Protecting Petrochemicals

Protecting Petrochemicals

Minister of Trade and Industry Tunky Ariwibowo ate his own words when he admitted on Wednesday that the government has slapped a 20 percent surcharge on imported polymer-grade propylene, thereby granting the local producers of the chemical the protection of a 25 percent tariff. Only five months ago, amid strong lobbying by PT Chandra Asri Petrochemical Center for a 40 percent tariff, Tunky promised that the government would not grant the politically-well connected company tariff protection.

His September statement, made after he met with President Soeharto, was consistent with the government's June, 1994 deregulation package that explicitly rules out increasing import tariffs on products from new manufacturing plants. Tunky did however add that the government would impose surcharges whenever foreign petrochemical firms dumped their products in Indonesia.

The government is right to ensure that the US$1.7 billion Chandra Asri olefin center in West Java is protected from bankruptcy, especially after it licensed Chandra Asri to make an additional $1.9 billion investment to expand its olefin center.

Asia is threatened by an olefin glut after massive capacity expansions in Malaysia, Thailand, Taiwan, Singapore and South Korea. Ethylene and propylene prices dropped by 30 percent in Asia last year to $450 and $550 a ton respectively.

Moreover, Chandra Asri's 550,000-ton ethylene unit and 245,000-ton propylene unit, besides strengthening the petrochemical industry's base, could save Indonesia about $600 million a year in foreign exchange, which should be spent on imports. Such a saving would be of great help at a time when the country's current account deficit is as high as $8 billion.

Nonetheless, the controversial surcharge is totally at odds with the government's commitment to steadily reduce tariff and non-tariff barriers. However short term the inconsistency might be, it will surely affect investors' trust in the government's policymaking.

The controversy is not so much about the size of the tariff -- several other Asian countries have even higher tariff barriers -- but the way the protection was granted and the obvious preferential treatment Chandra Asri has enjoyed since the early 1990s. After all, Pertamina's refinery in West Java, which is designed to produce 180,000 tons of propylene a year, will also benefit from the tariff protection.

Tunky's defense, that the surcharge was imposed to make transactions more transparent and that it is a win-win solution for both upstream and downstream petrochemical industries, is confusing.

The decision to grant the surcharge was not made transparently. The decision would not have surfaced so soon had it not been for Tri Polyta's disclosure on the Nasdaq stock market in New York that its propylene imports were subjected to a 20 percent surcharge. Why didn't the government use the simple argument that Chandra Asri's production costs justify tariff protection. Even if Chandra Asri's propylene price was higher, say up to 20 percent, than the price of imported propylene, local users would still prefer its product because of the savings they gain from lower inventory costs. By buying from Chandra Asri, local users can make just-in-time-delivery arrangements, thereby cutting inventory costs.

Several questions therefore remain unanswered in the government's rationale for the tariff hike, especially because no single foreign producer has been proven to have dumped propylene in Indonesia.

It is puzzling, for example, why the protection is needed when Tri Polyta-- its consumption of more than 300,000 tons of propylene a year making it the largest user in Indonesia -- is also majority owned by the shareholders of Chandra Asri. Tri Polyta is also located near the Chandra Asri which makes transportation of the bulky chemical much cheaper and more convenient. If even Tri Polyta, which itself enjoys a 40 percent tariff protection for its polyethylene product, had to be coerced with an import surcharge to procure its feedstock from Chandra Asri, there must be something dreadfully wrong with the commercial viability of the propylene produced by Chandra Asri.