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Indonesia’s cement industry 2015 and beyond: Randolph Wintgens, Wintgens Associates (Indonesia)

Filmed at Cemtech Asia 2015, 21-24 June, Grand Hyatt, Bangkok, Thailand

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I will talk to you about Indonesia this morning and at a glance you have 250 million people living there fourth largest country in the world, ENP per capita 3500 dollars, economic growth about 5% but going down, we have 12 cement producers, some state owned, some privately owned and the privately owned are mostly foreign. Production capacity is 76 million tonnes 81% utilization, cement consumption almost 60 million last year but it's cooling down, exports minimal, imports pretty high and unfortunately a multitude of green and brown field expansion projects both ongoing and planned and the surplus is certainly going to increase. This is just the glance as an appetizer of what you may want to hear in the next minutes. We will cover today demographics, economics, producers, markets, capacity, sales, distribution and outlook of that country.

250 million, fourth largest populated country, still relatively small population density but that's because the country is so big compared to Bangladesh which is much higher density but the country is much smaller. You have distances, 5100 kilometers from east to west and 1760 kilometers north to south, 34 provinces, 17,500 islands the largest islands being Sumatra and Java and Kalimantan the form of Borneo, Slavici the form of Silabese and then you have the malukus and Bali of course and Aryanjaya and Papua.

The economy basically it's a market based economy in which the government plays a significant role. There are 139 state owned companies including some cement companies such as Cement Indonesia, the largest cement producer as a matter of fact and smaller producers, Semen Baturaja in Sumatra. The government administers prices in several basic goods, fuel, rice, electricity but recently some interference in cement prices have started since early this year, I will get back to that in a short while. From 0% in 1999 which is quite amazing which was after the fall of the Suharto regime and the crisis of the late 90s, Indonesia had a growth rate of 0% and it then gradually went up and stabilized at about 6% until 2013.

But then since 2014 it gradually starts to slip down and it may even go below 5% in 2015. Recently the IMF and Wold Bank have both corrected their forecast to be below 5%. Now 5% may still be a nice growth rate for some countries but a country like Indonesia at the stage of development like Indonesia, 5% is much too low.

What is causing this slowing economic growth in Indonesia? Well, there are of course the global factors as usual and the domestic factors. The global ones are the sluggish global economic growth particularly caused by the slowdown of China which is a key trading partner and Indonesia used to be an export commodity based country, so since China is not buying so much as it used to be so that market collapsed for Indonesia and of course there's a looming monetary crisis or tightening in the US which leads to capital outflows, depreciation of the Rupiah, imported inflation and limited purchasing power of course for the people just illustrate how the Rupiah has changed since 2011, it moved from 9,022 Rupiah to the US Dollar, to 13,901 yesterday not today, yesterday. 7% it has deteriorated since beginning of this year and Bloomberg calls it the worst performer of Asian currencies.

The domestic factors, I said there are global factors and domestic factors, the domestic factors one of the reason is of course the Indonesian Central Bank BI maintains 7.5% at interest rate. That of course is undermining the purchasing power of people, it results in reduced domestic consumption. You also see which is new to me since I live in Indonesia, all of a sudden you have slowing car sales, slowing motor cycle sales which shows that consumers either don't have the money or they're becoming cautious and also new is the fact that cement sales are down you will see in a few minutes which shows that activities in the property market and construction markets have slowed.

Inflation is up, in may it went already up to 7.2% which is very scary because this is even happening before Ramadan and Idd ul Fitr time, which started a few days ago. Normally during Ramadan and Idd ul Fitr that the inflation goes up but now it is already much up before so this is a little bit scary but interesting enough as usual the Indonesian government always sometimes looks the other way, they think it will still be between 3 and 5% target this year but I strongly doubt that.

Interesting enough foreign and domestic investments have still been increasing. Investments are registered, approved by the state owned investment coordinating board called BKPM and in the first quarter of this year you have seen both foreign direct FDI and domestic investments up to almost 16 billion US dollars which is quite amazing in this environment as I explained it before. Most foreign investors are from Japan, Singapore, US and South Korea, China for the first time made it to the list of 10.

