Staying competitive

in an oversupplied
market
Overview of Indonesias cement industry
October 2016
 Contents
Indonesias cement industry in 2016 3
Market overview and competitive
5
landscape
Industry competitiveness and
9
profitability

Industry growth drivers 15

Key contacts 22

2| Staying competitive in an oversupplied market: Overview of Indonesias cement industry

Indonesias cement
industry in 2016

Staying competitive in an oversupplied market: Overview of Indonesias cement industry |3

Indonesias cement industry in 2016

Driven by the rapid increase in production facility, Indonesias cement market is

getting more competitive. The average profitability margin has been in
downward trend in the past 4 years, as the new players are offering much lower
selling price in a market that is already oversupplied in an effort to penetrate
the market. Year-to-date (YTD) sales as of September 2016 is amounting to
44.7 million tons, increased slightly (2.95%) compared to last year YTD sales in
the same period. However, month-to-month sales in September 2016 is
declining -3.3% compared to September 2015.

By perforce, the existing players is being forced to forgo the high profit margin
that they used to enjoy in the past as they have to reduce their selling price in
order to defend their market share. While maintaining brand awareness should
remain to be a priority, the existing players need to look after the importance of
pricing strategy. In 4 months period from December 2015 to April 2016, the
big three players market share have decreased by 3% from 85% as of to 82%,
most notably in the region where the new entrants production facilities are
located.

In an environment where pricing decision is a critical factor to survive in the

market, it is important for the players to keep their production costs efficient as
it will determined the selling price they can offer. Fortunately, the energy costs,
which accounts for significant portion of the production cost, has been in
downward trend.

Amid the low growth in property sector, the increase in government

infrastructure spending could provide a silver lining to the cement demand. The
planned infrastructure development in the Eastern Indonesia can also lead to a
higher cement consumption in the anticipated future. However, it will depend
whether or not the government can ensure that the increase in budget is
followed by high level of absorption.

In addition to the infrastructure projects, a relief to the oversupplied condition

might also come from export market, as some of the neighboring countries are
still short in cement supply.

4| Staying competitive in an oversupplied market: Overview of Indonesias cement industry

Market overview and
competitive landscape

Staying competitive in an oversupplied market: Overview of Indonesias cement industry |5

Market overview and competitive landscape
Indonesias property boom over the past 5 years has contributed to the
surge of cement demand. Owing to its growth prospect coupled with the
high margin, Indonesia has become one of the most attractive markets in
the global cement industry and lured many new entrants to enter. Rapid growth of
Consequently, Indonesia was experiencing a significant increase in cement production
production capacity, most notably in the past couple of years. However, capacity and
due to the recent slowdown in economy and property sector, cement the slowdown in
demand was growing in much slower rate (5-6%) compared to its supply
property sector
(15-18%). The property sector accounted for almost 80% of the total
cement consumption in Indonesia, while the remaining comes from growth
infrastructure projects. This resulted in an oversupplied market condition. resulting in an
oversupplied
Figure 1. Indonesia domestic cement consumption condition in
92.1
107.4 cement market
78.4
54.9 57.7 58.0 61.0 59.9 68.9 60.4 63.7 67.9
48.0 54.3

