MARKET CONCENSUS of CEMENT INDUSTRY in INDONESIA PDF

Preview

Summary

MARKET CONCENSUS of CEMENT INDUSTRY in INDONESIA Compiled by Iwan Budhiarta, B.Sc., M.Sc.Mgmt., M.Eng.Env., CBAP, CPM, CWM, CMT, CIFE (+628116878999) ([email protected]) A. INTRODUCTION Cement is an important element for a nation's economy as this binder is a building material used for inf...

Description

MARKET CONCENSUS of CEMENT INDUSTRY in INDONESIA

Compiled by Iwan Budhiarta, B.Sc., M.Sc.Mgmt., M.Eng.Env., CBAP, CPM, CWM, CMT, CIFE (+628116878999) ([email protected])

A. INTRODUCTION Cement is an important element for a nation's economy as this binder is a building material used for infrastructure and property development. As such, cement sales gives valuable information about savings and investment in a country. Rapidly accelerating domestic cement sales are a sign that the infrastructure as well as the property sectors are booming. The cement industry of Indonesia is a lively one. The country's total installed production capacity expanded from 37.8 million tons in 2010 to over 100 million tons in 2016, while domestic sales surged from 40 million tons to an estimated 60 million tons over the same period.

However, similar to other industries, Indonesia's cement sector has been plagued by Indonesia's economic slowdown that started in 2011. After rapidly rising cement sales in the years 2010-2012, sales started to slow from 2013 onward due to slowing economic growth, weakening purchasing power, low commodity prices, uncertainties surrounding the winners of Indonesia's 2014 legislative and presidential elections, and the higher

benchmark interest rate (raised aggressively in 2013 in an effort to combat high inflation, the wide current account deficit and to support the ailing rupiah amid monetary tightening in the USA). Apart from the higher interest rate, Indonesia's central bank also implemented other measures that cooled the country's property market, such as a higher down payment requirement.

In 2016 this tighter monetary trend reversed. Bank Indonesia cut its key BI rate and raised the loan-to-value ratio for the purchase of a house in a bid to boost the nation's sluggish property sector. This may bring some new life in this sector in the second half of 2016. The residential property market accounts for the majority of cement demand in Indonesia and therefore the nation's cement players are eagerly waiting for a rebound in the property sector.

1. Government-Led Infrastructure & Property Development in Indonesia

The Indonesian government, under the leadership of President Joko Widodo, has given more attention to infrastructure development in order to boost the country's economic growth in a productive way. The picture below shows that funds allocated to infrastructure spending has risen markedly in recent years (the steep rise between 2014 and 2015 was primarily caused by reallocating funds from energy subsidies - after scrapping costly gasoline subsidies in early January 2015 - to infrastructure spending). Obviously, sharply rising funds for infrastructure development across the archipelago will boost cement demand, provided that government spending goes smoothly. According to the latest reports, government spending on infrastructure development started to gain momentum in the second half of 2015 after a slow start in the preceding half.

In late-April 2015, the government also launched the "one million houses program", a government program that seeks to provide adequate housing facilities to low income citizens (more than half of these houses will be built using funds from the government’s

state budget).

Another program that was launched in 2015 by Indonesian President Joko Widodo is the 35,000 MW power plant program through which the government aims to have added a total of 35,000 MW to the nation's existing power capacity by the year 2019. This implies that we should see the construction of many new power plants in the years ahead. Construction of a power plant requires cement.

Moreover, the new 2009 Mining Law of Indonesia, which includes a ban on exports of unprocessed minerals, encourages the development of domestic processing facilities (smelters). This ban came into effect in January 2014. However, due to the lack of domestic smelting capacity the government postponed the full ban until 2017 (some companies are allowed to continue raw commodity exports but have to adhere to strict regulations). Amid the low commodity price environment few miners are interested to invest in costly smelters and therefore we still expect to see robust smelter development in the years ahead, provided the Indonesian government remains committed to its latest policies. Just like power plants, the construction of smelters requires cement.

