Semen Gresik needs consolidation to improve efficiency: CEO

State-owned firm, PT Semen Gresik, the country's largest integrated cement producer, is currently faces a daunting task to make its operations more efficient amid higher energy prices as well as a lack of consolidation among its subsidiaries. The East Java-based company has a total installed capacity of 17.2 million tons at present, with 5.5 million tons and 3.5 million tons derived respectively from its subsidiaries PT Semen Padang in West Sumatra and PT Semen Tonasa in South Sulawesi. Semen Gresik's newly appointed president director and chief executive officer (CEO), Dwi Soetjipto, shared his views with The Jakarta Post's Rendi A. Witular about the company's new strategy in coping with present and future challenges. The following are excerpts from the interview:

Question: What are the problems in Semen Gresik that you will need to immediately address?

Answer: The most daunting task I am facing now is to consolidate the operation of Semen Gresik with its subsidiaries PT Semen Padang and PT Semen Tonasa.

The problem occurred because the relationship between Semen Gresik, as the parent company, and its subsidiaries has not been solid ever since the government decided to unite the three state- owned companies.

Each of the companies is currently operating as a single and separate entity. Such a condition has actually created unnecessary costs, which eventually led to operational inefficiencies.

In the marketing sector, for example, most often the three companies compete with each other in the same area. This has created additional marketing and transportation costs. With regard to inventories, each company now tends to procure its own goods and supplies without coordinating with the others. This has also created inefficiencies.

If not contained immediately, all of these problems will result in high costs and make our products less competitive. I expect that with improved consolidation, we can boost our profit margin.

At present, we are still in the process of consolidating our marketing, production, procurement, organization, information technology system, human resources and financial system.

How much do you expect to save from the consolidation program?

We are still calculating the figure. It is too early for me to say, but we expect the consolidation will help us cover at least the rise in energy costs. With higher global oil prices and a possible rise in electricity charges next month, we have estimated that there will be a rise in production costs of 11 percent. At present, energy costs account for some 30 percent of our production costs.

The rise in the oil prices concerns us because it will eventually drive up the price of coal, which is our main energy driver here. We only use diesel fuel for starting up our machinery, but for running the entire production process we use coal.

We are afraid that higher fuel prices may increase our transportation costs, which account for at least 10 percent of our operating costs.

Our operations budget this year has not factored in possible rises in energy and transportation costs. That is why we are pushing forward with our efforts to boost efficiency.

How will the unresolved dispute between the government and Mexican cement giant Cemex S.A. -- which has an approximately 25 percent share in Semen Gresik -- affect the company's future operations?

For the new management, we are going to keep trying to accommodate the interests of the shareholders, be it the government, Cemex, or retail investors. The management will also try to create a working environment that is conducive to all.

What about political interests? Are you willing to accommodate political requests?

The new management will strongly uphold professionalism. We will comply with all business regulations.

Are there any plans to revise this year's targets?

There will be no revision in our targets for this year as we are still concerned about a possible rise in energy costs. We are sticking to our target of making some Rp 600 billion (US$61.8 million) in net profit this year by boosting our sales and improving efficiency.

Although there will be some pressures arising from costs, we will try not to raise our cement price again. We are still monitoring our competitors. But if the pressure from energy prices and transportation reaches a certain level, we will have no other choice but to raise our cement price once again.

What about cement demand this year? How fast will it grow?

The focus of growth in cement demand will remain in Java. Demand is likely to remain low in other parts of the country because of various problems, such as natural disasters and local elections for governors, regents and mayors.

As for next year, I estimate that cement demand will be even higher because of the reconstruction programs in tsunami-stricken Nanggroe Aceh Darussalam, as well as government-sponsored infrastructure projects.

How is the plan going to build a new plant? Any progress?

We are currently in the process of conducting a feasibility study, which we expect to complete in November or December. The construction of the plant is scheduled for next year, with a completion time of three years.

During the study, we will also investigate securing external resources to fund the project, which it is estimated will cost about Rp 3 trillion. We expect that 70 percent of the money will be derived from external sources, while the remaining 30 percent will be from our cash reserves.

We have yet to decide whether the external funds will be derived from bonds or bank loans.

Regarding the location for the plant, we are still undecided. We are still seeking a suitable area that has sufficient resources and infrastructure. But the plant will definitely be located in Java.

Like other cement producers, we may build our plant in West Java or Banten in order to take advantage of the huge demand in these two areas.

At present, our market share is 44 percent. We expect to increase that, but with our current capacity it will be difficult. Our capacity is designed to supply a 33 percent market share.