~By Todd Callahan
~By Todd Callahan
Since 2000 national cement consumption has experienced a
strong recovery and the sector as a whole is quite vibrant.
Despite temporary declines on parts of Java and Bali, consumption
is robust in Riau, Kalimantan, Papua and many of the outer
islands. According to the Indonesian Cement Association, the
industry enjoyed another high-growth year with domestic
consumption topping just over 27 million metric tons in 2002.
Another positive sign is that cement sales are now close to pre-
crisis levels. Longer term, as the restructuring of the
Indonesian economy continues, the industry can expect to benefit
from even more growth. An important challenge for domestic
producers is decreasing operating margins. Over the past four
years, the production cost hikes at some companies have
outstripped the increase in selling prices.
Beyond a slowly improving economy, one of the crucial factors
driving the rejuvenation of the sector has been foreign
investment, more of which the country urgently requires if it is
to get back on its feet. Since the late 1990s, four of the
world's top producers from Europe and North America have bought
into the Indonesian cement industry. Their interest in Indonesia
is a part of their overall strategy of diversification
geographically into developing markets with high-growth
potential. Three have already acquired majority shareholdings in
Indonesian companies while the fourth, Cemex, has purchased a
substantial minority position in the state-owned Semen Gresik
Group. Below is a brief description of the activities of the four
major multinationals active in Indonesia.
Germany's Heidelberger has acquired majority control of PT
Indocement, once the country's largest private producer. Formerly
an important asset in the Salim Group's portfolio of companies,
Indocement was pledged to the Indonesian Bank Restructuring
Agency (IBRA) to repay the government for its bailout of the
Group's bank during the worst of the financial crisis.
Heidelberger was named the winner when IBRA sought to divest its
stakeholding in Indocement. This month an additional 3.89 percent
of Indocement is expected to be sold to Heidelberger under an
agreement that will net the government Rp200 billion. The put
option sale will decrease the government's stake to 12.98 percent
and raise Heidelberger's holding to 65.59 percent. Today
Indocement boasts an installed production capacity of 15.65
million metric tons per year and a domestic market share of
approximately 32 percent. Outside of Indonesia, Heidelberger
operates in more than 50 countries worldwide.
Switzerland's Holcim acquired majority control of Semen
Cibinong as a part of the Indonesian company's efforts to
restructure more than US$1 billion in debts. Through a
complicated restructuring agreement, Holcim agreed to pump over
US$300 million into the troubled firm and assume responsibility
for some of its obligations in return for a majority stake. Today
Semen Cibinong has an installed capacity of 9.7 million metric
tons per year and a domestic market share of approximately 13
percent. Outside of Indonesia, Holcim is active in more than 60
countries worldwide.
France's Lafarge acquired majority control of Semen Andalas
after its takeover of Blue Circle. Although Lafarge has operated
in Indonesia since the early 1980s, its holdings in the cement
sector remain relatively modest. Semen Andalas is a small
Sumatra-based producer with an installed capacity of
approximately 1.4 million metric tons per annum and a domestic
market share hovering around 4 percent. Outside of Indonesia,
Lafarge is expanding aggressively and is active in more than 60
countries worldwide.
Mexico's Cemex owns a 25.5% holding in the state-owned Semen
Gresik Group, which operates three units in East Java, South
Sulawesi and West Sumatra. Although Cemex would like to acquire a
majority stake in the firm, the sale has not occurred because of
opposition from interest groups at the unit level, especially in
West Sumatra. The government has not been able to force an
extraordinary shareholders meeting at the Semen Padang unit to
resolve the matter. Acting against central government authority,
a local court in Padang has prevented the meeting from taking
place. Since September 2002 the case has been awaiting a final
decision from Indonesia's Supreme Court. On the matter of demands
that Semen Padang and Semen Tonasa be hived off from the Semen
Gresik Group, this would set a bad precedent that would almost
certainly provoke claims for compensation from shareholders.
Until the government as the majority shareholder is able to
assert its control, privatization of Semen Gresik will remain
unfinished.
Despite opposition from some quarters, all of these
investments are sure to have a positive impact on the future
development of the local cement industry. Prior to acquisition,
many Indonesian cement companies lacked important elements of
corporate governance and performance accountability. It is hoped
that private investors will introduce higher levels of governance
and management culpability. Another tangible way the industry
benefits is from the worldwide trading networks of the global
investors. Specifically, there will be more of an opportunity to
export cement at a time when the local industry is still over
capacity. Furthermore, foreign investors bring with them fresh
capital and access to more sophisticated production and
management information technology. This will boost
competitiveness and modernize the domestic industry. Finally,
despite concerns that these investments would exact social costs
such as increased unemployment, there have been no significant
layoffs at any of these companies. This was an argument grounded
in fear. In fact, job security for the average worker at these
companies is likely better today than it was before the
acquisitions occurred.
With respect to concern these investments will lead to private
monopolies that fleece the Indonesian people, the fear is genuine
but it is being manipulated by vested interests. The foundation
for this anxiety is that predatory monopolies were long a feature
of Soeharto's Indonesia. Suspicion toward the private sector is
comprehensible because examples abound of corporate Indonesia and
SOEs acting against the interests of the people. That said, the
foreign ownership equals monopoly argument does not hold up
because monopolies ultimately cannot exist without the permission
of government. In fact, the big four cement companies compete
against each other all over the world. If the government focuses
its attention on regulating industries, this is a non-issue. In
the United States, as an illustration, more than 80 percent of
the cement industry is in foreign hands but prices remain low
because the regulation ensures fair competition.
On the matter of privatization, it is admittedly a
controversial issue in Indonesia. Privatization itself is merely
an economic prescription stemming from shock therapy and the view
that the private sector was inherently good for parts of the
world like Eastern Europe. It is understandable that government
officials from any country that has or has had a significant
public sector are hesitant to break iron rice bowls, confront
unionized workforces and tackle interest groups. For the present
government, there is the added risk that pushing a privatization
like Semen Gresik too aggressively will make President Megawati
vulnerable to political attacks in the run up to next year's
election. That said, the economic argument in support of
privatization is indisputable. If one wears a longer eyepiece and
does good, comparative analyses, the evidence is clear that the
government, industry, employees and other stakeholders would
likely be better off if the Semen Gresik Group were privatized
along the lines of Indocement.
The overall trend in the Indonesian cement industry is
positive and strong growth is certain to continue as the country
recovers. As a means to strengthen the domestic industry, foreign
investors should be welcomed as partners and catalysts of change
to enhance performance, ensure a competitive market and, not
insignificantly, to spur additional investment and increase
exports.
Consumption Statistics
Source: Indonesian Cement Association (ASI), other sources
Key Statistics: Indonesia's Four Leading Producers
Indocement
Cibinong
Andalas
Semen Gresik Group
Multinational Cement Firm's Stakeholding
61.7% *
77.3%
88.0%
25.5%
Cement Production Capacity per Year (MMT)
15.65
9.70
1.40
17.25
Cement Production Volume in 2002 (MMT)
9.37
4.12
1.12
14.19
Domestic Sales Volume in 2002 (MMT)
8.73
3.52
1.11
11.86
Export Sales Volume in 2002 (MMT)
- Cement
0.86
0.96
0.00
2.27
- Clinker
1.44
1.60
0.00
0.35
Market Share in Domestic Market
32%
13%
4%
44%
* Stakeholding will increase to 65.59% pending completion of a
put option sale.
Source: Indonesian Cement Association (ASI), other sources
Todd Callahan is a Senior Technical Advisor at PT Jasa Cita, a
Jakarta-based research consultancy associated with CastleAsia.