Thu, 13 Oct 1994

The cement tug of war

I was interested to see your comment in the Oct. 7, 1994 issue as well as that of the week before.

There has been a lot of comments in recent weeks both in newspapers and in parliament on the shortage and price situation, which I feel the need to point out the actual facts in the industry over recent years.

I myself have been in the cement industry for over 30 years in Europe, Africa and Asia and I can assure you the problems being encountered in Indonesia today are not new. A similar situation occurred in England a few years ago due to a sudden increase in demand and imports had to be arranged at short notice. As in England, the cement industry has, perhaps, been too good to its customers in the past. There are not many commodities that you can expect to order one day and receive the next, but this until recently has been the case with cement. You will appreciate that cement is a costly product to store, not only for manufacturers, but also distributors and retailers. It is therefore not economically possible to keep large stocks besides the product deterioration that takes place over a short time, when stored in bags or outside in clinker form.

You refer in your article to the difference in percentage increases announced. The facts are that production between January and September 1994 has increased by 15 percent over 1993 and domestic supply by 21.1 percent. However these are year to date figures and do not show the monthly or regional variations. The increase for Java was 24 percent but over 30 percent for the last two months. It is not possible for suppliers to meet such large increases without some disruption to the normal distribution operations. These same variations also dictate the requirement to allow flexibility, to export or import in different regions at different periods of the year.

Those that criticize without full knowledge should also understand the historical position of the cement industry. In Pelita III cement capacity increased by 270 percent but consumption by only 121 percent and it was not until the start of Pelita V that consumption began to catch up with capacity. Over ten years the industry had major losses on it's investments due to the lower than expected demand and my company PT Semen Andalas Indonesia is still in a loss position due to those years of being unable to service our debt, as well as the continuing low prices to pay back the principal loans in dollars.

In regards to prices, I believe that most cement companies are selling ex-factory at below the government's H.P.S. limits. However, the increased demand in certain areas as explained above is enabling those in the distribution chain to take advantage. This is simply a supply and demand situation where users of cement have been unused to ordering sufficiently in advance to ensure continuity of supply. The present problems are temporary and will reduce once the rainy season commences, when traditionally demand drops 10-20 percent.

Imports this year have already reached a volume of 540,000 tons this year, with a further 800,000 tons expected. There have been no restrictions on imports and no tariffs since 1991. The reason non-manufacturers do not import is because the price of imported cement averages Rp 5,250 per sack C.I.F, but after storage, transport, profit for distributors/retailers and 10 percent tax, the retail price is around Rp 8000 compared to the present H.P.S. in Jakarta of Rp 5,930.

Finally you referred to investment and opening the industry to market forces. The industry would welcome this as the true position would then become apparent and manufacturers would obtain a realistic return on their investments. It should be appreciated that a new factory costs between US$ 180 and 200 per ton of installed capacity, depending on overall volume and infrastructure requirements, which are usually high in Indonesia. At a gross production and overhead cost of $40-45 and average ex- works price received of $55, there is insufficient money to pay finance costs for the investment, which at 15 percent for principal and interest would be $27-30. You will, perhaps, therefore understand why non of the 20-30 projects approved by BKPM have progressed.

I hope the above explains some of the misunderstandings and misconceptions of the cement industry situation.


President Director

PT Semen Andalas Indonesia