And by the way Singapore's little bit misleading, these are not true Singaporean companies, these are mostly foreign companies who invest via Singapore venue. OK, all of this was to lead us eventually into cement and houses, what I explained has an effect on the industry. We now have 12 cement producers as per last count and spread all over the country, starting from Aceh in the North which is Lafarge owned plant all the way through to the islands of Sumatra and Java, Kalimantan, Slavici etc.For an estimate, best estimate of ours is that today's cement capacity is about 76 million tonnes. Cement consumption has been increasing since 2000 reaching 59.9 last year, interestingly enough it's after the crisis which I already mentioned in the late 90s it took the country five years, if you can see with here, it took the country five years to be back of the level of pre-crisis sold that was basically five years lost here for the country.

59.9 million last year but sorry and to see it in details, the 59 versus 2013 was 57 so it was up 3.6%. Also regionally speaking, all the regions were up, job hours up Sumatra, Kalimantan etc. but the slow down has definitely started since early this year, may was a disaster was -7.9%

a year to date, still -.38, there's a little bit of increase in exports which makes up the shortfall but this is not a very good forecast, the slow down is caused mostly by the major delay of infrastructure start ups, then of course economic uncertainties which I mentioned previously and also I must say that Indonesia had very stronger than usual rainfalls over earlier this year which of course seriously hampers construction and so these are the figures of May, June of course we don't know yet but it will not look good for the next two, three months because now as I mentioned last Friday Ramadan has started so during the one month of fasting period, the business in Indonesia is completely lower than normal.

Also regionally speaking compared to 2014, all the regions are down too, Java the major driver, Sumatra, Kalimantan everything. The only region which is up is Nusa Tenggara in the East but that's only 1.3 million tonnes. Exports are up very highly up as a matter of fact but this is a direct sign of companies which they don't have domestic market they put it in the export, no clinker exports.

Java has always been the major market in Indonesia, 56% of the total consumption stays in the island, the island of Java. Sumatra is same to the rest, Sumatra is the second largest market followed by the other thing, this is how it looks by region. Semen Indonesia is the form of Semen Gresik which has three companies under it's group which is the old Gresik and Semen Tonasa and Semen Padang all together forming Semen Indonesia have 43.8% market share.

Indocement owned by Heidelberg has 30% Holcim owned by Holcim of course, the rest here Bosowa is privately owned, Bosowa in Sulawesi is privatelyowned under Loesche Lafarge but to add into the government and then there's a few others. Most cement is sold in bags about 80% 80:20 is the ratio.

Per capita we now stand at 239 kilo per head in 2014 which is still very low compared to the rest of Asia. Went up from 150 in 2008 now at 239. The method of cement transportation in Indonesia it's quite obvious, largely depends on the location of your plant. If it's more on the water side then it's more water distribution or sea distribution and the other way around.

Padang for instance in West Sumatra does not have a big market around itself, so they have to use most of their transportation by sea. Gresik on the other hand in East Java has a good domestic market so they say 85% of the distribution is done by land. Exports as I mentioned basically they have been going down since 2008 and going down ever since as an indicator of the slow down in the domestic sales, I told you already, exports are increasing because companies are trying to overcome their surplus by putting it into the export market but this has never been a good solution because this is not where the money is made, personally I expect that exports will increase further during the year. Here you can see from 2006 onwards how big the volumes were and by how much they have gone down but at that time don't forget the demand was not as big but the capacities were there so everybody was exporting like crazy and I remember export prices of 12 dollars a tonne of clinker not like the 35 of which was mentioned by Vietnam before, so crazy prices. Imports thanks to a friendly source here in this audience I received some import figures which for last year show 1.6 million tonnes of cement and 1.9 million tonnes of clinker OK.

Since 2013 there's a strong regulation by the government to curb imports or to try to limit import as much as possible. There's a regulation called the Economy Monsanto as you can see there effective since September and basically you do need a register, you'll have to be a registered person with a licence to import and that can only be done basically by people doing market, pre-marketing or setting up a the new plant.

