Olefins denied protection<\/p>\n
Industry Minister Tunky Ariwibowo's announcement yesterday
\nthat the government will not be granting tariff protection to the
\nUS$1.6 billion olefin plant of PT Chandra Asri Petrochemical
\nCenter came as a pleasant surprise. We had come to take it for
\ngranted that companies controlled by politically well-connected
\nbusinessmen get what they want from the government.<\/p>\n
We had expected tariff protection to be announced at the
\ninauguration of the plant by President Soeharto on Saturday.
\nLocated 120 kilometers east of Jakarta, the new facility is
\nIndonesia's first olefin plant.<\/p>\n
In early 1992 the project became embroiled in controversy over
\nthe perceived preferential treatment it was receiving from the
\ngovernment. Earlier, the project was one of several large
\nprojects shelved by government decree in late 1991, in response
\nto concern about a deteriorating balance-of-payments position.
\nThe olefin project was revived in 1992 as a wholly foreign-owned
\nventure, although it continues to be controlled by the old
\nshareholders. Those shareholders triggered another bout of heated
\npublic debates last year, when they asked for tariff protection
\nof up to 40 percent, at least during the first few years of
\noperations.<\/p>\n
The decision not to grant the industry any tariff protection
\nis to be welcomed, as indicating that the government is
\ndetermined to gradually reduce import tariffs along with non-
\ntariff barriers in preparing for the advent of the ASEAN Free
\nTrade Area, in 2003, and the Asia Pacific Free Trade Area, in
\n2020. Tariff protection for such important and widely-used
\nindustrial materials as ethylene and propylene would have
\nadversely affected numerous downstream industries.<\/p>\n
Nevertheless, we do think that the plant should be given some
\nassistance from the government to enable it to compete with
\nimports. The capital costs of the Chandra Asri plant were much
\nhigher than those faced by similar projects overseas because the
\ninvestors had to bear the costs of most of the supporting
\ninfrastructure. Moreover, its depreciation costs will be much
\nhigher than those of the older olefin plants in countries such as
\nTaiwan, South Korea and Japan.<\/p>\n
Chandra Asri also faces other difficulties. The commencement
\nof production at the plant in May coincided with a glut in the
\nAsian olefin market, caused partly by a sharp reduction in the
\nvolume of imports by China. This has forced olefin producers in
\nJapan and Taiwan to slash both their prices and their output. One
\nplant in Taiwan was reportedly shut down for a month because of
\nlow demand. Such market conditions could lead overseas suppliers
\nto dump their products in Indonesia.<\/p>\n
The government's intention to protect the new olefin plant
\nfrom dumping, as promised by Tunky yesterday, is therefore
\nappropriate.<\/p>\n
We hope, however, that whatever assistance the government
\ngrants to Chandra Asri will be decided through a transparent
\nprocess. Care should be taken that no incentives provided to the
\ncompany create new market distortions or make local olefin prices
\nmuch higher than the price of imports.<\/p>\n
The existence of a domestic olefins industry is of great
\nadvantage to Indonesia, given the importance of olefins as the
\nbasic ingredients in the manufacture of plastics and synthetic
\nfibers. Procuring ethylene and propylene from the Chandra Asri
\nplant will save the country about US$600 million a year, that
\nfigure being the annual import bill for olefins. Such a saving is
\nquite significant, especially given that our foreign trade
\nsuffered a deficit in June, the first in five years.<\/p>\n
It also makes common business sense for industrial users to
\nprocure from a domestic plant rather than importing, provided
\nthat quality is comparable and local prices are not way above
\nthose overseas. First, delivery is much faster. Second, buyers
\ncan schedule deliveries to arrive just in time for use in the
\nproduction process, thereby reducing manufacturers' inventory
\ncosts and sparing them the difficulties often encountered by
\nimporters at seaports.<\/p>\n
This said, Chandra Asri should see to it that the quality of
\nits products is comparable to that of imports and, as the sole
\ndomestic producer of olefins, the company should be on guard
\nagainst the temptation to behave like a rent-seeking monopoly.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/olefins-denied-protection-1447893297",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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