In high demand: Building materials are seeing investment and capacity expansion

As Indonesia’s real estate market has experienced growth in recent decades, the demand for building materials has skyrocketed. The domestic market is thriving, with Indonesia’s key players rapidly expanding production capacity of high-demand materials such as concrete and metals. Inflation is high for imported building materials and infrastructure challenges make transporting materials logistically challenging.

However, as infrastructure is prioritised under the government’s plans, companies should see relief from logistics challenges and opportunity for project involvement in the near future. Local producers have begun to expand capacity in order to meet high demand for building materials amid a climate of rising import costs.

Heavy Metal

Indonesia is the fastest growing steel market in ASEAN, with this segment experiencing the fourth-fastest market growth rate in the world over the decade to 2012, according to the OECD. Construction has also been the largest driver of this growth. While in the past, lower overall activity meant the domestic steel sector was able to supply construction with the majority of its needs, in recent years there has been a growing level of steel imports.

Metal building materials conglomerate, BlueScope Lysaght Indonesia, expects demand in the domestic market to continue annual growth too, as builders are using less wood and more steel. The company provides metal materials for walls, decks and roofing to developers as well as to major construction ventures, such as Jakarta’s Ciputra World. In 2012 metal building materials used for roofing averaged a demand of 10,000 sq metres per month. With around 10% of market share, BlueScope Lysaght will branch out further, having established two new factories in 2013, one in South Sumatra and one in Riau, which will each have the capacity to produce 500 tonnes of roofing material every month.

Currently many companies are grappling with increases in imported steel prices, especially in the wake of rupiah depreciation. Steel companies are also having particular trouble, because they are incurring their costs in dollars, but are contracting in rupiah. Salman Fajari Alamsyah, research analyst at Bahana Securities, told OBG, “Steel products are sold in rupiah, which has significantly depreciated since the beginning of 2013.

25-50% of the total supply is dollar-linked, so costs have gone up due to depreciation. Due to the spike in costs, companies are often forced to re-negotiate contracts.” Yet major investment from the private and public sector has allowed the metal, steel and iron sectors to fund rapid domestic production expansion in recent years. Indeed, overall, in the first half of 2013 the industry experienced 12.7% growth, as demand was addressed by boosts in production capacity.

Other challenges include a lack of a steel standard.

“Developing and setting comprehensive national steel standards continues to be the biggest challenge for the steel industry. Well defined national standards drive consistency and allows fair competition domestically. For example, Singapore has no steel industry but still defines the steel standard, by ensuring all steel imports meet the required standards,” Cheong Ku Wei, president director of BlueScope Steel, told OBG.

While Krakatau Steel still wears the crown as Indonesia’s top steel producer, capable of putting out 2.5m tonnes per annum, it has also been in the lead in boosting domestic expansion. In December 2013 the firm began operating a new blast furnace and plate mill in partnership with POSCO from South Korea at Cilegon, West Java, while it also plans to open a hot strip mill in 2014 and another blast furnace at the same location in 2015. Indoferro also plans phase two of its blast furnace at Cilegon later in 2014. Other steel companies expanding over the next few years include JFE Steel Galvanizing at Bekasi in West Java, Gunung Raja Paksi also at Bekasi, Essar Indonesia and Gunawan Dianjaya Steel.

This should boost domestic production, easing supply pressures and foreign currency risk.

Aluminium is also becoming increasingly popular as a construction material in Indonesia. New rules banning the export of metal ores from Indonesia are also aimed at supporting domestic production of this, with a new alumina refinery due to be completed in 2014.

Set In Concrete

As with steel, though cement is produced domestically, annual output is not enough to meet Indonesia’s demand, leading the industry’s top players to expand capacity. The Indonesia cement association documented an increase in national cement sales from 40.8m tonnes in 2010 to 48.8m tonnes in 2011 and 55m tonnes in 2012. Into the third quarter of 2013 41.6m tonnes of cement was purchased from domestic suppliers, which are looking to expand production across the archipelago and the region. Semen Indonesia, a government-owned cement manufacturer, and the nation’s largest, sold 18.5m tonnes in the first nine months of 2013 and closed the year with 27.8m tonnes sold. Semen Indonesia aims for an 8% increase in 2014 and has budgeted Rp5trn ($429m) to invest in production expansion, which could boost its sales total to 31.8m tonnes in 2014. If growth continues at the current rate, it could expand production capacity to 40m tonnes in 2017. The second-largest cement producer is Indocement, which is majority owned by HeidelbergCement. The company is building a 4.4m-tonnes-a-year plant at Citeureup, while seeking licences for the construction of two more, 2.5m-tonne capacity plant at greenfield sites in Central Java. The third-largest is Holcim, which saw its capacity boosted in 2013 with its Tuban 1 plant coming on-stream, while Tuban 2 is scheduled to commence operations in 2015. Indeed, continued expansion in Indonesia’s cement industry may make it more competitive in time for the ASEAN single market implementation at the end of 2015. Overall, the industry plans to allocate $6.7bn through 2017 in order to expand cement production capacity, which will then increase from 60m tonnes to 90m tonnes. Some 80% of domestic cement sales are by the bag, rather than in bulk, with the main driver of demand being real estate rather than large-scale infrastructure projects. This could change though in the years ahead, as government and public private partnership plans to develop transportation infrastructure in particular forge ahead. Under the MP3EI, some $28.5bn of road projects are planned, or Rp24trn ($2.4bn) per year throughout the plan period. In terms of aggregates, until recently, Indonesia was not only a producer, but also an exporter. The 2014 ban on raw metal ore and mineral exports halted this, leaving increased supply for domestic aggregate crushers and processors. As 2014 got under way, cement companies reported somewhat lower demand, partly due to poor weather, while also due to the general economic slowdown. Based on cement association data, the Jakarta Post reported in March 2014 that in 2013, domestic consumption had risen 5.5% to 58m tonnes. This was in comparison to 14% growth in 2012. Continued pressure from exchange rates was also being experienced, as many of the sector’s inputs, such as coal, are also dollar-linked. Electricity costs – another major input – have also gone up. “The recent energy price hikes on large-scale industrial users are being felt in the concrete industry, especially in factory-related operations. As a result, many companies are looking towards the feasibility of eventually shifting to using alternative energy such as compressed natural gas,” Surakhman, president director of Adhimix, told OBG. “As a result, many companies are looking towards the feasibility of eventually shifting to using compressed natural gas as an alternative.”

Other Materials

Production of ceramic floor, wall and roof tiles is a major subsector in Indonesia, with 2012 seeing the country rank sixth in the world in terms of total ceramics production. The country has large supplies of the necessary raw materials, such as clays and silicas, with growing real estate construction the main driver of subsector growth. Heating, ventilation and air conditioning (HVAC) products are also seeing a rising demand overseas. “We are seeing increasing global demand for Indonesian ventilation and air conditioning products from countries near and far, including Nigeria, Panama and Vietnam,” Toto Djamaludin, president director of Air Tekindo Prima, told OBG.

Further Domestic Growth

Despite major efforts to boost production capacity, Indonesia’s building materials sector cannot meet the demand from domestic construction projects. The space could be filled by foreign firms, but the government’s efforts to decrease imports can be restrictive. Rupiah depreciation against the dollar has also raised the costs of many imported building materials. Given that demand for materials will only increase as infrastructure projects are implemented, investment in domestic expansion efforts will be vital. Building material suppliers are thus set to benefit from continued investment and capacity growth.