Indonesia Plastic Resin Industry

MARKET INTELLIGENCE REPORT ON

DEVELOPMENTS OF POLYETHYLENE (PE) RESIN INDUSTRY IN INDONESIA

May 2007

Current Isuues

Scarcity in the supply of feedstock namely naphtha has remained the main problem slowing development of polyethylene (PE) industry in Indonesia in the past 10 years. Naphtha is used as the feedstock for ethylene, which is in turn used as the main basic material for PE resin. This problem has been pointed out in a report of Joint Forum on Investment Competitiveness/SME WG Petrochemical Indonesia Japan in March 2007. Indonesia is lagging behind Thailand, Malaysia, and Singapore in the development of upstream petrochemical industry. Mitsubishi Chemical Japan in 2006 put Indonesia the 34th among countries having petrochemical industry in the world.

PE market in ASEAN is still highly potential especially after the implementation of AFTA. Petrochemical demands in this region total 4 million tons a year as against exports of 2.5 million tons. Production of petrochemical products in ASEAN grows by 6%-8% annually. Despite growing market demand, the growing presence of new players from Middle East in this region may pose a threat to regional industry.

Olefin and aromatic industries as the bases of petrochemical industry in the country have grown sluggishly. There are few local investors interested in the industry or having the capacity to develop the industry. The industry needs large investment of US$ 1.5 billion - US$ 3 billion.

In addition, scarcity in the supply of feedstock namely ethylene is also a problem. Imports will be needed at high price to follow the soaring prices of crude oil to as high as US$ 70 a barrel. As a result PE industry in the country operated only at 60% of its capacity in 2006. According to the association of plastic and olefin industries (Inaplas), a factory has to operate by at least 80% of its capacity to hit the break even point.

Noteworthy in the recent events in the country's petrochemical industry was the takeover of PT. PENI (PE producer) by Titan Petrochem Sdn Bhd from Malaysia in 2006 at a price of US$ 78 million. The acquisition made the Titan Group as the largest producer of PE in Southeast Asia. The Titan Group also plans to acquire PE companies in other countries in this regional such as Vietnam and the Philippines. The Titan Group has the first and largest integrated facilities producing olefin and polyolefin in Malaysia and it is the second largest producer of polyolefin in Southeast Asia.

Through the take over of PENI, the Titan Group hopes to dominate the Indonesian market of plastic basic material. After the acquisition, Titan plans to build an ethylene factory to feed the polyethylene plant of PENI.

Titan has saved PENI, which previously continued to be in the red and in the doldrums with capacity utilization of below 30%. The presence of the Titan Group in Indonesia will change the condition of PE industry in the country, which still depends on imports for PE. In 2006, imports of PE totaled 244,000 tons.

Meanwhile, there were reports of plan to acquire Chandra Asri Petrochemical Centre (CAPC) by Temasek Holdings, an investment holding from Singapore. Temasek already has stakes in telecommunications sector namely in PT Telkomsel and PT Indosat, the country's largest and second largest telecommunications company and in banking sector namely in Bank Danamon Tbk and Bank Internasional Indonesia (BII) Tbk.

Also noteworthy was the recent acquisition of PT. Styrindo Mono Indonesia, a producer of ethylene benzene by CAPC. The acquisition made CAPC more integrated. CAPC also plans to invest US$ 30 million to expand its ethylene production capacity to 590,000 tons from 520,000 tons annually at present.

Expansion by two PE producers - CAPC and Titan - will cope with the scarcity in the supply of PE in the country and reduce dependence on import for that material.

Indonesia has so far needed to import considerable quantity of PE. In 2006, the country needed 682,000 tons of PE as against local production of only 470,000 tons a year.

Almost all users of petrochemicals in the country depend on imports for more than 50% of their basic material requirement. In 2006, the country needed 1.3 million tons of ethylene as against domestic production of only 520,000 tons.

PE imports averaged 244,000 tons - 267,000 tons annually in the past two years to meet growing demand in the country for downstream industries such as plastic bag, electronic and automotive industries.

The expansion indicated that PE producers see good prospects of the industry in the country. The expansion by CAPC and PT. Titan Petrokimia Nusantara Interindo (TPNI) will encourage investment in upstream petrochemical industry.

As investment in upstream sector will require large fund, the government is expected to offer incentives and remove restrictive regulations to attract investors.

Producers and Capacity

In Indonesia, there are two PE producers - PT. Chandra Asri Petrochemical Centre (CAPC) and PT. Titan Petrokimia Nusantara Interindo (TPNI). CAPC is a producer of petrochemical materials operating an integrated factory with upstream products including ethylene and propylene and downstream products including plastic basic materials namely high density polyethylene (HDPE). TPNI produces HDPE and low density polyethylene (LDPE).

CAPC's annual production capacity for PE is 300,000 tons (200,000 tons for LLDPE, 100,000 tons of HDPE), 520.000 tons of ethylene and 240.000 tons of propylene a year. TPNI's annual production for PE is 450,000 tons -- 225,000 tons each for LLDPE and HDPE.

PT. Chandra Asri Petrochemical Centre

PT. Candra Asri Petrochemical Centre (CAPC) was established in 1989 as a joint venture between Barito Pacific, which is owned by tycoon Prajogo Pangestu (75%) and Marubeni of Japan (25%). CAPC started commercial operation in 1995 with an investment of US$ 1.7 billion.

After experiencing changes in the composition of shareholders, in 2006, CAPC was controlled by Temasek Holding from Singapore.

PT. Titan Petrokimia Nusantara Interindo

The company was previously known with the name of PT. Petrokima Nusantara Interindo (PENI) established in 1990 by Beyond Petroleum formerly British Petroleum (BP) from Britain, Sumitomo Corp and Mitsui Co Ltd from Japan and PT. Arseto Petrokimia.

In 2003 PT. Indika from the Indika Group of the Sudwikatmono family acquired 100% of PENI. In 2006, Indika resold it to Titan Petrochem Sdn Bhd a subsidiary of Titan Chemicals Group from Malaysia

Production of PE up

The country's PE production has continued to increase in the past five years - from 430,000 tons in 2002 to 470,000 tons in 2006 or an annual growth of 3%. The increase in production was booted by growing demand mainly from plastic and packaging industries. Plastic packaging is used much by food and beverage industry. Inaplas said the size of plastic market in Indonesia was around 2.6 million tons in 2006 and the market requirement is forecast to rise to 4 million tons in 2015.

Domestic production of PE totaled 470,000 tons in 2006 falling short of requirement of 662,000 tons. Imports, therefore, were needed such as from Singapore, South Korea and Middle East.

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