Ceramic Industry of Indonesia Weakens on Slowing Property Sector
Utilization of Indonesia's installed ceramic production capacity fell from 92 percent in 2014 to 62 percent in 2015, while the country's ceramic sales plunged 28.6 percent (y/y) to 350 million square meters over the same period. Elisa Sinaga, Chairman of the Indonesian Ceramic Industry Association (ASAKI), said ceramic sales have fallen over the past two years due to slowing economic growth and the sluggish property sector. Sales are expected to remain stagnant in 2016.
Total annual installed ceramic production capacity in Indonesia grew 7.7 percent (y/y) from 520 million square meters in 2014 to 560 million square meters in 2015 due to promising perspectives on the back of Indonesia's hot property sector in the years before 2014. In fact, Indonesia's property sector was so rapidly expanding in the years 2012-2013 that Bank Indonesia was concerned about a property bubble (it detected speculative buying) and therefore implemented a tighter monetary policy.
This tighter policy involved the raising of the minimum down payment (DP) requirement for property purchases and curbing mortgages for second home ownership (to prevent an excessive build-up of housing debt). Banks were also barred from providing loans for the purchase of properties that were still under construction (for second time - or more - home buyers). The higher DP requirement (or lower loan-to-value ratio) applied to properties measuring over 70 square meters, thus aiming specifically at the middle-upper end of the market.
In combination with the slowing domestic economy, the relatively high benchmark interest rate (BI rate) and high inflation, the country's property developers have been postponing or canceling new property projects since 2014. As largest demand for ceramics stems from the property sector, Indonesia's ceramic industry was heavily influenced by the country's slowing property sector. The official figure has not been released yet but it is estimated that Indonesia's ceramic sales declined 30 percent (y/y) to IDR 25 trillion (approx. USD $1.8 billion) in 2015 from total sales worth IDR 36 trillion in the preceding year.
Indonesian Ceramic Industry 2009-2015:
|Revenue (IDR trillion)||13||17||17||24||30||36||25|
|Growth YoY (%)||-20||30||0||41||25||20||-30|
¹ indicates a forecast
Asaki Chairman Sinaga, who believes ceramic sales will remain stagnant in 2016, requests the government to offer incentives in order to boost the industry. One example of a good incentive would be a lower gas price. Particularly as Indonesia's regional counterparts (in the ASEAN region) pay a cheaper gas price, implying that Indonesia's ceramic products become less competitive. Indonesian ceramic producers pay USD $6 per mmbtu, considerably higher than the USD $4 per mmbtu that regional peers pay, Sinaga says. Although the Indonesian government announced a lower gas price for industrial use in the third economic stimulus package that was announced in September 2015, this incentive has not been implemented yet as the government is still in the middle of formulating new rules. When the cheaper gas will be offered remains unknown.
Gas accounts for about 30 percent of total ceramic production costs and therefore a lower gas price would give a boost to the industry. Other threats to the ceramic industry are higher minimum wages and the weakening rupiah.
But to end on a positive note, the central bank and government of Indonesia have been eager to boost the country's property sector. Per June 2015 Bank Indonesia raised the LTV ratio for home mortgage loans, thereby reducing the obligatory minimum DP for first home buyers, while the government launched its "one million houses program" last year, offered a tax incentive for first-time home buyers to obtain a subsidized lending rate, and allowed foreigners to own apartments as well as landed houses (under the so-called right of use category).