Indonesian cement demand growth likely to ease?

Indonesian cement demand growth likely to ease?
Published: 08 August 2005

Inflationary pressures from higher energy prices and a weakening rupiah, in addition to a delay in major infrastructure projects, may result in this year’s growth in domestic cement demand being far below last year’s eight per cent, PT Indocement Tunggal Prakarsa said. The company reported that higher energy prices would likely force the company to raise its prices to cope with increasing production costs.  

Indocement finance director Christian Kartawijaya told local reporters on Thursday that the country’s cement industry and construction activities would likely experience a slowdown due to the weakening rupiah -- now standing at some Rp 9800 a dollar compared to last year’s close of Rp 9290 -- and high interest rates.  

"Some 65 per cent of our production costs are directly or indirectly related to the dollar," he said.   Christian said the recent fuel price hikes would further hurt the industry, as the multiplier effects would eventually affect their production costs.   "The planned rolling out of major infrastructure projects for this year has also been delayed," he said.  

Global coal prices rose by 33 per cent earlier this year while industrial diesel has more than doubled since March. Marine fuel oil had also increased by 34 per cent.  State power firm PT Perusahaan Listrik Negara (PLN) also announced that it would raise its electricity charges during peak hours for industrial undertakings with power utilization capacities of more than 14kVA starting this month.   "In light of this situation, we see the growth in cement demand here being well below last year’s eight per cent," he said. "In addition, our performance in the remainder of the year will likely not be as good as during the first quarter."  

The country’s second largest cement producer, which is majority-owned by German cement giant HeidelbergCement, sold 5.84Mt in the first half of this year, as compared to 5.69Mt in the same period last year, booking a net profit of Rp 307.6 billion (US$31.4m).   Indocement president director Daniel Lavalle said the recent rise in energy prices would have a major impact on the price of cement.  

Although Indocement had no problem with the government’s decision to reduce fuel subsidies through price adjustments considering that other countries actually imposed energy taxes, Lavalle however hoped for a more planned and focused policy.   "The main problem here is that the recent increase in fuel prices came as something of a surprise to the industry, making us unprepared and hurting our businesses," he said.   "With this, there is no other option for us than to increase prices," he said, though stressing that Indocement would continue to seek ways to make its production more efficient. (Indocement had previously said it would increase prices by some 15 per cent this year).  

The firm’s technical director, Kuky Permana, said that among its cost-cutting strategies was converting its coal-fired generators to natural gas. "Natural gas could work out at some 40 per cent cheaper than coal," he said.  Indocement owns three plants located in Citeureup and Cirebon, both in West Java, and Tarjun, South Kalimantan, that produce some 80 per cent of its own electricity needs from coal and diesel.