Indonesia’s Biggest Cement Firm Looks Offshore Amid Glut at Home

Updated on
  • Semen Indonesia targets raising foreign revenue to 10-15%
  • South Asian markets being looked at, says president director

Indonesia’s biggest cement producer is looking offshore as a supply glut damps profits at home, says the company’s new president director.

Rizkan Chandra, who took over as head of PT Semen Indonesia in May, said he wants to raise sales outside of Indonesia to 10 to 15 percent of revenue over the next three years from 5.2 percent in 2015. The state-controlled company, which already has operations in Vietnam, may expand into Bangladesh, Sri Lanka and the Maldives, he said in an interview in his Jakarta office.

The entrance of PT Cemindo Gemilang and China’s Anhui Conch Cement Co. into the Indonesian market in recent years has led to overcapacity, while economic growth has slowed and the government’s attempts to speed up infrastructure development haven’t been sufficient to absorb the extra supply. Indonesian cement sales volumes should rise at least 5 percent this year but revenue growth will probably be flat, said Chandra.

“The increase in demand is smaller compared with the rise in supply, so prices will remain depressed,” he said. “This is a structural shift in the market and we cannot address it with temporary measures.”

Semen Indonesia’s domestic sales increased 1 percent in January through May from a year earlier, compared with 2.3 percent growth for the industry as a whole, as the company was doing maintenance on its production facilities at the beginning of the year, said Chandra, 47. Semen’s selling prices in May dropped to their lowest level since August 2012, according to Bloomberg Industry analyst Michelle Leung.

Sales may improve in the second half due to greater public spending and a recent relaxation in mortgage rules, which could spur demand for residential property, said Chandra, who was a senior executive at PT Telekomunikasi Indonesia before joining Semen Indonesia. The cement industry resembles the mobile telecommunications business at the end of the last decade when new entrants sparked a price war, he said.

Southeast Asia’s largest economy grew 4.79 percent last year, the slowest pace since 2009, official data show. Decisions to enter the market or expand capacity were taken several years ago when growth was above 6 percent, said Edward Tanuwijaya, an analyst at DBS Vickers Securities Indonesia in Jakarta.

“Demand has expanded slower than what these companies thought,” he said. “Cement sales will improve in the second half as infrastructure development accelerates.”

Semen’s share price fell 0.8 percent at the close in Jakarta, taking its decline this year to 21 percent as the Jakarta Composite Index rose 6.2 percent. PT Indocement Tunggal Prakarsa has dropped 27 percent in 2016, while PT Holcim Indonesia has rallied 6.5 percent after plunging 55 percent in 2015.

As well as South Asia, Semen Indonesia is considering opportunities in Australia, Ethiopia, Kenya and Somalia, Chandra said. Countries with oligopolistic market structures and higher cement prices than Indonesia were the most attractive, he said.

“We have come to the conclusion that just remaining in the domestic market can’t increase the value of this company.”