Cement and Building Material Industry in Indonesia

MARKET INTELLIGENCE REPORT ON

CEMENT AND BUILDING MATERIAL INDUSTRY IN INDONESIA

February 2008

Current Issues

The past several years saw no significant increase in the production capacity of the country's cement industry. The production capacity remains around 47 million tons per year. Plan has been made to increase the capacity since 2005, but most of the plans have remained in the pipeline.

The fact that the industry still had high idle capacity until last year discouraged investment. The capacity utilization of cement industry was only 60% in 2006 as demand was weakened by sharp oil fuel price hikes late 2005.

In 2007, the impact of the fuel price hikes began to recede resulting in growing demand especially from the property sector and infrastructure projects of the government. A number of cement players, therefore, have plan capacity expansion.

Capacity expansion is necessary to keep pace with growing demand, which reached around 35 million tons in 2007. The requirement is expected to continue to grow in higher rate in 2008 with implementation of large infrastructure projects expected in the year.

In addition, some of the cement factories have been too old and need replacement of their machines. A number of production units were already closed in 2006 such as those of Semen Padang, Semen Gresik, Semen Tonasa, and Holcim.

Small producers with old machines could not last long in competition especially with the increase in production cost. The soaring price of coal fuel is the main cause of the increase in production cost.

Small producers like Semen Kupang, Semen Baturaja, and Semen Bosowa could not fully utilize their production capacity because of a number of factors like, location being too far the market - Java, Sumatra and Sulawesi, and inadequate transport facility such as faced by Semen Kupang and Semen Baturaja.

Energy is a major factor in cement industry. Modernization of cement industry is now focused more on saving energy and modification of machines to use secondary energy.

A major factor that may determine implementation of capacity expansion plan is the availability of and price of coal. Cement industry is a major consumer of energy and coal is the main source of energy for cement factories in the country.

A number of producers or investors planning capacity expansion or planning to build new factories need to secure supply of coal especially amid the growing demand for coal in international market. Therefore, the want guarantee from the government for coal supply as most coal producers choose to export most of their production.

In 2007, the price of coal tended to increase. The price of Indonesia's low rank coal was around US$50 per tons that year. Demand for coal is strong from India, China, South Korea and Malaysia pushing up the price in the world market.

Production capacity down

The past several years saw no increase in the production capacity of the country's cement industry. The highest increases were recorded in 1997 and 1998. In 1997, the capacity for clinker rose from 24,995,000 tons to 30,945,000 tons or by 23.8% and cement production rose from 27,330,000 tons to 33,620,000 tons or by 23%.

In 1998, the production capacity for clinker rose from 30,945,000 tons to 40,245,000 tons or 30%, and the production capacity for cement increased from 33,620,000 tons to 45,070,000 tons or by 34%.

Since then the production capacity of the industry has virtually stagnant as demand, which was previously predicted to increase, fell in the wake of the crisis in 1997/1998. As a result the industry had big idle capacity as the expansion in 1997 and 1998 was prepared to meet expected increase in demand in the following years, which saw the contrary to expectation.

In the period of 2000-2005, the market demand began to rise growing by 7.2% annually on the average, but in 2006, slum hit he market again with a sharp rises in the oil fuel prices in October, 2005.

The wide gap between demand and production capacity discouraged investment for capacity expansion already planned in 2005. In 2005, the production capacity of the country's cement industry fell in 2005 and 2006 as one of major producer PT. Semen Andalas was destroyed by the tsunami in Aceh in December 2004.

In addition a number of old production units were scrapped in 2006. The annual production capacity of PT. Semen Padang was reduced by 100,000 tons for clinker and by 200,000 tons for cement; that of PT. Semen Gresik was reduced by 800,000 tons for clinker; PT. Semen Tonasa by 60,000 tons for clinker; and PT. Holcim Indonesia by 1,000,000 tons for clinker and 1,000,000 tons for cement.

The impact of the oil fuel price hikes was no longer felt in 2007 as indicated by a 7%-8% increase in demand on the domestic market that year. The growing trend in demand is expected to continue this year and in the coming years that capacity expansion will be needed.

Major Producers

PT. Semen Gresik, Tbk (PT. SG)

PT. SG has three factories in Tuban and Gresik, East Java with annual production capacity of 8.2 million tons. The company has two special ports in Tuban and Gresik.

On 15 September 1995, PT. Semen Padang in West Sumatra and PT. Semen Tonasa in South Sulawesi became subsidiaries of PT Semen Gresik of the Semen Gresik Group (SGG) controlling 99.9% of the shares of each of the companies. Including the two subsidiaries, the production capacity of SGG totals 17.1 million tons per year at present.

In 2008, the capacity is to be expanded to 17.7 million tons per year through de-bottlenecking.

In the SGG also has plan to build two new factories each with a capacity of 2.5 million tons in Java and Sulawesi. The two factories are to be operational in 2012, bringing its production capacity to a total of 23.9 million tons.

SGG also plans to build 10 units of coal fired power plants with a total capacity of 410 Megawatt (MW) to be operational in 2011 to guarantee power supply to its factories.

Among the power plants to be built by the company group include one in Tuban with a capacity of 2 x 65 MW; in Indarung, West Sumatra with a capacity of 3 x 35 MW and in Biringere, Pangkep, South Sulawesi with a capacity of 1 x 35 MW.

