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.