Fertilizer firms need more than $6.2 billion from the private sector to upgrade their aging factories but cannot attract the money because of the problems they face in securing a reliable supply of natural gas to keep the factories running, the head of a state fertilizer firm said this week.
The government has included the revitalization of fertilizer factories among its top priorities during its first 100 days. But unlike other priority sectors, to which the government provides direct aid or facilitates soft bank loans for upgrades, fertilizer producers only received support in the form of tax cuts, PT Pupuk Kalimantan Timur president director Hidayat Nyakman said.
“The government is providing us with a 30 percent corporate tax cut for five years but only after we have attracted the money for the revitalization program,” Hidayat said.
All the financing was expected to come from investors or lenders, he said.
Data from the Indonesian Chamber of Commerce and Industry (Kadin) indicated the fertilizer industry needed $6.2 billion in investment to renew dozens of factories, most owned by state firms.
Industry Ministry data showed that about half the fertilizer factories were more than 20 years old, with about 20 percent more than 30 years old.
Meanwhile, demand for fertilizer is growing by about 13 percent a year.
Despite rising demand for fertilizer, Hidayat said investors declined to invest in fertilizer companies because they were uncertain they could secure natural gas supplies - the main input to the fertilizer production process. This was especially true now because many fertilizer producers’ gas contracts were scheduled to expire next year, he said.
“There is no guarantee that the gas suppliers will be able to fulfill our needs [in the future],” Hidayat said.
One project by Pupuk to upgrade factories had already been delayed because of a lack of investment, he said.
“Sometimes [gas producers] distribute just 50 percent of a factory’s total gas needs. Sometimes they fulfill all our needs but they give us the gas a little bit at a time, through installments,” Hidayat said.
Industry Ministry data show the fertilizer industry needs around 794 billion standard cubic feet of natural gas each year to meet its production targets.
About 25 percent of the country’s gas production is supposed to be allocated for domestic consumption, and sold at a cheaper price than it would be overseas because of government intervention. The lower price means gas producers are often unwilling to sell to local fertilizer firms, or increase supplies from levels agreed to in contracts. Negotiations between gas and fertilizer producers are also slow, with gas producers unwilling to part with gas at prices they consider too low.
Problems over domestic obligations for gas led investors in the planned multibillion dollar Donggi-Senoro natural gas project to pull out this year after former Vice President Jusuf Kalla declared in July that 100 percent of the gas from the planned facility would be diverted to the local market.