However, when we take a look at domestic cement sales in the first quarter of 2015 the aforementioned positive picture has not materialized yet. Based on the latest data from the Indonesian Cement Association (ASI) Indonesia’s cement sales fell 3.3 percent (y/y) to 13.6 million tons in the first quarter of 2015. Widodo Santoso, Chairman of the Indonesian Cement Association, said that several factors explain why we see disappointing cement sales in Indonesia in the January-March 2015 period.

Firstly, several ambitious government infrastructure and property projects have not seen groundbreaking yet. It is not uncommon for projects in Indonesia to be delayed due to severe bureaucracy, legal issues (especially land acquisition), or the lack of financial means. Although the government reserved IDR 290.3 trillion in this year’s state budget for infrastructure spending, this amount is far too little to fund all needed infrastructure development across the country and therefore the government needs to team up with the private sector.

However, as Indonesia is not the easiest place to do business (Indonesia ranks 114th from a total of 189 countries in the World Bank’s latest ease of doing business survey) the private sector is hesitant to invest. Moreover, infrastructure projects are usually not the first choice of the private sector as these projects constitute relatively long-term commitments and are costly. Without possessing a good track-record of successful public-private partnerships (PPPs), the government has difficulty to attract large investment from the private sector for infrastructure projects.

Infrastructure projects that have been delayed include the Jakarta-Surabaya high-speed train project (delayed for at least five years as the costs are too high) and the Cilamaya seaport in West Java (which will be relocated to a different location as the initial location could disturb a local oil and gas production block). Projects that are expected to see groundbreaking in April 2015 are the 2,700 kilometers-long Trans-Sumatra toll road and the “One Million Houses Program”. These projects will require plenty of cement.

The second reason why Indonesian cement sales have been weak in the first quarter of 2015 is the high amount of rainfall amid the peak of the rain season. As about 80 percent of cement sales are retail, demand drops when it rains.

Despite weak results in the first quarter, Indonesian cement companies and analysts agree that cement demand will grow in the remainder of 2015, particularly because the government projects will boost cement sales. The ASI expects to see a total of 62 million metric tons of cement sales in 2015, up 3.3 percent from last year.

Indonesian Cement Sales 2008-2015:

 Year    Cement Sales
   YoY Growth
 2015¹        62 million         +3.3%
 2014        60 million         +3.3%
 2013        58 million         +5.6%
 2012        55 million        +14.6%
 2011        48 million        +20.0%
 2010        40 million         +4.2%
 2009       38.4 million         +1.1%
 2008        38 million             -

¹ ASI target
Source: Indonesian Cement Association (ASI)

Semen Indonesia

Semen Indonesia, the largest cement producer in Indonesia, posted a 10.2 percentage point (y/y) growth in revenues to IDR 27.0 trillion (USD $2.1 billion) over 2014, while the company’s net profit rose 3.7 percent (y/y) to IDR 5.6 trillion (USD $431 million). The company is the market leader in Indonesia in terms of cement sales and is investing to stay on top. By 2017, it wants to have production capacity at 40.8 million tons of cement per year, up from around 32 million tons of cement in 2014.

Regarding 2015, Semen Indonesia’s revenues are expected to rise by 10 percent (y/y). However, net profit growth will be limited at an estimated 3.5 percent (y/y). Main reason for this sluggish growth is that President Joko Widodo forced state-owned cement companies to lower their cement prices in January 2015 in order to make it easier for the wider public in Indonesia to buy cement. Although only state-owned cement producers were forced to lower these prices (Semen Indonesia and Semen Baturaja are both state-owned), private producers will have to follow suit to stay competitive. As a result of this government policy, shares of listed cement producers fell in January 2015.

The other reason why Semen Indonesia is expected to post limited net profit growth in 2015 is that operational costs will rise due to higher electricity tariffs. To reduce these costs the company is increasingly using waste heat recovery solutions.

Stock Quote Semen Indonesia - SMGR:

Indocement Tunggal Prakarsa

Indocement Tunggal Prakarsa (Indocement), the second-largest cement producer in Indonesia, posted a 7 percentage point (y/y) growth in revenues to IDR 19.9 trillion (USD $1.5 billion) over 2014. Meanwhile, net profit grew 5.2 percent (y/y) to IDR 5.3 trillion (USD $408 million).
Compared to Semen Indonesia, Indocement has more stable margins and lower operating costs, resulting in a gross profit margin stably above 45 percent. Indocement keeps a lower level of leverage and has a relatively strong cash flow.

Indocement’s revenues are estimated to grow 17 percent (y/y) in 2015, supported by an estimated 9 percentage point growth in sales volume to 20.4 million tons. The company’s net profit may rise 13 percent in 2015.

However, the company is vulnerable to rupiah depreciation as 50 percent of Indocement’s costs are US dollar-denominated. Amid tightening monetary policy in the USA, the rupiah is expected to continue to depreciate against the greenback in 2015. Indocement President Director Christian Kartawijaya said that the company is now in the process of hedging currency risks.

Indocement is also eager to expand cement production capacity. The company’s new cement factory in Citeureup (West Java) is nearly completed and should start operations at the end of 2015. This factory will add 4.4 million tons to the company’s total annual production capacity. Two more factories are planned to be constructed in Central Java and North Sumatra and will add 5 million tons of cement to the company’s annual production capacity. But it will take up to 2019 before both factories can start operations. The company's annual cement production capacity stood at 20.5 million tons at the end of 2014.

Stock Quote Indocement Tunggal Prakarsa - INTP:

Holcim Indonesia

Holcim Indonesia, part of the Swiss-based Holcim Group, recorded an 8.6 percentage point growth in revenues to IDR 10.5 trillion (USD $807 million) over 2014. However, the company’s net profit fell 30 percent (y/y) to IDR 669 billion over the same period. The primary reason for this development was that operational costs surged by about 18.5 percent (y/y) due to higher trademark service costs and higher franchise costs. Moreover, and more than its rivals, Holcim Indonesia is affected by rupiah depreciation as a larger portion of the company costs (including imports) are US dollar-denominated.

Although facing tougher conditions than its rivals, Holcim’s sales and production capacity are expected to increase in 2015. The company’s Tuban II factory will commence operations this year and will raise the company’s total annual production capacity to 12.7 million tons.

Stock Quote Holcim Indonesia - SMCB:

Semen Baturaja

Semen Baturaja is the smallest player (in terms of sales) among the listed cement producers. However, as the company has a strong connection to the government (it is for 76 percent state-owned) Semen Baturaja is expected to benefit from government infrastructure projects. Moreover, the company is based on Sumatra where the government is eager to develop the 2,700-kilometers long Trans-Sumatra toll road project. As such, the company’s cement sales are estimated to grow 41 percent (y/y) in 2015. However, Semen Baturaja’s production capacity is still limited at 4 million tons of cement per year only, far below production capacity of the aforementioned cement producers. The company is in the process of developing a new plant but it can only become operational in 2016 or 2017.

Stock Quote Semen Baturaja - SMBR:

Stock Performance SMGR, INTP, SMCB and SMBR versus Jakarta Composite Index (JKSE):*

* normalized stocks, 1 January 2015 = 100