Indonesia's Petrochemical Industry (II)
- Gerry Christopher
- Feb 17, 2020
- 8 min read
This two-part research covers Indonesia's petrochemical industry, heralded as one of the rising golden boys of the economy. The second section covers the key players and the risks.
Key players - local
Chandra Asri Petrochemical
PT Chandra Asri Petrochemical (IDX: TPIA) is Indonesia’s largest petrochemical company by revenue and production. Recording a net revenue of USD 2.4 billion in 2017, the company is also the sixth-largest within Southeast Asia’s petrochemical industry.
The company was established as a merger between two of Indonesia’s most prominent manufacturers of petrochemical products in 2011: PT Tri Polyta Indonesia Tbk (IDX: TPI) and PT Chandra Asri. Established in 1984, TPI has grown to be the largest polypropylene producer in Indonesia. Chandra Asri, on the other hand, has been manufacturing olefins and polyethylene products since 1992.
Currently headquartered in Jakarta, TPIA is supported by two strong players within the industry. 40% of TPIA’s shares are owned by PT Barito Pacific Tbk (IDX: BRPT), an Indonesian conglomerate with a portfolio comprising of petrochemical, energy, and property businesses. Meanwhile, 30% of its shares are acquired by SCG Chemicals, one of the largest integrated petrochemical companies in Thailand and a subsidiary of Siam Cement Group, Thailand’s third-biggest company by revenue. With established enterprises in the ownership list, TPIA has gone to achieve operational excellence -- the company has accumulated over ten certifications and fifty awards since its establishment in 2011.
Pertamina
PT Pertamina (Persero) is Indonesia’s biggest energy company and is among the country’s largest state-owned enterprises by revenue. The company, established as a merger between two state-owned oil and gas companies in the late 1950s, is mainly focusing its business on fuel products. In 2017, the volume of fuel-related products reached over 250 million barrels, almost ten times its non-fuel products that include petrochemical products. This translates to Pertamina’s revenue structure: 80% of its domestic sales originate from fuel products, accounting for over 50% of the company’s entire revenue.
Despite its comparatively minuscule operations compared to the fuel products, Pertamina’s petrochemical unit still has an overarching influence in the industry. For instance, Pertamina is the biggest propylene producer in Indonesia, a precursor for widely-used polypropylene resin. The company also produces a relatively large volume of benzene, an intermediate for polystyrene, another widely-used resin.
On the other hand, the production of downstream products such as resin currently is indeed still minimal. Pertamina, however, has pledged to invest billions of dollars in the next decade to enter this market, transforming it into one of the biggest regional players. As of 2020, the company is developing six new petrochemical processing facilities nearby its refineries, including a USD7 billion redevelopment project of its major Balongan refinery. The Indonesian government has also fully endorsed Pertamina’s USD16 billion construction of brand-new refinery-petrochemical plant complex in East Java, which will be capable of producing 1,200 KTA polypropylene and 750 KTA polyethylene.
Polytama Propindo
PT Polytama Propindo is a privately-owned, major polypropylene producer based in Balongan, West Java. With a production capacity of 240 KTA, it is Indonesia’s second-biggest polypropylene manufacturer, supplying about 15% of the national demand. Its factory in Balongan is highly integrated with Pertamina’s Balongan refinery, making it among Pertamina’s biggest propylene customers. In recent years, the company has also opened up new supply channels. In 2015, for instance, Polytama built a gas transfer facility at Cirebon seaport, enabling it to receive and process imported propylene gas.
The company has set its vision to become a major force in Southeast Asia’s polypropylene market, boosting its production to 1,000 MT by the end of 2024. However, the company has expressed little interest in expanding to other petrochemical products, citing its focus on improving the supply of polypropylene precursors.
Sulfindo Adiusaha
Unlike its petrochemical peers which focus on polypropylene and polyethylene, PT Sulfindo Adiusaha primarily focuses on producing polyvinyl chloride (PVC). PVC is one of the most widely produced synthetic plastic polymers after polypropylene and polyethylene, used in rigid materials such as construction pipes and electric cables insulation. This privately-owned company itself is the largest local PVC producer with a production output of 110 KTA and is second only to Asahimas Chemical - a subsidiary of Japanese-based multinational company AGC Group - in the Indonesian market.
