Global Business Guide Indonesia

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Manufacturing | Indonesia’s Plastic and Packaging Industry

Indonesia’s plastic industry is growing healthily in line with the country’s increased consumption of all manner of products ranging from food & beverages (See Overview of the Food & Beverage Sector) to automobile components (See Automotive Industry: Driving Manufacturing). The local plastic market expanded by 22.47% in 2011 in spite of the global economic slowdown and is expected to continue growing albeit at a slower pace in 2012 at 7.75% to 3.48 million MET. Indonesia’s per capita consumption of plastic goods remains low at 10 kg annually compared to 56 kg in Thailand and 45 kg in Malaysia (Ministry of Trade and Industry) leaving plenty of scope for future growth. The upstream and downstream plastic sectors are therefore in a key position to take advantage of this further growth in plastic consumption but face various challenges in remaining competitive on a domestic and global scale.

Indonesia’s Plastic and Packaging Industry
Recycled plastic producers are stepping in to meet the country’s growing demand for plastic products and also offering environmentally sustainable solutions.

Indonesia has a relatively developed downstream plastic industry with plenty of potential for further growth, yet a reliance on imported raw materials has somewhat held back the sector’s potential on a global scale. In 2010, demand for olefin and aromatic products reached 2.9 million MET with local producers supplying 1.2 million MET. Demand for Polypropylene in particular has increased significantly from 750,000 MET in 2010 to over 850,000 MET in 2011 however only two local players have the capacity to produce on the scale required by the domestic plastic industry; namely Chandra Asri and Pertamina with a combined annual output of 520,000 MET (IFT). The under capacity of oil refineries to produce naphtha and condensate for the upstream petrochemical industry has led to a weakness in raw material supply for the downstream plastic industry. The Indonesian Government pushed the oil refinery industry to integrate upstream and downstream industries yet the results have been slow to materialise. The upstream plastic sector has therefore not been able to keep pace with local demand from the downstream sector. This has subsequently forced downstream players to import raw materials mainly from markets in the ASEAN which supply 85% of total imports as well as Europe and USA which make up the remaining 15% (Upstream Plastic Association APHINDO).

In addition to the under capacity of supply, the protective measures in place for local raw material producers through the Minister of Finance Decree No.19/2009 whereby up to 40% of imported petrochemical products such as polypropylene and polyethylene are subject to 15-20% import tariffs are actually hindering the domestic plastic and packaging industry. The Indonesia Upstream Plastic Association has argued that the price of plastic raw materials produced in Indonesia has actually increased as a result of the measures as domestic producers price their goods unfairly. In 2011, the average price per tonne of polypropylene from Singapore and Thailand was $1,400 USD compared to $1,750 USD from Indonesian producers. Downstream plastic producers therefore prefer to import raw materials, yet face the issue of balancing their need for immediate supply which only local producers can meet thus highlighting the need for significant investment in the petrochemical sector in order to boost output and meet the demand from Indonesian plastic producers which will continue unabated for at least the next decade.

Another key issue facing local Indonesian downstream plastic producers is the increased competition as a result of recently revised regulations concerning the ASEAN-China Free Trade Agreement. In July 2012, the Ministry of Finance announced new regulations which widened the scope of plastic products which are exempted from import duty under the FTA. Previously, 8,738 types of plastic product could enter the Indonesian market without being subject to import duties; this has now been increased to 10,012 items and includes a variety of finished plastic products such as sheeting, packaging and toys which were previously subject to duties of up to 15%. The Indonesian Olefin, Aromatic and Plastic Industry Association (INAplas) estimates that 85% of all plastic products consumed in Indonesia are produced locally with imports making up the remaining 15% or 523,800 MET. The new finished product categories within the revised regulations constitute 30% of Indonesia’s total plastic imports with the majority of such products being produced by domestic manufacturers (INAplas). However, the association foresees that this figure will rise by 8% in 2012 and by approximately 10-20% annually once the regulations fully take effect, which could well see local manufacturers being undercut and priced out of the market.

