A matter of survival

03 August 1998 00:00  [Source: ACN]

Only last year it was assumed that the healthy growth in Indonesia's gross domestic product would ensure an equally healthy growth of its chemical industry. Now, however, projects are on hold and the very survival of the industry in its present form is in doubt.

The future of the Indonesian petrochemical industry has been thrown into serious doubt by a crisis which is threatening the industry's expansion and position as a significant force in the region.

Only 12 months ago there was talk of five new crackers in Indonesia. Now, however, there are major financial uncertainties surrounding a number of companies involved with some of these projects.

In addition to these uncertainties, there are those concerning government tariff policy, when the recovery will arrive and the rate at which petrochemical demand will grow subsequent to the recovery.

'Only the unexpected can be expected. Long-term planning is a waste of time,' says a source at an Indonesian PVC producer, a view which he says he formed following the riots in May.

Nevertheless, other petrochemical company executives are attempting to revise their long-term plans, even if those plans contain almost as many scenarios as there are rupiahs to the US dollar.

Take the scenarios surrounding the future of more crackers in Indonesia. Industry observers last year told ACN that an alliance would take place between Chandra Asri and BP Chemicals-Salim, which at the very least would result in an agreement on the timing of the startup of their prospective C2 projects.

It was suggested that Chandra Asri would take shares in BP Chemicals-Salim, in return for which the Salim group would take an equity position in Chandra Asri.

However, because of the long-running and, ACN understands, still continuing disagreement over the supply of ethylene from Chandra Asri to Peni, which is 51% owned by BP, sources indicate that an alliance may now not take place.

Chandra Asri insists that it already has the licence, the land and sufficient electricity, cooling water and other infrastructure at its existing C2 site in Cilegon, West Java, to build its own second cracker once the recovery arrives.

How such ambitions will be funded remains seriously in doubt for a company which outsiders say is suffering heavy and perhaps unsustainable losses. Also, Chandra Asri has had to postpone the debottlenecking if its existing cracker and PE lines, part of its second-phase expansion.

This expansion also involves diversification into PP, C4s, aromatics and solvents, financing for which will be difficult to obtain in the present climate.

Further hindering any possibility of an alignment between Chandra Asri and BP Chemicals-Salim is the fact that the Salim group is not at present in a position to acquire any new equity stakes, say financial analysts.

The Salim-led Bank Centra Asia (BCA) is experiencing financial difficulties which also places a question mark over Salim's ability to take part in the cracker project itself. The analysts add that BCA, which is the primary source of lending for the Salim group, cannot lend the type of sums required for the cracker.

However, they say that the government is considering raising the 50% ceiling on foreign ownership of domestic banks which could lead to an overseas takeover and recapitalisation of BCA.

'The question then would be whether the new owners would be interested in petrochemicals,' says a financial analyst.

She adds that an additional uncertainty is whether the government will proceed with a change in the banking law.

'The government will face nationalist pressure to maintain the 50% ceiling. However, if this administration is serious about wanting to ease the liquidity crisis, it will have to let in overseas controlling interests.'

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Despite these difficulties, Peni says it intends to approach international banks for some of the financing required for the cracker by the end of the year. It remains to be seen whether this financing will be available.

The Trans Pacific Petrochemical Indotama (TPPI) cracker, the leading shareholders of which are the Tirtamas Group and Siam Cement, has also been delayed, officially from end-1999 to 2000, although industry sources say the cracker and its derivative plants will have to be put on hold until later. The project, which has so far been funded by equity and is 40% complete, has been stalled principally because of the financial difficulties of the Tirtamas Group.

A new equity partner is being sought to buy some of Tirtamas's stake. Itochu, a 5% shareholder in TPPI, says that although interest has been expressed by western companies, boards of directors are currently unwilling to invest in Indonesia because of the political and economic instability.

Given an economy which contracted by 12.23% in H1 this year compared to the same period in 1997, it may seem a little irrelevant to be discussing expansion plans.

Collapsing demand means that most products are heading for or have already reached potentially ruinous overcapacity. Take PVC, for instance. Supply will exceed demand by more than 200 000 tonne in 1998, says Asahimas Subentra.

Chandra Asri adds that monomer and polymer demand has fallen by 60-70% this year compared to the same period in 1997.

However, all the chemical company executives and commentators who ACN spoke to stressed that this country of 202m people consumes a fraction of the plastics and textiles consumed elsewhere in Asia and in the West.

The potential, therefore, still remains huge which is one of the reasons the Japanese joint ventures in Indonesia insist that they are in for the long haul.

A cynical view expressed by one polyester company executive is that existing foreign players have no choice but to be in for the long haul as no rival chemical company would at present be willing to buy a plant in Indonesia.

In the case of Chandra Asri, it too insists that its shareholders remain convinced as to the company's long-term viability. The shareholders recently held two weeks of meetings in Jakarta ahead of the company's annual general meeting.

'That is a clear sign that they are committed, that they haven't lost interest and don't want out,' says a source at Chandra Asri. 'The tone of the meetings was one of "how do we work together to deal with the problems." 'Another company source argues: 'The question shouldn't be whether we can survive but whether the industry can survive without us.'

He says that many of the downstream concerns supplied by Chandra Asri would, be unable to import ethylene and propylene because the liquidity crisis limits the supply of letters of credit.

In the long term, he argues that the economics of dependence on imported propylene and ethylene makes little sense because of freight charges and the risk of demurrage.

He predicts that if Chandra Asri disappears, 'Indonesians will be queueing up to refill their plastic bottles with consumer goods such as shampoo. There will be no plastics industry left.'

But other industry sources suggest that the reduction in ethylene and propylene tariffs to 10% by 2003, as part of Indonesia's commitment to the Asean Free Trade Agree-ment (Afta), will significantly alter the economics of relying on imported feedstocks.

Nevertheless, al-though they predict that a change in its structure may take place, they are confident that Chandra Asri will remain.

The government has demonstrated its commitment to Afta by announcing it will accelerate the programme for the reduction in both the monomer and polymer towards achieving the 2003 target (see p33).

The chemical industry would at present struggle to dissuade the government to delay tariff cuts because they are viewed as a means of controlling the rise in the prices of goods in the shops.

In the long term, it remains to be seen whether the government can be persuaded to change course. If it does not change course, one of the sources at Chandra Asri warns that 2003 could be too early for the lowering of tariffs to 10%.

'Indonesia may then still be regarded as a risky place to invest in compared with other Asean countries which may or may not have tariffs of 10%,' he says. 'At the very least, we are likely to need tariffs of above 10% if the industry is to grow.'

Growth is at present the last priority for most of Indonesia's chemical companies and it is likely to remain so for several years as they struggle to survive this crisis.

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