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Property | Indonesia's Construction Material Sector: Challenges Amid Flood of Imports

Indonesia's construction material industry has faced tough challenges over the last few years. The flood of cheap imported products from China, low domestic consumption, and oversupply have put pressure on the sector.

Indonesia's Construction Material Sector: Challenges Amid Flood of Imports
Areas that need to be addressed include reducing industrial gas prices, providing tax and fiscal incentives, requiring developers to prioritise local products, and imposing higher import duties on imported materials
 

The Indonesian government has not yet formulated the right policy to revamp the construction materials sector. Areas that need to be addressed include reducing industrial gas prices, providing tax and fiscal incentives, requiring developers to prioritise local products, and imposing higher import duties on imported materials to protect domestic players.

Successful overseas, flop domestically

Indonesia's building material exports recorded remarkable growth in 2017 with a total export value of $1.54 billion USD (See Indonesia’s Construction & Building Materials Sector On the Up & Up) and contributed around 3% to the country's exports. In South and Southeast Asian countries, such as Sri Lanka and the Philippines, Indonesian construction materials exports grew more than 20%. Meanwhile, in Middle Eastern countries, such as Jordan, it grew by 68%.

The country's main export destination countries are Thailand, Singapore,  Japan, Malaysia, and Australia. Its major exported products are pipes, ceramics, cement, drilling casing as well as steel or iron nuts and bolts.

In the domestic market, however, Indonesia's building materials industry is hampered by external and internal challenges. On the external side, the industry was hit by a flood of cheap Chinese products (See Indonesia’s Building & Construction Materials Sector). Moreover, the trade war launched by US President Donald Trump (See The US Presidential Elections and What it Means for Indonesia) against major producing countries have caused oversupply in the world market which has dragged down prices of various commodities, including steel and aluminium. 

On the internal side, high industrial gas prices have reduced the competitiveness of local industry players; especially compared to Chinese manufacturers who recently returned to coal which is two thirds cheaper than natural gas (See Overview: Indonesia’s Downstream Oil and Gas Sector). As a result, Indonesian local construction companies prefer to use imported materials over local products due to their more competitive price.

Cement

Indonesia's cement industry still faces a number of challenges including oversupply; a persistent problem which has been present since 2012, low domestic demand, increased raw material and coal prices as well as stiffer competition (See Indonesia’s Coal Industry: Full Steam Ahead).

In 2017, the net profit of PT Semen Indonesia Tbk (SMI), plunged by 55.5% from 4.52 trillion IDR in 2016 to 2.01 trillion IDR despite a 6.4% revenue increase to 27.81 trillion IDR. Likewise, the net profit of another leading cement manufacturer, PT Indocement Tunggal Prakasa Tbk, in 2017 was down 52.2%. The decline was due to the increase in raw material and fabrication costs, leading to a hike in the cost of revenue.

A further reason was the slowdown in the residential property sector which accounts for 75% of cement sales in the country. The sales of SMI's cement bags in 2017, for example, was down 30.4% to 63.03 billion IDR from 90.53 billion IDR in 2016. The sector experienced a slowdown due to the increase in commodity prices and the decline in overall purchasing power (See Indonesia’s Residential Property Sector: Remaining Sluggish Despite Incentives).

In contrast, the sales of clinkers in 2017 rose by 39.4% to 590.62 billion IDR from 423.69 billion IDR thanks to the Indonesian government's infrastructure projects (See High Stakes for Indonesia's New Infrastructure Push). Overall, SMI's sales volume in 2017 was up 10% y-o-y to 28.91 million tonnes or 40.7% of total cement sales volume in the country of 66.38 million tonnes, and up 7.68% compared to 2016 which accounted for 61.64 million tonnes. Its domestic sales grew by 5.29% to 27.04 million tonnes, while its export sales soared by 212.1% y-o-y to 1.87 million tonnes.

Many predict that the sales increase will continue in 2018. Based on data from the Indonesian Cement Association, the domestic sales volume of cement in early 2018 increased by 8.1% from 9.7 million tonnes in 2017 to 10.5 million tonnes.

Steel and aluminium

The national demand for steel products in Indonesia continues to increase every year. In 2017, domestic steel demand was estimated to reach 13.4 million tonnes, up from 12.7 million tonnes in 2016. In 2018, the demand is expected to grow by  6-7% to 14 million tonnes (See Indonesia’s Metal Mining Sector: Rewriting the Rules).

Unfortunately, local Indonesian steel manufacturers are unable to fully capitalize on this demand. This is because 45% of this demand is met by imports due to the lack of local production capacity and their comparatively cheaper price.

The flood of cheap Chinese steel products has hampered the growth of Indonesia’s domestic steel industry. The government's infrastructure projects have failed to boost the growth of the local steel industry because many developers prefer to use cheaper imported products over locally made ones.

The issuance of Trade Minister Regulation No. 22/2018 served to deepen the problem as it waives the requirement to obtain technical consideration from the Ministry of Industry for importing steel products.

Furthermore, the Trump administration's decision to impose 25% import duties on steel products and 10% import duties on aluminium products from a number of countries, particularly China, has become a concern because many fear that the latter will divert its export focus to other countries, including Indonesia. After all, China has made clear its plans to increase its steel and aluminium production capacity in 2018.

