Cement is far from glamorous, but it serves as the foundation of the Indonesian construction industry.
With an installed capacity of more than 100 million tons, Indonesia is the largest cement producer in East Asia and the fifth largest in the world.
Its rapid urban growth has pushed cement demand up in recent years and brought foreign money into the market. Investors are eager to profit from sky-high demand which has helped fund capacity expansions.
In recent years, however, the property boom has cooled, with growth settling at around 5% per year.
With supply outstripping demand, producers are expected to focus on increasing efficiency as the country moves into a new economic cycle.
Worldwide production of cement has tripled since 2001 thanks to urbanization and rapid development of previously rural regions.
China alone is responsible for half of the world’s 4.6 billion tons of annual cement use, but Indonesia has seen consumption rise as well: since 2009, per capita cement consumption has increased by 50%.
In the first few years of the decade, this came on the back of ambitious construction and infrastructure plans designed to boost economic output and build a more stable economy. Cement has a near-perfect correlation with construction growth, and over the past decade, some of the world’s largest producers entered the Indonesian market to meet demand.
State-owned Semen Indonesia Group, Indocement, and Holcim Indonesia are the three largest domestic producers, with Semen Indonesia responsible for more than 45% market share as of 2013 and Indocement close behind with 31%.
Backed by foreign investment, all three announced new expansion projects in recent years. Semen Indonesia has plans to increase annual production capacity from its current level of 35.5 million tons to 40 million tons by 2018 thanks to a USD374-million plant in Central Java.
A wave of smaller newcomers have also arrived on the market over the past two years, including Anhui Conch, the Indonesian branch of China’s (and the world’s) largest cement producer. Though these new arrivals all have annual production capacities well below the leaders in the market—Anhui Conch is the largest of the new arrivals at 4.5 million tons per year—they have nevertheless had a significant impact on the market by raising supply and placing downward pressure on prices.
Moreover, many of these new cement producers are willing to operate at a loss to increase market share and gain a foothold in a lucrative developing economy.
Yet the influx of new arrivals came right at the moment that Indonesia’s growth, and thus demand for cement, started to slip. After jumping 20% from 2010 to 2011 and 14.6% from 2011 to 2012, YoY growth in cement sales slipped below 2% between 2015 and 2016.
Data from early 2017 showed slight improvement, with sales rising 4.4% in the first half of the year, but industry estimates are that it will take a decade for sales to match installed capacity if Indonesia continues to see 5% annual growth.
Cement producers are down to producing at 70% of total capacity, and although the government has additional plans to increase infrastructure spending, the property market is expected to take some time to recover.
As such, the goal for Indonesia’s cement producers for 2018 is to focus on efficiency and increasing exports.
Semen Indonesia and Indocement have both expressed desire to improve cost efficiency by upgrading outdated technology in their plants, also reducing emissions and waste while doing so. Indocement’s new P14 plant in West Java is expected to save them up to IDR440 billion in 2018 at a production level of 4.4 million tons. Both firms are also looking to increase their logistic networks to lower distribution costs.
While projections for domestic cement sales are expected to improve slightly in 2018, firms are also looking beyond Indonesia’s shores in search of new markets for their cement. Southeast Asia has no shortage of demand; Bangladesh, the Philippines, and Singapore are three of the world’s 10-largest cement importers. While not a large exporter in absolute terms, Indonesia has seen exports rise faster than domestic sales lately, and industry leaders are optimistic that they can combine local and international demand to match capacity.