A sharply rising population and a government directed move to boost housing in Indonesia is highly favourable for domestic concrete producers.
Rising populations, urbanisation and a fast-growing middle class have led to a huge need for housing and infrastructure investment right across developing Asia.
One of the areas where this is most stark is Indonesia, home to a burgeoning economy and the world’s fourth-largest population.
The Jokowi Government hopes to bring the housing shortage down from 7.6 million homes in 2015 to 5.4 million this year with a number of high-profile projects, most notably its ‘One Million Homes Program’, which aims to build more than 1 million units per year, with 70% aimed at low-income households.
Reducing the deficit and improving the standard of its subsidised housing units will be a vital part of fulfilling the UN Sustainable Development Goal 11 – ensuring access to safe and affordable housing. But there is much more to be done, with the One Million Homes Program only achieving its target for the first-time last year.
Housing and infrastructure demand is likely to be an important factor for investors in Indonesia for several years to come. One area where this is creating opportunities is in cement production. This industry enjoyed a decade-long period of profit growth between 2003 and 2013, when demand surged – due to a rapidly expanding property market and development of the infrastructure network.
At that time, the domestic industry was controlled by three big players, who accounted for the lion’s share of supply. In addition, competition from imports was largely non-existent, due to the lack of port capacity. Cement companies therefore exerted a high level of pricing power and saw a massive increase in profitability.
However, success attracted a wave of new entrants, both local and international, which coincided with a downturn in demand as the housing boom faltered and resulted in the market swinging to an oversupplied position. Industry capacity utilisation fell sharply and pricing collapsed as new entrants tried to establish a foothold.
Source: Martin Currie calculations compiled from company reports, FactSet
An industry poised for recovery
Consumption has increased since 2016, although not to the heady levels seen earlier this decade, predominantly driven by the government infrastructure programme.
What is required for a full-blown recovery is a turn in the housing market. The government has relaxed regulation here with the aim of stimulating the property sector, but this has had a limited impact due to political uncertainty related to April’s general election. But there does now appear to be growing confidence that a recovery will materialise once this election is out of the way.
Moreover, the pace of new supply has slowed materially, meaning industry utilisation is starting to improve, enabling industry participants to push through price increases. While we are seeing industry consolidation, with the top-two players now controlling more than two thirds of the market.
The worst is over for the industry and recovery is underway, and the long-term outlook for cement demand in Indonesia is very attractive. As efficient, low-cost operators with a dominant market position, the big industry players are very well positioned to take advantage of this.
Of course, the path will not be smooth given the cyclicality of the industry, but we believe significant returns are available for investors who are prepared to take a long-term view.
 Source: FactSet