THE INDONESIAN IRON & STEEL INDUSTRY ASSOCIATION

Manila, 27 November 2017

CONTRIBUTION OF CONSTRUCTION INDUSTRY TO INDONESIAN STEEL INDUSTRY

Basso D. MakahanapStandardization & Certification Committee

Introduction

The main customer of Indonesian steel product is construction Industry. Construction sector is one of Indonesian GDP big five driver.

The biggest driver of Indonesian construction sector currently are infrastructure development projects, housing, high rise building for the offices, hotels etc. either conducted by the government or private sector.

To build all of those infrastructure, housing, high rise building etc. steel is needed, the result is demand of steel will be rise up follow the infrastructure, housing, high rise building development trend.

Most of the steel specification required for the infrastructure purpose, housing and high rise building can be produced in Indonesia.

Construction, 78%

Transportation, 8%

Oil & Gas, 7%Machinery

4% Others, 3%

Indonesian Steel Market Segmentation

Indonesian steel market is dominated by construction industry.

The construction sector recently grow up significantly due to infrastructure government’s development program and demand for the offices, hotels and housing sector. This phenomena is in line with increasing of Indonesia’s population and its gross domestic product

It is can be said that the construction sector is key driver of Indonesian steel industry.

Figure 1

Contribution of Construction Sector To Indonesia’s Economy

0

5

10

15

20

25

Contribution Margin to GDP 2015 (%) The construction industry influences most, if not all, of any nation's economic sectors. It builds and provides infrastructure for other economic sectors, such as agriculture, tourism, manufacturing, trade and others.

The importance of the construction industry to the economy can be measured by its contribution to the Gross Domestic Product (GDP), in the year 2015 construction sector is the second largest contributor Indonesia’s Gross GDP

Construction can be an important generator of jobs since the number of people employed in the construction industry can be high due to its relatively labour intensive

Contribution of construction sector to Indonesia’s Gross Domestic Product (GDP) increase significantly. Its contribution to Indonesia’s GDP in 2006 is about 7.5%, in 2015 increased to 14.6%.

Figure 2

Indonesia’s construction industry output grow up yearly andwill continue to grow, driven by investment in infrastructure, energy and residential projects, as shown in Figure 3 that shows historical and predicted construction output up to 2021.

The construction industry’s output grew by 6.2% in 2016 in real terms, following an average annual growth of 6.6% during the preceding four years. Over the past five years, growth has been supported by favorable demographics, and public and private sector investment in infrastructure and residential construction projects, leading to an increase in demand for the construction industry.

The development of transport infrastructure and the construction of affordable housing units will be the key growth drivers for construction industry and steel industry.

Figure 4

0

20

40

60

80

100

252

254

256

258

260

262

2015 2016 2017

Population (Mio) Ministry of Public Works and Public Housing Budget (IDR Trillion)

Correlation between Indonesia’s population and state housing budget

Indonesian population increased yearly, current population of Indonesia is about 260 million. As a result, the housing requirement also increased yearly.

In order to fulfill the housing requirement, government increase the state housing budget significantly.

The housing requirement is also fulfilled by the private sector

Government’s Program For People Housing

Figure 5

Indonesia’s urban population is increasing significantly, according to World bank, urbanization figure in Indonesia is very high, about 4.1%. This urbanization figure boost the demand for for housing, office space, shopping space, hotels and health facility like hospitals as urbanization proceeds. The response of those demands is expressed by among others, increase of high rise building (>200 m height) number, the number is increase significantly every year.

Increase of high rise building in terms of height and numbers will boost up the construction industry, it means increase the requirement of steel in terms of quantity and quality. The higher the building the stronger and tougher steel is required.

Influence of Urbanization to Steel Industry

0

10

20

30

40

50

60

<2005 2006 - 2008 2009 - 2011 2012 - 2014 2015 - 2017

Cumulative High Rise Building Built

Figure 6

High rise building is building with >200 m height

Jakarta And Surrounding Areas, 53

Surabaya, 4 Bandung, 1

High Rise Building Location Up To 2016 In Indonesia case, the high rise building mostly built in Jakarta and its surrounding areas as shown in Figure 5. Jakarta is the highest population city in Indonesia, need a lot of space for housings, offices, health and other social facilities.

