Indonesia stands firm on its large chemical industry ambitions  

26 Oct 2022

Projects such as the chemical industry complex located just north of the new capital city in Kalimantan, as well as developing chemical import-substitutes are just some of the strategies the government is employing to elevate the national chemical industry. 


Within the masterplan of the new capital city project of the Indonesian government – slated to begin construction in mid-2024 – is a chemical industry complex that has been touted as the world’s largest. 


“We will have the largest petrochemical industry in the world,” said the Coordinating Minister for Maritime Affairs and Investment Luhut Binsar Pandjaitan during an investment event at Fairmont Hotel in Jakarta, earlier this March, in reference to the project. 


The chemical industrial complex itself will be a part of the current administration’s grand plan to create a ‘Superhub’ on the location of the country’s future capital city Nusantara, currently under development on an area that straddles the two regencies of North Penajam Paser and Kutai Kartanegara in East Kalimantan.  


This grand plan includes the establishment of a ‘green industrial park’ in Bulungan Regency in the neighboring province of North Kalimantan, where – in accordance with the government’s ‘green’ ambitions – a $17 billion (or over Rp 265 trillion in current exchange rates) hydropower plant with a planned capacity of 9,000 megawatts will power the industries. 


The chemical industrial complex is expected to contribute up to US$6.5 billion to the national GDP and open up nearly 40,000 jobs, according to the Ministry of National Development Planning. 


The project above is just one example of how Indonesia is serious about becoming a global player in the chemical material global supply chain. As the country recovers from the COVID-19 pandemic, the government has been aggressively pushing to reinvigorate the national chemical industry. 


This is because, despite currently being heavily reliant on imports for raw materials, the national chemical industry continues to play a significant role in the country’s non-oil-and-gas manufacturing sector.  


According to data from the National Statistics Agency, as of the end of 2021, the chemical, pharmaceutical and traditional medicine sub-sector contributed Rp 339.1 trillion – or over a tenth of the whole manufacturing sector – to the national GDP (under current prices), up from Rp 296.7 trillion in the previous year. 


Furthermore, considering that chemical ingredients are widely used in downstream industries, a highly-utilized chemical industry would have a significant impact on the nation’s overall economic growth. 


In this regard, the government has aimed towards increasing the nation’s production of chemical import-substitute in order to reduce imports by 35% until 2025. This is to be achieved by setting a fixed price of $6/mmbtu of gas for industrial needs and by offering tax holidays for companies that hold Research & Development operations. 


The strategy seems to have had a positive effect thus far. According to data from the Ministry of Investment or BKPM, January-July 2022 investments in the chemical industry are among the top three highest for both domestic (Rp 5.3 trillion) and foreign ($1.1 billion) investors within the manufacturing sector.   


Additionally, according to the Ministry of Industry, until 2030, as many as 20 projects with an estimated value of $50 billion in the petrochemical sub-sector are under development. These include investments from South-Korea based Lotte Chemical Titan, which has a production capacity of 3.1 million tons per year for upstream and downstream petrochemical products such as ethylene, propylene, and butadiene in Cilegon, Banten, as well as the Rp 1.5 trillion expansion of polyvinyl-chloride (pvc) production capacity to 750 thousand tons per year from 550 thousand tons per year from Japan-based PT Asahimas Chemical. 


This positive effect is further demonstrated by the most recent Purchasing Manager’s Index from S&P Global, which shows that Indonesia’s manufacturing sector – including the chemical industry – is on an expansionary path, reaching an 8-month high of 53.7 in September 2022.  


The question now is whether the chemical industry can weather the inflationary headwinds that are currently shaking the global economy. As quoted by an online news portal Alinea, an online news portal, Michael Susanto, Chairman of the Inorganic Basic Chemical Association of Indonesia (AKIDA), said production cost had risen by up to fifty percent following the rising prices of imported chemical ingredients. 


Regardless of what the future may bring, one thing is for sure: tThe Indonesian government will need to work and synergize together with the local and global business community if it wants to achieve its chemical industry ambitions.