Olefins denied protection

Olefins denied protection

Industry Minister Tunky Ariwibowo's announcement yesterday
that the government will not be granting tariff protection to the
US$1.6 billion olefin plant of PT Chandra Asri Petrochemical
Center came as a pleasant surprise. We had come to take it for
granted that companies controlled by politically well-connected
businessmen get what they want from the government.

We had expected tariff protection to be announced at the
inauguration of the plant by President Soeharto on Saturday.
Located 120 kilometers east of Jakarta, the new facility is
Indonesia's first olefin plant.

In early 1992 the project became embroiled in controversy over
the perceived preferential treatment it was receiving from the
government. Earlier, the project was one of several large
projects shelved by government decree in late 1991, in response
to concern about a deteriorating balance-of-payments position.
The olefin project was revived in 1992 as a wholly foreign-owned
venture, although it continues to be controlled by the old
shareholders. Those shareholders triggered another bout of heated
public debates last year, when they asked for tariff protection
of up to 40 percent, at least during the first few years of
operations.

The decision not to grant the industry any tariff protection
is to be welcomed, as indicating that the government is
determined to gradually reduce import tariffs along with non-
tariff barriers in preparing for the advent of the ASEAN Free
Trade Area, in 2003, and the Asia Pacific Free Trade Area, in
2020. Tariff protection for such important and widely-used
industrial materials as ethylene and propylene would have
adversely affected numerous downstream industries.

Nevertheless, we do think that the plant should be given some
assistance from the government to enable it to compete with
imports. The capital costs of the Chandra Asri plant were much
higher than those faced by similar projects overseas because the
investors had to bear the costs of most of the supporting
infrastructure. Moreover, its depreciation costs will be much
higher than those of the older olefin plants in countries such as
Taiwan, South Korea and Japan.

Chandra Asri also faces other difficulties. The commencement
of production at the plant in May coincided with a glut in the
Asian olefin market, caused partly by a sharp reduction in the
volume of imports by China. This has forced olefin producers in
Japan and Taiwan to slash both their prices and their output. One
plant in Taiwan was reportedly shut down for a month because of
low demand. Such market conditions could lead overseas suppliers
to dump their products in Indonesia.

The government's intention to protect the new olefin plant
from dumping, as promised by Tunky yesterday, is therefore
appropriate.

We hope, however, that whatever assistance the government
grants to Chandra Asri will be decided through a transparent
process. Care should be taken that no incentives provided to the
company create new market distortions or make local olefin prices
much higher than the price of imports.

The existence of a domestic olefins industry is of great
advantage to Indonesia, given the importance of olefins as the
basic ingredients in the manufacture of plastics and synthetic
fibers. Procuring ethylene and propylene from the Chandra Asri
plant will save the country about US$600 million a year, that
figure being the annual import bill for olefins. Such a saving is
quite significant, especially given that our foreign trade
suffered a deficit in June, the first in five years.

It also makes common business sense for industrial users to
procure from a domestic plant rather than importing, provided
that quality is comparable and local prices are not way above
those overseas. First, delivery is much faster. Second, buyers
can schedule deliveries to arrive just in time for use in the
production process, thereby reducing manufacturers' inventory
costs and sparing them the difficulties often encountered by
importers at seaports.

This said, Chandra Asri should see to it that the quality of
its products is comparable to that of imports and, as the sole
domestic producer of olefins, the company should be on guard
against the temptation to behave like a rent-seeking monopoly.