Newly opened cement plants in Indonesia, like this one at Semen Gresik, risk being underused as cement sales in September fell due to lower demand from the housing industry. (Antara Photo/Zabur Karuru)

Indonesia Sees Cement Supply Glut as Foreign Producers Move In


APRIL 26, 2016

Jakarta. Indonesia's large market and its strategic position in Southeast Asia have drawn foreign cement companies to invest in the country, creating competition for existing producers, which are already struggling to maintain their market share amid a glut in production capacity.

Three cement producers from Taiwan, China and India and one local firm plan to build factories in Indonesia that will have a combined capacity of 12.1 million tons per year. The total investment is estimated at between $1.3 billion and $3 billion over the next few years.

The factories include India's Ultratech that seeks to establish a plant in Wonogiri, Central Java, with an annual production capacity of 4 million tons. China National Building Material Company, the East Asian country's largest cement maker, is currently building a 2.3 million-ton plant in Grobogan, also in Central Java.

Lucky Cement Taiwan has partnered with local company Fajar Semen Barru for a plant in Barru, South Sulawesi. The plant will have an annual production capacity of 3.3 million tons.

Meanwhile, the Medco Group, a local energy business group controlled by tycoon Arifin Panigoro, is setting up a new cement operation in Gombong, Central Java.

These factories will boost Indonesia's cement production capacity beyond 100 million tons in next few years, which is a milestone that could already be reached this year if China's Anhui Conch Cement and Jui Shin; Thailand's Siam Cement; and local producers Cemnido Gemilang and Panasia Cement also start production.

Semen Indonesia, the country's largest cement producer, also expects its 3-million-ton plant in Rembang, Central Java, to go online this year.

On the other hand, domestic cement sales may only increase to 63 million tons this year, up 5 percent from last year, according to the Indonesia Cement Association (ASI).

"All the producers would have to be aggressive to battle for market share in order to fully utilize their production capacity, which they expanded in the past year," Ciptadana Securities equity analyst Andre Santoso said.

"Anything goes, including offering heavy discounts that would reduce their margins," Andre added.

Anhui's strategy to offer 10 percent discounts in South Kalimantan has managed to hurt the market share of Indocement Tunggal Prakarsa, Indonesia's second-largest cement producer, according to a report from Trimegah Securities.

ASI chairman Widodo Santoso said the government should anticipate more interest from foreign investors in the domestic cement market and that it should move to protect existing players.

Investors have been keen to expand to Indonesia to benefit from the Association of Southeast Asian Nations Economic Community (AEC), which will establish a market of around 600 million people in the region, Widodo said.

Growth prospects for these cement producers are limited in their respective countries because of their inability to export their products to distant markets such as Europe and the United States.

In addition, at 241 kilograms per capita per year, Indonesia's domestic cement consumption was still low compared to the average consumption rate of 400 kg per capita in the Asean region, making for attractive growth prospects.

Widodo said local cement producers needed to come up with a strategic plan to boost exports in order to remain competitive. Last year, Indonesian cement exports amounted to 1 million tons, an increase of 280 percent from the previous year.

"We plan to export to various countries in Africa, Sri Lanka, Bangladesh, the Middle East, Australia, the Philippines, Papua New Guinea, and Timor-Leste," the ASI chairman said.