Key players - foreign owned
Lotte Chemical Titan Indonesia
Lotte Chemical Titan Indonesia’s profile can be traced back to 1987 when it was initially established as a local company named PT Indofatra Plastik Industry. Over the next two decades, the company went on extensive expansion in its facilities, building up capabilities to produce up to 450 KTA polyethylene. It was ultimately acquired by Lotte Chemical Titan Group Malaysia, a wholly owned subsidiary of the Korean conglomerate Lotte Chemical Group. The company remains as Indonesia’s market leader in polyethylene, supplying around 31% of the entire market demand.
Asahimas Chemical
Asahimas Chemical was initially founded in 1986 as a subsidiary of AGC Inc, the largest glass company in the world. Currently, the company is shared among four parties from Japan and Indonesia, with 64% of the ownership belonging to the Japanese counterparts (AGC Inc. and Mitsubishi Corporation). Over the years, it has undergone multiple expansions focusing on chlor-alkali & vinyl products - the precursors of PVC. With over 500 KTA production capacity of PVC, the firm operates the largest chlor-alkali & vinyl plant in Southeast Asia, thus becoming the dominant player in Indonesia’s PVC market.
Other Importers
As mentioned earlier, the existing demand-supply gap in polyethylene and polypropylene production means that Indonesian industries still rely on imported resins. In fact, around half polyethylene and polypropylene demand isl satisfied by imports. The following table summarizes the major polyethylene and polypropylene producers in Southeast Asia, in which their resins also enter the Indonesian market:
Chandra Asri: a high-potential player
Out of the major local players, Chandra Asri Petrochemical is the only publicly-traded company. Below are the reasons why the company is a high-potential pick for investment despite the ever-increasing competition.
Diverse product portfolio
Currently, TPIA’s two biggest product groups of polyolefins and olefins capture 41% of the entire domestic market. The polyolefins comprise polypropylene (PP) and polyethylene (PE), while the olefins consist of propylene, ethylene, py-gas, and mixed C4. TPIA also produces styrene monomer and butadiene, albeit in smaller amounts.
TPIA’s capability in capturing a large market share in its key product groups stems from its versatility. The merger between TPI and Chandra Asri -- two companies producing interrelated petrochemical products -- creates a highly integrated production line within TPIA. Hence, the company could efficiently produce diverse same-group outputs by channeling one of its factory’s outputs as its other factory’s inputs. For instance, the ethylene manufactured by one of TPIA’s facilities is transferred to its other units to produce polyethylene and styrene monomer. Similarly, the self-manufactured propylene is used to produce polypropylene, and the mixed C4 is utilized for butadiene production. As a result, TPIA’s cumulative production output across all petrochemical products far exceeds its competitors: as of 2018, the company produces 3,458 KTA of petrochemical products - around double of Pertamina’s (including its subsidiary TPPI) output.
The diverse product portfolio also enables the company to monopolize some petrochemical product markets. As of 2018, TPIA is the only local producer of styrene monomer and butadiene, claiming a 100% market share in Indonesia in both markets. Barring any new competition, TPIA is set to fully capitalize on the enormous consumption growth of these two materials. Styrene monomer consumption, widely used in the FMCG industry, is projected to have a 10.5% CAGR from 2017 to 2023 per Nexant. On the other hand, butadiene consumption - a crucial material for car tires - is expected to grow by 17.7% CAGR during the same period. These growth rates far exceed global figures of 1.6% and 2.4%, respectively.
On the other hand, the wide-ranging portfolio in the domestic market also promotes the diversification of revenue streams. The company’s financial statement points that over 70% of the revenue is generated within Indonesia, shielding it from currency risks and international demand volatility. Moreover, its top 10% customer accounts for less than half of the total revenue, making it relatively immune to single customer risk.
Expansion & Innovation
Despite its market-leading position, TPIA still allocates a rather considerable portion of capex to bolster its existing capabilities. In 2018 alone, the company reserved USD465million - equal to 15% of the company’s total assets - for multiple improvement and expansion projects. This includes enhancing furnace capabilities, debottlenecking production processes, and promoting vertical integration as well as further downstreaming on some of its products. Most significantly, the company has announced the construction of a second petrochemical complex worth USD5 billion, expected to double its total output to 8,000KTA by 2020.
