Indonesia’s plastic and packaging sector has shown strong growth of the back of the country’s intensified consumption habits. The food packaging industry remained the largest plastics end-user in 2015 in Indonesia, after enjoying another year of considerable growth. Meanwhile, the infrastructure and automotive sectors have rapidly become new growth drivers over the course of 2015, which has helped to boost sales of plastic products. Despite this demand, the potential of Indonesia’s plastic sector remains unfulfilled due to an over-reliance on imported raw materials. Furthermore, a recent government initiative to begin charging for use of plastic bags at modern retail outlets as of March 2016 may place more pressure on the plastic sector going forward.
The global economic slowdown and the decline of the rupiah against the US dollar are major factors behind the more sluggish growth of Indonesia’s plastic industry in 2015. The Indonesian Olefin, Aromatic and Plastic Industry Association (INAplas) estimated that plastic sales in 2015 recorded a meager growth of just 3% versus 7-8% in previous years. The plastic and packaging sector’s dependence on raw material imports has also been more acutely felt as a result of the weakening of the rupiah which has caused production costs to soar.
Indonesia’s plastic sector still relies on imports to meet 40% of local demand signaling the extent of the opportunities still available to local manufacturers. In 2014, for example, 2.5 million tonnes of total plastic demand of 4.2 million tonnes was met by imports. Indonesia’s plastic exports in 2015 decreased by 18.44% compared to the same period in the previous year. At the close of 2015, the plastic industry recorded export earnings of just $2.25 billion USD versus $2.76 billion USD in 2014. In terms of volume, Indonesia’s plastic exports fell by 5.58% to 1.39 million tonnes in 2015 from 1.47 million tonnes in the previous year. Likewise, the imports of plastic raw materials and products dropped by 12.36% to $6.83 billion USD compared to $7.79 billion USD in 2014.
Indonesia’s annual plastic consumption per capita of 10 kilograms is still relatively low compared to other ASEAN countries, such as Singapore, Malaysia, and Thailand, which reached 40 kilograms per capita per year. Based on this, INAplas predicts that Indonesia’s plastic sales will increase to 7 million tonnes by 2018.
Plastic products in Indonesia are used by a wide array of industries such as the food and beverage packaging industry which accounts for 60%, building and household appliances for 15%, the automotive sector for 8% and the remainder by other sectors including agriculture and horticulture.
The food and beverage packaging industry continues to be the bedrock of Indonesia’s plastic sales (See Thirst Quenching: Indonesia’s Food & Beverage Industry). There are 892 companies operating in this sector throughout the country, with an installed capacity of 2.35 million tonnes and employing 350,000 workers. Their products include rigid packaging, flexible packaging, and extrusion thermoformed products.
Besides the food and beverage industry, the infrastructure sector (See High Stakes for Indonesia’s Infrastructure Sector), which is currently being pushed by the government also helped boost sales of plastic construction materials. The domestic demand for plastic products is expected to increase to keep pace with the growth of the manufacturing industry. INAplas estimated that in 2015 the construction sector consumed 600,000 tonnes of plastic products, or increased by 7% compared to 2014.
Another promising market for Indonesia’s plastic industry in recent years is the automotive sector (See Downshifting Demand; Insights into Indonesia’s Automotive Sector). Nearly three-quarters of plastic parts used by automakers in the country are imported. At present, the domestic plastic industry is only able to supply 60,000-70,000 tonnes of total plastic parts of the 250,000 tonnes used by the automotive industry. This means that the sector still offers plenty of scope for growth as Japanese automotive brands present in Indonesia are increasingly demonstrating their commitment to use Indonesian domestically-manufactured components. The challenge in meeting this potential lays in the limited expertise of local plastic manufacturers to move up the value chain and meet the exacting standards of higher value industries such as that of automotive parts.
The fundamental weakness of Indonesia’s plastic industry is that it heavily relies on raw material imports. The majority of the country’s petrochemical industry players do not have oil refineries capable of producing naphtha and condensate; two basic raw materials of plastic. Consequently, the industry still imports 1.6 million tonnes of naphtha and 33 million barrels of condensate per year. To reduce the reliance on imports, the Indonesian government has encouraged players in the industry to build oil refineries by offering various incentives, such as a tax holiday, tax allowances, and exemption from import duty for capital goods.
