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Petrochemical industry in need of help for downstream growth

Jakarta Post - October 31, 2023

Aditya Hadi, Jakarta – The government's push to develop mineral processing industries has prompted Rp 151.7 trillion (US$9.53 billion) of investment this year, according to government data, for the construction of nickel and copper smelters among other things, but the Industry Ministry says investment in the petrochemical industry has been subpar.

"I think it's still less [than optimal]," Investment Minister Bahlil Lahadalia said in a press conference on Oct. 20, noting that the country's petrochemical industry still depended on other countries for raw materials.

Investments to build petrochemical processing facilities in Indonesia only reached Rp 31.6 trillion this year, less than downstream investment in forestry and agriculture.

Abra Talattov, head of the Center of Food, Energy and Sustainable Development at the Institute for Development of Economics and Finance (INDEF), explained that the government's push for downstream industrialization, when applied to the petrochemical sector, was hampered by a high degree of risk in large-scale projects.

Countries including China have a head start in the industry, according to Abra, meaning local chemical companies seeking to widen their operations may struggle to compete in what for them are new markets.

"That's the reason why so many petrochemical products have flooded the local market," Abra told The Jakarta Post on Friday.

Data from Statistics Indonesia (BPS) and a major petrochemical firm Chandra Asri show that the country still depends on imports of olefins, polyethylene and polypropylene – materials for midstream and downstream petrochemical firms – to meet around 33 percent, 42 percent and 57 percent of domestic demand, respectively.

Chandra Asri relies on imports for naphtha, its key raw ingredient, as there is not enough domestic supply. The firm has encouraged the government to support the construction of a local refinery that would make the country less dependent on foreign supplies of the material.

Last month, the firm's legal and external affairs director, Edi Rivai, noted that it was not only raw petrochemical products flooding the local market, but also final products. He urged the government to impose restrictions on imports.

"There are many final products, such as plastic tarpaulin, plastic bags and household plastic containers, which are imported from China and South Korea," Edi was quoted as saying by Bisnis.

In July, Coordinating Maritime Affairs and Investment Minister Luhut Pandjaitan revealed a plan not to extend export contracts for liquefied natural gas (LNG), a crucial raw material for the petrochemical industry, so that the LNG produced in the country could be diverted to local petrochemical companies.

"All of our gas that could be used for downstream development [of petrochemical industries], why should we export it?" Luhut said at the time, as quoted by CNBC Indonesia.

However, the plan is still under discussion.

Upcoming projects

Some petrochemical companies have announced expansion plans for the upcoming years, which would align with the government's downstream push.

Lotte Chemical Indonesia, an affiliate of publicly listed Lotte Chemical Titan, started construction on a new factory in 2020, with Rp 60 trillion of investment and a plan to employ 13,000 workers. The new facility is to produce ethylene, polypropylene and benzene, among other chemicals.

Chandra Asri, meanwhile, has revealed plans to build a caustic soda plant and an ethylene dichloride plant, both expected to begin operations in the next four to six years. In total, construction of the plants requires $9 billion of investment, according to the company.

According to Indef's Abra, to help local petrochemical industries compete with foreign players, the government should set a price policy that allow them to get cheaper raw materials.

"In the early phase, we need government support with raw material prices, because, unless the price is competitive, fighting against imported products will be futile," Abra said.

Suhat Miyarso, chairman of the Indonesian Olefin, Aromatic and Plastic Industry Association (Inaplas), said the government's plan to lower gas prices for local industry and ban gas exports would help.

"It would accelerate new investor commitment to realize projects for new petrochemical factory construction in the country," Suhat said on July 22, as quoted by Liputan6.com.

If it wanted to push downstream growth in petrochemical industries, Abra opined, the government also needed to encourage manufacturers to absorb locally produced petrochemical products rather than foreign ones.

However, the strength of those manufacturing firms, especially those currently under financial pressure, like textile companies, should also be taken into account, he cautioned.

"In the second quarter, the growth of the manufacturing industry was only 4.88 percent, below the GDP growth of 5.17 percent. That means the manufacturing sector performance is suboptimal," Abra concluded.

Source: https://asianews.network/petrochemical-industry-in-need-of-help-for-downstream-growth