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Property Climbs, Ceramic Times

Over the last two decades, from 2000 to 2022, Indonesia has witnessed a remarkable demographic shift, marked by an increase in population and a surge in urbanization rates. 


Annually, the population has grown by approximately 1.15%, while the rate of urbanization—the movement of people flocking to cities—has escalated by about 1.5%. When these two growth rates converge, the urban population in Indonesia has expanded at an average pace of 2.64% annually. 


Source: World Bank, Sucor Research


Under the assumption that each urban household shelters an average of four individuals, the demand for new housing in Indonesia's urban areas is skyrocketing


Annually, the burgeoning urban populace necessitates the addition of approximately 1 mn new housing units to keep pace with this growth. Moreover, there's an existing housing backlog, a lingering shortfall of around 12.7 mn units, underscoring a widespread need for residential spaces.


This colossal demand for housing has paved a golden path for major property developers in Indonesia, presenting them with a prime opportunity to meet this critical need. Year after year, they've been breaking records, achieving remarkable feats in marketing sales, and tapping into this vast, untapped market with strategic finesse.


Source: World Bank, Sucor Research


The momentum doesn't stop there!


In 2024, every sector within the property industry is setting its sights on surpassing the previous year's marketing sales, eager to tackle the untouched backlog. This signifies a prediction of an upward trend in the property sector this year, potentially eclipsing the growth seen in prior years.


This surge isn't just fantastic news for those deeply entrenched in the property sector but also breathes new life into related industries, particularly ceramics.


As the landscape brims with new buildings, homes, and commercial projects, the demand for ceramics – a cornerstone of both construction and decoration – is also set to skyrocket. This scenario unfurls a golden opportunity for the ceramic industry to not only grow but also outperform by surpassing expectations and achieving remarkable success this year. 


Indonesia stands as the 8th largest ceramic producer globally, with a staggering production of 430 mn sqm in 2022, and ranks 5th in consumption, with demand hitting 489 mn sqm in the same year.


Source: Ceramic World Review, Sucor Research


Despite the industry witnessing a modest consumption growth of about 4.6% CAGR from 2015 to 2022, a significant portion of domestic needs is still met through imports. This gap stems from local production not yet being sufficient to cater to consumption, with production utilization rates hovering around 68% over the past five years.


The ceramic industry in Indonesia is primarily divided into two key categories: red body ceramics and white body ceramics. Out of the total ceramic demand, which reached 489 mn sqm, approximately 150 mn sqm were for white body ceramics, typically favored by the middle to upper-income segments.


One of the pressing issues within this industry is the limited supply of 'white body tiles.' Over 50% of the domestic demand for these premium ceramics is met through imports.


Where do these imports come from? Ofcourse, China.


Indonesian ceramic manufacturers are up against stiff competition from Chinese ceramic products, which are often sold at lower prices due to a practice known as 'dumping.' This means that a significant chunk of ceramic imports flooding into Indonesia originates from China.


Source: BPS, Sucor Research


China finds itself with an excess supply of ceramics due to the property crisis it has faced in recent years. This surplus has driven Chinese manufacturers to seek new markets for their products, and Indonesia has become a prime target. 


Source: Ceramic World Review, Sucor Research


Why has Indonesia become such an attractive target for China? Currently, the existing regulations seem to favor Chinese ceramic producers due to a reduction in the safeguard duty for ceramics from 15% to 13% in October 2023.


Furthermore, the Chinese government continues to grant a 13% export tax rebate to its manufacturers. This dumping practice enables Chinese producers to flood the Indonesian market with large volumes of ceramics at lower shipping costs per sqm.


As a result, a significant influx of white body ceramics from China enters Indonesia at bargain prices, challenging local producers and reshaping market dynamics. 


But don’t worry, Indonesian ceramic entrepreneurs!


The Indonesian Anti-Dumping Committee (KADI) is already crafting new anti-dumping regulations to shield the domestic market. These measures are expected to come into effect in the second quarter of 2024.


Source: Global Trade Alert


These upcoming regulations aim to be a boon for local white body ceramic producers by alleviating the pressure from imports. 


With the expected increase in the cost of imported goods, local manufacturers may find themselves at a crossroads, faced with two strategic choices:

  • maintain their current selling prices, potentially boosting sales volumes, or

  • raise their Average Selling Price (ASP) to enhance profit margins. 


One standout company poised to benefit from these new regulations is ARNA, a leader in its industry. ARNA has heavily invested in white body ceramics and boasts robust financial health. With high production capacity utilization, ARNA demonstrates remarkable efficiency in its operations.


Given these promising indicators, we recommend buying ARNA's stock with a target price of IDR 880.


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