Recycled plastic producers are stepping in to meet the country’s growing demand for plastic products and also offering environmentally sustainable solutions. In Jakarta alone, 6,000 MET of waste are produced daily and plastic waste alone makes up 14% of the total figure (World Bank & Jakarta Public Works Department). The practice of recycling is still in its infancy in Indonesia due to a lack of supporting infrastructure leaving the sector mainly in the hands of the informal sector and thus lacking economies of scale for the recycling industry. However, the recycled plastic industry has been growing rapidly by sourcing raw materials from developed markets such as Germany, France and Japan to produce recycled PET pellets and flakes. Such products are offering commercially viable solutions to plastic manufacturers as both a wholesale raw material alternative to virgin polymers or as a supplementary filler product when petrochemical prices spike.

Currently, recycled plastic producers are supplying mainly polyester products for use in items such as packaging including plastic bottles as well as industrial textiles such as plastic sheeting. The next stage in Indonesia’s recycled plastic industry is therefore in moving up the value chain through new technology in order to be able to produce recycled plastic that is on par with that of virgin plastic in terms of quality that can have premium applications such as food grade plastic and yarn for consumer textiles. This represents significant opportunities for international companies engaged in the sector to bring technology and knowhow to a market with potential for not only manufacturing but also domestic consumption of plastic products. This combination is also seeing multinationals across the board from carbonated drinks to nappy manufacturers taking a bullish approach to the Indonesian market and bolstering their manufacturing facilities thereby creating demand for plastic raw materials.

Indonesia’s packaging industry has been expanding in line with the country’s increased consumer purchasing power and is expected to grow by 11.1% in 2012 reaching US$4.36 billion. Key sectors such as food and beverage as well as pharmaceuticals are the main sources of demand for packaging materials with the former consuming 67% of total packaging supply according to the Indonesian Packaging Federation. Both of the aforementioned sectors are expected to see an increase in demand with spending on food and beverage and pharmaceutical products estimated to rise by 10% and 12.6% respectively in 2012 (Food and Beverage Producers Association and Indonesian Pharmaceutical Association). Sustained consumer purchasing and population growth has made observers of Indonesia’s packaging industry optimistic; a BRICdata Report released in January 2012 forecasts that the country’s packaging industry will reach a value of $9.6 billion USD in 2016.

Plastic packaging both flexible and rigid has become the most popular form of packaging making up nearly 60% of total packaging demand with paper and board packaging constituting 25%. The superior flexibility and durability offered by plastic packaging has contributed to the demand for greater creativity in product packaging. Trends in packaging design have also been shifting as FMCG companies seek to differentiate their products to a maturing and more brand conscious consumer market. The rapid transition to modern retail and changing lifestyles is also placing new demands on packaging both in terms of aesthetics to attract consumers when being displayed as well as function such as for storage and transport purposes. For food and beverage producers in particular such as dairy products, packaging that retains the quality of the contents while facilitating consumption on the go is in high demand. Using packaging to target particular market segments such as for personal care products and cosmetics is becoming more common place among Indonesian manufacturers presenting exciting opportunities for the country’s packaging industry. However, local Indonesian packaging producers remain behind markets such as Japan, Thailand and China when it comes to knowhow, technology, use of the latest materials and production line flexibility. However, the country’s competitive advantages as a manufacturing base such as the cost of industrial land and its labour force make it an attractive opportunity for the packaging industry through collaboration and joint ventures with local producers.

Indonesia’s plastic and packaging sector offers potential both in the upstream and downstream industries, yet protectionist measures and weak capacity in raw materials are keeping the sector from reaching its full potential by making downstream plastic products and packaging uncompetitive in both the domestic and global market. The sector therefore faces the challenge of restructuring itself and moving up the value chain as well as looking at alternatives such as recycled raw materials in order to effectively compete against imported plastic products and to take full advantage of the booming demand for consumer plastic and packaging products.

Global Business Guide Indonesia - 2013

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Indonesia Manufacturing Snapshot

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.