Chemical

This section contains an investor’s summary to the chemical industry sector in Indonesia.


Indonesia’s chemical industry is one of more prioritized industries in the development of the country’s manufacturing sector. This is because the chemical industry plays a significant role in supplying the country’s other manufacturing sectors such as the plastic and textile industries. Within Indonesia’s Making Indonesia 4.0 roadmap, the chemical industry is also among the industries that are being pushed towards implementing industry 4.0 practices.

 

Comprising mainly of two sub-industries, namely the basic oleochemical and biodiesel industry as well as the upstream petrochemical industry, Indonesia chemical industry possesses a competitive edge in both of these sub-industries due to its wealth of natural resources; specifically in crude palm oil and natural oil and gas reserves – not to mention the country’s own significant domestic market of 265 million people. Indonesia has an estimated oil reserve of 3.3 billion barrels, an estimated natural gas reserves of 135.55 trillion Standard Cubic Feet, and an estimated coal reserve of 39.89 billion tons. For crude palm oil, Indonesia’s is the world’s largest producer with 48 million tons per year or about 68% of the world’s total production.

 

Despite possessing this competitive edge, fully developing these industries remains a significant challenge for Indonesia as they are capital intensive, technology intensive, and energy intensive. The country simply has not been able to fully develop the necessary infrastructure to add more value into its chemical sector. In fact, the current situation regarding the chemical industry in Indonesia is that it is heavily reliant on imports. The petrochemical industry, for example, needs around 5.6 million tons of raw materials annually, less than half of which can be fulfilled domestically. The pharmaceutical industry is notorious for importing 90 of the raw materials needed to produce finished goods domestically. This results in expensive production cost across the board.

 

In terms of its utilization rate, according to the Ministry of Industry, the upstream chemical industry has a relatively small material supply contribution to the building component industry, but is a stable supplier of components to the foodstuff industry. Its highest contribution in terms of component supply is to the pharmaceutical industry. Overall, the chemical industry has a utility rate of about 60 percent.

 

Nevertheless, owing to the country’s vast domestic market, the demand for Indonesia’s chemical sector is significant and continues to grow. Based on data from the Ministry of Industry, in 2019, the manufacturing sector grew by 4.34 percent (year-on-year), which is slightly slower compared to the growth in 2018 of 4.77 percent. Even so, the chemical industry continues to grow positively, at 5.59% in the first quarter of 2020 (yoy). Amidst the COVID-19 pandemic, the chemical industry was the only industry in the manufacturing sector to post positive growth – 14.96% in the third quarter of 2020 compared to the same period last year.

 

HIGHLIGHTS

 

 

 
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Source: Statista

* preliminary figures
** very preliminary figures

 

In 2020, preliminary figures showed that the GDP from manufacturers of chemicals, pharmaceutical and botanical products in Indonesia amounted to Rp 296.71 trillion (US$18.8 billion) - a constant increase since 2014.

 

 
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Source: Industry Analysis June 2021, Indonesian Ministry of Industry

 

 
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Source: Industry Analysis June 2021, Indonesian Ministry of Industry

 

The chemical sector consistently ranks among the top three contributors to Indonesia’s import-export numbers.

 

 
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Source: Indonesian non-oil and gas manufacturing industry development analysis 2020 Fourth Edition, Ministry of Industry

 

In the second quarter of 2020, the chemical, pharmaceutical and traditional drug industries were the only industries to record positive growth amidst the COVID-19 pandemic.

 

 

CHALLENGES

 

As previously mentioned, the chemical industry is capital intensive, technology intensive and energy intensive. This makes it difficult for the Indonesian government to develop the sector as, also due to its strategic nature, it is sensitive to both global and domestic factors. Globally, for example, a shift in the exchange rate or the price of oil could easily tip the balance sheet of any company operating in this sector. Domestically, due to the weak supply chain flow between the upstream and downstream industries, a shift in policy for infrastructure development could potentially affect logistic prices, further driving up the operational costs for chemical companies.

 

Indonesia is aware that it needs to draw more investment into the sector. Thus, the Indonesian government has moved to provide several fiscal incentives such as tax allowance and tax holidays for investors of Indonesia’s chemical industry. For example, Minister of Finance Regulation No. 159/PMK.010/2015 stipulates that chemical companies are eligible for 100% income tax deduction for the next 5 to 10 years and a further 50% income tax deduction for the next two years.

 

Even so, as reported by a number of consultancy firms, these incentives haven’t been widely exploited. As reported by the Institute for Development of Economic and Finance – an Indonesian-based Think Tank – out of the three major basic chemical projects with a foreign investment of $65.7 million and a local investment of 500 million rupiah in 2017, not a single one received the tax holiday.

 

Having said that, more recently, positive signs are showing with the Indonesian unity of the Korean conglomerate LOTTE Chemical Titan Holding, PT Lotte Chemical Indonesia, resuming its $4.4 billion petrochemical project in Indonesia, including an ethylene plant with an annual capacity of 1 million tons in Cilegon, Banten. Also, in October 2020, a revamping project of Indonesia’s petrochemical company PT Trans-Pacific Petrochemical Indotama in East Java province’s district of Tuban continues to run during the COVID-19 pandemic with a construction cost of 180 million U.S. dollars to produce 780,000 paraxylene per year by 2022.

 

Both examples show that, despite the challenges, Indonesia chemical sector remains a prospective sector for investors.

 

 

CONCLUSION

 

According to Market Research.com, the Indonesian chemical market had total revenues of$24.1 billion in 2020, representing a compound annual growth rate (CAGR) or 8% between 2016 and 2020. The specialty chemicals segment (chemicals used as ingredients or to improve manufacturing process) was the market’s most lucrative in 2020, with total revenues of $8.4 billion, or 34.8% of the market’s overall value. The demand from the strong perfor3ming construction and automotive industries were some of the main reasons behind this push.

 

Oxford Economics forecasts that Chemicals value added is expected to increase by about 4.5% in 2021, after a 5% contraction in 2020. Pharmaceuticals value added increased by 7.4% in 2020 and is forecast to grow by about 4.5% in 2021, driven by higher health spending. The industry benefits from increased demand for drugs, supplements and healthcare products during the COVID-19 pandemic. About 90% of the pharmaceutical companies active in Indonesia focus on the downstream sector in producing medicines.

 

Overall, despite the challenges it faces domestically and globally, Indonesia’s chemical sector continues to be an important and prospective sector that is supported by a growing a middle-class and a wealth of natural resources