Wed, 23 Apr 2008
Andhika Suryadharma, Analyst

Indonesia's domestic consumption for cement rose 17 percent to 8.7 million tons in the first quarter of 2008, marking the highest first quarter growth since 2002.

Evidently, this was made possible with a 25 percent growth in outer Java consumption and an 11 percent growth within Java.

Exports, on the other hand, plunged 37 percent to 1.1 million tons, signaling high domestic demand.

It seems reasonable now to think the domestic market offers more attractive returns for cement producers given the price of the commodity is higher at home than it is in international markets, without even calculating the transportation cost incurred in exporting.

Could this be an indication of strong domestic growth? What are the challenges which may lie ahead?

First, variables which would induce further growth in domestic cement consumption should be identified, including factors such as population and GDP growth, property credit and planned infrastructure value.

With those factors -- population, GDP, property credit and infrastructure value -- all expected to rise, further growth in domestic consumption would not be impossible.

Packed-bag sales comprised 84 percent of total consumption, which shows why domestic consumption, in our view, is still propelled through retail from the property sector.

Data from the central bank shows that the amount of property credit has grown with a 7 year compound annual growth rate of 33 percent -- to Rp 12 trillion since 2000.

Simultaneously, Indonesia's construction market will reach an astonishing US$120 million by 2010, second only to China, according to the Indonesian Construction Service Association.

Despite of all that, the Indonesian Cement Association firmly maintains its conservative growth scenario of 5 to 6 percent, amid possibilities of 7 to 8 percent price hikes this year.

The rule of thumb in the cement industry suggests that future growth can be predicted by multiplying the future GDP growth by one and a half, but it has now become more complicated given the recent turbulence.

Second, from the cement industry's supply perspective, we could easily draw growth estimates from the industry's total installed production capacity, which is currently around 48.2 million tons.

Year-end consumption for 2007 reached 34 million tons, providing room for exports of up to nearly eight million tons and an excess capacity of six million tons.

Assuming a conservative growth of 5 percent over the next five years, demand could increase to touch 56 million tons by 2013.

Despite the industry's prospective future, producers are concerned with increasing production costs; raw materials combined with fuel and energy. Both mostly contribute about an average of 40 percent of production cost with oil, gas and coal as main sources of production.

Oil is considered the most expensive energy source nowadays, especially with global oil prices reaching a new record at $117 per barrel, while coal is also experiencing a price hike, but still is considered the least expensive of the three.

Cement producers have found efforts to minimize costs and concurrently face higher demands through lowering clinker contents in their cement products by decreasing usage of raw materials, increasing operational days of kilns, increasing qualities of machinery to pump production, finding new sources of alternative energies as well as adding new cement plants.

Along with the increasing cost of productions it is only a matter of time before prices soar.

So far in certain parts in Indonesia, i.e. in the eastern parts, cement prices could reach Rp 50,000 per sack! This might affect the purchasing power of consumers and accordingly weakening demand.

With the general election coming up, infrastructure projects are enforced to win votes, giving another boost to consumption. While the property sector will still push consumption this year, the uptrend in interest rates might tone down property growth and cost rise dilemmas may still linger despite all the efficiencies.

Yet in our view cement will still grow at a strong pace.

The writer is a research analyst at Bahana Securities



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