Infrastructure projects to boost cement demand

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.