High urbanization will boost the population density, it is means will boost the housings, transportation, social, health and business facilities. In the urban area, the space is limited so the high population density need more taller buildings to accommodate those requirement. The high rise building will be distributed to another cities in the future due distribution of the wealth. It means that a lot of steel in terms of quantity and quality will be needed.

It is can be said that urbanization, construction and steel intensity go hand in hand, means that the urbanization has a significant influence to the steel industry.

Figure 7

High Rise Building Location Up To 2016

0

2

4

6

8

10

12

14

16

18

20

0

100

200

300

400

500

2014 2015 2016 2017

Government Infrastructure Budget

Govt. Infrastructure Budget (IDR Trillion) % of GDP

Improving infrastructure is a priority of the government program since

it is critical for the country’s economic development, Poor of country’s

infrastructure means higher logistic cost and reduce the country

competitiveness.

The government program to improve the infrastructure quality is

focused more on the expansion of the country rail, harbors, roads,

airports and other core infrastructure facilities.

In order to realize those infrastructure development programs, the

government increase the state budget as shown in Figure 6.

There is a correlation between apparent steel consumption,

government infrastructure budget and contribution of construction

sector to GDP as shown in Figure 7. It is shown that the apparent

steel consumption was increased if the government budget for the

infrastructure program increased and the result was the contribution

of construction sector to GDP was increased too.

All of the infrastructure projects need steel for their construction. It is

clearly that the infrastructure programs will be a key driver for

construction sector at the end will be the key driver for Indonesia’s steel industry.

0

5

10

15

20

0

100

200

300

400

2014 2015 2016

Correlation between Apparent Steel Consumption, Govenrment Budget For Infrastructure and Contribution of Construction

Industry to GDB

App Steel Cons. (ton x 100,000)

Govt. Infrastructure Budget (Trillion IDR)

% of GDB

Figure 8

Figure 9

The correlation between steel consumption and the

GDP/capita is shown in Figure 8. Indonesian position

is in Stage 1. The steel consumption is driven largely

by high levels of government investment that boost

construction and infrastructure demand.

Indonesia still need a lot of steel to fulfill the

infrastructure and other facilities caused by high

urbanization figure.

Figure 10

Construction Industry

Construction Industry

Construction Material

Construction Material

Stone Sand Etc

Stone Sand Etc

SteelSteel

Raw Materials

Additives Energy Etc

Raw Materials

Additives Energy Etc

CementCement

AsphaltAsphalt

TransportationTransportation

Lime Stone Energy Etc.

Lime Stone Energy Etc.

Oil Refinery By Product

Natural Asphalt

Oil Refinery By Product

Natural Asphalt

LaborLabor

InfrastructureInfrastructure

High Rise Building for housings,

hotels offices etc.

High Rise Building for housings,

hotels offices etc.

Services Industry Sector

Services Industry Sector

Indonesian Construction Input And Output Process

TransportationTransportation

Better Human And Material

Moving

Better Human And Material

Moving

As shown in this Input and Output Process scheme, construction industry drive several economy sector, both in Input and Output sectors.

The driver of Indonesia’s construction industry now is the sectors in the output side due to aggressive government infrastructure development and high demand for housing, offices, hotels and other business and social facilities.

If the GDP grow up, construction industry will grow up too, input and output industries will be automatically grow up.

Figure 3

Input Output

Indonesia’s Future Construction Steel Quality Demand

Cemindo Tower, Jakarta The Signature Tower, Jakarta

The building height is higher and higher, means that the steel quality required is higher and higher too.

Stronger, more tough and higher earth quake resistance steel will be needed.

