Demand Builds Up For Cement

Indonesia

Economic News

22 Jul 2010
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Expectations for the cement sector have been exceeded by market performance in the first five months of this year. Industry analysts had predicted growth of 5% for 2007. However, Indonesian Cement Association (ASI) data show that domestic demand for cement in that period stood at 12.83m tonnes, a year-on-year increase of 8% from 11.87m tonnes in 2006.



The boom in demand follows a lackluster 2006 when high interest rates led to a slowdown in construction and oil price hikes curtailed consumer purchasing power. This year, as interest rates have declined, and as cheaper credit has become more available, the real estate sector has picked up. Speaking at Intercem, an international conference on cement that took place in Jakarta this month, Kurnadi Gularso, the corporate secretary of state-owned construction firm Adhi Karya, said this trend was set to continue.



Government infrastructure projects - which encompass a vast range of roads, bridges, ports, power stations and transmission networks - had been expected to be the main driving force in cement consumption but private sector interest in investing in these projects has been lower than expected. Last year, the government conceded that progress in attracting foreign investors to its infrastructure projects had been slow but that it was concentrating efforts to sort out the issues holding it back. Kurnadi Gularso said that higher demand would begin to be seen in the next three years as government infrastructure projects currently being put out to tender would reach commencement.



Next year, a minimum 8% increase in demand for cement is expected, Agus Tjahajana, the secretary general of the department of trade and industry told Intercem. Tjahajana warned of a possible cement shortage in 2011 if new investment is not made in the sector in 2007 and 2008. In particular, the government would like to see new plants set up outside Java due to the fact that cement demand in other islands is often not met. Last year, while cement demand in Java fell slightly, it grew at rates as high as 11% in other islands. Tjahajana said the demand in other islands had been boosted by robust commodity prices, which have helped farmers and others involved in primary industries.



Indonesia has a total of nine cement companies. The top three - Semen Gresik Group, Indocement Tunggal Prakarsa and Holcim Indonesia - have a total market share of 90%, according to the Asian Development Bank, but locate 73% of their capacity in Java which accounts for two thirds of their sales.



Despite the lower overall demand in 2006, state-owned Semen Gresik reported a 29.3% year-on-year rise in net profits. Its net profits for 2006 stood at Rp1.3trn ($140m) compared to Rp1trn in 2005.



Last month, Semen Gresik announced plans to begin building an additional plant in 2008, which would have a total annual capacity of 4.4m tonnes. The project is estimated to cost up to $580m. The move is part of the company's plans to increase capacity to 22.9m tonnes by 2013. This represents a 40% increase on its 16m tonnes last year.



Holcim Indonesia's results for 2006 reveal sales were virtually unchanged year-on- year at Rp3trn. "However our net income of Rp176bn or Rp23 per share was a distinct improvement," said Tim Mackay, president director of Holcim Indonesia.



Mackay said that despite the urgent need for rebuilding after earthquake, tsunami and flood damage, the demand in Java had contracted by 2% in 2006, a factor that sparked intense competition and drove prices lower by as much as 16%. The company said that it had managed to counteract the double impact of lower prices and high inflation during the year by intensifying its cost-cutting efforts through outsourcing road transportation, shortening the supply chain, expanding cement shipments by rail and doubling export cargo handling rates. The company cited the GDP growth prospects, large domestic market and its demographic structure, as well as the possibility to produce at low costs, as reasons for finding Indonesia an attractive market. The company remains "carefully optimistic for the year ahead."

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