INSIGHT: Investors going ‘crackers’ over Indonesia

27 March 2007 16:04  [Source: ICIS news]

By John Richardson

 

SINGAPORE (ICIS news)--Wander around any Jakarta hotel lobby these days and the joke is that you will hear several conversations among different groups of investors interested in building a cracker in Indonesia.

 

This is not quite the heady days of 1995-96 when there were three solid cracker projects, but there is a renewed interest in adding to the country’s petrochemical capacity.

 

Reasons are an economic recovery that could lead to GDP (gross domestic growth) reaching 6% in 2007. This would be the best performance since the 1997-98 implosion of the economy.

 

The government has paid off its International Monetary Fund debts ahead of schedule, has lowered public debt to a healthy 40% of GDP meaning that much-needed heavy infrastructure spending is possible, and is making a decent fist of tackling corruption.

 

But the biggest reason for the interest in new Indonesian crackers and downstream investments are big and potentially much bigger monomer and polymer deficits.

 

Indonesia will need to import 500,000 tonne of ethylene and 179,000 tonne of propylene this year, according to the Indonesian Plastics Association.

 

All the polymers bar polyvinyl chloride (PVC) are in deficit. Even PVC, the worst victim of oversupply following the 1997-98 economic collapse, is expected to slip into a minor net import position in 2010.

 

Indonesia has had big monomer deficits for a long time. This has been a useful sink for surplus Asian C2s and C3s.

 

But more recently there has been a dramatic jump in deficits down all the product chains, accompanied by forecasts of even bigger shortfalls as GDP growth accelerates.

 

For example, the polypropylene (PP) shortfall is forecast to rise to around 700,000 tonne in 2011 from this year’s 460,000 tonne.

 

Titan Petrochemicals, the Malaysian producer that bought Indonesian polyethylene (PE) producer PT Peni last year, has talked about building a cracker. For the time being, though, the focus is on using ethylene from Titan’s Pasir Gudang complex to restart the long shut down third high-density PE (HDPE) line at Peni.

 

Pertamina, the state-owned oil and gas producer and refiner, announced a year ago that it was looking at a gas cracker.

 

Chandra Asri, the country’s sole cracker operator, is also talking about another C2 plant with a private consortium of investors also announcing their intention to build a facility in late 2005.

 

Some commentators are bold enough to predict that there will be one or two crackers on stream by early next decade, raising the country’s ethylene capacity to 1.5m tonne/year from the current 520,000 tonne/year.

 

But talk is one thing and steel in the ground is another in a country where concerns over corruption and political instability persist.

 

Desperately needed infrastructure spending is, ironically, being held up by the government’s attempts to tackle graft: civil servants are reluctant to award contracts in case they get hauled before a new anti-corruption court.

 

One of the infrastructure shortfalls is electricity generating capacity. This has led to frequent brown-outs in Merak, west Java, where the petrochemical industry is located, because power plants are being run too hard.

 

Investors need to prove they are a great deal more serious than a few casual conversations in Jakarta hotel lobbies if they want to get engineers and contractors to submit bids.

 

The building market is so tight that less established Middle East project proponents are being forced to pay contractors just to make bids, says a western investment banker based in Saudi Arabia.

 

But perhaps the biggest single reason why all this hot air might come to nothing is that there is no point in building capacity for the next 4-6 years.

 

The cycle will turn extremely nasty in 2009 due to overcapacity. Even imported monomers could become reasonably cheap because several of the new cracker complexes have large C2 and C3 surpluses.

 

The Indonesian petrochemical industry might be better off sitting out the next crisis rather than slugging it out with the biggest-ever wave of low cost Middle East capacity.

 

What on earth is the point of pilling on debt right now after years of painful but eventually successful debt restructuring?

 

Sadly, it could be too late for Thai and South Korean producers who are already committed to big investments.

By: John Richardson
+65 6780 4359

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