Considering its sizable capex commitment, TPIA seems to be able to manage its financial prudence. Its latest financial figures in 2018 indicate healthy debt ratios. Liability-to- equity ratio in 2018 stands at 0.8, while asset-to-equity ratio is 0.4 - both relatively stable compared to the preceding two financial years. Current ratio also hovers at 2.1, signifying the company’s ability to settle short-term obligations.
Industry's key risk
The petrochemical industry is highly influenced by macroeconomic factors, leaving it exposed to downturns. Taking Chandra Asri’s case as an example, 2019 saw its net profit falling significantly in each quarter YoY. In their official press releases, the company cited weak demand as the primary reason. 2019 indeed was a difficult year for the industry: the ravaging trade war between U.S. and China has dampened demand for popular downstream products such as polyethylene. The slowdown of the global economy also hurt multiple industries closely related to the petrochemical industry. Chandra Asri, for instance, was left reeling after Indonesia’s FMCG and automotive industries recorded their worst performance in years.
With multiple new factories going into operation throughout the year, the global market was oversupplied by more than 500KT in 2019. The excessive supply pushed down the price, indicated by the naphtha-polyethylene spread - a typical proxy used to estimate how much profit petrochemical industries could make. Naphtha itself is a distilled version of crude oil, and is the raw material used in most petrochemical products. In 2019, the quarterly average of naphtha-high-density polyethylene spread reached its lowest level in 7 years.
The double whammy of weak demand and weak price leaves the petrochemical industry especially vulnerable. Further pressures could be exerted by other external factors. The unexpected coronavirus outbreak would hand a further blow on the demand as factories shut down. Meanwhile, confrontations could stoke up the price of crude oil, as seen earlier in the year when the tension between U.S. and Iran suddenly flared.
The close ties between the petrochemical industry and macroeconomic environment implies the need for exercising caution. Considering the enormity of investment involved, favourable climate is paramount for the industry to keep growing. A close cooperation between multiple stakeholders is also necessary to ensure the momentum: the continuous support from government in establishing appropriate investment platform must be constantly responded by businesses' eagerness to innovate. Although undeniably the industry has a bright future, especially in beaming economies such as Indonesia, entering it at the wrong time could deal a major hit and the absence of active involvement from all sides will reduce it to a mere rhetoric.
Closing remarks
Overall, it is clear that Indonesia’s petrochemical industry has great potential to thrive. Accommodative policies by the government - fueled by its intention to further modernize the manufacturing sector and to alleviate the current account deficit - open up opportunities for expansion. This ties in nicely with the persistent demand-supply gap in the petrochemical market. The consumption of petrochemical products is expected to soar in the upcoming decades, driven by the government’s focus on industrializing sectors such as FMCG and automotive, which are among petrochemical items’ biggest users. The ever-growing middle class will also boost the demand for manufactured items, which in turn will further increase petrochemical products’ demand.
Hence, industry players who are quick to fulfill the extra demand are poised to reap significant benefits. Chandra Asri, Indonesia’s biggest petrochemical company by volume, is one of the players with the highest potential. Already possessing diverse product offerings, Chandra Asri’s billions of additional investments would help to consolidate his position in the market, serving wide-ranging customers. Other local players such as state-owned Pertamina, Polytama Propindo, and Sulfindo Adiusaha have also set ambitious targets, further highlighting the industry’s positive dynamic.
On the flip side, as an industry closely linked with the macroeconomic environment, the petrochemical industry is currently experiencing challenging headwinds. Weak price and weak demand fears, driven by global economic uncertainties, are hurting the profit margins. At the same time, unpredictable instances such as the coronavirus outbreak and fluctuating geopolitical tension in the Middle East could damage the demand further. Hence, as with other industries, extra prudence must be exercised in terms of market entrance timing to reap the most benefits.
Acknowledgment
The author would like to credit Raymond Widjaja for providing some constructive inputs for this research.
Source: Reuters, ICIS, BCG, CEIC, Trading Economics, WorldPanel, Bank of Indonesia, CNBC Indonesia, Kontan, Bisnis.com, The Insider Stories Indonesia, & various corporate websites and presentation
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