Cemex eyes Indonesia for Southeast Asia headquarters

By Berni K. Moestafa

JAKARTA (JP): The global cement industry, like many others, is consolidating and evolving into a tight industry with a few key players vying to control the world market.

This trend was picked up by the Mexican-based cement producer Cemex in the mid-1980s, when the company realized the need to compete in the international market. As a result it adopted a new strategy to expand geographically into emerging markets with high growth potentials.

A rapid expansion followed and today the company boasts of itself as the third world's largest cement producer, with a production capacity of some 65 million metric tons of cement per year and 56 cement production facilities across 15 countries.

While Cemex's 1997 investment in the Philippines was a large part of the company's expansion program, Cemex's stake in Indonesia was even more than that.

Cemex focused on Indonesia because of the country's proximity to other Asian markets, its own domestic market potentials and the availability of educated human resources.

"We're not thinking of a simple cement factory in Indonesia. Since day one, what we've been thinking is to have the headquarters of Southeast Asia here in Jakarta," said Cemex president for Indonesia Fransisco Noriega.

In 1997 Cemex then entered Indonesia by acquiring a stake in the state owned Semen Gresik Group (SGG).

Grouped under SGG are PT Semen Gresik, PT Semen Tonasa and PT Semen Padang.

Cemex currently owns a 25 percent stake at Semen Gresik, which is the parent company of Semen Tonasa and Semen Padang. The government is the majority shareholder at Gresik with 51 percent while the public owns the remaining 24 percent.

"We want to make out of Gresik a big company that will become the umbrella company of our investments in Asia," Noriega said.

According to him, the move would turn Semen Gresik into a global player responsible for Cemex's investment in the Southeast Asian region.

He said that throughout the region, Cemex planned to invest in such things as cement terminals and grinding facilities.

The company is currently building a cement grinding facility in Bangladesh, with the Semen Gresik Group supplying the clinker -- the raw material to be pulverized into cement.

Through Semen Padang, the group will also provide the grinder and steel structure of the Bangladesh facility.

But Noriega added that Cemex investment in Indonesia was not merely based on the country's export potentials.

He said that investment in the cement industry was aimed at meeting a country's domestic cement demand, while exporting to cover any deficits in other markets.

Along with PT Indocement and PT Semen Cibinong, Semen Gresik dominates the local market with a 90 percent share, according to news agency Reuters.

But Noriega acknowledged that Indonesia's current production capacity exceeded domestic demand.

He said that Indonesia's installed production capacity reached 48 million metric tons of cement per year as against an estimated domestic consumption of 21 million tons this year.

"Before the crisis, we all thought that there would be a shortage in supply, but that happened in all countries in this region," he explained. He estimated that by 2007 cement demand could match Indonesia's installed production capacity.

According to him, Indonesia's cement demand was already growing by around 15 percent a year on the back of a recovering construction industry.

However, as Indonesia shows the right potentials to become Cemex's headquarters in Southeast Asia, the company is still far from realizing the plan.

Transforming Semen Gresik into a global player depends largely on whether the government gives its approval for the Mexican company to purchase a majority stake in Semen Gresik.

Although the government first agreed on the acquisition, protests by the people of Padang in West Sumatra, who rejected foreign control of Semen Padang, delayed the plan.

The people have argued that Semen Padang's factory was built on their heritage land and demanded that the company remain under their control.

The government then accepted the local community's suggestion to spin off Semen Padang from Semen Gresik and to pave the way for Cemex to become the majority shareholder in Gresik.

Noriega said that although the plan had the support of President Abdurrahman Wahid and his economic ministers, the government had yet to follow up on the spin off plan.

He described the current situation as contradictory to the government's desperate efforts to attract foreign investors.

"The message is confusing, I see no major problem to explain why this (the spin off) is not happening," he said.

He said that while most foreign investors shy away from Indonesia, Cemex was eager to invest and expand here.

"Are we willing to invest more in Indonesia? Yes! When do we want to do it? Now! Are we committed to this country? Yes!" Noriega said.

Cemex, however, is not the only cement producer interested in Indonesia despite the country's infamous volatile investment climate.

The world's largest cement producer, Switzerland's Holderbank, plans to raise its stake to a majority in the publicly listed PT Semen Cibinong.

While Heidelberger, ranking fifth in the global cement industry, is aiming for a stake in the publicly listed PT Indocement Tunggal Prakarsa.

According to Gresik corporate secretary Amat Oemar Asnar as quoted by Reuters, cement firms have a chance to enter the market cheaply.

"While a new plant would cost around $150 per ton of cement, most Indonesian cement firms are valued now at less than $100 per ton," he said.

Amat said Cemex paid only $70 per ton when it bought a 20 percent stake in Gresik in 1998.

Gonzalo Galindo, vice president for planning at Cemex Philippines said that the opening of the world's economies was pushing cement firms to expand and consolidate their operations world wide.

He estimated that, except for the Chinese market, the consolidation has resulted in ten cement companies controlling about 44 percent of today's world market.

However, he said, to control the market, Cemex always aimed at acquiring a majority stake when investing in cement companies.

"A majority stake is the only way for us to implement Cemex's overall strategy," Galindo told visiting Indonesian journalists in Manila.

Calling it the Post Merger Integration process, he said, cement companies would assimilate Cemex's best working practices, while at the same time share their expertise with Cemex.

But at present, he said, Indonesia and Chile are the only two countries where Cemex owns a minority stake.

Noriega said that with only a minority stake at Semen Gresik, the company had no control over the management of Semen Gresik, let alone being able to introduce Cemex's best working practices.

He said that although the presence of Cemex here showed its optimism on becoming a majority shareholder at Gresik, there was still a timeframe.

Cemex, he said, has shown patience but would have to pull out of Indonesia if no progress was made on the government's side.

"It takes two sides, the buyer and the seller, so we're still waiting," he said.