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.