Indonesia's methanol industry to enter real competition

by Johannes Simbolon

JAKARTA (JP): Indonesia's methanol industry will enter tight competition when the Humpuss Group's PT Kaltim Methanol Industry opens its methanol plant in Bontang, East Kalimantan, by the end of the year.

The start-up of the US$350 million plant will not only put an end to the importation of methanol but also cause an oversupply of methanol on the domestic market, pushing the country's methanol industry into tight competition.

The construction of the plant -- which Kaltim Methanol president Abdul Wahab sees as a possible new flagship of the Humpuss Group -- was completed last month, several weeks ahead of schedule, and it is now under the commissioning stage.

Kaltim Methanol is 70 percent owned by the Humpuss Group, which is controlled by President Soeharto's youngest son Hutomo Mandala Putra, and 30 percent by Japanese trading house Nissho Iwai.

The country's other methanol producer is PT Medco Methanol Bunyu, a subsidiary of the Medco Group.

Medco Methanol manages and operates the country's first methanol plant on the island of Bunyu, East Kalimantan, which is owned by state-owned oil and gas company Pertamina.

Medco Methanol took over the plant's operation and management from Pertamina last April after years of production problems.

According to their contract, Medco Methanol is entrusted to operate the plant for 20 years, while Pertamina will receive a fixed amount of fees and a share of the plant's revenue.

Since production started in 1986, Pertamina was only able to produce about 50 percent of the plant's designed capacity of 330,000 tons of methanol a year due to shortages of natural gas supplies on the island.

Medco Methanol now pipes natural gas to Bunyu from its gas field on the island of Tarakan, about 35 kilometers southwest of Bunyu.

The company spent $30 million laying pipes and building other related infrastructure to supply gas to the Bunyu plant from Tarakan.

Medco Methanol has allocated a further $20 million to revamp the 14-year-old plant to increase production to its designed capacity of 330,000 tons per annum for another 20 years. The upgrading will start next year.

Both Wahab and Medco Methanol president Robby J. Rompis said once Kaltim Methanol's plant came on stream, the domestic supply of methanol would increase to between 560,000 tons and 580,000 tons a year, much higher than the domestic demand of about 400,000 tons a year.

That would make an oversupply of between 160,000 and 180,000 tons a year, they said.

Kaltim Methanol's plant is designed to produce up to 660,000 tons of methanol a year.

To tackle deal with the oversupply, Wahab said, the company would sell only 40 percent of its methanol domestically. Nissho Iwai would market the remaining 60 percent overseas.

Rompis said Medco Methanol had managed to raise the production of the Bunyu plant to between 930 tons and 950 tons a day or between 300,000 and 320,000 tons annually.

But with the oversupply, which company will sell the most methanol?

Wahab believes Kaltim Methanol has a better chance to surge ahead in the competition since distribution of its product will be handled by a sister company, Humpuss Trading.

Humpuss Trading, Wahab said, had vast experience in distributing methanol across the country and had developed a wide marketing network.

Humpuss Trading monopolized the distribution of methanol from Pertamina's Bunyu plant until Medco Methanol stepped in and dismantled Humpuss Trading's monopoly.

"I believe our former costumers will be loyal to us. It's like two men, old and young, competing for a girl. I believe girls always choose the young one," said Wahab referring to Kaltim Methanol's new methanol plant

Medco Methanol, meanwhile, is not interested in marketing its methanol itself but prefers to focus on production.

"We sell the methanol on the spot. Any company wanting to buy methanol is welcomed at the plant," Rompis said.

According to Rompis, there are six companies acting as distributors for Medco Methanol's products, including Humpuss Trading, Aifta Dirga Jasa and Multi Impressa.

Both Wahab and Rompis promised not to wage a price war, saying their methanol would be sold at the international price.

To win and to lose is, however, the order of the day in business. Kaltim Methanol and Medco Methanol are well aware of this and have been thinking of solutions.

One solution is to increase absorption on the domestic market.

Methanol is traditionally used for the making of formaldehyde, acetic acid, cleaning agents, solvents, methyl tertiary butyl ether, clean fuel (especially in Brazil) and others. The growth of these industries in the country influences domestic methanol consumption.

According to Rompis, between 70 percent and 80 percent of methanol in the country is absorbed by formaldehyde producers to make glue for plywood. Therefore, methanol demand in the country depends heavily on the growth of the country's plywood industry.

Government data say methanol consumption grew by 2 percent per year domestically. But Rompis doubted this, saying consumption seemed to be at a standstill and the plywood industry was stagnating.

The Association of Indonesian Wood Panel Producers hoped to increase the country's plywood production to 10 million cubic meters this year from 9.57 million cubic meters last year.

But the association later revised its 1997 target to 9.6 million cubic meters, only a negligible increase from last year's production.

Rompis did not expect that demand for acetic acid, cleaning agents, solvents and methyl tertiary butyl ether would grow in the foreseeable future to absorb the surplus in the country's methanol output.

"The only solution to the oversupply situation is exporting our methanol," he said.

Meanwhile Wahab was rather optimistic about the domestic market's potential.

He believed the absorption of methanol on the domestic market would grow as a consequence of the oversupply. He predicted the acetic acid business would grow to be the second largest methanol buyer in the country after the formaldehyde business.

He said so far there was only one acetic acid producer in the country.

Data from the Ministry of Industry and Trade data show that Indonesia's imports of acetic acid grow by an average of 17 percent per annum, with 1996 imports reaching 26,357.8 tons.

Still, Wahab said the only solution to methanol oversupply in the foreseeable future was exporting the commodity, for which Kaltim Methanol was well prepared with Nissho Iwai.

"Nissho Iwai has prepared a methanol tanker with a capacity of 30,000 tons to carry our methanol from Bontang Port to export markets," Wahab said.

Rompis, meanwhile, said Medco Methanol would barely face any problems in selling its methanol abroad as several companies from Japan, Malaysia and Taiwan had offered to sign long-term purchase contracts with it. Each wanted to buy up to 200,000 tons of methanol a year.

"We, however, have so far rejected the offers due to consideration for domestic consumers," Rompis said