Cement Producers in Indonesia Concerned about Oversupply

Widodo Santoso, General Chairman of the Indonesia Cement Association (ASI), said the Indonesian government should take the same steps that were taken by the governments of Vietnam and Thailand. Authorities in both these countries decided to (temporarily) curtail expansion of cement capacity in a bid to combat the oversupply.

Indonesia has already become the biggest cement producer in East Asia with an annual installed production capacity of 92 million tons, followed by Vietnam (78 million tons), Japan (60 million tons), and South Korea (55 million tons). However, Indonesia's cement demand has grown sluggishly ever since 2013 due to the impact of the country's economic slowdown (as well as tighter monetary policy) on the property and infrastructure sectors.

Prior to 2013 Indonesia's property sector expanded rapidly hence consuming more and more cement. This was reason for existing cement producers to expand output, while it also attracted the arrival of foreign cement manufacturers.

As such, the establishment of more cement plants will only put more pressure on existing players' profit figures as they need to engage in fierce price competition to gain market share. Santoso informed that in the years 2014-2016 a total of 13 new cement factories were built with a combined total cement production capacity of 34 million tons (per year). Due to the growing oversupply, warehouses of existing cement producers are fully filled with cement and clinkers. This causes local producers to curtail production rates. Santoso says cement plants' utilization rates has now declined toward 65 - 70 percent. Meanwhile, local cement players can become plagued by financial trouble as they have used bank loans to expand production capacity but - given low demand and the need to offer competitive rates on the market - profit margins are on the decline.

Read more: Overview of Indonesia's Cement Industry

The domestic oversupply is also a reason for Indonesian cement producers to focus on export markets. Currently, Indonesia's share toward global cement exports is insignificant. However, given the weakish global economy, it is particularly tough to boost cement exports, especially as Indonesian cement exporters need to compete with counterparts in Thailand, Vietnam, Japan, South Korea, and China where there have also occurred domestic oversupplies of cement.

Indonesian Cement Sales 2008-2016:

Year	Cement Sales	YoY Growth
2016¹	65 million	+6.6%
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	-

^{¹ ASI forecast
Source: Indonesian Cement Association (ASI)}

In the first half of 2016 cement sales in Indonesia climbed 3.1 percent year-on-year (y/y) to 29.48 million tons, supported by the construction of power plants, smelters and other infrastructure projects, especially located outside the island of Java. Given the Indonesian economy is expected to accelerate back to +5 percent (y/y) levels in 2016 (and beyond), cement demand in Indonesia should rise accordingly in the foreseeable future.

The Indonesian government is still eager to push for infrastructure development (although disappointing tax revenue could make the government decide to cut on infrastructure spending for the remainder of the year in a bid to curb the budget deficit), while asset repatriations under the government's tax amnesty program could give a boost to the nation's property sector. As of yet, however, declarations and repatriations related to the tax amnesty scheme failed to impress.

Indonesian Cement Sales in H1-2016 per Island/Region:

Island/Region	Cement Sales (in million tons)	% of Total Domestic Sales	YoY Growth
Java	16.24	55.08%	+1.3%
Sumatra	6.24	17.78%	+6.9%
Sulawesi	2.54	8.62%	+24.8%
Kalimantan	2.00	6.78%	-16.0%
Nusa Tenggara	1.68	5.72%	+2.1%
Moluccas & Papua	767,770	2.60%	+16.9%
Indonesia	29.48	100%	+3.1%

^{Source: Indonesian Cement Association (ASI)}

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