INDONESIA: Holcim Indonesia Adds Cement Plants to Tap Rising Demand

PT Holcim Indonesia (SMCB), the country’s third-largest cement producer, will add a plant in Tuban, East Java in addition to one already under construction as it seeks to meet rising demand in Southeast Asia’s biggest economy.
Holcim Indonesia, 80.6 percent owned by Swiss cement maker Holcim Ltd. (HOLN), plans to boost capacity to 12 million tons a year by 2015 from 8.3 million tons as housing construction increases and the government works on more infrastructure projects, President Director Eamon Ginley said.
“The cement industry here in terms of domestic supply needs to double because the market will grow to nearly 100 million tons by 2020-2021,” Ginley, 46, said in an interview at the company’s headquarters in south Jakarta. “The prospects for the cement industry are very strong.”
Indonesian President Susilo Bambang Yudhoyono has pledged to build more highways, airports and ports to clear bottlenecks and meet an economic growth target of an average 6.6 percent by the end of his second term in 2014. Gross domestic product expanded 6.37 percent in the second quarter. Bank Indonesia (BBRI) reiterated its forecast last month for expansion at 6.1 percent to 6.5 percent this year and 6.3 percent to 6.7 percent in 2013.
Holcim Indonesia is spending $450 million to build the first Tuban plant, which will have an annual capacity of 1.7 million tons when it begins operation next year, Ginley said. The second facility will have “similar” capacity, he said.
Holcim operates two sites on Java island and a cement grinding station in Banten province, west of Jakarta. If the second plant in Tuban is approved, the company would have total capacity of almost 12 million tons by 2015, Ginley said.

Outlook

“If Holcim wants to remain competitive with the other two listed cement companies, it better expand its capacity again,” said Adolf Sutrisno, an analyst at Andalan Artha Advisindo Sekuritas in Singapore. “The outlook for the cement industry is very good as it will be supported by the government’s infrastructure spending.”
Indonesian cement companies have outperformed the broader market this year and Holcim is the best-performing stock among three listed cement makers. Its share price has gained 49 percent in 2012, better than the 28 percent increase of PT Semen Gresik (SMGR) and 26 percent gain of PT Indocement Tunggal Prakarsa. (INTP) The Jakarta Composite index has risen 13 percent.
Holcim reported yesterday its nine-month net income rose to 911.2 billion rupiah ($95 million) from 740.2 billion rupiah the same period a year earlier. Its share price was unchanged at 3,250 rupiah each as of the noon Jakarta-time break. The Jakarta Composite index declined 0.7 percent and Semen Gresik, Indonesia’s biggest cement producer by volume, fell 2 percent.

Better Margins

Ginley predicted a margin on earnings before interest, tax, depreciation and amortization of 30 percent to 35 percent over the next five years as better efficiency from the facility in Tuban helps lower the operating costs and reduces transportation costs to areas in East Java. The margin for the nine-month period rose to 28.2 percent from 21.5 percent a year earlier.
The Tuban plant “gives us position in the East Java market,” Ginley said. “We truck the cement from the West Java or Central Java plants to supply East Java today. Next year, when we turn on the Tuban plant, we can save all those additional logistic costs.”
Indonesia consumed 48 million tons of cement last year, industry data show, and Ginley expects the volume to expand by 14 percent this year and at least 10 percent in 2013.
Indonesia has a “very solid plan” to boost economic growth, Ginley said. “In order to do this, you need cement. If you don’t have cement, you can’t have development. That’s why it’s very important for Indonesia that the local industry also continues to invest and meet this challenge.”