Indonesia has arguably witnessed the start of a cement consumption slowdown in the outer islands, with consumer confidence deteriorating due to lower prices, writes analyst Andhika Suryadharma, in the Jakarta Post.
According to Indonesian domestic cement consumption figures, areas outside of Java booked a 9.5-per cent month-on-month and a 4.1-per cent YoY decline to 1.3Mt in August 2008.
On the flip side, Java proved to be more resilient posting 1.9 per cent month-on-month growth despite a 2.1-per cent YoY decline.
Going forward, this trend is expected to intensify, particularly because Java, with 65 per cent of the country’s population, is likely to benefit from the government’s pump-priming ahead of the 2009 elections.
Meanwhile, overall domestic cement consumption remains resilient, showing 16 per cent YoY growth to 25.6Mt in the first eight months of 2008 (8M08).
However, 8M08 exports continued to decline, plunging 35 per cent YoY to 3.3Mt as cement producers have opted to sell domestically due to more favorable local prices, not to mention escalating shipping costs caused earlier in the year by high oil prices.
Nevertheless, it is worth noting that cumulative YoY cement consumption peaked in June with growth coming in at 21 percent, only to decelerate to the 16 per cent level by August.
On a stand-alone basis, August has been the weakest month year-to-date, booking a fall of 2.9 per cent YoY, raising the question whether the slackening will persist in subsequent months.
Domestic demand is expected to remain weak through September as the seasonality associated with fasting and the Ied festivity come into play.
However, some improvement is expected starting in October, even though, traditionally, cement consumption in the fourth quarter tends to be lower than in the first and second. Nevertheless, the Indonesian Cement Association has upgraded its growth estimate by between 13 and 15 percent from a previous six to eight percent, a show of confidence in the sector’s performance this year.
With growth expected to average 8 percent per annum through 2012, the cement industry is in the midst of planning extensive expansions.
Up to six domestic cement producers are earmarked to add production capacity in 2009, with a total investment estimated at US$1.7 billion, on a total combined capacity of 12.1 million tons.
Given that steel and other commodity prices are trending down, we believe the production expansion next year will be timely. Demand will outstrip supply, as the former is expected to reach approximately 51 million tons by 2012 versus the current capacity of 48.8Mt.
In 2009, lower commodity prices should rein in inflation, paving the way for the government to lower interest rates, supporting property consumption, which would subsequently drive sales of cement bags (approximately 85 per cent of total cement consumption).
Additionally, we believe cement demand will remain robust, particularly in the period leading up to the 2009 elections. Our study, based on the 2004 elections, shows consumer confidence in Java would rise substantially, outpacing that in the outer islands during an election year (chart 2).
With the government expected to prime the pump, we believe infrastructure projects, particularly those in Java, will push ahead in an effort by the current administration to win votes on the populous island, providing a strong boost for consumption.
In conclusion, domestic cement demand remains favorable, with Java expected to pick up any slack that may occur in the outer islands due to weaker commodity prices.
The writer is a researcher at Bahana Securities.