Industry is consolidating
Industry giant Semen Indonesia is acquiring 81 percent of its competitor Holcim, which belongs to Swiss group LaFargeHolcim. With the acquisition, Semen Indonesia increases its market share to 50 percent. This gives the company, in which the government holds a majority stake, 34 additional production facilities. However, the merger still requires approval of Indonesian antitrust authorities. Should the merger be approved, Semen Indonesia would increase its production capacity from 35 million to 50 million tons. Indocement, which belongs to HeidelbergCement, would continue to be the second largest player with an estimated market share of around 25 percent and production capacities of 30 million tons. In total, there are 15 cement manufacturers in the country.
This step does not come as a surprise to industry insiders. There has been speculation about a market shakeout for years. The industry is suffering from overcapacity: only two thirds of production capacity is currently being used. In 2012 and 2013, capacity utilization was over 90 percent. A fundamental improvement is not in sight. Analysts at RHB Bank estimate that cement demand will increase by 7 percent in 2019, but capacities will also increase by a further 2 percent. According to them, the majority of market participants are operating at a loss. A cement plant has to operate at least at 80 percent of capacity in order to be profitable. According to Indonesian cement association ASI (https://asi.or.id/), overcapacities will amount to 30 percent by 2024.
Market must be conquered locally
The Indonesian market has long been considered promising. Growth in the construction sector is generally well above that of the economy as a whole. Several foreign cement manufacturers e.g. from China (Anhui Conch) or Thailand (Siam Cement) already entered the country. Production capacities increased by 54 percent between 2013 and 2018. However, demand increased by only 20 percent during that period.
Despite a limited list of suppliers, the Indonesian cement market is considered to be locally driven. According to Semen Indonesia, the company serves 66 percent of the market in East Java and 42 percent in Central Java. In Sumatra (42 percent market share) and Sulawesi (59 percent), too, the company is undisputed leader. Semen Indonesia, however, has a comparatively weak position in West Java (17 percent) with its construction-happy metropolis Jakarta. The region accounts for more than a quarter of national demand. Holcim is considered to be particularly strong in West Java.
More than 50 percent of Indonesia’s construction activity takes place on the main island of Java, where two-thirds of the population live. Here is also the greatest need for infrastructure. The second most important region is Sumatra, with the northern metropolis of Medan and the industrial center Batam off the coast of Singapore.
Expansion of infrastructure as a source of optimism
Cement manufacturers’ hopes rest on the extensive infrastructure agenda launched by the central government. Roads, train connections, ports and airports are being built all over the kingdom. In 2018, US$28 billion were spent on transportation infrastructure. Housing construction is booming as well. In cities, residential and office buildings are mushrooming. An example of public housing construction is the “One million houses” program launched by President Joko Widodo in 2015, which supports 700,000 houses for low-income families, among others. According to cement association ASI, 75 percent of cement demand comes from the private sector and 25 percent from government construction projects.
For 2019, Mandiri Bank anticipates a slightly weaker growth of the construction sector of 6.3 percent in real terms, with overall economic growth being at 5.2 percent. One reason for the slower development of the construction sector is the weak Rupiah, which fell by 6 percent against the US dollar in 2018. As a result, the cost of purchasing foreign machinery and engineering services has risen significantly.