Suppliers of building materials are in a prime position to capitalise on Indonesia’s booming real estate market and rising investment in infrastructure. The construction sector has outpaced Indonesian GDP growth in recent years and plays an increasingly important role in the country‘s economy. According to the Indonesian Contractors Association (AKI), the sector expanded from just over $25 billion USD in 2011 to an estimated $40 billion USD in 2013. This trend is set to continue as a vibrant economy and rising personal incomes drive demand for commercial and residential properties. In addition, the government has embarked on a massive long-term infrastructure development programme that includes projects worth hundreds of billions of US dollars. Rising private investment and government spending can be expected to make Indonesia one of the largest construction markets in the world and should secure strong demand for building materials for decades to come (See Property in Indonesia: Overview).
With its reliance on the domestic market and government-funded projects, the building materials sector should prove relatively insulated from global economic risks. While the threat of localised overheating in the property market must not be overlooked, square metre prices in general are still low by international comparison and urbanization in Indonesia has a long way to go yet. Moreover, the country is still catching up on infrastructure development after long years of neglect. Neither should the economic slowdown in 2013 jeopardise long-term demand for building materials, because many of the stalled projects will resume once inflation and GDP growth stabilize.
The building materials sector has seen a rapid increase in investment in recent years. In 2012, the non-metallic mineral industry (which includes the production of many building materials and their ingredients) attracted 10.7 trillion RP (around $1 billion USD) in domestic direct investment in 2012 – more than any other sector apart from food, according to the Indonesian Investment Coordinating Board (BKPM). As supply has nevertheless struggled to keep up with rising demand, wholesale prices of construction materials more than doubled from 2005 to 2012, according to Statistics Indonesia (BPS).
National cement sales amounted to 55.0 million tonnes in 2012 after rising rapidly from 48.0 million tonnes in 2011 and 40.8 million tonnes in 2010, according to figures from the Indonesian Cement Association (ASI). Some 41.6 million tonnes were sold in the first nine months of 2013, up 5.3% on the year. Despite a more difficult macroeconomic environment, the ASI expected full-year sales to continue growing in 2013, albeit at a slower rate than the 14.5% increase seen in 2012. Demand in Eastern provinces is growing much faster, rising by more than 50% in 2012, though volumes are still low.
State-controlled Semen Indonesia dominates cement production with a market share of more than 40% and is expanding into other ASEAN markets. The Jakarta-listed company reported a 15.6% year-on-year increase in sales over the first three quarters of 2013 to 18.5 million tonnes. It is in the process of building new plants in Central Java and West Sumatra to defend its leadership. Meanwhile, Semen Indonesia’s main competitor, Indocement Tunggal Perkasa, is building its fourteenth plant, which it says will be the country’s largest when completed in 2015. The company, majority-owned by German Heidelberg Cement, is looking to increase its capacity from 18.6 million tonnes in 2013 to 28 million tonnes by 2018. Holcim Indonesia, the country’s third largest cement producer and controlled by Switzerland-based Holcim Group, aims to commission a new plant in East Java in the first quarter of 2014.
Indonesia’s total cement production capacity surged from 37.8 million tonnes in 2010 to 60.6 million tonnes just two years later, and it rose further in the course of 2013. The increase in production could eventually pose a threat to sales and margins in the domestic market, though currently Indonesia still relies on imports of cement products. Moreover, at 225 kg per-capita cement consumption in Indonesia is less than half that of Thailand or Malaysia.
Indonesian steelworks are set to be among the main beneficiaries of rising construction activity, while aluminium is becoming an increasingly popular building material (See Metal Mining; Foreign Investment More Necessary than Ever). Ample deposits of iron ore, bauxite and nickel provide easy access to raw materials. Domestic steel use rose from 7.5 million tonnes of crude equivalent in 2006 to 13.1 million tons in 2011, according to the World Steel Association. Crude steel production, meanwhile, has stagnated in recent years and stood at 3.7 million tons in 2012. As a result, Indonesia relies increasingly on shipments from abroad. Imports of semi-finished and finished steel products rose from 4.7 million tonnes in 2006 to 8.6 million tonnes in 2011.
The domestic production gap is good business for foreign companies exporting steel goods to Indonesia, but as the government strives to limit imports, it also presents opportunities for companies operating within the country. Indonesia needs to improve overall volumes as well as diversify its steel products from what is currently a limited range. An assertive policy to add value to Indonesia’s metal industries by forcing mining companies to process their ores domestically aims to expedite investment in smelting and processing facilities. Most bauxite, for example, is still exported to China, but the planned ban on raw exports will make the mineral more easily available for domestic aluminium producers. The government’s carrot and stick approach entails tax holidays and other incentives for major projects and should eventually ease access to minerals for domestic iron, steel and aluminium producers and reduce dependence on scrap iron imports. That said, smelter projects in many regions are still hampered by a lack of infrastructure and reliable power.
Amid heavy investment into future production capacity, Indonesia`s basic metal, iron, and steel industries grew by 12.7% in the first half of 2013, according to the Industry Ministry. State-controlled Krakatau Steel is the largest steelmaker with an annual capacity of 2.5 million tonnes. The integrated company is partnering with South Korea’s POSCO on a new steel plant in Banten. Other Indonesian steelmakers are also cooperating with foreign companies to boost capacity and efficiency.
Apart from the cement and steel industries, makers of glass, ceramics, plastics and paints are banking on a bright future in Southeast Asia’s largest economy. In 2012, Indonesia was the world’s 6th largest ceramics producer, with more than three quarters of output going to the local market. Readily available deposits of clays, feldspar and silica sand support the industry, while low per-capita consumption leaves ample space for expansion. The ceramics business has enjoyed double-digit growth since 2011, according to industry association ASAKI. The construction sector, where ceramic tiles are used for floors, walls and roofs, should secure strong demand going forward. Glass and plastics producers are similarly reaping the benefits of growing demand from the construction sector, which could help them overcome a slowdown in the food and beverages and automobile sectors. Finally, manufacturers of protective paints and coatings can expect rising sales to property and public infrastructure projects, after decorative paintings are already enjoying strong growth thanks to Indonesia’s expanding middle class.
Compared to other countries in the region, the Indonesian construction materials market remains underpenetrated. Indonesians in less-developed eastern provinces and cities outside of Java, such as Medan, Makassar and Manado, seek to emulate the consumer lifestyles of Jakarta residents, and their regions will benefit particularly from the government’s massive infrastructure drive designed to help them catch up. That is good news for the construction sector and suppliers of building materials.
While foreign companies exporting to Indonesia can use shortfalls in domestic production capacities to their advantage, long-term growth opportunities, a large and increasingly skilled workforce and regulations aimed at discouraging imports make a compelling case for direct investment. Joint ventures with local companies can ease market access for foreign players. As they brace for intensifying competition in the upcoming ASEAN single economic space, Indonesian companies should be receptive for such cooperation, particularly with regards to innovative materials and green building techniques.
Global Business Guide Indonesia - 2014
Contribution to GDP: 10% (2016)
Number of Contractors: 77,000 (2015)
Number Employed in the Sector: 7 million (2016)
Standardised Qualification: ASEAN Chartered Professional Engineer (ACPE) certificate and the National Construction Services Development Board (LPJKN) certification.
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List reserves low-technology and low-risk construction services for local SMEs and cooperatives. Foreign companies can establish representative offices in Indonesia and execute complex and high-technology projects in partnership with local companies, Minister of Public Works Regulation No. 10/PRT/M/2014 provides the guidelines.
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