Hanging on the rupiah

03 August 1998 00:00  [Source: ACN]

The immediate priority for Indonesian chemical companies is how to deal with the collapse of the rupiah which has depreciated hundreds of per cent in value against the US dollar in just 12 months, forcing many into debt default during a period when domestic demand has been hugely reduced

The collapse of the rupiah and the chances of a significant and sustained recovery in the currency is the dominating concern for every chemical company in Indonesia.

Nowhere in Asia is the crisis as critical as it is in Indonesia, principally because of a depreciation which has seen the rupiah slip from around Rp2585:US$1 a year ago to 14 050:US$1, the level at which it was trading as ACN went to press.

A consequence of this devaluation is that every chemical concern in Indonesia is unable to meet all their debt repayments, say several senior industry sources.

The sources add that several of these companies are in complete debt default in that they are unable to pay any principal or interest on their borrowings.

'By western standards, a number of chemical businesses in this country are bankrupt,' adds one source.

In addition, crazy fluctuations in the value of the rupiah, by as much as 2000-4000 Rp:US$1 in the space of a few days' trading, make financial planning virtually impossible.

'It's difficult to calculate from one week to next what price our customers, who are heavily dependent on the rupiah, can afford to pay,' says one polyester producer.

Domestic demand in every chemical sector has been dragged down by the inability of the average working person to afford even the most basic of commodities which have soared in cost as a result of the collapse in the rupiah.

The riots in May brought sales of chemicals in Indonesia to a virtual halt and where demand still exists, credit and cash flow difficulties scupper many potential transactions.

Product prices both overseas and in Indonesia have declined to such an extent that margins are now insufficient to cover fixed costs.

The collapse of product prices in Indonesia is, again, the result of the collapse in the rupiah.

Export markets have been flooded because chemical companies in Indonesia, as is the case elsewhere in Asia, have been forced to increase exports in an attempt to compensate for weak domestic sales.

At least one producer predicts that if its margins decline any further, it will no longer be able to cover variable costs, forcing it to suspend operations.

'Our shareholders will not allow us to sell at below variable costs,' says a source at this company.

There is the threat of widespread starvation because of flooding, huge increases in the prices of food, food shortages and a breakdown in the food distribution system. The result could be further riots and a repeat of the economic paralysis which crippled the country in May.

Some commentators go as far as to suggest that Indonesia may be pushed into a civil war as severe as that which afflicted the former Yugoslavia in the early 1990s.

This is the economic environment in which chemical companies are attempting to function, an environment the like of which has not been experienced in any country since World War II. The World Bank, in a recent report, concluded that the recession in Indonesia is the worst since 1945.

The International Monetary Fund and the rest of the international community has pledged to give more financial aid to Indonesia in an effort to support its currency.

However, economists, financial analysts and chemical company executives who spoke to ACN all express the view that unless the threat of riots and political instability is removed, offshore money will fail to return in sufficient quantities for the rupiah to strengthen and stabilise adequately for a recovery to take place.

###6768###

Indonesia is facing a Catch 22 situation. The threat of social and political unrest has to disappear before the rupiah can significantly improve. However, it appears that the only way the rupiah can register such an improvement is if the danger of unrest vanishes.

Despite the frequently repeated assurance that 'things have settled down after the riots', there is an atmosphere of uncertainty in Jakarta which is as palpable as the smog.

'I hear the same rumour almost every working day - "The riots are going to start again this weekend," ' says a financial analyst who lives in Jakarta.

One plastic fabricator and converter adds that it is keeping inventory levels at virtually zero in case further social unrest results in stock being ruined by rioters and arsonists.

Some of the converters who shut down and left Indonesia in May because of concern over racial attacks have yet to return.

In the state-owned fertiliser sector, one of the first sectors of the chemical industry to be established in Indonesia, both the drought and cashflow problems of customers have resulted in a sharp fall in domestic demand.

'And international prices have collapsed due to oversupply and product prices have fallen dramatically, squeezing our margins,' says a source at Asean Aceh Fertilizer.

Pertamina, the state-owned refiner, is also seeing its margins squeezed during a period when it may lose its monopoly on domestic oil and gas refining, fuel distribution and marketing.

Domestic consumption of plastics will this year be only a fraction of what it was in 1997. Take PE, for instance. Last year, 550 000 tonne of PE was sold in Indonesia but this year, the industry expects to sell less than 150 000 tonne.

Reduced sales volumes, of course, result in cashflow and debt repayment problems. At least in the case of Peni, sources say that because it is 51% owned by BP Chemicals, it is in a relatively strong position.

Producers in every sector of the industry have been forced to reduce operating rates. Peni is running its plant at 50-60% and has pre-commissioned but has been forced to mothball a third PE line which was to have taken advantage of strong demand growth in Indonesia.

Operating rates have been reduced in the PVC sector because many government and privately-funded construction projects have been halted by the crisis.

PVC producer Asahimas Suben-tra, back-integrated to chloralkali, has the advantage of also being able to sell caustic soda into the domestic merchant market to small export-oriented textile producers. At present, these producers are running at close to 100%. However, there is concern that they may be affected by labour unrest.

