Putting it all together: Cement companies are preparing for significant growth

There should be major growth for the foreseeable future in Indonesia’s cement market, as the country ramps up an infrastructure-building drive, addresses a housing shortage and attempts to match demand in one of the world’s most populous countries. Per capita consumption was about 165 kg in 2010, which is low compared to other developing markets – it is about 1000 kg annually in China and 350 kg in Malaysia.

But there are still obstacles to growth in Indonesia, such as cumbersome bureaucracy and legal issues, which could keep consumption lower than full market potential. Forecasters are also concerned about inflation. More cautious predictions project 5% annual growth in the coming decade and from there become more ambitious. Demand is currently about 40m tonnes per year, a figure that should double a decade from now.

THE BOTTOM LINE: For local cement producers, the question is what this expansion will do for bottom-line profits. One factor will be how much of the country’s current infrastructure plans come to fruition. The question is not whether demand will grow for construction materials, but by how much. “Despite unrealised spending by the government on infrastructure-related projects, supporting industries of the construction sector will continue to experience growth, mostly as a result of increasing domestic consumption,” said Mike Gundy, the president director of Bluescope Steel Indonesia, a unit of Australia’s Bluescope Steel.

The Indonesian Cement Association reported cement sales were up 14.8% in the first half of 2011 when compared with the first half of 2010, far beyond its 6% expectation. Results for the period also show rising supply costs, thinner operating margins and profits growing at a smaller rate. Indonesia’s cement market has recently been a relatively expensive one – one of the region’s costliest. The industry has been accused of price fixing in the past, but was exonerated in August 2010 by a state anti-monopoly commission.

COMPETITION: Along with demand, another factor to watch in the coming years will be how the country’s three main producers and their smaller rivals handle competition. There is not much room for prices to rise before Chinese imports become a reasonable alternative, particularly because the bilateral Indonesia-China free-trade agreement ended import tariffs.

The market is set to see new entrants from other countries soon. Chinese cement maker Anhui Conch said in June 2011 it would spend $2.35bn building four cement plants in the country. They will be the company’s first overseas venture and Indonesia is considered a logical first choice for a Chinese firm looking to expand abroad.

BIG THREE: Indonesia’s three main cement-makers are Semen Gresik, Indocement Tunggal Prakarsa and Holcim Indonesia. They account for about 90% of market share, divvied up geographically as producers aim to control spiralling delivery costs due to supplying multiple Indonesian islands with just a few factories.

About 30% to 40% of cement consumption comes from retail consumers located outside the cities and are typically people that are building their own homes.

The government owns a majority stake in the largest producer, Semen Gresik, and announced a $260m expansion plan in January 2010 to add two new plants.

Gresik in 2010 reported a gross profit of Rp6.81tn ($817.2m), up 5.9% from Rp6.77tn ($812.4m) in 2009.

Indocement Tunggal Prakarsa is the second-largest cement supplier. Expansion plans currently include two new factories, each with a capacity of 2.5m tonnes per year. One is to be located on Java and another in Cirebon. In the second quarter of 2011, net profits rose 7% to $100m, though the company’s operating margin slid to 30.9% from 38.1%. Holcim Indonesia is the smallest of the three main producers and a division of Holcim, the world’s second-largest cement company. Its Indonesian division has a capacity of 8.2m tonnes.

With construction in Indonesia set to expand dramatically in the short term, all three cement companies are paying close attention so that they can best leverage new opportunities, while at the same time keeping prices relatively competitive with foreign firms.