Market improvements in Indonesia

Market improvements in Indonesia
Published: 08 January 2010

Although Indonesian cement consumption was hit by falling demand in 2009, down by 1-2 per cent over the previous year according to industry estimates, the outlook now looks very promising with a growth of 6.5 per cent being mooted for 2010. Recent pronouncements from industry leader Semen Gresik suggest substantial improvements, with Gresik’s investor relations manager, Agung Wiharto reporting that signs of growth were first noted back in October, when a monthly consumption of 3.79Mt was up 22 per cent on the same period in 2008.

Infrastructure developments are the key apparently, with the Indonesian government now pushing through a range of projects designed to stimulate cement demand. Toll road construction is of particular note with latest projects switching to concrete rather than the traditional asphalt, but in a country like Indonesia, and despite the clear benefits of such national programmes, the main market is still the selling bagged cement to the retail sector. On the basis of 2009 figures, with 80 per cent of total annual sales of 38Mt sold in bags, retail customers buying two or three bags for small domestic projects actually accounted for over 15Mt of total domestic annual sales - a huge market.

Looking at the national statistics, domestic demand for 2010 will climb to 40Mt, a growth of around five per cent on 2009 totals. Production capacity this year will climb by a further 1Mt to 51.8Mt while exports will drop from 4.5Mt in 2009 to 3.6Mt as more production is diverted to domestic sales. And looking further ahead, analysts at JP Morgan suggest that domestic demand should rise to 44Mt in 2011 with such positive trends underlined by Indonesia’s growing population, greater urbanisation, severe housing shortages and easier access to mortgages.

Likewise, the outlook for Indonesia’s major cement producers remains positive as capacity is now starting to lag behind demand growth. Semen Gresik is already pushing through expansion at its Tonasa V plant, with a new 2.5Mta works due to enter service in 2011, while further expansion at its Tuban IV works will come on-stream in 2012. PT Holcim Indonesia plans a new 2Mta plant in Tuban, East Java, although PT Indocement, part of the troubled HeidelbergCement group, and now the second largest producer in Indonesia after Semen Gresik, has yet to announce any further capacity gains, a company spokesman said recently, noting that its present capacity level of 18.6Mt will be sufficient for some time ahead.

JP Morgan sees Semen Gresik as its top domestic pick, with a price target of Rp9600 providing 27 per cent upside potential with its leading domestic position allowing it to benefit from long-term demand growth. Indocement also gains a favourable response from JP Morgan, given its growth potential and the fact that its shares currently trade at a 20 per cent discount to its peak valuation. However in both cases, the volatility of the Rupiah, uncertain energy price trends and inflation fears could quickly dampen such present market enthusiasm.