This is of course to discourage traders to come in looking just to make quick profit. Now earlier I mentioned that all of a sudden there is interference into cement prices by government. The government for many years kept out of interfering in cement prices but all of a sudden since January two things happened, one was that in January, the President ordered the state controlled Semen Indonesia to drop the price and the reason why it was done is of course they wanted to push ahead with the infrastructure development in the hope to achieve a higher GDP.

And this don't forget now Semen Indonesia has about 45% market share, so if the market leader drops its price obviously the whole competition has to follow and I read here the effect of this price cut are dubious, why I'm I saying that? Because at the same time that Semen Indonesia lowered the prices of course Holcim and Indocement and everybody else is lowering it too, so they're back to square one.

After one or two weeks so nobody has basically gained and the other problem is that the expected rise in demand has not happened. So right now the losers are the industry because now instead of making this kind of money or loosing that now it's even more, so this is a complete in my opinion backfiring. And then the second one all of sudden last Thursday we had another surprise, cement now is being capped, cement prices are being capped officially again in order to try not prices to increase too much during the Ramadan muslim fasting month's time.

It gives the government authority to set the prices for a certain time. An economist of Standard Chartered in Indonesia said while the goal is good but to industry players this is an interventionist policies. The losers will be the industry players basically. Now, today and beyond in view of major under spending, public spending in the past 10 years.

In view of the large population base, still relatively low per capita consumption, the potential increase in demand for residential construction, the need of infrastructure, the increased government spending, I still say that Indonesia today is a country with positive outlook for its cement industry. But I'm not saying what I said last year that this wasn't a short one I'm now correcting myself,it's more in the mid to long run that Indonesia may become again more attractive from a cement investment point of view and also despite because of the slowing demand and substantial capacity increases, we see a major surplus coming in the midterm, so these are not very good news neither for existing company nor for potential new projects. Between 1998 and 2009 the capacity was relatively stagnant, it only started to take off as of 2010, 2012. These are several of these increases which have been announced recently, I'm not going through all of it you will see it will be published in the paper so let's not go too much but it shows you the multitude of ongoing projects also as described by the Cement Association, ASI. You have to analyse expansion projects and new projects by existing players and by new and local foreign entrants. While I personally believe that existing players expansion of projects and new projects will materialize eventually, I'm less bullish on the multitude of the new local and foreign entrants except for a few.

Existing players in our opinion will add a capacity of about 21 million by 2017. New entrants but the ones which I personally think will go through or are already under construction will add another 14 million. There is a minimum of 15 other projects which are in the market, local foreign entrants but so far, none of those are materializing not even under construction so I will not talk about them but keep in mind there are some more.

So we have, as I said about 21 million coming in from existing players plus about 14 from new. This is where these expansions are going to happen. Yes, I'm almost there you didn't say that to the gentleman from Vietnam. Don't blame me, so it's easy to enter the market, in Indonesia there are obstacles regarding land acquisition, environmental permits, licensing issues, the access to adequate materials and the famous cost line issues are problems, logistics, infrastructure, proximity to the market then of course you have the resistance of local players, of existing players you have time and financial constraints and to market a new product in existing established market place is not easy.

The Indonesian securities company in Bahana foresees by 2016 a cement capacity of 99 million but a demand of 67, I'm sorry a demand of 66 and utilization rate of 67. I see it a little bit differently, in my opinion by 2017 so a year later I only see consumption because I base it on what is happening before, I see consumption growing by only 2% this year, going to 5% in 2016 and 2017. New projects as I said by existing about 12 million, new projects entrance at today's status of 11 so that means the capacity by 2017 may be hitting 99 million but the consumption will only be 17.

Big shortage, big problems now of course all of this can change because if the consumption goes faster then you have a different scenario if new entrants will be the ones which I said are just on the one project. You cut me off? Thank you. Sorry I'm being boycotted here, anyway thank you for smiling about it. It's a signal so we have at come at the end. I'm not supposed to speak longer, so thank you anyway for your kind attention.

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