The wide gap between total national installed cement production capacity and total domestic cement demand will continue to put pressure on Indonesia's cement industry in the foreseeable future. While all local cement manufacturers together are now able to produce a total of 108 million tons of cement per year, domestic cement demand in Indonesia is only expected to reach 68-70 million tons in 2018. Hence, there exists a major oversupply of cement; an oversupply that puts pressure on cement companies' corporate earnings.
So far this year, the capacity utilization rate of Indonesian cement factories stands at 62.7 percent. This is indeed a small improvement compared to 2017 when the rate stood at 61.8 percent. However, it also means that a large chunk of installed productive capacity remains unused (idle capacity). When production capacity is not being used optimally it implies the company's corporate performance is not optimal as well. For example, amid fierce competition cement prices will not be able to rise.
Over the past five years Indonesia's combined cement production capacity doubled as existing cement players invested in business expansion, while various newcomers from abroad (mainly from China and Thailand) entered Indonesia to establish new plants. The newcomers were attracted by Indonesia's rapidly rising cement sales in the years 2010-2013. Domestic cement demand during these years was particularly supported by a boom in property construction (as well as the fact that Indonesia's per capita cement consumption is still at a low level thus there should be plenty of room for long-term growth). However, after this boom ended cement sales growth slowed considerably, hence resulting in massive cement production overcapacity.
Currently, the Indonesian cement industry is still dominated by the three long-standing players Semen Indonesia, Indocement Tunggal Prakarsa and Lafarge Holcim Indonesia. Together these three giants can produce up to 75 million tons of cement per year. However, the newcomers - combined - can now manufacture up to 23 million tons of cement, roughly 21 percent of total installed productive capacity in Indonesia.
Furthermore, the gap between cement production and cement demand in Indonesia is expected to grow further in the years ahead as several existing cement manufacturers are engaged in the establishment of new plants. For example, Semen Grobogan, Semen Conch, Semen Garuda, Semen Indonesia and Semen Baturaja. Romauli Panggabean, analyst at Bank Mandiri, sees Indonesia's cement production capacity rising to 120 million tons by 2021. According to her calculations production capacity will continue to exceed domestic demand until at least 2031.
The return of the property boom would have a positive impact on Indonesia's cement industry as it would boost the demand-side. Therefore, cement manufacturers are hoping that Bank Indonesia will soon implement a relaxation on the loan-to-value (LTV) ratio. Last week, Bank Indonesia Governor Perry Warjiyo said the central bank is considering to relax the LTV ratio in order to give wider room for local banks to disburse funds through a mortgage program.
Based on data from the Indonesian Cement Association (ASI), domestic cement consumption in Indonesia grew 6 percent year-on-year (y/y) to 5.33 million tons in April 2018. Cumulatively, domestic cement consumption during January-April 2018 was recorded at 21.05 million tons, up 6.4 percent (y/y) from 19.78 million tons in the same period one year earlier.
Meanwhile, exports of cement continued to rise rapidly (albeit from a low base). In the January-April 2018 period exports rose 110.7 percent (y/y) to 1.29 million tons. A focus on exports is important for Indonesian cement manufacturers. However, there is plenty of competition on the international market from Thailand, China, Japan, and Vietnam.
Indonesian Cement Sales 2008-2017:
Source: Indonesian Cement Association (ASI)