Cautious growth forecast for Indonesia
In the first three months of 2022, Indonesia's cement market expanded by 4.8 per cent to 15.594Mt when compared with the equivalent period in 2021, when demand stood at 14.873Mt. In January Indonesian cement producers supplied 5.4Mt of product to the domestic market, up 10.1 per cent YoY. However, this robust growth faded as the quarter progressed with the market absorbing 4.727Mt in February, representing an increase of two per cent YoY, and deliveries in March increasing 2.5 per cent YoY to 5.467Mt.
In terms of regions, Sulawesi led the market recovery as it reported a 19.7 per cent increase in deliveries to 1.421Mt in the 1Q22, followed by Timur, where the market expanded by 13.1 per cent to 0.559Mt. Meanwhile, Kalimantan saw its cement deliveries increase by seven per cent YoY to 0.977Mt. However, dispatches in the Java market, the largest in the country, noted below-average growth of 3.9 per cent YoY to 7.971Mt. Sumatra’s market remained largely stable as deliveries edged up by 0.6 per cent to 3.342Mt. Only the Nusa Tenggara market contracted, by 2.5 per cent to 0.734Mt.
However, the latest data, which reflect cement deliveries in May 2022, show a return to higher demand growth at 7.5 per cent YoY, driven by a 33.3 per cent expansion of the bulk cement segment. Bagged cement sales were up 1.4 per cent. The Java market expanded by 14.7 per cent with a robust recovery seen in East and West Java markets where both bagged and bulk cement deliveries were up considerably. However, outside Java, growth was more muted at 0.2 per cent YoY. It must be noted that May 2022 data are compared against a low base as last year the Eid Al-Fitr holiday fell in the middle of the month.
Outlook
Looking ahead, while the risk of impacts from COVID-19 appears relatively moderate, there are several macro-economic factors that could negatively impact the cement sector. In addition to the possibility of a global recession, looming high inflation may see the benchmark interest rate increase, impacting on property demand and therefore, postponing investment in the construction sector. The increase in electricity prices for households, starting in July 2022, is expected to impact on household spending, resulting in reduced disposable income.
Nevertheless, infrastructure projects as well residential and commercial construction markets are expected to support Indonesian cement demand in the second half of 2022. The development of Indonesia’s new capital Nusantara (IKN) as well as several projects in Sumatra and eastern Indonesia are scheduled to start during this period. Moreover, the construction of new clusters in Jabodetabek area with projects such as the third phase of the Jakarta Mass Rapid Transit (MRT) project is forecast to generate further demand, especially in the ready-to-use cement products where an oversupply of around 40Mt existed in FY20-21. In the run-up to 2024, the government is expected to spend US$450bn between 2020-24, up 25 per cent when compared with the previous five-year plan. However, the commitment of the private sector will be key in implementing this expenditure as the government is expected to directly fund only US$165bn, of which state-owned enterprises will contribute US$95bn.
On the supply side, there are challenges for the cement industry. While a more stringent moratorium on new cement production capacity would positively address the current oversupply situation, in the last 2-3 years the government has continued to approve new capacity, although at a slower rate.
Production costs have also increased as cement producers have been plagued by soaring coal prices on the back of coal shortages and a plan to implement a carbon tax on coal-fired power plants. The Indonesian government has supported the industry to some extent as it capped the coal purchase price at US$90/t between November 2021 and March 2022 and banned coal exports from the country for three weeks in January 2022. Cement producers also hope that the latest EBT Bill on new and renewable energy will require companies to fill at least 30 per cent of domestic coal demand with the highest price of US$70/t from a coal reference of 6322kcal/kg, leading to lower production costs.
The high coal price in particular has been putting upward pressure on average selling prices (ASPs) and increased the need to raise ASPs going forward. Indocement and Semen Indonesia are obliged to increase their prices by 3-5 per cent, but if coal prices remain high, further price rises cannot be ruled out to sustain healthy profit margins. Higher prices may then affect Indonesia’s cement consumption, slowing market growth.
