Cheap Indonesian cement seen as solid opportunity

Cheap Indonesian cement seen as solid opportunity

JAKARTA (Reuters): Most foreign investors may have dropped
Indonesia from their list, but in the cement world the country is
attracting global players by offering some solid and cheap
opportunities.

Three major world producers -- Mexico's Cemex, Germany's
Heidelberger Zement AG and Switzerland's Holderbank -- are either
raising their stakes or acquiring new ones in leading Indonesian
cement makers.

Cemex and Holderbank are in the process of raising their
stakes to a majority in Semen Gresik and Semen Cibinong,
respectively, while Heidelberger is trying to acquire a stake in
Indocement through a debt revamp deal.

These international players are facing significant risks, from
political unrest, overcapacity in the cement sector and policy
uncertainties to a huge debt burden, for a share of the market
that other investors have shunned.

In favor of these investments is the low price foreigners are
paying, the huge market share of around 90 percent held by the
three Indonesian companies and a recovering economy.

Analysts say that despite all the risks, and the possibility
that returns may be slow in coming, these investments hold good
long-term potential.

To world cement producers it is a chance to get in cheap.

"I guess the fact that cement firms are cheap is irresistible
to these cement giants. As an illustration, it usually costs
US$150 per ton to establish a new plant, but most Indonesian
cement firms are currently valued at much less than $100 per ton,
very cheap," Gresik corporate secretary Amat Oemar Asnar told
Reuters.

Mexico's Cemex paid only $70 per ton when it bought a 20
percent stake in Semen Gresik in 1998. It now owns 25 percent and
plans to increase that to a majority stake.

A recent report by ING Barings Securities puts Semen Gresik's
current enterprise value at just $50 per ton, mainly the result
of the weaker rupiah, which had declined 19 percent on the year,
and falls in its share price.

Asnar added that most Indonesian cement producers boosted
efficiency as a result of major expansion in 1997 in the last
days of the Indonesia's economic boom.

"Investing in Asia would also make it easier for those cement
giants to expand their market in the area," said Ella Nusantara,
cement analyst at Bahana Securities.

Analysts said the industry suffered from huge overcapacity and
it would take years to get back to the bright days before
Indonesia's economic and political crisis erupted towards the end
of 1997.

Consumption

Domestic cement consumption in January to July this year rose
nearly 15 percent year-on-year to 11.8 million tonnes.

ABN AMRO Securities said in a report the increase was mainly
from the retail sector -- construction of residential homes and
renovations -- and concentrated in Jakarta and Central Java.

"It remains to be seen whether the trend is sustainable."
Analysts expect total consumption this year of almost 30 million
tonnes -- 20 million domestic and 9.5 million in exports.

But this figure is still well below total production capacity
of 47 million tonnes. The country consumed 28 million tonnes of
cement in 1997, the year the Asian crisis started.

Even with rising domestic demand, the utilization rate remains
a low 60 percent and cement makers will have to boost exports to
be able to maintain an adequate margin.

One analyst said it would take five to eight years before the
local firms reach a 90 percent capacity utilization.

"Looking at the size of the total installed capacity, it would
take years for cement firms to return to their pre-crisis
condition," said ING Barings' Budiardjo.

Analysts say the planned investments may not happen soon.
To placate local opposition, the government has said it would
spin off Semen Gresik's West Sumatra plant before Cemex can take
up its majority stake.

Holderbank's plan to raise its stake in Indocement to 50
percent from 12.5 percent has to wait until the company reaches
agreement with creditors on more than $1 billion debt.

"The whole process of restructuring would take time. I don't
think they would be able to complete it this year, next year at
the earliest," Nusantara said.

Some big cement firms are also burdened by huge debts from
heavy foreign borrowing to finance expansion in early 1997.

"Unfortunately the crisis hit at the time when expansion work
had begun, demand then plunged and the rupiah's sharp
depreciation had made it almost impossible for the cement firms
to service their debts," Nusantara said.