2011 2012 2013 2014 2015 2016F 2017F

Consumption Installed capacity

Figure 2. Production capacity in Indonesias cement industry

2014 2015 2016F 2017F

In 000 tons
SMGR 28,600 30,450 32,700 37,200
Gresik Tuban - Jawa 14,000 15,100 15,850 18,100
Padang - Sumatera 7,300 7,300 8,050 10,300
Tonasa - Sulawesi 7,300 8,050 8,800 8,800
INTP 20,025 20,500 22,700 24,900
Bogor (9 plants) 13,325 13,800 16,000 18,200
Palimantan - West Java (2 plants) 4,100 4,100 4,100 4,100
Tarjun - Kalsel (1 plants) 2,600 2,600 2,600 2,600
Holcim 9,550 11,250 11,250 11,250
Naragong + Ciwadan, West Java 5,700 5,700 5,700 5,700
Cilacap, Central Java 3,000 3,000 3,000 3,000
Tuban, Java 850 2,550 2,550 2,550
Bosowa 3,800 5,300 6,425 6,800
Maros, South Sulawesi 2,500 2,500 2,500 2,500
Kampung Baru Batam, Riau 1,000 1,000 1,000 1,000
Banyuwangi, East Java 300 1,800 1,800 1,800
Cilegon, Banten Java 1,125 1,500
Andalas (Lafarge) 1,600 1,600 1,600 1,600
Lhok Nga, Aceh 1,600 1,600 1,600 1,600
Baturaja 2,000 2,000 2,000 2,925
South Sumatera, Lampung & Palembang 2,000 2,000 2,000 2,000
Central Sumatera, Jambi 925
Kupang (NTT area) 550 850 850 850
Anhui Conch - 1,500 2,975 9,300
South Kalimatan, Tanjung 1,500 1,875 3,000
West papua 1,500
Merak, West java 1,100 3,300
South Sulawesi Maros 1,500
SCG 450 1,800 1,800
West Java, Sukabumi 450 1,800 1,800
Semen Merah Putih 750 2,000 5,750 6,750
Ganda Group - Ciwandan, Banten 750 1,750 1,750 1,750
Ganda Group - Bayah, Banten 3,000 4,000
Gresik, Jawa 250 1,000 1,000
Semen Puger - Jember, East Java 500 500 500 500
Panasia - Central Java, Banyumas 500 2,000 2,000
Jui Shin - Karawang, West Java 1,500 1,500 1,500 1,500
Total 68,875 78,400 92,050 107,375
Source: BNP Paribas, DBS Vickers, Morgan Stanley, EY analysis

6| Staying competitive in an oversupplied market: Overview of Indonesias cement industry

 Market overview and competitive landscape
(continued)
With the addition of new entrants in the market, Indonesias cement
market is becoming more competitive. Although the market share is still
Though the dominated by the big three players (Semen Indonesia Group, Indocement
market share is and Holcim), the new entrants have acquired 5% market share from the big
3 players since their capacities were completed in 20142015. In 4
still dominated months period, the big three players market share have decreased by 3%
by the big three from 85% as of December 2015 to 82% as of April 2016 according to
players, Indonesian Cement Association data.
the presence of
new entrants The presence of new entrants has also driven the price competition stiffer,
has driven the especially in regions outside of Java where the customers are more price
price sensitive and brand recognition outside of the players home market is low.
While maintaining strong brand image might still top the cement
competition companies strategy priority chart, the existing players need to put more
stiffer attention to the importance of the pricing strategy and increasing
utilization.
Figure 3. Market share of cement players

Market share 12M15Y

Big 3 = 85% Others = 15%
43.0%

27.8%

14.3%

5.2% 2.5%
3.0% 2.4% 1.4% 0.4%

Semen Indocement Holcim Bosowa Lafarge Semen Cemindo Jui Shin Semen
Indonesia Baturaja Kupang

Market share 4M16Y

Big 3 = 82% Others= 18%

41.6%

26.9%

13.7%
4.9% 3.0% 2.5% 2.2% 1.8% 1.5% 1.1% 0.5% 0.4%

Source: Indonesian Cement Association (ASI)

Staying competitive in an oversupplied market: Overview of Indonesias cement industry |7

8| Staying competitive in an oversupplied market: Overview of Indonesias cement industry
Industry competitiveness
and profitability

Staying competitive in an oversupplied market: Overview of Indonesias cement industry |9

 Industry profitability and sales by segments
In an effort to penetrate into the market, new entrants often come with
significantly lower price. Accordingly, the existing market players are
forced to reduce its sales price in order to defend their market share. This
has resulted in lower margin and profitability of the existing market
players, especially for the big three players which have been enjoying an Due to price
exceptional profitability resulting from a high margin in the past.
competition,
the players have
New players have started price discounts since Q2 2015 due to increase in
been reducing
capacity. Prices offered by the 5 new players: Anhui Conch, Panasia, Siam
Cement, Cemindo Gemilang and Jui Shin are approximately 20% lower their sales price
than the big three. resulting in a
downward trend
Looking at the historical trend, it was evident that addition of new players of average
had increased the competition in the market, as indicated by the fact that selling price and
the gross margin of Indonesian public cement companies has been gross margin
declining for 4 consecutive years while the average cement selling price
was decreasing for the first time in 5 years period in 2015 as shown in the
graph below.

