One of the surprises from the recent round of half-year results has been HeidelbergCement’s struggle to grow its sales so far in 2017. Part of this has been down to a variable market in Indonesia where the German cement producer runs the second largest player, Indocement.
Cement consumption for the country as a whole dropped by 1.3% year-on-year to 29Mt in the first half of the year, according to Indonesian Cement Association figures. This appears to be due to a particularly poor month in June 2017 where local consumption fell by 27% to 3.7Mt. Prior to that, consumption was actually showing 4% growth up until the end of May.
Fairly reasonably HeidelbergCement blamed the decline in part on this year’s timing of Ramadan. Unfortunately this could not explain everything, as its total sales volumes including exports fell by 2.4%. Remove the exports and its sales volumes fell by 4.4%, more than the national average. It said this was due to its concentration in weaker markets in Jakarta, Banten, and West Java where competition pressures had forced prices down ‘significantly.’
They weren’t alone in feeling the pain in June 2017 with both Semen Indonesia and LafargeHolcim reporting reduced sales. However, LafargeHolcim also raised the issue of production overcapacity creating increased sales volumes and pushing down prices. This was reflected in lower earnings for its Asia Pacific division. HeidelbergCement too saw its earnings crumble.
Graph 1: Cement production capacity and consumption. Source: Semen Indonesia investor presentation, March 2017.
Graph 1 shows quite nicely the fix the Indonesian cement market is in at present. Consumption surpassed production capacity in the early 2010 before incoming capacity jumped ahead again around 2013. You can also view Global Cement’s version of this graph here. Even at an optimistic annual growth rate of 8%, consumption won’t get close to capacity until 2020. Yet before the market collapsed in June, consumption was growing at 4%, which is the weakest of Semen Indonesia’s growth scenarios.
Admittedly the graph is in an investor document so we can forgive ebullience but they are going to need a magic bullet to dodge this one. Lucky then that the graph also has infrastructure highlighted. The cement producer says that the Indonesian government earmarked US$26bn for infrastructure spending in 2017 and that this spending campaign can be seen in the changing ratio of bulk to bagged cement it has been selling. Independent of Semen Indonesia, the Fitch credit rating agency was also predicting rising consumption off the back of infrastructure plans in a report it put out in June.
However, as more cement plants are being built, cement plant utilisation rates seem destined to stay subdued for the foreseeable future unless the government seriously ups its infrastructure investment or unless the economy goes into overdrive. Unsurprisingly exports have shot up so far in 2016, by 74% to 1.14Mt. Cement producers in neighbouring countries beware!