The highest building in Indonesia up to 2015. Construction finished on 1996. 262 meter height, 50 floors

Wisma BNI 46

The highest building in Indonesia up to 2017. Construction finished on 2015. 310 meter height, 63 floors

Will be the highest building in Indonesia on 2020. 638 meter height, 111 floors

Figure 11

RoadsRoads, 2650 KmToll Roads, 1000 KmRoad Maintenance, 4670 Km

PortsSea Ports, 24Ferry Ports, 60 Locations

AirportsCommercial Airports, 15Airports Development ForCargo, 6 location

Power & IrrigationDams, 40Hydroelectric Power Stations, 33Oil Refineries, 2Electricity Generations, 35000 MW

RailwaysTotal Track Length, 3258 KmIntercity Railway Track, 2159 KmCity Railway Track, 1000 Km

Industrial FacilitiesIndustrial Parks, 15

Indonesia’s Infrastructure Target Up To 2019

Source : ITE Build & Interiors, Indonesia’s Construction Industry : Building the Archipelago

Figure 12

No Product Capacity Million ton/year

Flat Products

1 Reinforcing bar 5.991

Medium/Large Section

2 H – Beam 1.331

3 Equal angle

4 U Channel

5 Wide Flange

6 I Beam

Flat Products

7 Hot Rolled Coil/Plate 5.900

8 Galvanized sheet 1.490

9 Welded Pipe 2.012

Indonesia’s Steel Supply Demand

There is unbalance between iron making, steel making and rolling mill, the capacity of the up stream is smaller

compare to the middle and down stream. Indonesia still need a certain more capacity especially for iron and steel

making.

From quality point of view, most of the steel quality for construction application can be produced locally.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Iron Making Steel Making Rolling

Capacity x 1000

Figure 13

Conclusion

Indonesia’s development in infrastructure is growing up.

Housings, business and social facilities requirement in Indonesia will increase in line with

the increasing of population and their prosperity.

Increasing of urbanization figure, push the high rise building development due to land

limitation. This condition will push the steel demand in quantity and quality point of view.

Infrastructure development, increasing of housing requirement either in country side or

urban areas are the driver of construction sector. As the construction industry grow up

steel demand in quantity and quality point of view will automatically grow up.

It is clearly that construction industry in Indonesia is the key driver of Indonesia’s steel

industry.

TERIMA KASIH

References

1. Adrian Panggabean, “Eonomic Outlook : Indonesia in 2017”, PT Bank CIMB Niaga Tbk, 10 Nopember 2016;

2. Badan Pusat Statistik, “Konstruksi Dalam Angka 2016”, Desember 2016

3. BMI Research, “Industry Trend Analysis – Strong Outlook for Indonesia’s Building Sector”, May 2017;

4. Budiwibowo, Agung and Trigunarsyah et.al, “Competitiveness of the Indonesian construction industry” Journal of Construction in

Developing Countries, Vol.14 No1, 2009. pp. 51-68, QUT Digital Repository: http://eprints.qut.edu.au/;

5. Construction intelligence center, “Construction growth in Indonesia to remain high over the next five years”, July 3rd 2017;

6. https://www.construction-ic.com/pressrelease/construction-growth-in-indonesia-to-remain-high-over-the-next-five-years-5859683

7. Daewoo Securities Indonesia, “Overweight (Initiate) Initiation report”, December 20, 2016;

8. Direktorat Jenderal Anggaran Kementerian Keuangan 2015, “Peranan APBN Dalam Mengatasi backlog Perumahan Bagi Masyarakat

Berpenghasilan Rendah (MBR)”;

9. Kompas.com - 11/02/2017, 16:30 WIB Anggaran untuk Perumahan Rakyat pada 2017 Capai Rp 17,3 Triliun

10. INDUSTRY TODAY, ”Construction Industry in Indonesia Growing 8% to 9% of CAGR-Forecast to 2021”, Published Mon, Aug 8th 2016

11. ITE Build & Interiors, “Indonesia’s Construction Industry : Building the Archipelago”;

12. media.iyaa.com, Editor Risnawati Avin, “10 Gedung Tertinggi di Indonesia, Salah Satunya Akan Kalahkan Shanghai Tower di Cina”, 06

Februari 2017

13. OECD Development Center, “Economic Outlook for Southeast Asia, China and India 2017, Adddrssing Energy Challenges;

14. Perumnas.co.id

15. SEAISI, “2016 Steel Statistical Yearbook”;

16. Steven R. Tabor, “Constraint to Indonesia’s Economic Growth”, Asian Development Bank Papers On Indonesia, No 10, December 2015;

17. www.pwc.com/id, “Building Indonesia’s future unblocking the pipeline of infrastructure projects”

18. http://www.worldbank.org/in/news/feature/2016/06/14/indonesia-urban-story