Figure 4. Average selling price of Indonesian public cement companies

-4.1%
1,027 1,072 1,029
966 947 962 964 950
902 853
838 884 890 878 881 926 916 874 939 924
820 828
772 777
689

2011 2012 2013 2014 2015

Source: BNP Paribas, DBS Vickers
Indocement Semen Indonesia Semen Baturaja Holcim Average selling price

Source: Annual reports, EY analysis

Figure 5. Gross margin of Indonesian public cement companies

47.7%
46.3%
45.1% 46.9% 46.2%44.3% 45.5%
42.4% 42.9% 44.1% 43.8% 42.5% 44.4%
38.9% 41.0% 39.1%
37.9% 36.4% 36.8%
34.6% 35.3%
30.1% 33.0%
29.2%
24.7%

2011 2012 2013 2014 2015

Indocement Semen Indonesia Semen Baturaja Holcim Average gross margin

Source: CapitalIQ

10 | Staying competitive in an oversupplied market: Overview of Indonesias cement industry

 Industry profitability and sales by
segments (continued)
By type, bag cement product holds the majority of cement sales in
Indonesia. In 2015, bag product accounted for 76% of the total cement
sales, while bulk product only accounted for 24%. However, there was an
Majority of increasing trend in bulk product sales, of which the proportion has been
cement sales in increasing significantly from 19% in 2011 to 24% in 2015 and is
expected to reach 29% in 2017.
Indonesia are
of bag products In term of geographical market, cement sales in Indonesia are still
and mostly concentrated in Java region which in 2015 accounted for more than a
concentrated in half of total cement sales in Indonesia (55.7%), followed by Sumatera
Java region (21.6%), Sulawesi (7.9%) and Kalimantan, respectively.

Figure 6. Cement sales by product type

81% 80% 79% 78% 76%

19% 20% 21% 22% 24%

2011 2012 2013 2014 2015

Bulk Bag

Source: Indonesia Cement Association (ASI)

Figure 7. Cement sales by geographical market

7.4% 8.0% 7.6% 7.6% 8.1%

7.3% 7.5% 7.4% 7.6% 7.9%
7.0% 7.4% 7.6% 7.6% 6.7%

23.0% 21.8% 21.0% 20.9% 21.6%

55.3% 55.3% 56.4% 56.3% 55.7%

2011 2012 2013 2014 2015

Java Sumatera Kalimantan Sulawesi Others

Source: Indonesia Cement Association (ASI)

Staying competitive in an oversupplied market: Overview of Indonesias cement industry |1 1

Industry profitability and sales by segments (continued)

Despite of the small share in terms of percentage of sales in 2015, the

regions outside of Java managed to maintain a strong growth rate amid
the slowdown in economic activities with exception for Kalimantan region
which was negatively affected by the plummeting commodity prices.
While Java
Except for Kalimantan region, the cement sales growth is expected to
region is still
gradually recover in the upcoming years. While Java region is still
expected to continue its firm domination in the future, the growth rate of expected to
regions outside of Java (except Kalimantan) is forecasted to be two times continue to be
faster in average. the main
cement market,
the growth rate
Figure 8. New and possible entrants in Indonesia cement industry
in regions
Kalimantan Java Sumatra Sulawesi Others outside of Java
(except
10.0% 10.0%10.0% 9.0%9.0% Kalimantan) is
9.0%
5.0% 4.5%
5.7% 5.1% forecasted to be
4.0%
two times faster
0.0%
-0.2%

