http://www.bahana.co.id//?p=mod&m=artikel&nid=2130
Indonesia cement: Weighed down
Owner: BS posted on : Kamis, 13 Februari 2014 23:23
Teguh Hartanto & Salman F AlamsyahAnalysts
The Indonesian cement sector is not off to a good start in 2014.
Based on data published by the Indonesian Cement Association, the
countrys cement industry experienced a slow start with January 2014
domestic volumes of 4.6mn tons (-12.2% m-m; -0.2% y-y), partly due
to heavy rains. This years nearly flat y-y growth in January was
worse than January 2013s level (+14.5% y-y), even though there were
floodings in both years.
The slowdown in January cements our view that the industry will
face a challenging year in 2014. The Government has been focusing
on easing the Current Account Deficit which results in gradual
benchmark rate hike from 5.75% in May 2013 to 7.50% in November
2013. We see that this will result in GDP slowdown to 5.3% in 2014
from 5.7% in 2013 and likely to cap cement demand going forward. We
note that the higher interest rate environment in 2013 had taken
its toll as cement volumes only grew 5.6% y-y, a severe
deterioration when compared to 2012s growth of 14.5% y-y.
As nearly 80% of domestic cement is sold by the bag rather than
in bulk, volume growth is driven mainly by housing-related projects
rather than infrastructure. However, any positive multiplier effect
for cement consumption as a result of infrastructure development
could take longer than expected, due to the possibility of a
prolonged high-interest-rate regime coupled with the new impeding
BI regulations on mortgages.
In terms of infrastructure development, road and port projects
are the main drivers of cement demand. Ironically, a two-lane
elevated concrete road utilizes about 2,500 tons of cement per
kilometer or 4% of total construction costs, while a non-elevated
road uses about 22,000 tons/km or 16% of total costs. Under the
governments long-term Master Plan for Acceleration and Expansion on
Indonesias Economic Development, or MP3EI (2011-25), for road
projects worth IDR339tn, or average annual spending of around
IDR24tn, cement consumption would account for less than 3% of
domestic sales.
We also have concerns on the cement companies to maintain their
margins, especially given the current higher average IDR/USD
exchange rate period as their raw materials such as coal are
dollar-linked. The Government and House of Representatives decision
to revoke subsidized electricity from PLN, the electricity
state-owned company, for industries starting 1 May 2014 will also
add more pressure as electricity accounts around 12-20% of a cement
companys cost of production. However, this is still subject to the
official decree being issued.
Over the long run, we view that cement production overcapacity
could be an issue as there exists the possibility of additional 30
million tons of capacity coming from existing and new cement
players over the next 3 years. This, coupled with our expected
cement demand slowdown, could see the utilization rate drop from
92% in 2012 to around 70% by 2016. This will likely weigh on the
performances of Indonesian cement companies, particularly in their
ability to increase selling prices.
Mitrardi Sangkoyo
