The Challenges of Cement Producers When the Economy Is Sluggish
24 June 2022

A number of pressures had to be faced by cement producers throughout 2015. Indonesia's economic growth and property slowed down, adding that government infrastructure projects have not been running optimally  to suppress cement  producers in 2015.

Cement consumption  is one of the indicators to measure the pace of development in developing countries  and  economic growth.  Based on cement consumption  data has a positive correlation with economic growth. In the first half of 2015,  economic growth was only 4.7 percent.

That gives speculation of  bad hope for cement  consumption.  What's more, the slowing property sector  is also affecting cement  sales for housing construction.

"The property market  grew more slowly in 2015 with previous years.  With  a  macro background, it becomes an obstacle to cement  consumption," wrote research by  PT KDB Daewoo Securities Indonesia, which was quoted on Wednesday (26/8/2015).

The research also conveys conservative views  on the development of government infrastructure projects.  The realization of government budget spending  is still minimal, making infrastructure spending targets difficult to achieve.   However, infrastructure projects can only help the  growth of cement  consumption in the  coming year.

The same thing is also mentioned in the research of PT Henan Putihrai.  Cement demand is expected to grow just under 10 percent in 2015 from 59.9 million tonnes in 2014.  Based on data from the Indonesian Cement Association (ASI),  cement sales for the January-July 2015  period were recorded at  31.34 million tons.  This sales volume  decreased  compared to the same period last year of around 32.69 million tons.

Not only that, domestic  cement  producers are now also getting fierce competition.  Considering that there are a number of new cement   producers entering  Indonesia.  It is estimated that there are about 10 new players who will enter.   The new players include Siam Cement, Semen Merah Putih, Anhui Conch Cement, and others.

By looking at these  conditions, PT KDB Daewoo Securities Indonesia provides underweight recommendations. This is against the backdrop  of the Indonesian  economy and  the slowing property market  has put pressure on cement  consumers. Oil prices  and the weakening rupiah  exchange rate against the US dollar have also  added to higher pressures.   Looking at BI's middle rate  data  ,  rupiah depreciation was  12.77 percent to 14,067 on August 25,  2015.

When, the competition is also  increasing because of the large number of newcomers.  However,  cement producers will get positive  sentiment from the easing of down payments or loan-to-value and the million-house program  which is expected to  increase cement  consumption.

Cement producers also get pressure when the  government intervenes  to reduce the selling price of  cement, especially PT Semen Indonesia Tbk. The market also responded negatively to  the government's intervention.

 Government Infrastructure Project  To Lift Indonesian Cement

 Slowing   macroeconomic  conditions plus  sluggish property growth  also have an impact on the performance of  PT Semen Indonesia Tbk (SMGR).

The  company's sales volume  is expected to decrease by 3 percent to approximately 12.34 million tons  by  June 2015.  Cement sales fell due to  a weakening in absorption due to projects not yet underway.

PT Semen Indonesia Tbk posted revenues down 1.9 percent to Rp 12.64 trillion during the  first half of 2015 from the  same period last year of around Rp 12.88 trillion.  Net profit  decreased by 20.64 percent to Rp 2.18 trillion.

 PT Investa Saran Mandiri analyst Hans Kwee said the sluggish property  development  plus government infrastructure projects did not go quickly to suppress cement  sales.

"The  rupiah exchange rate weakening against the United States dollar  also makes COGS tend to rise. Domestic gas prices  are not falling but the exchange rate is weakening so the costs are rising. The selling price  of cement in the market is falling," Hans said.

 Meanwhile,  PT MNC Securities analyst Sharlita Malik said that the infrastructure project was running slowly, making the   growth of  PT Semen Indonesia Tbk not optimal. However, the company benefited  from the  sale of  its exports. "Export sales of PT Semen Indonesia Tbk are quite significant until June," said Sharlita.

Hans added that the demand for cement is likely to increase. This  can happen if the government quickly realizes its infrastructure spending.  This can have a positive impact on cement    producers including PT Semen Indonesia Tbk.

 Capital market observer Ellen May said that if  the government's infrastructure projects are boosted in the  next year, PT Semen Indonesia Tbk will have a positive impact.

The need for cement for infrastructure will increase, what else will state-owned  enterprises get a share  first. "PT Semen Indonesia Tbk will definitely be prioritized for demand because it is a state-owned company," ellen said.

However, seeing the  economic slowdown that occurred, Hans estimated that the  financial performance of  PT Semen Indonesia Tbk was  still depressed.

"Because there is an increase in cost indications, it is likely that profits will fall by 20 percent and   revenues by about 5 percent in 2015," Hans said.

 Stock Recommendations

  Hans recommends accumulating shares of  PT Semen Indonesia Tbk (SMGR) with a target price of  Rp 12,500 by the end of 2015. Hans said that  if the  government's infrastructure projects run smoothly, will have a positive effect on PT Semen Indonesia Tbk in  the future.  Sharlita also recommended buying shares of  PT Semen Indonesia Tbk.

At the close of stock trading on  Tuesday, August 25, 2015,  the share price of PT Semen Indonesia Tbk was in the range of Rp 7,700 per share.

Shares of PT Semen Indonesia Tbk (SMGR) plunged 56 percent from its  highest peak in January 2015 at 16,475 to  a  low of the year at 7,200.