-5.0%

-10.6%

2015 2016F 2017F

Source: DBS Vickers

12 | Staying competitive in an oversupplied market: Overview of Indonesias cement industry

 Utilization rate

As new entrants are struggling to gain market share, we expect that the
players will engage in more intense price war in the future. The ability to
survive the competition is determined by how far can the players lower its
The declining selling price. Therefore, it is important for the players to achieve high
energy prices and utilization level as cost will decline in line with the increase in production.
appreciation of Through cost optimization, the players will gain pricing advantage which is
Rupiah against US the key to survive the competitive market.
Dollar could reduce However, given the continuous increase in supply and the persistent
the loss of profit oversupplied market condition, achieving high utilization level will turn out to
resulting from be a challenging task. As a matter of fact, the average utilization rate is
lower selling price forecasted to decline 69% in 2016 and 65% in 2017. EBITDA/ton of Semen
Indonesia and Indocement are also forecasted to decline from USD19/ton and
USD26/ton in 2015 to USD18/ton and USD24/ton respectively. Nonetheless,
Semen Indonesia and Indocement are forecasted to perform better with
utilization rate of 75%-77% by 2017E, compared to the non-big three players
with utilization rate of 45% by 2017E.1)
1) Morgan Stanley estimates

Figure 9. Indonesia cement domestic utilization

90% 94% 93%

100% 87%
77%
80% 69% 65%

60%

40%

20%

0%
2011 2012 2013 2014 2015 2016E 2017E
Source: Morgan Stanley

Figure 10. EBITDA/Ton (USD)

45 39
36 37
40
35 31
30 26 25
33 24
25 31 31
28
20 24
15 19 18
10
5
0
2011 2012 2013 2014 2015 2016E 2017E

Semen Indonesia Indocement

Source: Morgan Stanley

Staying competitive in an oversupplied market: Overview of Indonesias cement industry |1 3

 Cost factors

Amid many pressures that restrain growth, the declining energy costs
(including electricity) seem to be a lifeline for the cement industry.
Considering the fact that electricity accounts for almost half of the cement
manufacturers cost of production, the reduction in energy prices could The declining
somewhat compensate the loss of revenue resulting from lower selling price. energy prices and
appreciation of
As of the first quarter of 2016, average coal price has been declining -15% y- Rupiah against US
o-y while average electricity tariff for I-4 class and average gasoline have Dollar could
been declining for -10% y-o-y in the same period. compensate the
loss of revenue
In addition to declining energy prices, Rupiah is also appreciating against US from lower selling
Dollar. As of September 2016, Rupiah is held stable at around
IDR13,000/USD. The appreciation should also have a positive impact as most price
of the manufacturing cost components are in US Dollar denomination.

Figure 11. Selected cement cost components

Gasoline/
Electricity
Quarterly Coal price diesel average
USD/IDR I-4 tariff
average (IDR/ton)
(IDR/kwh)
price
(IDR/litre)
1Q14 11,989 957,000 732 6,000

2Q14 11,576 857,000 790 6,000

3Q14 11,798 835,000 969 6,000

4Q14 12,197 803,000 1,145 7,333

1Q15 12,717 825,000 990 6,700

2Q15 13,088 808,000 1,042 7,150

3Q15 13,667 803,000 1,081 7,150

4Q15 14,010 773,000 1,059 7,050

1Q16 13,563 704,000 954 6,350
1Q16 % q-o-q -3% -9% -10% -10%

1Q16 % y-o-y 7% -15% -4% -5%

Source: Morgan Stanley

14 | Staying competitive in an oversupplied market: Overview of Indonesias cement industry

Industry growth drivers

Staying competitive in an oversupplied market: Overview of Indonesias cement industry |1 5

