AnalysisSSESSMENTS: Detailed Analysis of COVID-19 Impact On Business, Polymers Demand in Indonesia

Summary: 

• Implementation of large-scale social distancing measures in Jakarta started on Friday (April 10)
• Inventory of raw materials remains sufficient for most converters, hence no rush to make procurement
• Demand for end products weakened further following the large-scale social distancing (PSBB)
• Consumer spending and consumption to be severely impacted by COVID-19 crisis
• Quite a number of factories in Indonesia are running at reduced production rate 
• Indonesia Rupiah believe to weaken further, to surpass IDR17,000-per US dollar
• Indonesian government estimates 2.9-5.2 million to lose their jobs during the coronavirus pandemic
• Economy to grow 2.3% this year, sharply down from a range of 5.1% to 5.5% projected earlier

SSESSMENTS.COM previously reported that polymer inventory in Indonesia is sufficient based on reports from manufacturers, buyers, local producers and traders, international traders, as well as local distributors with warehouses in Indonesia. The problem that still looms is the price volatility of the polymer since last week. Buyers are reluctant to make new purchases due to the depreciation of the Indonesian Rupiah and implementation of large-scale social distancing measures in Jakarta starting from Friday (April 10).

Indonesia announced the first Coronavirus case on March 2. Data reported on April 14 shows rapid increase with 4,839 cases and 459 deaths, making Indonesia one of the countries with the highest mortality rates. Likewise, Indonesia has on April 4 declared Coronavirus a national disaster and issued a strict guideline on physical distancing (Pembatasan Sosial Berskala Besar or PSBB). Ahead of the Bank Indonesia’s (BI) interest rate decision on April 14, Indonesian Finance Minister Sri Mulyani Indrawati said under the government's worst scenario, GDP growth in Q2 2020 may contract by as much as -2.6%. The outlook for the economy growth prospect in 2020 is still at 2.3%, but if the outbreak persists it can decrease to -0.4%. In 2021, the government expects GDP growth to be between 4.5% and 5.5%, with inflation expected within the 2%-4% range. The government will manage the 2021 budget deficit around 3%-4% of GDP, Indrawati noted.

In terms of economic policy, the Indonesian government has guaranteed several manufacturers, including those related to chemicals, chemical products and plastics to be able to act more freely with the fiscal - non-fiscal package stimulus issued on March 13. As noted by SSESSMENTS.COM, the package contains a relaxation of income tax policy along with streamlining the current import and export process. Prior to that, Indonesia has already issued economic stimulus and safety-net assistance in the amount of IDR 405.1 trillion (USD 24.2 billion)

However, a positive indication for the polymer trade in the Indonesian market is still not getting a pertinent response. Slumping demand in conjunction with PSBB implementation starting in Jakarta from April 10 gave negative signals to market participants across the country.

The largest trading house in Indonesia told SSESSMENTS.COM that the company is ready to release PE and PP cargoes at a large price discount or any price due to no demand. The trader said the company will release the cargoes just to continue selling as it would be better than zero sales. Another trader based in Jakarta also said that the company is yet to receive a permission letter for their driver, hence facing some delay to deliver the materials to customers.

Converters located in Padang and Solo have started to reduce their activity as much as 50% in anticipation of restriction in the respective area, which will weaken future order and complicate the delivery of end products. In Surabaya, the second largest city in Indonesia and the capital of East Java Province, converters reduced operating rate to below 50%. A converter said to SSESSMENTS.COM, ”While PSBB has not yet been implemented, Surabaya has experienced a slowdown with economic activity decreasing by 40% because most of the manufactures, shops, malls start to close. Our machine is still running but only in 20-30% of capacity because the shoe factory that uses our products suppress their production below 50% capacity and prioritize personal protective equipment (PPE) used in healthcare such as rubber boots or plastic boots. Our target in Q2 is only to run 20% of total production considering the demand for Q2 decreases significantly compared to Q1 and we project the market will remain weak until year-end. Regarding our employees, the company has asked 50% of workers to take leave while still paying their salary and also paying their Eid al-Fitr benefit (THR) because at the moment everyone is suffering and this is the only way to help the worker.” Further added by the same converter, they are expecting that most of the manufacturers will shut down their factory due to the Eid al-Fitr holiday event despite the cumulative holiday move to December, as well as due to lack of orders.

Similarly, a pipe manufacturer from East Java explained to SSESSMENTS.COM, "Usually private or government projects start around this time, but they are unable to do that because of the outbreak. This condition causes deficient demand that brings production rate below 50%. While all employees still work entirely at the office and factory, the current working hours have to curtail with other arrangements that can occur if conditions worsen." The manufacturer also heard the news that many factories in West Java have already cut their workers up to thousand. According to data from the Manpower Ministry and the Workers Social Security Agency (BPJS Ketenagakerjaan), approximately 2.8 million people have lost their jobs as of Monday (April 13), and more than 50% of the figure were furloughed and placed on paid or unpaid leave.

Contrastingly, a different trend is observed in Medan and industrial areas around Jakarta with several factories there continuing business as usual. The demand for converters in the area mentioned earlier comes from the agriculture sector which are in the harvesting season and also chemical industries who are stockpiling products in anticipation of lockdown. ‘’Due to large-scale social distancing (PSBB) in Jakarta, offers for PE and PP are scarce in the market. Our plant in Tangerang as of April 14 is still running, but we are in the process to submit permission to the government to continue running our business as Tangerang will implement PSBB starting this Saturday (April 18). For now, there is no plan to shutdown any of our plants, but in the meantime we will continue to monitor the situation closely,’’ the plastic bags manufacturer stated to SSESSMENTS.COM. As the Indonesian government has moved the four-day Eid al-Fitr collective leave to Dec 28-31, from May 26-29 due to concerns that the annual exodus could cause further transmission of Covid-19, a Thai PE producer informed that delivery of materials to customers may proceed with no disruption as for this year, there will be no truck restriction during Eid al-Fitr holiday. ''We will continue with delivery of cargoes to customers throughout May, except in the third week of the month due to Eid celebration,'' the producer revealed.

Having said that, the majority of converters stated that their inventory of raw material is sufficient for the production of existing orders, therefore they will halt procurement of raw materials while waiting for market development. The same sources also find there is no surging demand because consumption during and after the Muslim fasting month of Ramadhan in 2020 will not be as large as in previous years, especially after the Indonesian government has set aside Eid al-Fitr holidays to the end of December. Converters contacted by SSESSMENTS.COM said that they are still trying to fulfil the rights of workers related to Eid al-Fitr benefits despite a declining business or number of orders for end products. There are also indications that after Eid some converters will postpone to resume production, given there is no clarity on further orders after June.

*THR (Tunjangan Hari Raya) is a non-wage income or bonus paid to employees once a year as financial support at the approaching celebration of the religious holiday. 

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