I

ncreased cement consumption in a developing country like Indonesia is inevitable, growing at an average rate of 6.2 percent over the past five years with 2009 as the only exception due to the global economic turmoil.

Supported by buoyant property development, realization of infrastructure projects and continued low interest rates, demand for cement is likely to persist growing between 6 percent and 8 percent per annum in our view.

We believe that a country’s cement consumption is generally related to its per capita income growth and industrialization progress. With strong gross domestic product growth, the current low domestic average cement consumption per capita of around 171 kilograms should provide ample room for growth.

For comparison purpose, other developing countries like Thailand and Vietnam have average cement consumption per capita of around 394 kilograms and 564 kilograms respectively, while developed countries like the United States has penetration rate per capita of around 223 kilograms.

The development of infrastructure projects is expected to produce substantial multiplier effect for growth in cement consumption. As the concentration of the government’s infrastructure-related projects, the Java region would become a major contributor to growth. At the same time, the Outer Java areas will also support growth, helped by regional autonomy and robust commodity prices.

According to the Indonesian Cement Association, March’s domestic cement consumption grew 11.3 percent year-on-year, bringing total first quarter 2011 cement consumption to 10.57 million tons, or 8.6 percent growth year-on-year, in line with our full-year volume estimate of 43.7 million tons.

This strong growth was supported by accelerating demand from Java, which registered 15 percent year-on-year growth to 2.00 million tons in March and accounted for approximately 53 percent of total domestic consumption, while Outer Java rose 7.4 percent year-on-year and accounted for the remaining 47percent.

Within Java, Jakarta and Banten posted the strongest growth and contributed to nearly 30 percent of Java’s consumption while East Java continued to underperform as March volume contracted 5.1 percent year-on-year. For Outer Java, Sumatra performed well booking 24.3 percent year-on-year growth, benefiting from growing commodity-related business. Surprisingly, other ex-Java regions experienced contractions in their March’s volumes.

Amongst the listed companies, Indocement Tunggal Prakasa and Holcim Indonesia would be the beneficiary of growing cement demand in Java. In contrast, Semen Gresik has continued to underperform due to its current limited capacity, particularly in Java and Sumatra. However, the expected additional five million production capacity in early next year would spur Gresik’s volume growth going forward, allowing the company to benefit from continued growing cement consumption in
Indonesia.