Property growth

The weak macroeconomic condition and the long-running tight interest rate
policy imposed by the Central Bank (Bank Indonesia or BI) has negatively
affected the growth in property sector. Accordingly, the demand growth for
cement products was significantly decreasing, especially in Java region The bleak outlook
where the property sector boom occurred prior to the interest rate in property sector
tightening. is likely to continue
for a while until the
In an effort to stimulate economy and recover the growth in property sector,
BI have cut the interest rate gradually from its peak at 7.75% as of November decision to cut the
2015 to 6.50% as of July 2016. However, the property price index that was interest rate takes
barely increasing in 6 months period from December 2015 to June 2016, effect
indicating that the sector might be lagging in responding the monetary
stimulus. Thereof, the bleak outlook is likely to continue for a while until the
policy takes effect.

Figure 12. BI rate

7.75%
8.00%
7.50%
7.00%
6.50%
6.00% 6.50%
5.50%
5.75%
5.00%
4.50%
4.00%
Oct-12

Oct-13

Oct-14

Oct-15
Jul-12

Jul-13

Jul-14

Jul-15

Jul-16
Jan-12

Jan-13

Jan-14

Jan-15

Jan-16
Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Source: Bank Indonesia

Figure 13. Property Price Index

190.02 193.13
181.64
170.90
153.58
167.79 165.30
144.20 139.76
113.83

2012 2013 2014 2015 Q2 2016

Commercial Residential (Primary Market)

Source: Bank Indonesia

16 | Staying competitive in an oversupplied market: Overview of Indonesias cement industry

 Infrastructure spending

While slow growth in property sectors growth might seem dreadful to the
cement industry, the governments infrastructure development plan might
provide a relief for the slow growth in demand.
The increase in
government President Joko Widodos administration has risen the infrastructure spending
infrastructure budget from IDR161 trillion in 2014 to IDR 276 trillion in 2015 as the
spending could administration campaigned to close the infrastructure quality gap with the
provide a relief to neighboring countries. While this might sound like a good news, the
the demand of government has to strive to ensure that the increase in infrastructure budget
is accompanied by high level of realization.
cement product
amid the low Figure 14. Government infrastructure budget
growth in property Government capital Realization of
Absorption
sector expenditure budget spending
(%)
(IDR tn) (IDR tn)

2011 128.7 114.2 89%

2012 174.9 145.5 83%
2013 184.3 155.9 85%
2014 177.9 154.6 87%
2015 290.3 256.31) 88%
2016 313.5 n/a n/a
1) Temporary figure
Source: Ministry of Finance

Figure 15. Infrastructure investment plan

Infrastructure Investment in 2015-2019

2,560 km new road BRT in 29 cities

1,000 km new toll road MRT in 6 metropolitan
46,770 km existing road cities and 17 major cities

New oil refinery (2 x 300k

2,159 km inter-city train barrels capacity)
1,099 km commuter train Expansion of Cilacap and
Balongan oil refineries

24 new seaports 35,000 MW electricity

60 crossing port generation program

33 new dams 30
15 new airports


hydroelectric power plants
6 air cargo facilities 1 million ha irrigation
system

Source: Committee for Infrastructure Provision Acceleration (KPPIP)

Staying competitive in an oversupplied market: Overview of Indonesias cement industry |1 7
Overseas export market

Sri Lanka

Fast-growing demand, driven by development in

construction sectors
During the last 5 years, cement demand in Sri Lanka was growing
fast due to the rapid development in the services, tourism, and
construction sectors. Based on data from Sri Lankan Central
Bank, the cement demand in Sri Lanka has been growing from
3.8 million metric tons in 2010 to 6.3 million metric tons in
2014. However due to low domestic production, Sri Lanka is
experiencing shortage of cement supply, where 70% of its
cement needs is fulfilled through import.

Myanmar
Increasing foreign investment and high
domestic prices
Myanmar is one of the regions most promising
emerging markets. The growth of Myanmar's
GDP and GDP/capita after the country opened up
for foreign investments in recent years has
resulted in an increase in consumer demand and
foreign investments.

