Editorial: Growing pains

There is always a strong correlation between economic expansion and growth in the construction industry. No wonder, the demand for building materials such as cement and steel also have been increasing by more than 12 percent a year since 2009.

State-owned Semen Gresik, the country’s largest cement producer with an annual capacity of 20 million tons, has been operating at full capacity since last year, riding on the back of the economic expansion of 4.5 percent in 2009 and 6.1 percent in 2010 and even a higher growth of 6.5 percent in the first half of 2011.

On top of that, property development also has been expanding rapidly on the back of the declining interest rate. Our low average cement consumption per capita of around 175 kilograms, compared to 395 kilograms in Vietnam and 565 kilograms in Thailand, should provide ample room for growth.

The government expects a higher economic growth of 6.7 percent next year, but many analysts foresee an expansion of almost 7 percent despite the indications of an economic slowdown in Europe and the United States.

For sure, this greatly positive development will further bolster demand for building materials, especially because the government has allocated the bulk of its investment budget for accelerating infrastructure development such as roads, airports and seaports and power generation.

The Indonesian Cement Association has warned that the national cement capacity, which currently is 54 million tons, should be increased to meet swiftly rising consumption – totaling 46 million tons – otherwise there could be a shortage in case one or two plants go down either for periodical maintenance or unexpected technical problems.

All the largest cement groups — Semen Gresik, Indocement and Holcim — have quickly tapped this positive development by expanding their installed capacity in anticipation of the rising consumption.

Semen Gresik in East Java, for example, embarked on its expansion in late 2009 to add 5 million tons to its capacity under a US$600 million investment program, scheduled to come on stream next year.

Likewise, the country’s steel producer, state-owned Krakatau Steel, in Banten, is also building new steel mills in a joint venture with South Korea’s Pohang Steel Corporation, which will more than double its annual capacity to 6 million tons in 2013.

The problem, though, is distribution. How will all of these additional millions of tons of goods be distributed across Java, which accounts for more than 55 percent of national steel and cement consumption, if new road construction work remains at its current snail’s pace.

Traffic gridlock is already a daily sight in Jakarta and its surrounding towns, with long lines of trailers hauling container boxes in and out of the Jakarta port of Tanjung Priok slowing down freeway traffic to a halt.

Unfortunately, the indications so far are not so encouraging with regard to the construction of new toll roads in Java, where more than 20 freeway projects have stalled for years due to problems in land acquisition.

Worse still, the bill designed to cut down the red tape in land acquisition for public interests will likely not be enacted this year.

Even if this bill is approved later this year, its full-fledged implementation will start only six months later at the soonest, taking into account the time needed for issuing regulations on technical details.

If the cement and steel plant expansions come on stream in 2012 and 2013, as scheduled, and the freeway networks do not see signification expansion, we will be in for total gridlock on the highways.