The flood of supply will eventually reduce steel and aluminium prices and make Indonesian steel and aluminium products uncompetitive. This is one of the reasons why Krakatau Steel (KS) still recorded a net loss of $81.7 million USD in 2017 although it was slightly improved compared to that in 2016 of $171.7 million USD.

Ceramics

Similar to the cement and steel industries, Indonesia's ceramic sector was also severely hit by the flood of cheap Chinese products following the implementation of the ASEAN-China Free Trade Agreement (See Indonesia and the ASEAN Economic Community – Ready for Regional Integration?). Despite the imposition of 20% import duties, Chinese ceramic products continue to flood Indonesia’s domestic market which is growing at a rate of 22% per year.

The Indonesian government's plan to lower import duties to 5% is predicted to cause ceramic imports to soar to 40%. This is bad news for the local ceramic industry which saw its utilisation rate decline from 90% to 80% and its rank plunged from fourth to the seventh largest ceramic manufacturer in the world (See Indonesian Tile Makers Riding on the Property Boom).

An additional constraint hampering the domestic ceramic industry is the high gas price which accounts for 30% of its production cost. According to the Association of Various Ceramic Industries of Indonesia (ASAKI), 10 out of 46 ceramic companies have ceased their production due to high gas prices. Moreover, the slowdown of the property sector has also been blamed for the sluggish growth of the ceramic sector in the last few years (See Mass Housing Plan Spells Massive Opportunity).

Paint and coatings

The paint and coatings industry is one of few business sectors in Indonesia with strong domestic players. Local industry occupies a market share of 75-80% in which the property sector is the major growth driver of the industry.

In 2015, however, the Indonesian paint and coatings industry was hit by the global and domestic economic slowdown and its market value went down to 10–12 trillion IDR. The industry’s growth declined by 10% and only 60% of its production capacity was utilised (See Overview of the Indonesian Paint Industry: Still Promising Despite Slowdown).

The situation persisted until the first quarter of 2016 and was exacerbated by lower demand from the automotive and property sectors. The latter sector experienced a slowdown in 2016 because its prospective buyers, especially in the premium segment, delayed their purchases. In addition, escalating political tension in the last quarter of 2016 until the first quarter of 2018 has also negatively affected the property sector (See Indonesia’s Mass Housing Sector: The Rise of Vertical Housing). Nevertheless, the industry managed to grow by 9.7% by the end of the year. This growth was supported by the government’s large-scale infrastructure projects. 

Bright prospects ahead

The prospects for the construction material industry in Indonesia remains bright. Currently, Indonesia's construction market ranks number one in ASEAN and fourth in Asia after China, Japan, and India.

For 2018, the Indonesian government has set a target to increase investment in this sector to 370 trillion IDR. The sector currently employs 170,000 direct labourers and two million indirect workers. Its contribution to Indonesia’s GDP was 10.38% or ranked fourth after the industrial, agriculture, and trade sectors.

Currently, the consumption of building materials in the country is only 1.4 m2 per capita, far below other countries with an average of 3 m2/capita. Meanwhile, in the cement sector, Indonesia's domestic per capita consumption of 262 kg/capita is still significantly lower than other ASEAN countries such as Thailand, Vietnam, and Malaysia with 458 kg/capita, 617 kg/capita, and 763 kg/capita, respectively.

The same holds true for steel products. Indonesia's domestic per capita consumption is only 50 kg. This is far lower than other ASEAN countries which means that there is still ample room for growth.

That is why existing and new investors are still interested in investing in the construction material sector. PT Gunung Steel Group, for example, recently collaborated with German contractor, SMS Siemag, to construct a blast furnace in Cikarang with an annual capacity of 700,000 to 1.2 million tonnes which will enable the company to produce its own slab.

PT Cipta Mortar Utama, a subsidiary of French building material company Saint Gobain Group and a mortar producer under MU-Weber brand, has just completed the construction of its fourth factory in Cikande, Tangerang. The plant occupies a total area of 5 hectares with a production capacity of 180,000 tonnes per year and an investment value of around 8 million euros.

The company plans to construct several other plants until 2021 with a fifth plant in Semarang under construction. The plant occupies a total area of 2 hectares with a production capacity of 170,000 tonnes per year and an investment value of 8-9 million euros.

Going forward, however, the Indonesian government needs to throw more support behind the construction materials sector to attract more investment and help the local industry grow. This is crucial as the sector cannot heavily rely on the government's infrastructure projects in 2018 because the government has begun slowing down its development pace to increase the budget for subsidies and social assistance programmes in 2019. This can be seen in the low budget absorption by the two infrastructure-related ministries, particularly the Ministry of Public Works and Public Housing and the Ministry of Transportation.

Global Business Guide Indonesia - 2018

Indonesia Property Snapshot – Construction

Contribution to GDP: 10% (2016)
Number of Contractors: 77,000 (2015)
Number Employed in the Sector: 7 million (2016)
Standardised Qualification: ASEAN Chartered Professional Engineer (ACPE) certificate and the National Construction Services Development Board (LPJKN) certification.
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List reserves low-technology and low-risk construction services for local SMEs and cooperatives. Foreign companies can establish representative offices in Indonesia and execute complex and high-technology projects in partnership with local companies, Minister of Public Works Regulation No. 10/PRT/M/2014 provides the guidelines.