Growing household spending and an evolving retail landscape are underpinning demand for packaging in Indonesia, much to the benefit of the plastics industry. The economic slowdown and bout of inflation that beset Indonesia's economy in 2013 did not leave packaging companies and plastic producers unscathed, but the long-term market outlook is promising thanks to the country's expanding consumer class. Its heavy reliance on the domestic retail sector makes the packaging industry less susceptible to global economic downturns than export-focused industries, and the shift from traditional wet markets to modern supermarkets and convenience stores should continue to support demand for packaging of fast-moving consumer goods (FMCG), particularly food and beverages. The recent devaluation of the rupiah, however, has exposed currency risks that plastic packagers face due to their reliance on imported raw materials. This is one reason why the industry is taking a growing interest in recycling.
Indonesia's plastic packaging industry grew by 8% to around 55 trillion RP ($5.3 billion USD at the time) in 2013, according to the Indonesian Packaging Federation (FPI) and was expected to grow at the same rate or faster in 2014. Accounting for more than two-thirds of national demand, the food and beverage industry is of overwhelming importance for Indonesia's packaging industry, followed by pharmaceuticals and cosmetics (See Indonesia’s Fast Moving Consumer Goods Sector).
Plastic consumption in Indonesia is still relatively low on a per-capita basis at just over 17 kilogrammes (kg) per year, compared to around 35 kg in Malaysia and Thailand and 40 kg in Singapore, according to the Indonesian Olefin, Aromatic and Plastic Association (INAplas). This highlights the scope for future growth as personal income continues to rise in Indonesia's consumption-led economy. The domestic industry is able to supply around 3.6 million tonnes of plastic a year against total demand of 4.3 million tonnes, leaving imports to fill the gap. Besides the food and beverage industry, which accounts for the bulk of plastic use in Indonesia, agriculture and the construction sector as well as the automotive and electronics industries are the main buyers of plastics.
Indonesia has a relatively developed downstream industry both for flexible and rigid plastic, but a reliance on imported raw materials has held back the industry's potential on a global scale. The devaluation of the rupiah in 2012 and 2013 put significant strain on local plastic producers' operating costs and brought to the forefront the need to boost the production of numerous petrochemical inputs for the plastics industry, such as ethylene and propylene.
While Indonesia has significant oil and gas deposits, exploration and production have suffered from more than a decade of underinvestment (See Indonesia’s Oil and Gas Sector – Upstream Challenges). The same is true for the construction of oil refineries and gas processing plants. The result is a shortage in crucial petrochemical feedstock like naphtha and methanol. A number of major petrochemical projects have recently been announced, including a joint venture between state-owned PT Pertamina and Thailand's PTT Global Chemical for a $5 billion complex, but it will take many years for Indonesia to develop a powerful and closely integrated petrochemical industry that could alleviate the plastic industry's dependence on imports. Given the expected rise in demand, plans by the country's largest integrated petrochemical company, PT Chandra Asri Petrochemical, to invest around $1 billion from 2014 to 2015, fail to impress.
Import tariffs on basic petrochemical products for the plastics industry, while intended to protect local raw material producers, exacerbate the supply situation for packagers and jeopardize Indonesia's odds of becoming a regional hub for the industry. Duties vary between 0% and 20% depending on origin and the nature of the product. Local industry representatives are especially concerned about plastic imports from Thailand and have appealed to the government to improve upstream incentives and remove all import duties on petrochemical feedstock. Somewhat ironically, Indonesian plastic packagers themselves have called on the government to impose anti-dumping duties on imported polyethylene terephthalate (PET) products like plastic bottles from South Korea and China (even though Indonesia is a net exporter in PET).
Both the upstream and downstream plastics industry will be hard-pressed to defend their home turf against foreign competition, but curtailing imports of petrochemical feedstock or plastics is becoming hard to justify amid tightening economic integration within the ASEAN region and between ASEAN and other countries. A protectionist stance would also burden the local food and beverage industry, which itself faces tough competition from imports. The only realistic option is to boost the competitiveness along the entire hydrocarbons-to-packaging production chain. This will require local firms to upgrade their equipment and enhance their production methods, which in turn creates investment opportunities and an appealing market for foreign exporters of packaging machines and other hardware.
The increasing use of recycled materials is one way to address the local plastic industry's dependence on imports while at the same time tackling the pressing issue of municipal waste. Recycling is still in its early stages in Indonesia due to a lack of supporting infrastructure, notably with regards to waste collection and sorting. Recycling is mainly in the hands of micro-sized and small businesses in the informal sector, with PT Rejeki Adigraha in Jakarta being one of the few exceptions. As such, the industry lacks economies of scale and mainly employs simple crushing and pelleting technology leading to inferior output compared to sophisticated chemical methods.
However, interest in building modern and larger-scale recycling facilities appears to be growing, as illustrated by the case of PT Enviro Pallets, which recently set up a plant in Bali to turn some 30 tonnes of household and industrial waste into plastic pallets every day. With most plastic waste still disposed of in landfills and private consumption increasing fast, there is plenty of room for growth. Investing in environmentally sustainable solutions is also a prudent measure for plastic manufacturers in anticipation of growing environmental awareness among the Indonesian population. Regulations are likely to become more supportive, as large Indonesian cities struggle to deal with heaps of waste.
Booming demand for consumer products and plastic packaging, an anticipated easing of feedstock import restrictions and the need to modernise equipment make a compelling case for investment in Indonesia's plastics and plastic packaging industry. The restructuring needed to make the local industry competitive on a global scale will require significant investment and innovation. The recycling business offers particularly alluring opportunities for experienced foreign companies to put to use their knowhow and technology. The country’s competitive advantages in manufacturing, such as affordable industrial land (See Indonesia’s Industrial Property Market) and a large and competitively-compensated workforce create attractive opportunities for the packaging industry. Aside from acquisitions or joint ventures with local firms, export opportunities beckon.
Global Business Guide Indonesia - 2014
Contribution to GDP: 18% (2015)
Sector Growth: 5.5% (yoy, 2015)
Number Employed in the Sector: 16 million (2016)
Highest Minimum Wage by Province: 3,350,000 IDR/month (DKI Jakarta)
Lowest Minimum Wage by Province: 1,631,245 IDR/month (West Nusa Tenggara)
Main Areas: Automotive, Electronics, Textile & Garment, Footwear, Food & Beverages, Metal Products, Chemicals.
Main Export Markets: USA, Japan, China, Turkey, South Korea, Germany, Singapore, Thailand, Philippines, Saudi Arabia, Malaysia.
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