Currently, the country imports 50% of plastic raw materials, such as plastic ore, polyethylene (PE) and polypropylene (PP) from the Middle East, Singapore, China and South Korea. Local petrochemical companies, particularly PT Chandra Asri Petrochemical Tbk (TPIA), are only able to meet just two-thirds of the demand with a capacity of 800,000 tonnes of ethylene per year due to the limited supply of naphta from Pertamina. Imports of polypropylene in 2015 reached an estimated 500,000 tonnes versus 400,000 tonnes in the previous year, worth $600 million USD.
INAplas has set a target to increase plastic raw material production by up to 4 million tonnes per year by 2023. Indonesia’s local petrochemical industry has therefore asked the government to allocate naphtha from domestic refineries. Others are exploring ways to produce olefin from coal which it is hoped can increase plastic raw material production by 2 million tonnes in 2022.
To reduce the cost of raw material imports, the Indonesian government has provided the Government-Borne Import Duty (BMDTP) facility to the plastic industry. The Minister of Industry, Mr Saleh Husin, said that the incentive is provided with the intention of boosting the growth of the plastic industry in the country. BMDTP will dramatically reduce the production costs of plastic given that raw material imports contribute some 63% to total production costs.
Another problem faced by the Indonesian plastic industry is that of environmental issues as cities such as Jakarta face major problems regarding waste management. To address this, starting in March 2016, the Ministry of Environment and Forestry requires modern retailers in the country to charge shoppers 200 IDR for each plastic carrier bag. This policy has been tested in 22 cities across Indonesia since 21st February 2016.
The majority of plastic manufacturers support the policy but demand more detailed technical guidance related to the use of funds, its tax report, and plastic waste management. In addition, many expect the policy to be applied to traditional markets too in order to maximise its impact. Today, the use of plastic bags in modern retail stores only accounts for 30% of total plastic bag usage in the country with the remaining 70% being taken up by traditional retail.
Moreover, the paid plastic bag policy should be followed by the development of biodegradable plastic and a plastic waste recycling industry which does not harm the environment. Various manufacturers in Indonesia have successfully developed biodegrable and bio-polymer plastic substitute products using cassava and other organic compounds; however, such products have yet to be taken up en masse in the domestic market. The Jakarta government has expressed their interest in requiring the use of environmentally-friendly plastic substitutes as opposed to adopting the paid plastic bag policy.
INAplas has also warned the government that the policy should aim at reducing plastic waste and not plastic consumption. At present, plastic bags accounted for 20% or 940,000 tonnes of total national plastic consumption in 2015 of 4.7 million tonnes but only a fraction of them are going back to the plastic waste recycling industry.
Indonesia’s dependence on plastic raw material imports presents a golden opportunity for investors to invest in the upstream plastic sector for the production of various plastic base materials such as naphta, condensate, plastic ore, polyethylene, and polypropylene. International partners that can offer expertise to work with local plastic producers in Indonesia to provide more sophisticated plastic products such as automotive parts can also find lucrative synergies to tap into Indonesia’s local market, as well as its role as a manufacturing and export base.
Bio-based and biodegradable plastics are further areas of opportunity given the country’s competitive advantage of having available a ready supply of raw materials that do not directly impact the food chain. In line with shifting global as well as local policies to reduce plastic consumption and encourage environmentally-sustainable alternatives, Indonesia’s producers in this field have a key time to make their mark within this trend.
Global Business Guide Indonesia - 2016
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.
Indonesia has a well developed upstream and downstream plastic industry with promising potential, yet a reliance on imported raw materials has somewhat held back the sector’s potential on a global scale. This section examines the challenges and opportunities of the sector.
Contribution to GDP: 20.41% (Q3 2015)
Sector Growth: 4.33% (yoy, Q3 2015)
Number Employed in the Sector: 16.38 million (February 2015)
Highest Minimum Wage by Province: 3,100,000 IDR/month (DKI Jakarta)
Lowest Minimum Wage by Province: 1,482,950 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.