Skip to main content

Mixed fortunes in Southeast Asia: Indonesia

World Cement,


Read Part 1 here.

Indonesian update

Analysts say that domestic cement consumption in Indonesia accounts for 55% of GDP growth. Increased consumption by the middle class will safeguard continued economic growth. In 2012, the country’s middle class amounted to about 75 million (out of a total population of 240 million). The Boston Consulting Group and McKinsey expect that the middle class population will expand to between 130 and 140 million by 2020 – 2030.

In November 2013, The Wall Street Journal and other media reports indicated that economic growth in Indonesia, which until recently had been a magnet for investors, eased to 5.62% in 3Q13 from 5.81% in 2Q13, as rising inflation set off massive capital outflows. The result was a fall of nearly 19% in the rupiah. This prompted the Bank of Indonesia to increase interest rates by 1.5% for that period. The weaker currency and higher rates negatively affected companies and households.

In December, World Cement received a statement from Holcim Indonesia in which the company declared, in responding to the current weakening of the rupiah against the US$, that it believed most industries would be heavily affected. Jan Kunigk, Holcim’s Commercial Director, said that price rises will impact most industries, especially capital intensive ones and such with a high degree of costs denominated in US$. Unfortunately these cost rises need to be passed on to consumers in the form of price increases, especially if the government could not help to raise up its rupiah rate. The recent re-rating of the rupiah, falling by 20% against the US$, were reactions to the widening current account deficit, surging US$ demand for earning repatriation and foreign debt payment and the external factor of potential tapering of the Federal Reserve’s QE initiative. Additionally, inflation in November 2013 soared to around 8.3%.

Kunigk stated: “In Holcim Indonesia very significant cost increases were observed in the areas of advertising, logistics, energy and wages in 2013. Financial cost also increased due to higher interest rates and the depreciation of the rupiah.”

To mitigate the impacts, Holcim Indonesia has implemented internal initiatives such as cost leadership programmes to save energy and deliver value-added solutions, without compromising on quality. The initiatives enabled Holcim Indonesia to delay passing on the cost increases to the end customer. Nonetheless, not all could be recovered and this needs to happen in a phased manner to reduce further margin erosion, as mentioned. Kunigk expects to see price rises and increased general costs continuing this year, at least to cover inflation, across the various heavy industries. In 2014, Holcim Indonesia expects inflation to be in the range of 7 – 7.5%.

Market outlook and growing middle class housing demand

Holcim Indonesia indicates that pent up demand for housing is still evident, with an additional 800 000 homes required each year. While the level of residential mortgage debt to GDP remains low, slower credit growth, a higher interest rate and the higher inflationary environment will potentially have a dampening effect on demand in the immediate future. Credit growth for the first nine months of 2013 was 23%; however, Bank Indonesia expects this to slow to 18 – 20% for the year overall and to a range of 15 – 17% in 2014. Bank Indonesia’s 30% downpayment requirement for mortgage loans is another factor to be considered in holding back real estate developments, while city apartment prices are staying firm as demand for investment properties still rises – given the recent weakening of the rupiah.

Brighter prospects for the construction sector and the cement industry are in evidence over the medium-term. General sentiment indicates any change in government in the second half of 2014 is not likely to impact core macroeconomic policies. The latent demand for homes has not diminished; the authorities resolve to curb current inflation has been applauded and Indonesia has had its investment grade reaffirmed by leading sovereign ratings agencies Moody’s and Fitch. National debt to GDP ratio, at just 25%, is a prudent base from which to grow.

The country plans to invest US$35 billion in new infrastructure projects this year. Of the 56 on the books, 32 are meant to be partnerships between the private and public sector (PPP). In recent years, Indonesia has attracted a record number of applications for foreign investment, but the level has started to slow in the face of a weaker global economy. Among the projects that will start between 2014 and 2017 are eight seaports, two airports, eight railways, five power plants and 11 water supply and waste treatment plants.

Holcim Indonesia’s 1.7 million tpa Tuban 1 plant sent out its first delivery of cement on 6 December 2013; 32 t of cement was delivered to the company’s warehouse in Romokalisari-Gresik, East Java. Tuban 2, which is being supplied with equipment from ThyssenKrupp Industrial Solutions, is on track for commissioning in 2Q15. The plant will have a production capacity of 1.7 million tpa and once fully operational will have expanded the company’s cement capacity in the country by 40%.

Read Part 3 here.

Written by Paul Maxwell-Cook. This is an abridged version of the full article, which appeared in the February 2014 issue of World Cement. Subscribers can view the full article by logging in.

Read the article online at: https://www.worldcement.com/asia-pacific-rim/28012014/mixed_fortunes_in_southeast_asia_part_2_647/


 

Embed article link: (copy the HTML code below):