Cement industry to fully revive next year: Semen Gresik CEO

State-owned firm, PT Semen Gresik, the country's largest integrated cement producer, has projected that the cement industry will fully recover next year on the back of robust demand for property and an increase in infrastructure projects funded by the government.

The East Java-based company has a total installed capacity of 17.2 million tons at present, with 5.5 million tons and 3.5 million tons derived respectively from its subsidiaries PT Semen Padang in West Sumatra and PT Semen Tonasa in South Sulawesi.

Semen Gresik's president director, Satriyo, shared his views with The Jakarta Post's Rendi A. Witular and several other reporters in a recent interview in Gresik about the domestic cement industry. The following are excerpts from the interview.

How do you see cement demand next year?

Based on available statistics from government agencies and from the company, local cement demand is expected to grow by between 8 percent and 10 percent next year. But based on my own analysis, growth in demand will probably be higher at 12 percent next year.

Cement companies are set to face rising demand earlier than expected next year. We had forecast earlier that demand would not be so strong until 2009, but figures for the first semester of this year indicate that next year will be robust.

The economy is projected to grow faster at 5.4 percent (compared to 4.8 percent expected for this year), amid continuing strong domestic consumption. Moreover, what amazes me is that there are is an over-liquidity of funds being held by individuals and banks at present, which should further boost demand for property next year, including property purchased for investment purposes.

For example, the houses offered by developers during recent property exhibitions in Surabaya have always been sold out. Based on that, East Java alone will contribute significant demand for cement.

I expect cement demand from private sector projects will be higher than that from government projects. There will be an increase in the number of projects funded by the government next year, but the amount will not surpass the projects funded by the private sector. Large government projects will include the 1,000 kilometers of toll roads from Merak in Banten to Banyuwangi in East Java. Irrigation and port development projects are also in the pipeline.

What obstacles could prevent cement companies from taking advantage of the higher demand?

Transportation problems are our major concern. Every year, there are at least 350,000 new cars coming onto the roads despite the network's limited capacity. This will create havoc for our distribution system. Due to the limitations, we predict that the government (central and provincial) will put our trucks at the end of their list of priorities after private vehicles, and vehicles transporting basic staples, energy products and fertilizers.

Such a situation may be expected to raise our cost of sales and hamper us from increasing sales.

This is a situation that cement producers cannot avoid or get around. If it is simply a matter of increasing coal prices, we can still find a solution by modifying our machines. But for the roads, we have to rely entirely on the government.

Some say that we should use the railways instead. But it is too risky. The railway operator cannot even transport people safely and on time to their destinations. By sea? It is too expensive and does not afford access to inland areas.

How do you forecast profit and sales for this year?

Our target will be at least similar to last year's. Although we recorded a significant increase in the first half of this year against the same period last year, we remain cautious over the recent hikes in coal and oil prices as these will drive production costs higher.

Energy costs account for around 45 percent of our total production costs. The rise in the price of oil and coal will cut our gross (profit) margin profit by between 5 percent and 10 percent. Currently, our gross margin is around 30 percent. We are trying o maintain that margin until the end of this year by controlling certain variables in our production costs and processes.

One of the ways in which we are attempting to cope with the problem is to modify our machines so that they can be fueled with low-calorie coal, which is available abundantly in Kalimantan at a lower cost. High-calorie coal, which is more expensive, is now allocated for export. The modification of our machines so that they can burn low-calorie coal will not undermine the quality of our cement.

Other way is to boost efficiency in our operations.

There will, of course, be a cut in our margins this year as a result of rising energy costs. But the amount will not exceed 5 percent -- maybe 1 percent or 2 percent.

Any plans to raise cement prices to cope with higher production costs?

Not at this moment. But we are still looking at the possibility of doing so in the second half of this year, depending on market demand. If there is a strong demand, we will not raise our prices. In the first semester of this year, demand for cement grew by between 9 percent and 10 percent. We will see whether demand for this semester will exceed the figure for the first semester.

There are several variables that we can modify so as to avoid price increase, such as increasing our volume and wisely managing our production costs.

We will try not to spoil the growth in the property and construction sectors by raising cement prices. We fear that by raising our prices, demand for property will be lower as it gets more expensive.

How is the progress of the forensic audit on Semen Padang? (The audit is being carried out to look into possible embezzlement of assets at the West Sumatra firm when it was managed by its previous, rebellious management)

The results of the forensic audit will impact the general audit. Our auditor is conservative enough to put aside some provision to cover losses in Semen Padang. For example, in 2003 Semen Padang recorded a profit of Rp 38 billion (US$4.2 million), but after the audit it recorded a loss of Rp 32 billion. We have promised our shareholders to complete the audit in September.