Indonesia Petrochemicals Report Q3 2009

The depreciation of the rupiah has given a fillip to the Indonesian petrochemicals industry by raising the cost of imports, with some producers approaching maximum capacity utilisation. While this may give the industry a respite in a period when domestic consumption is falling, domestic capacity restraints are undermining the long-term sustainability of some polymer consuming industries further downstream.

The volume of demand for thermoplastics dropped 7% year-on-year (y-o-y) in Q109 to 564,000 tonnes, according to the Asosiasi Industri Plastik dan Olefin Indonesia (Association of the Plastic and Olefin Industry of Indonesia, INAplas). The decline was blamed on declining market activity by thermoplastics consumers in Indonesia and the falling value of the rupiah, which went from IDR9,000/US$ to IDR12,000, helping to depress imports and leading to domestic scarcity. Thermoplastic imports dropped from just under US$1bn in Q108 to US$531mn in Q109. The problem of scarcity was most acute in the PP sector. In Q109, PT Tri Polyta was operating its PP plant at 90% of capacity, its highest ever level of capacity utilisation. Its output rose by nearly 14% y-o-y to 91,000 tonnes in the quarter. Indonesian PP domestic supply is well below demand and the market has tightened as Asian PP output has declined, in response to deteriorating global market conditions.

The petrochemicals sector is heavily reliant on domestic demand, which it is struggling to meet. Indonesia is having difficulty competing on the regional market following the emergence of large-scale production in the Middle East and increased capacity in China, which together will keep prices down and lead to problems of over-supply. However, the country is not self-sufficient in petrochemicals, which means it is compelled to open its market to cheaper foreign imports that undercut national producers.

Indonesia will require an additional 1.4mn tonnes per annum (tpa) of ethylene cracker capacity over the next five years if it is to achieve self-sufficiency in feedstock for the polymer sector; a development that BMI believes is extremely unlikely, thereby forcing Indonesia to source feedstock from abroad. Ethylene consumption is expected to reach 2.9mn tonnes in 2012 (up 125% over 2007), while propylene consumption will total 1.4mn tonnes (up 45%). A petrochemicals national strategy developed by the local industry, the government and Japanese investors and published in March 2007 envisages that over 50% of national ethylene demand will be met by imports up until 2010. BMI believes the figure will be closer to 70%, due to a lack of domestic ethylene production capacity. Even before the problems of oversupply began plaguing the regional market, the Indonesian petrochemical industry was in trouble. Development has been slow, and even some of the finished projects have subsequently been on hold due to controversy and irregular operations. BMI forecasts gloomier times ahead. The prospects for further investment in this segment are uncertain as large amounts of capital and expensive technology are involved. Without large investments to reduce the domestic shortfall of ethylene, parts of the Indonesian petrochemical industry could go into bankruptcy. If the sector is to survive, consolidation is essential and acquisition by global majors may be necessary.