Funds Allocated to Infrastructure Spending in the Government's State Budget:

2. Stock Performance Semen Indonesia (SMGR), Indocement (INTP) and Holcim Indonesia (SMCB):*

The three companies that dominate Indonesia's cement market are all publiclylisted on the Indonesia Stock Exchange. Indonesia's largest cement producer is state-controlled Semen Indonesia (formerly known as Semen Gresik). This company controls about 43 percent of the domestic sales market. The second-

largest company is Indocement Tunggal Prakarsa with a market share slightly over 30 percent. On third place - with a market share of around 15 percent comes Holcim Indonesia, part of the Swiss-based Holcim Group, one of the largest cement manufacturers worldwide. Smaller players include the Bosowa Corporation and Semen Baturaja.

In recent years, a number of foreign cement companies (particularly from China) have entered the Indonesian market. The influx of new cement producers was reason why some government officials requested to implement limits to foreign investment in Indonesia's cement industry. The country's current cement production capacity already outpaces domestic cement demand and therefore the arrival of new players would only lead to a larger oversupply (particularly considering the big cement companies have plans to expand production capacity in the years ahead) hence causing lower selling prices and limited profitability.

Cement companies in Indonesia were not amused when in early 2015 President Widodo ordered all state-controlled cement producers to lower selling prices of cement by IDR 3,000 per bag in order to boost growth in the infrastructure and property sectors. This also meant that non-listed cement producers had to follow suit in order remain competitive. However, this policy also reduced cement companies' profitability (and listed cement producers were hit by a sell-off in mid-January 2015).

In 2016 there arrived five newcomers in Indonesia's cement industry: (1) Anhui Conch (the local unit of China's cement giant Anhui Conch Cement Company)

with its cement plant in South Kalimantan (having an annual production capacity of 1.55 million tons), (2) Pan Asia with its Semen Bima brand produced in the company's plant in Central Java (with an annual cement production capacity of 2 million tons), (3) Siam Cement - the unit of Thailand's largest cement producer - with its cement plant in Sukabumi (West Java) that has an annual installed production capacity of 1.9 million tons of cement,

(4) Cemindo Gemilang with its plant in Banten (West Java) that has an annual production capacity of 4 million tons, and (5) Jui Shin Indonesia with its plant in Karawang (West Java) that has an annual production capacity of 2 million tons (its brand is called Semen Garuda).

The influx of new cement players - each providing additional cement production capacity to the nation's total capacity - implies that cement prices are under pressure. Several of the new cement companies offer their output at low prices in order to gain market share, despite domestic cement demand remaining relatively sluggish in the first quarter of 2016. The larger established cement companies of Indonesia may feel the need to join this price war in order to defend their market share.

B. PROBLEMS 3. Indonesia Cement Association urges government to restrict producer permits

The Indonesia Cement Association (ASI) has urged the government to restrict the issuance of new licenses as the country's cement industry has been experiencing oversupply. Widodo Santoso, chairman of the ASI, told an industry seminar that there are 13 cement producers in the country with total production capacity of 92Mt/yr but that local demand is only reaching 63 – 65Mt/yr, according to Cogencis.

"The government should restrict investment in cement industry by leading the new cement investment to outside Java where there is no cement industry," said Santoso

said.

Santoso added that 10 cement plants opened in 2015 and that four more are set to start operation in 2016. By 2017 the country’s cement production capacity may surpass 100Mt/yr. He recommended that local producers increase their exports. The ASI estimates that exports will increase to 2Mt/yr in 2016 from 0.5Mt/yr in 2015. Countries

such as Bangladesh, Sri Lanka, Australia, African countries, and West Asian countries are among the destinations.

4. Indonesia faces overcapacity

Holcim Indonesia inaugurated a new cement terminal in Lampung last week. Unfortunately, the spectre of industry overcapacity haunts the country at present and the subsidiary of LafargeHolcim may be late to the party. The Indonesian Cement Association (ASI) has been publicly warning the government of overcapacity since the end of the summer. Its first line of action has been to lobby for restrictions on producer permits to slow the growth of new plants.

ASI figures show that cement sales in September 2016 fell by 3.3% to 5.64Mt compared to August 2016 due to lower residential sector demand. Domestic cement sales rose by 2.95% year-on-year to 44.7Mt in the first nine months of 2016 and the ASI expects sales growth of 3 – 4% for 2016 overall. Yet, the risk of overcapacity is stark. Cement production capacity has nearly doubled from 59.3Mt/yr in 2012 to 92.7Mt/yr in 2016 but demand is projected to only reach 65Mt in 2016, leaving a production oversupply of 27.7Mt. Regional consumption has fallen in Jakarta, Banten and West Java, particularly in the first two. Elsewhere, it has grown, particularly in Central Java, as well as Yogyakarta and East Java to a lesser extent.

