we hope to commission the project by June/July next year," said a company source. He added that it plans to start work on the project in the next month, and some equipment has already arrived. "We are confident that demand, which has already started picking up in the state, will gain momentum in the coming months. We do not share the pessimism of a supply glut in the near future," saycompany sources.

Cement analysts say that the oversupply situation in Gujarat, which appears to have corrected recently, is there to stay. "For cement prices to remain steady, demand has to grow by at least 15-16 per cent. Capacity expansions at this stage, will, once again disturb the equilibrium," said an analyst.

The pressure on the realisations has prompted Crisil to downgrade Saurashtra Cement's NCD from BB to C. "The debt funded expansion cum modernisation programme has resulted in a significant deterioration in the financial risk profile of the company," Crisil has said.

Analysts said that last year the demand for cement in Gujarat was in the region of 5.74 lakh tonne per month, while the state churned out over 6 lakh tonne a month. "Add to this the inflow of cement from adjoining states, and the cement oversupply works out to approximately 1.5-2 million tonnes yearly, part of which is exported to the Mumbai market," he said.

"Thus to maintain a price stability, it is essential that demand forcement in the state grows by 15-16 per cent and also that no new capacity additions are taken up," the analyst said.

INSIGHT

Prices may stabilise

Cement demand in Gujarat is growing at a double digit rate and it is logical to believe that prices will stabilise at the current rate of Rs 125-130 per bag. Prices touched Rs 84 per bag in October-November due to supply from Rajasthan and major slowdown in exports. It is difficult, however, to speculate on cement prices one year down the line. The Gujarat market is catered by supplies from other states also, while units located in Gujarat supply to Mumbai, to some extent to the South and in near future to Sri-Lanka also. Competition from SE Asia will ensure that the export market for Indian producers will soon be virtually non-existent. The additional capacity, which is at least one year away, will clearly add to the industry's troubles.