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TimePosted 19/11/2018 00:00:00

PT Semen Indonesia tightens grip on domestic market

This week, LafargeHolcim agreed that PT Semen Indonesia (SMGR) was the successful bidder to buy its 80.6 per cent shareholding in PT Holcim Indonesia at a cost of US$917m. The agreement is subject to regulatory approvals, but SMGR, as a state entity, is not expected to be held up in its desire to extend its hold on the domestic cement market.

Indonesia currently has 15 cement companies operating with a total capacity of 110Mta, of which 63 per cent is owned by foreign players. Through the Holcim Indonesia deal, SMGR will acquire four cement plants with a combined capacity of 14.8Mta, 33 ready-mix facilities and two aggregate quarries. The company had been targeting assets in Central and West Java and now Holcim's plants of Narogong and Cilacap will increase SMGR's geographical coverage in these areas.

SMGR President and Director, Hendi Prio Santoso said, "We are grateful to be able to announce a transformational share takeover transaction for Semen Indonesia Group to be able to maintain its position as a market leader in Indonesia. In the increasingly competitive situation of the national cement industry, the combination of Semen Indonesia and Holcim Indonesia will make our foot print bigger and stronger.

"In addition to making Semen Indonesia group the largest company in southeast Asia with a capacity of 53Mt of cement per year, this transaction is also a tangible manifestation of SOE's contribution in increasing the resilience of the national cement industry that will support sustainable development in the country.”

Overcapacity problems
In a significant strategic U-turn, LafargeHolcim is divesting its Indonesian assets and chosing to exit a major emerging market, albeit one characterised by overcapacity and where its margins have been under pressure in recent years. It is true that new entrants have contributed to ramping up of domestic cement capacity, but they are still vastly overshadowed by the leading two players, SMGR and PT Indocement (HeidelbergCement), that control 70 per cent of the domestic market. Bloomberg reports that a merger between the number one and third-largest cement producers is not a solution to help the market and that regulators would do best to block the deal.

Organic growth is still the popular way to grow market share and SMGR has been a big promoter of expanding its capacity in this way. Since 2010, SMGR has added 17Mt of capacity. As recently as in June 2017, SMGR added 3Mta of greenfield capacity at Rembang in Central Java. This plant is only reported to be operating at around 28 per cent of its capacity, because it does not have an environmental mining licence and has to import limestone. Rembang was soon followed by the completion of the 3Mta Indarung VI plant in Sumatra in July 2017. SMGR is further adding cement capacity through its PT Semen Kupang Indonesia subsidiary, which is setting up a 1.7Mta integrated plant in Kupang to supply the markets of Nusa Tenggara, eastern Indonesia and Timor-Leste. With partners PT Samama Citra Agung, construction work is also starting on a new 1.5Mta greenfield plant in Aceh.

As the number two player with a capacity of 24.9Mta, PT Indocement (HeidelbergCement) also has plans to add 2Mta of greenfield capacity in north Sumatra in 2023. This follows the recent expansion of the Citeurup facility to 18.4Mta with the 10,000tpd P14 kiln line.

While PT Indocement may wish to acquire smaller local producers, following SMGR’s acquisition of Holcim Indonesia, its current liabilities – IDR3321bn (US$224.1m) at 30 June 2018 – may preclude it from following these ambitions in the short term. However, in its 1H18 results, Indocement stated that, "if newcomers look to actively sell their assets it will participate in the consolidation process, if there is clear value creation, limited operational risks and a reasonable price."

Anhui Conch, Lucky Cement, Siam Cement and Hongshi Cement are all late foreign entrants who joined the market just as demand started to fall off. The new entrants have in total added 20Mta of capacity to the market.

Pricing power
The entry of new cement players has reduced cement prices by more than 20 per cent in recent years. However, in the 4M18 SMGR was prepared to see its market share dip slightly in the 1Q18 by raising its cement prices. It did this on the back of the highest energy prices in the past 3-4 years and with a 39.4 per cent share of the cement market, and it was soon supported by Indocement Tunggal Prakarsa TbK in pushing price rises through in 2Q18. 

While Holcim Indonesia had been keener on price cuts, if the Holcim Indonesia acquisition goes through, the way will be clear for SMGR to use its increased pricing power to initiate a price recovery, which will be good for company profits.


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