OREANDA-NEWS. Oversupply in the Indonesian cement industry is likely to persist in the medium term, despite a recovery in sales volume this year, Fitch Ratings says. This will continue to put pressure on the margins of cement producers, who have expanded their production capacity faster than volume sales in the last two to three years, and are due to start more new capacity in the next year.

Fitch estimates domestic cement sales will increase by 4%-5% in 2016 to around 63 million tonnes. Growth will pick up from the 1% pace in 2015 due to a stronger domestic economy and better demand from the infrastructure-related sector. Fitch also expects cement sales volume to increase in the next two years, in line with the agency's expectations that GDP growth will accelerate to 5.5% in 2017 and 5.7% in 2018.

In comparison, the Indonesian Cement Association (ICA) said recently that total cement production capacity in the nation will reach 92.7 million tonnes per annum (mtpa) by end-2016. This will result in a utilisation rate of only 65%-70%, Fitch estimates. The utilisation rate was about 85% three to five years ago, when the economy and property market were more robust.

The oversupply could spark a price war as cement producers seek to protect their market share in Indonesia. In addition, the price of coal, a raw material crucial to cement production, has increased sharply in recent months, further squeezing cement makers' margins. Fitch expects cement companies to seek new ways to reduce costs, including cutting their use of coal, to maintain their margins.

The current oversupply is mainly due to the 34 mtpa of capacity from domestic companies and new players from outside Indonesia that started operations from 2014. Some cement companies, such as Semen Baturaja and Semen Indonesia, have been reported as saying they are ready to commence new factories in 2017.