Initial Global Cement Directory 2017 research places active production capacity at 66.3Mt/yr suggesting that the ASI may be exaggerating the risk of overcapacity. The

additional c30Mt/yr capacity arises from plants that have been proposed, that are actually under construction or that have been mothballed. However, the ASI data should be more accurate as it represents the local producers. Either way, capacity is growing faster than consumption as can be seen in graph 1.

Graph 1: Cement consumption and production capacity in Indonesia, 2012 – 2016. Source: Indonesian Cement Association, Global Cement Directory 2012 – 2017. Semen Indonesia, the country’s largest producer, reported that its revenue fell very slightly to US$1.4bn in the first nine months of 2016 and its net profit fell by 8.4% to US$215m. It blamed this on a fall in sales volumes and prices due to rising competition. The other large producers have said similar in the past. Indocement, the country’s second largest producer after Semen Indonesia, saw its revenue fall by 11.9% to

US$837m in the first nine months of 2016 and its profit fell by 2.2% to US$231m. LafargeHolcim described the market as affected by overcapacity and ‘a difficult competitive environment.’

Back in May 2016 a feature on the predicament facing the Indonesian cement industry in the Jakarta Post suggested that producers were building new capacity despite the risks of overcapacity to win market share. Cement producers are about to find out

whether this will work or not. Meanwhile it seems unlikely that the measures the ASI is suggesting will do much to alleviate the looming crisis. Still, on the positive side, it’s looking like a good time to buy cement as a consumer.

5. Cement Industry of Indonesia Plagued by Oversupply Woes

Over the past two years the cement oversupply in Indonesia has become increasingly excessive. Indonesia's total annual installed cement production capacity has now risen to 106.3 million tons, while domestic demand may not exceed 65 million tons in 2017. Moreover, production capacity will rise further this year as Semen Indonesia will open two new plants later this year.

Widodo Santoso, Chairman of the Indonesian Cement Association (ASI), therefore urges the government to impose a moratorium on the construction of new cement plants in Indonesia. To protect the interests of existing cement manufacturers, ASI wants to see a significantly rising utilization rate of domestic cement production capacity. Currently, Indonesian cement producers only use an average 70 percent of their total production capacity.

Between 2010 and 2013 domestic cement demand in Indonesia rose steeply amid the nation's property boom (this boom cooled in 2014) and therefore existing domestic players decided to invest heavily in business expansion (boosting their production capacity), while new foreign players entered, lured by the promising perspectives.

This led to surging cement production capacity in Indonesia. However, growth of cement demand stagnated starting from 2013 as the property sector cooled (while overall economic growth of Indonesia was also sliding). ASI estimates that - with cement demand growing an average of 5 percent per year in Indonesia - it will require ten years for cement sales to catch up with the nation's total installed production capacity.

A side-effect of the cement oversupply is that cement prices are declining by about 1 percent per year. For example, in 2015 a bag of cement cost IDR 70,000 (approx. USD $5.25) on Java island. Currently, the price has fallen to IDR 55,000 per bag on the same island.

In the January-July 2017 period Indonesian cement sales rose 4.4 percent year-on-year (y/y) to 34.6 million tons.

Installed Production Capacity Indonesian Cement Producers: Production

Company

Capacity

(in million metric tons)

Semen Indonesia Group

35.5

Indocement Tunggal Prakarsa

24.9

Lafarge Holcim Indonesia

14.5

Semen Merah Putih

7.5

Semen Bosowa

7.0

Semen Anhui Conch

4.5

Semen Baturaja

3.8

Semen Pan Asia

1.9

Siam Cement Group

1.8

Semen Jui Shin

1.5

Semen Serang (Haohan)

1.2

Semen Jakarta

1.0

Semen Hippo

0.6

Semen Kupang

0.3

Semen Puger

0.3

Source:

Kontan

Indonesian Cement Sales 2008-2016: Year

Cement Sales

YoY

Growth 2016

62 million

+1.6%

2015

61 million

+1.8%

2014

60 million

+3.3%

2013

58 million

+5.6%

2012

55 million

+14.6%

2011

48 million

+20.0%

2010

40 million

+4.2%

2009

38.4 million

+1.1%

2008

38 million

-

Source: Indonesian Cement Association (ASI)

6. Cement sales in Indonesia have increased rapidly in recent years, with 2016 set to follow that trend

The cement industry in Indonesia is set to reach new highs in 2016, as the government’s expansive infrastructure agenda drives domestic demand and sales growth across the country. Existing producers are rushing to increase capacity with the launch of new facilities, while a host of new foreign players has also entered the market in recent years, bolstering production capacity and foreign direct investment (FDI) inflows, and helping the country to overtake Vietnam as the leading regional cement producer.

6.1.

Domestic Strength

Domestic cement sales have recorded seven consecutive years of positive growth, with the Indonesian Cement Association (ASI) reporting that sales rose by 1.1% in 2009 to hit 38.4m tonnes, followed by annual increases of 4.2%, 20% and 14.6% in 2010, 2011 and 2012, respectively, to reach 55m tonnes. The growth trajectory has continued despite an economic slowdown, and sales rose by 5.6% in 2013, 3.3% in 2014 and 1.8% in 2015 to reach 61m tonnes, a 60.5% increase over 2008 levels.

The country’s cement industry is dominated by four major producers, including the state-owned Semen Indonesia, the country’s largest producer with a 44% market share, followed by Indocement Tunggal Prakarsa, Holcim Indonesia and Semen Baturaja. Originally known as Semen Gresik, Semen Indonesia was established in 1957 and its production capacity is set to hit 30m tonnes annually by the end of 2016. Indocement was established in 1975 and produces the Tiga Road brand of cement, with total installed design capacity of 18.6m tonnes as of 2014. Holcim holds a market share of around 15% in Indonesia, with a combined cement production capacity of 9.1m tonnes, while Semen Baturaja, which became a state-owned enterprise in 1991, before floating nearly 24% of its shares through an initial public offering in 2013, produced 1.3m tonnes of cement in 2014.

6.2.

Growth Drivers

A number of factors are supporting rising cement sales in Indonesia, most notably the government’s enormous infrastructure agenda, which envisions the construction of 2650 km of roads, 15 new airports, refurbishment of 24 ports, urban and national rail networks, 49 dams, two new oil refining units and over 500,000 new housing units. ASI chairman Widodo Santoso told Indonesia Investments, a subsidiary of Dutch investment firm Van der Schaar Investments, in January 2016 that although government spending on infrastructure was sluggish during the first half of 2015, project development picked up during the second half, and will be further bolstered by a new disbursement system in which projects for the coming fiscal year can be tendered and financed earlier (see Construction overview).

Monetary tightening by the central bank, Bank Indonesia (BI), had also weighed on project development, with relatively high interest rates weakening the private sector’s purchasing power and delaying the start of property and infrastructure projects. However, the bank cut the benchmark rate by 25 basis points in January, February and March 2016, bringing it from 7.5% to 6.75% and signalling a pro-growth approach to

lending. This has lent a more optimistic outlook to forecasts for 2016, with the World Bank projecting that GDP growth will hit 5.3%.

These factors are already spurring sales and export growth. Although sales increased by just 1.8% in 2015, ASI reported in March 2016 that sales rose 3% year-on-year (y-oy) in February to 4.5m tonnes, as infrastructure development accelerated. Growth was driven by a 16.5% sales increase in Sumatra to 2.1m tonnes, a 33% rise in Sulawesi to 841,000 tonnes and a 31% increase in the Moluccas and Papua to 125,000 tonnes. Cement exports reached 110,000 tonnes in the same month, according to ASI. The following month, Trimegah Securities announced that sales rose 4.2% y-o-y during the first quarter of 2016 to 19.3m tonnes, supported by 600,000 tonnes of supply provided by three new operators and rising demand.

6.3.

Capacity Upgrades

To meet rising demand, existing cement players have invested heavily in new production facilities, and in late 2015 and early 2016 four new cement plants constructed by Semen Bosowa, Holcim Indonesia, Semen Merah Putih, Semen Jawa and Semen Conch began operation, brin...