The imports are needed due to under-supply in

the local market and because of the reported
low-quality and high prices of domestic cement.
Domestic cement demand in Myanmar is around
8 million tons/year with half of this figure
imported from abroad.

Cambodia
Half of the cement needs are imported from
Thailand and Laos
Cambodia's demand is significantly higher than its domestic
production capacity. The shortfall is made up by imports, mainly
from Vietnam, and the remaining comes from Thailand and Laos.
Cambodias demand for cement has reached 8 million tons/year
and the existing three cement plants in Kampot province can only
supply about half of this amount.

Source: Globalcement.com, Cemnet.com

18 | Staying competitive in an oversupplied market: Overview of Indonesias cement industry
 Export market
could be seen as
one of the solutions
to the oversupply
condition as some
of the neighboring
countries is still
short in cement
supply

Brunei
13% of the total cement needs were imported from China
and Thailand
Brunei has one 550,000 tons/year capacity grinding plant in Muara. The
country has an excess of domestic cement demand as it only has one
production facility. Around 13% of the total cement needs were imported
from China and Thailand.

Philippines
Imports of cement grew from 4,000 tons in 2014 to
314,000 tons in 2015
Cement sales have risen by 10.7% year-on-year to 13.2 million tons in the
first half of 2016 due to increased government spending on infrastructure
and improved private sector involvement in construction. Cement
Manufacturers Association of the Philippines data shows that imports of
cement grew from 4,000 tons in 2014 to 314,000 tons in 2015. Cement
imports of 161,000 tons were recorded for the first quarter of 2016.

Staying competitive in an oversupplied market: Overview of Indonesias cement industry | 19

 Opportunity in Eastern Indonesia

Big three players Sumatera

12M15Y 4M16Y
Kalimantan
Others 31% 32%
12M15Y 4M16Y
10% 23%
69% 68%

Market shares of the big three

77%
players were declining 13% in 90%
Kalimantan, where Anhui Conch
opened its facility. Meanwhile, in
Java region where Cemindo
Gemilang, Siam Cement Group, Jui
Shin and Panasia opened its
facilities, the market share was only
down 6%. The reason of lower
decline of the big three players Semen Semen
Merah Garuda Conch
market share was possibly due to Tabalong, South
Putih Bekasi, West Kalimantan
their stronger brand awareness in Cilegon, Banten Java
Java, which was their home market,
compared to the other regions.

Eastern part of Indonesia (especially Irian SCG

Jaya region) might bring some opportunity PT Semen Jawa
Semen
Sukabumi, West
as there is no cement player who has set a Java Bima
production facility in that area. While the Ajibarang, Java
Central Java
demand is still low, the planned infrastructure 12M15Y 4M16Y
development in the Eastern Indonesia can
lead to a higher cement consumption in the 7% 13%
near future.

93% 87%

Source: Indonesian Cement Association (ASI), Trimegah Securities

20 | Staying competitive in an oversupplied market: Overview of Indonesias cement industry
 Sulawesi
12M15Y 4M16Y
24% 26% While the demand
remains low, the
planned
76% 74% infrastructure
development in the
Eastern Indonesia
can lead to a higher
cement
consumption in the
anticipated future.

Eastern Indonesia
12M15Y 4M16Y

24% 23%

76% 77%

Staying competitive in an oversupplied market: Overview of Indonesias cement industry | 21

 Key contacts

22 | Staying competitive in an oversupplied market: Overview of Indonesias cement industry

 Key Contacts
Deden Riyadi
Partner
Assurance
EY Indonesia

Tel : +62 21 5289 4564

Email : deden.riyadi@id.ey.com

Sahala Situmorang
Partner
Transaction Advisory Services
EY Indonesia

Tel : +62 21 5289 5188

Email : sahala.situmorang@id.ey.com

Reuben Tirtawidjaja
Senior Manager
Transaction Advisory Services
EY Indonesia

Tel : +62 21 5289 5669

Email : reuben.tirtawidjaja@id.ey.com

Staying competitive in an oversupplied market: Overview of Indonesias cement industry | 23

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