Cement demand to grow by over 10% per year

Cement demand to grow by over 10% per year

JAKARTA (JP): Cement demand in Indonesia is expected to grow by more than 10 percent per annum up to the end of the decade, reflecting the country's strong economic growth and the booming construction sector, according to investment bank Lehman Brothers.

"Based on our Asian Economics team forecast that real GDP for Indonesia will grow at an average of seven percent over the next five years, we estimate domestic demand for cement to grow by 15 percent in 1995 and by an average of 10.5 percent a year in 1996- 2000," the bank said.

In a report made available to The Jakarta Post yesterday, Lehman Brothers predicts that the demand will exceed supply, given that most domestic cement plants already operating at full capacity.

This year alone, the supply shortage is estimated at 1.2 million tons and next year it is expected to reach 2.9 million tons.

The supply shortage has prompted all nine cement producers of the country to prepare aggressive expansion plans to capture the growing demand.

Indocement, currently the largest cement producer, says it will increase its capacity by six million tons per year.

Semen Gresik, the second-largest producer, plans to increase its capacity to 4.6 million tons per year from its two plants in Tuban, East Java. Including its recently-acquired plants -- Semen Padang, in Sumatra, and Semen Tonasa, in Sulawesi -- Gresik is set to overtake Indocement to become the largest producer in 1997.

Semen Cibinong, Indonesia's third-largest cement producer, plans to increase capacity to 5.2 million tons per year.

Indocement, Semen Gresik and Semen Cibinong, which are listed on the Jakarta Stock Exchange, account for 74 percent of the Indonesia's total cement production. Their production facilities are in Java, which is the largest consumer of cement of the country -- accounting for approximately 69 percent of the three companies' total production.

All of Indonesia's cement producers are likely to benefit from further increases in cement prices resulting from the continuing supply shortfall.

Of the three listed cement companies, Lehman Brothers believes that Indocement offers the best value for investors. It rated the company a "1-buy".

Cement consumption in Indonesia mirrors the level of economic activity. Domestic cement consumption has risen from 11.4 million tons per year in 1989 to 21.5 million tons in 1994.

This was due to a flurry of activity in the housing construction sector which was partly encouraged by the government's relaxation of a tight credit policy in the latter half of 1992. Only in 1991, when interest rates peaked at above 25 percent, that cement demand slumped.

In spite of the increasing demand, however, on a per-capita basis Indonesia remains one of the lowest cement consumers in Southeast Asia. According to the ASEAN Cement Federation, in 1994 Indonesia consumed about 113 kilograms of cement per capita, compared with Singapore's 1,156 kg, Malaysia's 512 kg, Thailand's 493 kg and the Philippines' 140 kg.

According to Lehman Brothers, this indicates that there is great potential for cement consumption growth in Indonesia, particularly as the country moves into the next stage of industrialization.

"Given a strong estimated economic growth of seven percent, and its commitment to fulfilling its vast housing needs and infrastructure development plans, we are projecting per capita cement consumption to increase to 264 kg by the end of the decade," said the report. (13)