Price War and Investment Restriction So Challenge Cement Producers

Duniaindustri.com (October 2016) – Price war and investment restriction plan are the focus of the challenge of cement producers in Indonesia in the fourth quarter of this year. As demand slowdown is affected by national economic conditions, cement producers are suspected to still engage in price wars in certain areas to try to take greater market share.

“Competition in the cement industry is getting fiercer. Big players are price wars in a number of areas with high levels of competition. The price war could be a bigger discount, “said the world’s industry source from the cement industry.

It is not surprising that in September 2016 the national cement market fell 3.4 percent to 5.63 million tons in September 2016 compared to the same month of the previous year of 5.83 million tons, according to data from the Indonesian Cement Association (ASI). The decline is influenced by the market decline in Java -5.2%, Kalimantan Island -4%, and Sumatra Island -3.1%.

Domestic cement sales in Java, which contributed 55 percent to the national cement market, fell -5.2 percent in September 2016 to 3.1 million tons from 3.27 million tons in the same period last year. The weakening of cement market in Java affected by market decline in Jakarta by -15.8%, Banten -11.4%, and West Java -10.8%.

The three westernmost areas on the island of Java suffered a decline in cement sales over the past month, with the worst decline experienced by Jakarta. Other areas such as Central Java (1.1%), Yogyakarta (5%), and East Java (2.6%) still recorded the growth of the cement market. Outside Java, only Sulawesi (5.8%) and Maluku & Papua (10%) recorded an increase in cement demand.

Director General of Industry, Chemical, Textile and Various (IKTA) of Ministry of Industry Achmad Sigit Dwiwahjono said the beleid was targeted to be out this year. “The contents we will set about the technical requirements are tightened. For example, environmental requirements, such as emissions standards and technology, “said Sigit.

He said the current overcapacity that occurred about 25-26 million tons of total capacity of 90 million tons, while consumption only reached 64-65 million tons.

Margin Pressures
Fitch Ratings Ltd., the international credit rating agency, estimates that the over-supply condition of cement in Indonesia will put pressure on producer profit margins. Because the cement producers in the country have expanded their production capacity faster than the sales volume in the last two to three years.

According to the latest Fitch Ratings report in Jakarta on Monday (10/10), the Indonesian cement industry in the medium term is likely to still experience an oversupply despite a recovery in sales volume this year.

Fitch estimates domestic cement sales will increase by 4% -5% in 2016 to about 63 million tonnes. Growth will be supported by a stronger domestic economy and better demand from infrastructure-related sectors. Fitch also expects cement sales volume to increase in the next two years, in line with expectations that GDP growth will increase to 5.5% by 2017 and 5.7% by 2018.

In comparison, the Indonesian Cement Association (ASI) recently stated that the total cement production capacity in the country will reach 92.7 million tonnes per year by the end of 2016. Fitch estimates that the utilization rate is only 65% ​​-70% . The utilization rate was about 85% three to five years ago, when the economy and the property market were stronger.

On the other hand, excess supply can trigger a price war as a cement producer trying to protect their market share in Indonesia. In addition, coal prices, an important raw material for cement production, have risen sharply in recent months, putting further pressure on cement producer margins. Fitch estimates cement companies are looking for new ways to reduce costs, including cutting coal use, in order to maintain their margins.

Current oversupply is primarily due to 34 million tonnes of capacity from domestic firms and new players from outside Indonesia which began operating from 2014. Several cement companies, such as Semen Baturaja and Semen Indonesia, have been reportedly ready to start new plants by 2017. (* / editorial team 02)