INSIGHT: Indonesia polyolefins need some pleasant surprises

16 October 2012 13:05  [Source: ICIS news]

By Chow Bee Lin

“Be prepared for a surprise,” a Chandra Asri source said, referring to the company’s ongoing expansion plans at Cilegon in West Java, Indonesia.

The source declined to reveal the surprise element but one might guess from his smiles that it was going to be a pleasant one – the type that might help stem the company’s declining profit margins.

Chandra Asri, the sole naphtha cracker operator in Indonesia, plans to expand its naphtha cracker from 600,000 tonnes/year to 820,000 tonnes/year by the fourth quarter of 2014, and to start up a new 100,000 tonne/year butadiene extraction unit by the third quarter of 2013, a second company source said.

Any positive developments will be great for Chandra Asri because its shrinking profit margins had already led Moody's Investors Service to downgrade its rating from stable to negative in August this year.

But Chandra Asri is not the only one that needs a booster. The country’s polyolefins  industry as a whole needs to rejuvenate.

Indonesia is widely seen as the next major polyolefin market in Asia that will offer significant investment and market opportunities because of its large population, particularly now when the major Asian economies - China and India - are showing signs of slowing growth.

Indonesia has a population of 240m and its annual GDP growth rate was estimated at 6% in 2011, according to World Bank data. The World Bank forecast the country’s annual GDP growth rate for this year to be 6.1%.

Foreign and local private investors have expressed interest to build new ethylene and derivative plants in Indonesia but progress has been hampered by bureaucracy and unclear government policies, local sources said.

“Every government department has its own ideas of how to develop the local petrochemical industry, there’s no coordination,” one of the sources said.

Chandra Asri plans to expand its ethylene capacity to at least 1m tonnes/year if a new refinery is built in Indonesia by then, ensuring the company a consistent local supply of naphtha, said Budi Susanto Sadiman, Indonesian Olefin & Plastics Industry Association’s (INAPLAS) vice president for business development.

But private investors’ attempted foray into the refining sector, currently dominated by state-owned Pertamina, has been impeded by a lack of government support, local sources said.

South Korea’s Honam Petrochemical has been in talks with the Indonesian authority over acquiring a piece of land for a proposed 1m tonne/year ethylene cracker, but progress has been hampered by bureaucracy, local sources said.

Indonesia will be self sufficient in ethylene by the end of 2016 if Chandra Asri’s proposed ethylene expansion to 1m tonnes/year and Honam Petrochemical’s proposed ethylene cracker project materialised, said Sadiman.

Honam Petrochemical’s ethylene cracker and derivatives project could help drive developments in the local automotives and electronics appliance application sectors because, according to INAPLAS, most of the resin used in these sectors are currently imported from Japan and South Korea.

Honam Petrochemical already supplies PE to Indonesia from its subsidiary PT Titan, which operates three PE plants in Indonesia.

Most of the locally produced PP and PE resins are used in food packaging and woven bag applications, local sources said.

Food packaging is the biggest application sector for the local plastics resin producers, and resin demand growth in this application sector is estimated at an average of 10% per year, said Sadiman.

The average plastics resin demand growth in the local automotives application sector is estimated at more than 10%, but the base is much smaller, he said.

Plastics resin demand in the agricultural film application sector is seasonal, depending if the local rice farmers had a good harvest, said Sadiman. “We didn’t have a golden harvest for rice this year,” he added.

Indonesia’s 2012 demand growth for plastic resins, including PE, PP, polystyrene (PS), polyvinyl chloride (PVC) and acrylonitrile-butadiene-styrene (ABS) is estimated at 7.5% this year, he said.

Indonesia’s ethylene capacity is estimated at 1.3-1.4m tonnes/year in 2012, and this is expected to increase to 1.8-2.0m tonnes by 2016, according to INAPLAS data.

Increased local ethylene and derivate products could invigorate the whole local plastics processing sector whose growth has been capped by high raw material costs and intense competition from imported semi-finished and finished plastics products, local sources said.

Semi-finished and finished plastics products imported into Indonesia are non-dutiable, hence local processors face intense competition from lower-priced imports from China, they said.

Local plastics resins are expensive because two of the local producers have to import naphtha or ethylene as feedstock, they said.

About 50% of the country’s polyolefin demand is covered by imports, and polyolefin imports into Indonesia are subject to duties ranging from 5% to 10%, depending on the grade and the supply origin.

Polyolefins imported from six ASEAN (Association of Southeast Asian Nation) countries namely Singapore, Thailand, Malaysia, the Philippines, Vietnam and Brunei have been non-dutiable in Indonesia since 2010 because of the ASEAN Free Trade Agreement.

Local polyolefin importers were issued annual duty-exemption quotas in July this year which allow them to buy resins from any non-ASEAN countries without paying import duties, and the quotas could only be applied from September, a local trader said.

Nobody knew when to expect the quotas, hence it was a surprise to many when they were finally issued in July, the local trader said.

That’s probably just one of the surprises the local plastics industry does not need.

Read John Richardson and Malini Hariharan's Asian Chemical Connections blog

By: Chow Bee Lin
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