Infrastructure projects to boost cement demand

Rendi A. Witular, The Jakarta Post, Jakarta

Despite a predicted fall in consumer purchasing power as a result of higher interest rates, cement demand is expected to remain high in 2006 with a boost from government and private sector spending on infrastructure projects.

Infrastructure projects are expected to offset a decline in cement demand from the housing and property sector. Overall demand could grow by between 7.5 percent and 8.5 percent in 2006, said Dwi Soetjipto, president director of cement giant PT Semen Gresik.

"If translated into volume, demand will be about 35 million tons next year, fairly higher than this year's estimated demand of about 32 million tons, most of which is from the property and retail sector," said Dwi.

Among the government projects being eyed by cement producers next year are irrigation systems, toll roads and bridges.

"We expect the property and retail sector will pick up in the second quarter of next year after inflation eases and interest rates are gradually lowered," said Widodo Santoso, marketing director of PT Semen Padang.

Widodo said most of the cement demand would continue to come from Java, with Banten, West Java and Jakarta alone expected to account for about 40 percent of total demand in 2006, thanks in part to several toll roads planned for the areas.

Competition in the cement industry is expected to remain as tough as ever, as market leader PT Indocement Tunggal Prakarsa -- a local unit of Germany's Heidelberg Cement Group -- tries to maintain its dominance over Semen Gresik and its unit Semen Padang.

With its Tiga Roda cement brand, Indocement currently controls 40 percent of the market, followed by Semen Gresik with 25 percent and PT Semen Cibinong -- controlled by Swiss-based cement giant Holchim Ltd. -- with 12 percent.

The remaining 23 percent of the market is held by a number of smaller cement producers.

Widodo said that while cement from the household sector was expected to decline in 2006, it would be risky for producers to lower their prices at a time when production costs were going up and profit margins were relatively slim.

"I think cement prices will remain at about Rp 740,000 (US$76.20) per ton next year. Expansion into lucrative areas is unlikely to push cement makers to lower prices because that would just damage the industry," said Widodo.

Cement companies engaged in a costly pricing war in 2003 as they attempted to attract buyers amid falling demand.

"There will be less price competition in the industry next year because most companies have already increased prices this year to cover rising production costs," said the head of research at UBS Securities Indonesia, Joshua Tanja.

Joshua said Indocement would continue to boast the highest profit margin next year due in part to its efficient operations.

Cement demand in Sumatra next year is projected to grow by 4 percent, while growth in Java is projected at between 14 percent and 16 percent.

Demand in Java will be equally driven next year by infrastructure projects and the household sector, while in Sumatra 90 percent of demand will driven by households and 10 percent by infrastructure projects.