The power generating projects will cost around US$ 315 million for which SGG plans to issue international bonds valued at US$ 300 million-US$ 500 million. The bonds are to be issued this year.

SGG has invited 10 investment banks -- Bahana Securities, Citigroup, Credit Suisse, Danareksa Sekuritas, Deutsche Bank, Lehman Brothers, Mandiri Sekuritas, Merrill Lynch, Standard Chartered Securities, and UBS Securities among which two will be selected to team up with JP Morgan Securities, which has been named to arrange the U.S. dollar bond sales.

The SGG also has non core business operations such as in cement bagging industry under PT. Industri Kemasan Semen Gresik; industrial estate under PT. Kawasan Industri Gresik, limestone mining industry under PT. United Tractors Semen Gresik; steel making and civil contracting industry under PT. Swadaya Graha; public transport service and general trading and inter-island trading, sole agency and distribution under PT. Varia Usaha; and asbestos and building material manufacturing and casting industry under PT. Eternit Gresik.

PT Holcim Indonesia Tbk (PT. HI)

PT. HI was originally named PT. Semen Cibinong. The world's cement giant, Swiss based Holcim Ltd acquired 77.33% of PT. Semen Cibinong in 2001. PT. Semen Cibinong was renamed PT Holcim Indonesia on 1 January 2006. PT HI has two factories in Narogong and Cilacap. Holcim is the world's second largest cement producer with stake in cement companies in 70 countries in the world.

PT. HI plans to expand its production capacity by building a new factory in Tuban, East Java. By 2006, the company had an annual production capacity of 8.7 million tons.

Construction of the new factory is to start in 2008. Land clearing already started in 2007 and by October that year land clearing was already finished over 900 hectares.

PT. Indocement Tunggal Prakarsa, Tbk (PT. ITP)

PT. ITP was established in 1985 by the Salim Group. In 2006 its production capacity was 18.8 million tons per year for clinker and 15.6 million tons per year for cement. PT. ITP plans revamping to expand its cement production capacity by 4 million tons in 2009.

In the wake of the 1997/1998 crisis the company was taken over by the Indonesian bank rescue agency BPPN in compensation for a huge debt of the Salim group.

In 2001, a German cement giant Heidelberg Cement Group acquired 65.14% of the company through its subsidiary Kimmeridge Enterprise Pte. Ltd.

In 2003, Kimmeridge Enterprise Pte, Ltd handed over the stake it had PT. ITP to HC Indocement GmbH. In September 2006, HC Indocement GmbH was merged into Heidelberg Cement South-East Asia GmbH, which became the owner of PT. ITP.

In order to reduce its debt burden, PT. ITP sought fund to refinance debt in Master Facilities Agreement (MFA) scheme, which was part of the restructuring program by BPPN.

PT. ITP succeeded in securing the refinancing facility to settle MFA in April 2006. The facility was in loan of US$ 158 million from a bank syndicate. The loan fund plus internal cash of US$ 40 million was used to refinance the MFA.

In 2006 PT. ITP could reduce its debt by Rp 1.59 trillion partly with internal cash. In 2006, PT. ITP had Rp 53 billion in cash down from Rp 801 billion in 2005.

PT. ITP also succeeded in reducing its net debt ratio to equity to 36.8% from 54.4% in previous year. In 2000, when the MFA scheme was used for the first time, its net debt ratio to equity was 832.5%.

PT Semen Andalas Indonesia

The factory of PT. Semen Andalas (SA), which is owned by French cement giant Lafarge was destroyed by tsunami in Ache in Dec. 2004. In 2007, work started to rebuilt the factory and it is expected to be operational again this year. The new factory will have an annual production capacity of 3.1 million tons.

In the meantime PT. SA imports cement from a Lafarge factory in Malaysia to maintain its market foothold in northern Sumatra.

PT Semen Bosowa Maros (PT. SBM)

The factory was built in 1995 and it started operation in April 1999 with an annual production capacity of 1.71 million tons of clinker and 1.8 million tons of cement. PT. SBM is owned by Aksa Mahmud, a business tycoon from South Sulawesi.

In 2007, PT. SBM completed the construction of a packing plant in Samarinda, East Kalimantan. PT SBM plans to expand its production capacity by 1.4 million tons in 2009. The company is dominant in the eastern Indonesian market.

PT Semen Baturaja (PT. SB)

PT. SB is also wholly owned by the government with factories in Baturaja, Palembang and Panjang. In 2006 its production capacity was 1.2 million tons per year for clinker and 1.25 million tons for cement.

PT. SB produces portland cement of type I. Its main basic material was supplied from its own concession in Baturaja. Its production is disposed of only in Southern Sumatra and Banten because of difficulty in transport.

Cement Production grew in 2007

In the period of 2004-2006, increase in the production of clinker and cement was insignificant after a strong growth of 8.4%. In 2005, the production grew only slightly 2.1% to 33,917 tons and in 2006 it shrank to 33,032 tons or down by 2.6%.

In 2007, production grew sharply to 46 million tons to follow the revival of the property industry and construction of large infrastructure projects. The growing trend is expected to continue through 2008 but in more moderate rate as property company will be more careful facing global slowdown and possible recession in the United States. Financial problem also will slow implementation of large infrastructure projects of the government.

Production per company

Most producers increase production in 2006, but PT. ITP and PT. HI reduced output. In 2007, producers raised production to meet growing demand. SGG's production totaled 16.7 million tons or 103% of target. ..........................