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.