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.
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.
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-o-y) 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.
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, bringing the country’s total installed capacity to 92m tonnes annually. In December 2015 Semen Indonesia announced that it had targeted increasing its production capacity from 28.5m tonnes in 2015 to 30m tonnes in 2016. The company, which owns several plants on the islands of Java, Sumatra and Sulawesi, will continue to increase the number of packing plants in its portfolio to support a rise in production, according to CEO Suparni Somoredjo, and has targeted 5% revenue growth in 2016, with its new Indarung VI plant in West Sumatra and a plant in Rembang, Central Java, expected to come on-line in the third quarter of 2016.
New Players
In addition to ongoing expansion plans for existing industry players, new market entrants are having an impact on production capacity. In April 2016 Indonesia Investments reported that a total of five new players either already had entered or would enter the market in 2016, including Anhui Conch, a local unit of the Chinese cement giant Anhui Conch Cement Company, which established a cement plant with 1.6m tonnes of capacity on South Kalimantan; Pan Asia, which produces the Semen Bima brand from a plant in Central Java with annual production capacity of 2m tonnes; and Siam Cement, a unit of Thailand’s largest cement producer, which operates a cement plant in Sukabumi on West Java, offering installed production capacity of 1.9m tonnes annually. Cemindo Gemilang also operates a plant on West Java, in Banten, offering production capacity of 4m tonnes, as well as Jui Shin Indonesia, from Karawang on West Java, with capacity of 2m tonnes of Semen Garuda brand cement annually.
Oversupply
Rising capacity poses a significant problem for domestic producers, however. Although the ASI reports that domestic cement demand is forecast to rise by more than 5% in 2016, a strong performance after 2015’s 1% expansion, this will still only bring it to 65m tonnes this year, creating serious market oversupply. Indeed, in September 2015 ASI forecast Indonesia will become Asia’s largest cement producer in 2017, outstripping Vietnam, as eight new production plants begin operations. According to a March 2016 report published by DBS Vickers Securities, a Singapore-based brokerage firm, an additional 19.3m tonnes of new installed capacity is expected to come on-line in Indonesia by the end of 2017 ( compared to ASI’s forecast of 24m tonnes), with foreign entrants forecast to comprise 12% of total industry capacity by 2018, up from current levels of 6%.
“Considering the supply-demand imbalance, the industry’s design capacity utilisation rate will continue to drop to 67% in 2017, a similar level to 2004, and put pressure on price and subsequently margins,” wrote the company. According to Sim Putra Bradley, president director of Beton Indotama Surya, a lack of government regulation is reducing the quality of concrete offered, which often causes costly demolition and reconstruction. “Contractors are looking too much at price and forget quality,” Bradley told OBG.
Export Focus
This means export growth will be critical for the country’s cement producers, although cement exports from Indonesia are far outstripped by domestic sales at present — for example, of the 4.5m tonnes of cement sales recorded in February 2016, exports comprised just 2.4%. According to ASI, the most high-potential markets for cement export growth include Bangladesh, the African continent, Australia, the Philippines and the Middle East.
Indonesia’s major cement producers have taken note, and the industry is increasingly focusing on exports. Semen Indonesia, for example, intends to focus on consumers in the eastern regions of Sumatra and North Sumatra, with a view to exporting some production to Myanmar, Malaysia and Singapore, in addition to targeting Bangladesh, which meets 85% of its cement needs through imports.
In addition to a planned Aceh factory, the company announced in October 2015 that, together with the state-owned Semen Kupang, it would build a new cement factory in Kupang, East Nusa Tenggara, with an annual production capacity of 1.5m tonnes, of which 40% will be exported. The Rp2.5trn ($182.5m) project is expected to begin operations in 2019. Although China’s severe cement oversupply is likely to weigh on export growth, an emphasis on exports should help to keep the sector on a growth path.
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