As Indonesia’s real estate market has experienced growth in recent decades, the demand for building materials has skyrocketed. The domestic market for both the industrial and retail segment is thriving, with Indonesia’s key players rapidly expanding production capacity of high-demand materials such as concrete and metals. Inflation is high for imported building materials and infrastructure challenges make transporting materials logistically challenging. As infrastructure development has been prioritised under the Jokowi administration, companies should see relief from logistics challenges and opportunity for project involvement in the near future. Local producers have begun to expand capacity in order to meet high demand for building materials amid a climate of rising import costs due to rupiah volatility providing an opportunity for local producers to up their game.
A flurry of major infrastructure projects in Indonesia is set to boost the construction sector, although growth in the domestic building materials industry remains hamstrung by regional competition and government intervention in some cases (See High Stakes for Indonesia's New Infrastructure Push). Over the next four years the government aims to build 5,500km of railways, 2,600km of roads, 1,000km of toll roads, 49 dams and 24 seaports as well as to construct power plants with a combined capacity of 35,000 MW.
According to the publication Asia Construction Outlook, Indonesia is the top rated country in terms of potential construction spending growth in the medium-term. Construction spending is forecast to grow about 5.2% per year in the 2014-2019 period, which is above the regional average of 4.4%. In fact, the publication has identified Indonesia as the second most profitable construction market in Asia. The country also has an increasingly open and attractive market for investment as the government continues to deregulate to ease bureaucratic hurdles.
As a result of the government push to bolster the country’s infrastructure, the value of new contracts is expected to rise by more than 70% this year to 45.8 trillion IDR ($3.5 billion USD), according to two state owned construction companies, Wijaya Karya and Adhi Karya. In tandem, the Ministry of Industry forecasts cement market growth to reach 10% this year, boosted by the government infrastructure projects. However, despite the positive indicators, the outlook for the building materials industry companies remains unclear.
Indonesian cement sales are expected to peak at 95-97 million tonnes in 2017, while domestic production capacity is expected to reach 90 to 95 million tonnes by the same year. Production capacity in 2014 was 68 million tonnes per year. Therefore, Indonesian cement producers need to enhance production capacity to meet future cement demand. Semen Indonesia, the largest cement producer of Indonesia, is planning to construct new cement plants in Padang and Rembang in an effort to add a total of 6 million tonnes of cement per year to the current production capacity figure of 30 million tonnes per year. Total investment for these two plants is about 7 trillion IDR ($598 million USD). Meanwhile, Indocement Tunggal Prakarsa, Indonesia’s second largest cement producer, is planning to invest $1.2 billion USD for the construction of two new plants in Central Java and North Sumatra. This should raise Indocement’s total installed design capacity from 18.6 million tonnes of cement in 2014 to around 24 million tonnes by 2018.
Overall, the industry plans to allocate $6.7 billion USD through 2017 in order to expand cement production capacity, which will then increase from 60m tonnes to 90m tonnes. Some 80% of domestic cement sales are by the bag, rather than in bulk, with the main driver of demand being real estate rather than large-scale infrastructure projects. This could change though in the years ahead, as government and public private partnership plans to develop transportation infrastructure in particular forge ahead (See Indonesia’s Railways; Just the Ticket to Improve Logistics and Indonesia's Maritime Ambitions Require Massive Upgrade of Seaports).
Another key sector in the building materials market – steel – has seen limited growth in recent months, due to tough regional competition. Officials admitted in February 2016 that a jump in imports of steel alloys had negatively affected the domestic industry as imports took a larger share of the market. Indonesian steel demand was about 15m tonnes in 2013, against a domestic production capacity of only 7m tonnes.
Industry insiders said that Indonesia had the potential to become a Southeast Asian centre for steel construction materials, but more government assistance was needed. Currently many companies are grappling with increases in imported steel prices, especially in the wake of rupiah depreciation. Steel companies are also having particular trouble, because they are incurring their costs in dollars, but are contracting in rupiah.
Aluminium is also becoming increasingly popular as a construction material in Indonesia. New rules banning the export of metal ores from Indonesia are also aimed at supporting domestic production of this, with new alumina refineries due to be completed in the years to come (See Indonesia's Smelting Plans – Moving Slowly, but Moving).
Production of ceramic floors, walls and roof tiles is a major subsector in Indonesia, with 2015 seeing the country rank sixth in the world in terms of total ceramics production. The country has large supplies of the necessary raw materials, such as clays and silica, with growing real estate construction the main driver of subsector growth (See Indonesian Tile Makers Riding on the Property Boom). Heating, ventilation and air conditioning (HVAC) products are also seeing a rising demand overseas.
While Indonesia has ample resources and benefits from a strategic location and overall manufacturing strength, it has some way to go to achieve self-sufficiency in building materials with more government efforts needed to reduce raw material prices and improve electricity supply. There are signs that Jakarta is listening to the industry. In February 2016, the government imposed a safeguard duty on imported construction steel to curb the sharp rise in shipments to the local market.
According to the measure, set to last until January 2018, the products affected will be hit with a 28% safeguard duty, to be lowered to 26% and 18% respectively in the second and the third years. The duty should help lower imports of these steel parts, which have risen sharply in recent years. According to the Indonesian Trade Security Committee (KPPI) imports surged to more than 395,000 tonnes in 2013 from over 20,000 in 2010.
The House of Representatives is also expecting the construction services bill, a revision of the existing 1999 Construction Law, to be passed into law this year, months after the launch of the ASEAN Economic Community (See Indonesia and the ASEAN Economic Community – Ready for Regional Integration?), which is expected to create an integrated market for capital, labour, goods and services within Southeast Asia.
An article in the bill stipulates that foreign companies or businesspeople intending to carry out construction work in the country will be obliged to set up a representative office in Indonesia or a joint company with a local construction firm. Representative offices will also be obliged to have a joint operation with big national construction firm in their projects and to prioritise the hiring of local workers and the procurement of locally sourced materials and technology.
Despite major efforts to boost production capacity, Indonesia’s building materials sector cannot meet the demand from domestic construction projects. The space could be filled by foreign firms, but the Indonesian government’s efforts to decrease imports can be restrictive. Rupiah depreciation against the dollar has also raised the costs of many imported building materials. Given that demand for materials will only increase as infrastructure projects are implemented, investment in domestic expansion efforts will be vital. Building material suppliers are thus set to benefit from continued investment and capacity growth.
Global Business Guide Indonesia - 2016
Contribution to GDP: 2.79% (Q3 2015)
Mortgage to GDP Ratio: 3.5% (2015)
Housing Backlog: 13.5 million (estimated)
Average Condominium Price: 46,322,208 IDR/sqm (CBD, Jakarta, Q3 2015)
Average Retail Space Rental Price: 829,652 IDR/sqm/month (CBD, Jakarta, Q3 2015), 542,221 IDR/sqm/month (Jakarta, Q3 2015)
Average Office Space Rental Price: 342,581 IDR/sqm/month (CBD, Jakarta, Q3 2015)
Average Industrial Land Price : $220.2 USD/sqm (Bekasi, Q3 2015), $140.6 USD/sqm (Tangerang, Q3 2015)
Relevant Law: Government Regulation No. 41 of 1996 on Housing or Residential Ownership for Foreign Citizens Based in Indonesia allows foreigners to own leaseholds of up to 70 years subject to renewals at 25, 20 and 25 year intervals.