Where domestic demand still exists, companies have to be careful to whom they sell. 'We have reduced our customer base from 100 to 30,' says a source at one Indonesian polymer company.

Such policies are motivated by:

• A reluctance to accept letters of credit gauranteed by certain unstable domestic banks.
  
  
• A reluctance by producers to extend credit to end-users in case they cease trading before a bill is settled.
  
  
• A shortage of letters of credit.
  
  
• The inability of many end-users, due to cashflow crises, to meet requests for 100% payment upfront before delivery.

Chemical companies are constantly having to revise their strategies to survive this crisis. Take TriPolyta, for instance. The PP major recently obtained permission from creditors to use funds for cashflow which were originally meant for new projects.

TriPolyta can offer no firm reassurances that this money will be sufficient to cover any shortages of short-term financing, particularly as the funds, Rp124bn, are still in rupiah. Unless the rupiah improves significantly, they will clearly suffer a huge realised foreign-exchange loss on these borrowings.

As ACN went to press, the company was confronting the possibility that it could be delisted by the Jakarta Stock Exchange (JSE) because its accumulated losses of Rp249.4bn total more than 50% of its paid-up capital (see p18). A regional chemicals analyst says that delisting by the JSE would have no effect on TriPolyta's operations.

For Polytama Propindo, a domestic PP competitor, the issue is the restructuring of debt which has become impossible to meet because of both the crisis and an interruption in feedstock supply.

The non-listed company's 180 000 tonne/year facility was down for several weeks from end-April due to an outage at the Pertamina refinery.

Polytama, which sells entirely into the domestic market, is holding extensive discussions with creditors to restructure its debt repayments, following its failure to meet an 11.25% interest payment on its US$200m in US bonds.

As for the polyester sector, before this crisis, it was being buoyed by strong sales domestically and overseas. It, too, has seen sales volumes slip while the cost of servicing debt has become for some unbearable.

Discussions concerning debt restructuring are expected to begin soon between a merchant bank which Polysindo Eka Perkasa is seeking to appoint and the trustees of the purified-terephthalic-acid-to-textile major's US$700m of US bonds. In July, Polysindo defaulted on US$30-35m of interest payments on its bonds.

Efforts to raise exports to compensate for a decline in domestic sales seem destined to fall short of the US$360-400m target announced by Polysindo in March for the financial year 1998. Now, it expects to only achieve overseas turnover of about US$300m.

Commentators say another of Indonesia's leading polyester majors, Indo-Rama Synthetics, is on a sounder financial footing as US$250m of its total long-term borrowings of US$350m are 100% hedged against currency fluctuations.

However, Indo-Rama's strategy of increasing bottle-grade chip output at the expense of fibre-grade chip production appears likely to produce diminishing returns. Bottle-grade chip prices, which were significantly higher than those of fibre-grade chip in Q1 began to decline in Q2 and Q3 because of weaker European demand.

As with BP's involvement in Peni, Japanese companies, which collectively represent the biggest multinational presence in Indonesia, are able to help with cashflow and credit difficulties which their Indonesian partners might otherwise experience.

However, a concern for these companies, their partners and the industry is that Moody's Investors Service is considering downgrading the credit ratings of some Japanese companies because of their exposure in Indonesia. One such company is Marubeni Corp, under reassessment by the rating agency, partly because of its 23.8% shareholding in Chandra Asri.

Its exposure to Chandra Asri was further extended in February when it provided the troubled cracker operator with US$150m as an advance payment for monomer and polymer supplies.

Given the collapse in product prices, in some respects this might represent a good deal for Marubeni. However, the need for it to provide these funds illustrates the severity of Chandra Asri's cashflow problems.

A Marubeni source told ACN: 'We are not worried about our exposure to Chandra Asri because it only accounts for a very small proportion of our total assets.'

It remains to be seen whether Moody's, which currently rates Marubeni on the seventh point from the top of 21-point rating systems, takes the same view.

A source at one Japanese chemical company present in Indonesia says that the best method of preventing downgrading is 'to earn as many US dollars as possible from exports to minimise the drain on our overall company performance'.

Chandra Asri currently does not even have the option to sell overseas 'because export prices just don't make sense,' says a company source.

It therefore faces the immediate dilemma of attempting to deal with cashflow shortages from turnover in a depleted domestic market.

In terms of long-term debts, however, it insists that injections of funds by shareholders have reduced these debts to manageable levels.

The next 3-4 months, when the economy could either rebound or sink into a deeper recession, could prove to be the most critical period during this crisis for Indonesia's chemical companies, says the Chandra Asri source.

What will happen to these companies remains unclear. There are bankruptcy laws in Indonesia but a slow and complex system makes it difficult for banks to foreclose on companies. Efforts are, however, being made to improve this system (see p18).

There are no indications that the rupiah will in the near future either strengthen or stabilise sufficiently to drag Indonesia out of the recession.

Therefore, one of the few certainties in this crisis is that chemical companies will have to endure even further losses.

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly