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1 INVESTOR DOCUMENT PT FAJAR SURYA WISESA TBK. 24 September 2018
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INVESTOR DOCUMENT
PT FAJAR SURYA WISESA TBK.
24 September 2018
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Disclaimer
This Investor Document (the "Document") has been prepared by PT Fajar Surya Wisesa Tbk. (the "Company") solely for information purposes and does not constitute an offer to sell or, recommendation or solicitation of an offer to subscribe for or purchase any securities and nothing contained herein shall form the basis of any contract or commitment whatsoever.
The information contained in this Document should be considered in the context of the circumstances prevailing at the time and has not been, and will not be, updated to reflect material developments which may occur after the date of the Document. You acknowledge and agree that the Company and/or its affiliated companies and/or their respective employees and/or agents have no responsibility or liability (express or implied) whatsoever and howsoever arising (including, without limitation for any claim, proceedings, action, suits, losses, expenses, damages or costs) which may be brought against or suffered by any person as a result of acting in reliance upon the whole or any part of the contents of this Document and neither the Company, its affiliated companies nor their respective employees or agents accepts any liability for any error, omission or misstatement, negligent or otherwise, in this Document and any liability in respect of the Document or any inaccuracy therein or omission therefrom which might otherwise arise is hereby expressly disclaimed.
Certain statements contained in this Document may be statements of the Company's beliefs, plans and expectations about the future and other forward looking statements that are based on management's current expectations or beliefs as well as a number of assumptions about the Company's operations and factors beyond the Company's control or third party sources and involve known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward looking statements. Forward looking statements contained in this Document regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. There is no obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise. You should not place undue reliance on forward looking statements, which speak only as of the date of this Document.
Certain data contained in this Document was obtained from various external data sources, and none of the Company nor any of its respective affiliates, advisers or representatives has verified this data with independent sources. Accordingly, the Company and its respective affiliates, advisers and representatives make no representation as to the accuracy or completeness of that data, and this data involves risks and uncertainties and is subject to change based on various factors.
The information contained in this Document is not to be taken as any recommendation made by the Company or any other person to enter into any agreement with regard to any investment. You will be solely responsible for your own assessment of the market and the market position of the Company and you will conduct your own analysis and be solely responsible for forming your own view of the potential future performance of the business of the Company. Any decision to purchase securities in any offering of securities of the Company should be made solely on the basis of information contained in an offering memorandum or circular in relation to such an offering.
By accessing or accepting a copy of this Document, you agree to be bound by the foregoing limitations. For convenience, certain Rupiah amounts in this Document have been translated into US dollar amounts, based on the prevailing exchange rate footnoted. Such translations should not be construed as representations that the Rupiah or US dollar amounts referred to could have been, or could be, converted into Rupiah or US dollars, as the case may be, at that or any other rate or at all. Certain numbers, including percentages, have been rounded for convenience. Any discrepancies in the tables included in this Document between the listed amounts and their totals are due to rounding.
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CONTENTS
Page
CERTAIN DEFINITIONS IN THIS DOCUMENT ..................................................................................... 4
BUSINESS .................................................................................................................................................... 6
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...................................................................................................... 32
RISK FACTORS ........................................................................................................................................ 58
ANNEX A - INDUSTRY REPORT BY RISI, INC. ................................................................................ A-1
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CERTAIN DEFINITIONS IN THIS DOCUMENT
In this Document, when we refer to:
• “ASEAN” we are referring to the Association of Southeast Asian Nations;
• “BAPEPAM-LK” we are referring to the Capital Market Supervisory Board – Financial Institution (Badan Pengawas Pasar Modal – Lembaga Keuangan) (now OJK);
• “CDB” we are referring to coated duplex board, which is a type of boxboard;
• “CMP” we are referring to corrugated medium paper, which is a type of containerboard;
• the “Company,” “we,” “our” or “us” we are referring to FASW;
• “Design Capacity,” with respect to a year or six month period, we are referring to the maximum production capacity (in tonnes) of a paper machine for a period, assuming the paper machine is operated for 24 hours a day, 330 days per year or 165 days per six month period (as applicable), to produce the products that are designated for production by such paper machine during such period (being, CMP, KLB and/or CDB, in each case of a specified gsm), notwithstanding that such paper machine may produce other products during such period;
• the “East Java Assets” we are referring to eight paper machines, a cogeneration power plant, buildings and roads and other related infrastructure and land in East Java, for which our Subsidiary has entered into a conditional sales and purchase agreement for the acquisition of such assets;
• “FASW” we are referring to PT Fajar Surya Wisesa Tbk.;
• “FMCG” we are referring to fast moving consumer goods;
• “FSC” we are referring to the Forest Stewardship Council;
• “high-performance, lightweight” or "HPL" we are referring to packaging paper of a lower gsm but equivalent strength as compared with regular packaging paper;
• “Indonesia” we are referring to the Republic of Indonesia;
• the “Government” we are referring to the Government of the Republic of Indonesia;
• “gsm” we are referring to the weight of packaging paper measured in grams per square meter;
• “KLB” we are referring to kraft liner board, which is a type of containerboard;
• “ktpa” we are referring to thousand tonnes per annum;
• “OJK”we are referring to the Financial Services Authority (Otoritas Jasa Keuangan);
• “RISI” we are referring to RISI, Inc.;
• “RISI Report” we are referring to the industry report produced by RISI dated September 15, 2018;
• “Rupiah” and “Rp.” we are referring to the lawful currency of Indonesia;
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• our "Subsidiary" we are referring to PT Dayasa Aria Prima, our 99.99%-owned subsidiary, which has entered into a conditional sales and purchase agreement in connection with the expected acquisition of East Java Assets;
• “tonnes” we are referring to metric tonnes;
• “U.S.” and “United States” we are referring to the United States of America;
• “U.S. dollar” and “US$” we are referring to the lawful currency of the United States;
• “Utilization Rate” we are referring, with respect to a paper machine or paper machines for a period, to actual production (in tonnes) of such paper machine for such period divided by the Design Capacity of such paper machine for such period; and
• “2015,” “2016” and “2017” we are referring to the calendar years ended December 31, 2015, December 31, 2016 and December 31, 2017, respectively.
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BUSINESS
Overview
We are one of the largest packaging paper manufacturers in Indonesia, based on capacity. We own and operate six paper machines with aggregate Design Capacity of 1.3 million tonnes per annum for the year ended December 31, 2017. According to the RISI Report, we account for 28% of Indonesian containerboard production capacity and 7% of the Indonesian boxboard production capacity. We believe we are a pioneer in the development and production of high-performance, lightweight packaging paper, which is currently lighter by up to 20% in comparison with regular packaging paper in Indonesia.
We produce containerboard and boxboard from recycled paper for fabrication by box-makers into corrugated boxes, folding cartons and other packaging products, with a focus on the consumer packaging paper segment. Our principal containerboard products are corrugated medium paper, or CMP, which is used to box products such as electronic appliances and food, and kraft liner board, or KLB, which is used as the inner and outer layers of corrugated sheets and boxes. We sell CMP and KLB primarily to independent box-makers in Indonesia and export the balance to customers in more than 20 export markets including China and various countries in Southeast Asia, South Asia and the Middle East. For the year ended December 31, 2017, exports accounted for 15.4% of our net sales. Our principal boxboard product is coated duplex board, or CDB, which is used primarily in retail packaging for household and personal care, toys, shoes, cereal and other products. We sell our CDB primarily in Indonesia to end-users, printers, and a few independent third party distributors. While the majority of our net sales are pursuant to offtake agreements that we negotiate directly with converters, we also engage in "direct marketing" arrangements with end-users for sales to converters appointed by such end-users, pursuant to which we negotiate price and volume directly with end-users in respect of contracts to be entered by a converter appointed by the end-users, primarily in the FMCG sector. These "direct marketing" arrangements with end-users are not on a contractual basis.
We believe our high-performance, lightweight CMP and KLB products can reduce our customers' costs because the increased volume of paper per tonne facilitates the production of more boxes per tonne of containerboard. Our high-performance, lightweight containerboard accounted for approximately 71% of our total net sales of containerboard in 2017. Notwithstanding the availability of high-performance, lightweight containerboard, the remainder of our end-users continue to require ordinary containerboard for certain uses, such as for heavy appliances.
All of our products are currently made from 100% recycled waste paper. We currently do not use virgin pulp in our production process. We do not engage in any forestry or logging activities. We are committed to the environment and to green initiatives. Also, we have the FSC chain of custody certification, which certifies that the source of our raw materials used is not sourced from illegal logging. We are registered under the clean development mechanism of the United Nations Framework Convention on Climate Change and accredited under the Joint Crediting mechanism of the Government of Japan, which provides support in the form of grants and technical assistance to projects in developing member countries of the Asian Development Bank. Our products have Ecolabelling certification under the Indonesia Ministry of Environment and Forestry's Ekolabel Indonesia Scheme as having a reduced environmental impact over the product’s life-cycle compared with uncertified products. We have also received ISO 14001:2015 certification for our environmental management system and OHSAS 18001 certification for our occupational health and safety management system.
Our manufacturing facility comprises of six paper machines located at a single complex in Cikarang Barat, West Java, Indonesia. At this site, we also own and operate three cogeneration power plants, two fluidized bed incinerator plants and one waste water treatment plant. Our two gas-powered and one coal-powered cogeneration power plants have aggregate gross capacity of around 122.5 MW of electricity and
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420 tonnes of steam per hour. We supplement the steam supply from our cogeneration plants with two fluidized bed incinerator plants that, together, incinerate solid waste and convert the heat generated by the incineration process into a total of approximately 40 tonnes per hour of additional steam for our manufacturing facility. The power and steam generated by our cogeneration plants and incinerator plants are sufficient to meet the requirements of our manufacturing processes. We also have a 42.5 MW connection to the power grid of PLN, a state owned electricity company, for backup power. Our water treatment plant has a treatment capacity of 68,000 cubic meters and enables us to reuse 80% of our used water in the paper production process.
Our Subsidiary has entered into a conditional sales and purchase agreement in connection with the expected acquisition of the East Java Assets for the purpose of expanding our production capacity into East Java, with closer access to our customers based in Central Java and East Java.
In 2017, we produced a total of 1,073,000 tonnes of consumer packaging paper products; our net sales were Rp. 7,337.2 billion; our profit was Rp. 595.9 billion; and the rapidly growing Indonesian domestic market accounted for 84.6% of our net sales.
Our History and Group Structure
Our company was incorporated in 1988. Our only subsidiary, PT Dayasa Aria Prima, was incorporated in 2017 for the purposes of acquiring paper manufacturing assets and performing paper manufacturing business. We own 99.99% of the shares of our Subsidiary.
The table below sets forth our key milestones since incorporation:
Year Milestone
1988 Incorporated as a limited liability company in Indonesia
1989 PM2, our first paper machine, commences production of containerboard
1990 PM1, our second paper machine, commences production of boxboard
1994 Listed on the Jakarta Stock Exchange (currently the Indonesian Stock Exchange)
1996 PM3, our third paper machine, commenced production of CMP
Our first power plant, Cogen1, commenced operations
Awarded ISO9001:1994 certification for quality management system
2001 First incinerator commenced operations to transform solid waste into reusable steam energy for our production process. Construction of the incinerator was funded by a grant from the Japanese government under New Energy and Industrial Technology Development Organization, or NEDO
2003 Awarded ISO 9001:2000 certification for our quality management system
2006 PM7, our fourth paper machine, commenced production of CMP
Our second power plant, Cogen2, commenced operations
2010 PM5, our fifth paper machine, commenced production of CMP
Awarded ISO 14001 certification for environmental management system
2011 Second incinerator commenced operations
Awarded OHSAS 18001 certification for occupational health and safety management system
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Year Milestone
2012 PM2 and PM7 were modified and upgraded
Obtained FSC chain of custody certification, a mark of responsible forestry
Second incinerator registered for carbon credit with the United Nation Framework Convention on Climate Change for Clean Development Mechanism project
2013 Products are awarded Ecolabelling certification under the Indonesia Ministry of Environment and Forestry's Ekolabel Indonesia Scheme
2016 Commenced sales of high-performance, lightweight containerboard in Indonesia
Designated as a World Customs Organization ("WCO") Authorized Economic Operator in compliance with applicable supply chain security standards
2017 PM8, our sixth paper machine, commenced production of CMP
Our third power plant, Cogen3, commenced operations
Accredited under the Joint Crediting mechanism of the Government of Japan
Our Strengths
We believe the following are our core strengths:
Leader in the fast-growing Indonesian packaging paper industry with a presence in key export markets
We are a leading provider of containerboard and boxboard in Indonesia. According to the RISI Report, we are the largest containerboard producer in Indonesia, accounting for 28% of Indonesian containerboard production capacity, and are among the three largest market share in boxboard production, account for 7% of the Indonesian boxboard production capacity. We believe we are well-positioned to benefit from the fast-growing FMCG and e-commerce sectors in Indonesia, which are increasing demand for paper packaging products. According to the RISI Report, paper packaging accounts for a 25% share of the packaging industry in Indonesia based on data published by GlobalData Plc, with containerboard consumption expected to grow from 3,028 tonnes in 2012 to 3,579 tonnes in 2022. According to the RISI Report, e-commerce value in Indonesia is expected to grow at 26% per year over the five years commencing in 2017 based on data published by Euromonitor International Limited, while the Indonesia FMCG sector is also poised for healthy growth.
According to the RISI Report, we are currently the only producer of high-performance, lightweight packaging paper in Indonesia and our high-performance, lightweight 125 gsm CMP and 100 gsm CMP have the strength of standard 150 gsm CMP and 125 gsm CMP, respectively. We strive to improve our products through research and development to use cost competitive and environmentally friendly waste paper while preserving product quality and strength. We have been successful in reducing the paper weight by 20% over time from 125 gsm to 110 gsm in 2016 and further to 100 gsm in 2017. The increased volume of paper per tonne can reduce our customers' costs per tonne by up to 20% and facilitate the production of more boxes per tonne of containerboard purchased. According to the RISI Report, in addition to cost savings, end-users prefer lightweight paperboard as a means of meeting environmental goals of reducing packaging consumption. Most of our paper machines are capable of producing both standard and high-performance, lightweight packaging paper.
We pursue opportunities in key export markets, as they arise, with a primary emphasis on markets in Asia, such as China, in addition to other markets such as the United States of America. For 2017, exports increased to approximately 15.4% of our net sales with an average export price of Rp. 6,674 per kilogram
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in 2017 compared to 1% of our net sales with an average export price of Rp. 5,190 per kilogram in 2016. In 2017, Chinese packaging paper production was limited by restrictions on imported waste paper, resulting in increased demand for imported containerboard, which coincided with our increased production capacity due to the commencement of operations of our PM8 paper machine in June 2017. Furthermore in 2017, certain Chinese mills were forced to close at least temporarily as the Chinese government undertook intensive inspections at mills that import and process recovered paper after becoming concerned with contamination levels in these supplies. This regulatory trend has continued into 2018 as the Chinese government implemented a ban on imported waste paper as well as implementing a strict contamination level limit of 0.5% on imported recovered paper (which is much stricted than the 1.5% standard used in much of the world), according to the RISI Report. We manage our respective levels of domestic sales and exports based on demand and supply conditions in the relevant markets, and the extent to which we can increase sales in the Indonesian market without significant price deterioration. Going forward we expect exports to account for 40% to 50% of our net sales.
Established business model with strong barriers to entry
We operate in a capital intensive and energy intensive industry. For example, the cost of our PM8 paper machine, which commenced operations in June 2017 was US$100 million. While the production of packaging paper is energy intensive, we believe that our ability to generate captive power translates to energy cost savings of approximately 50% in comparison to sourcing power from PLN based on historical data. In addition, the strategic location of our manufacturing facility provides access to key transport routes while enabling us to draw from the Cikarang River, in accordance with our permit, and the East Java Assets are also strategically located near water supplies, specifically, the Sungai Berantas (Berantas River). Our Subsidiary has entered into a conditional sales and purchase agreement in connection with the expected acquisition of the East Java Assets to expand our production capacity into East Java, with closer access to our customers based in Central Java and East Java.
For sales in Indonesia, we believe our products compare favorably with imported packaging paper on the basis of customization, timeliness and costs. Domestic production enables us to customize the sizing of our products to suit our customers’ needs, such as for carton producers that make small, repeat orders to minimize wastage. We maintain approximately two weeks' supply of finished products and we can have our products delivered to customers in Indonesia within days following an order, compared to up to four weeks for imported packaging paper. Furthermore, a tariff of 5% is applied to packaging paper imported from outside Indonesia, except China, South Korea and countries that are members of the ASEAN. This tariff effectively reduces competition from imported packaging paper products.
We benefit from well-developed relationships with customers and an extensive network of partners across the entire packaging paper value chain. Sales to recurring customers accounted for more than 90% of our net sales in 2017. On average, our average relationship with our customers is more than 25 years. Our customer profile is highly diversified, with no single customer accounting for more than 12% of our net sales in 2017. Our status as a WCO Authorized Economic Operator provides us with broad access to potential customers who use such status to secure and facilitate their own global supply chains. Our extensive domestic supply network comprises more than 50 local suppliers of waste paper.
We continue to strive to improve our products through research and development and to use cost competitive and environmentally friendly waste paper while preserving product quality and strength in reducing paper weight in our high-performance, lightweight CMP and KLB products.
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Efficient, low-cost operations with high historical utilization
Our ability to secure raw materials at competitive prices and energy self-sufficiency are important drivers of our cost-efficiency. Our waste paper costs have historically been in line with domestic and import benchmarks and result in 75% cost-savings compared with virgin pulp based on our 2017 sales, based on data provided by RISI. For the year ended December 31, 2017, we sourced 51% of our waste paper requirements in Indonesia and imported the remaining 49%. We typically have more than 50 active local suppliers. We also source waste paper in the form of trimmings and rejects from box makers. We have assisted certain smaller Indonesian suppliers of waste paper to purchase a total of more than 29 baling press machines, which are used to bundle waste paper, in exchange for a guaranteed percentage of such supplier's supply of waste paper for a term of two to four years. Our waste paper imports are from countries such as United States, Germany, the United Kingdom, Australia and Singapore, among others. We do not rely on imports from any single country and have multiple suppliers in each country. We use waste paper of varying grades in order to streamline our waste paper costs. Our paper machines are capable of producing packaging paper with multiple layers, which enables us to use less expensive, lower quality mixed waste while preserving product quality. Lower quality mixed waste pricing trends continue to result in lower mixed waste pricing and our ability to use the increasingly cost efficient mixed waste paper gives us a competitive advantage over those competitors without the same capability. We monitor the market prices of waste paper of varying grades and adjust our mix of waste paper and chemicals with a view to maximizing fiber strength and optimizing cost efficiency.
Our two gas-powered and one coal-powered cogeneration power plants have aggregate gross capacity of around 122.5 MW of electricity. While our three cogeneration plants are sufficient to meet our total electricity requirements, we have a 42.5 MW connection to the power grid of PLN for backup power. We also benefit from cost savings with respect to steam, as our steam requirements are fully met by our three cogeneration plants, together with our two fluidized bed incinerators. The incinerators together incinerate solid waste and convert the heat generated by the incineration process into a total of approximately 40 tonnes of steam per hour of additional steam for our manufacturing facility. The energy generated by our incinerators represents cost savings of approximately US$14,400 per day. We are active about improving efficiency by reducing the energy and chemicals requirements of our paper machines, such as the modifications that we implemented with respect to our PM2 and PM7 paper machines in 2011 and 2012, respectively.
According to the RISI Report, we rank in the first quartile of lowest containerboard and boxboard production costs in Southeast Asia. The table below, extracted from the RISI Report, provides further information related to our production costs.
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Average Cash Costs by Company/Mill in Southeast Asia for Corrugating Medium and Linerboard, Fourth Quarter 2017
Source: RISI
The utilization rates of our paper machines, when fully operational, have historically exceeded 70%. Most of our existing paper machines are capable of producing both ordinary and high-performance, lightweight paper. With a view to optimizing our production processes, each paper machine is assigned a particular product, with a specified grade and weight and operated 24 hours a day, subject to routine maintenance and other scheduled downtime. From time to time we engage third party engineers to review our performance and provide recommendations to improve efficiency, in particular with respect to the utilization rates and production speeds of our paper machines. We also undertake substantial expenditures to maintain our equipment with a view to reducing unscheduled downtime and increasing utilization. For the years ended December 31, 2015, 2016 and 2017, our repairs and maintenance costs associated with our cost of goods sold were Rp. 35.7 billion, Rp. 90.4 billion, Rp. 54.4 billion, respectively.
Environmentally sustainable business model
Environmental sustainability is a core component of our entire production process, from sourcing recycled raw materials to reducing and reusing the production residue of our manufacturing processes. All of our products are currently made from 100% recycled waste paper. We also assess potential waste paper suppliers based, in part, on standards consistent with our environmentally sustainable business model, including, without limitation, with our FSC chain of custody certification. Our water treatment plant has a treatment capacity of 68,000 cubic meters and enables us to reuse 80% of our used water in the paper production process. Our two incinerators have aggregate capacity to burn 245 tonnes bone-dry
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tonnes of sludge and solid contaminants, which are part of the production residue of our manufacturing process. Rather than dispose of this production residue in landfills, which results in carbon emissions from their decomposition, we incinerate our sludge and solid contaminants to generate steam for our production process. Our second incinerator is registered for Carbon Emission Reduction certification under the United Nations Framework for Climate Change Convention Clean Development Mechanism. Also, we have the FSC chain of custody certification, which certifies that the source of our raw materials used is not sourced from illegal logging. Our products have Ecolabelling certification under the Indonesia Ministry of Environment and Forestry's Ekolabel Indonesia Scheme as having a reduced environmental impact over the product’s life-cycle compared with uncertified products. We have also received ISO 14001:2015 certification for our environmental management system.
We believe that our environmentally sustainable business model translates to better brand awareness and “stickier” customer relationships. Recurring customers accounted for more than 90% of our net sales in 2017. We believe that the trend toward "direct marketing" arrangements with end-users for sales to converters appointed by such end-users, pursuant to which we negotiate price and volume directly with end-users in respect of contracts to be entered by a converter appointed by the end-users, is partly due to environmental factors. In particular, the criteria on which paper packaging suppliers are evaluated may include our FSC chain of custody certification, usage of recycled fibers, or virgin fibers and levels of carbon dioxide emissions. Revenue from such "direct marketing" arrangements accounted for 28% of our total revenue in for the year ended December 31, 2017 as compared to only 17% for the year ended December 31, 2016. Furthermore, environmental factors may also contribute to increased demand for our products in Indonesia. Paper, which is recyclable and 100% biodegradable, accounts for approximately 25% of all packaging material in Indonesia today, according to the RISI Report, and we believe this percentage is likely to increase. According to the RISI Report, consumer product companies find lightweight paperboard desirable as a means toward meeting environmental goals of reducing packaging consumption. In addition, other packaging materials, in particular plastic, are associated with adverse environmental effects. There is growing concern over the impact of plastic packaging on the environment in Indonesia, as plastic materials make their way into rivers and oceans. According to the RISI Report, Indonesia is the second largest contributor to plastic marine waste in the world behind China.
Strong management with a proven track record
Our management team is experienced and has a proven track record with our Company as well as within the paper industry and other related industries. Several of our senior managers have over 20 years' experience in various roles at the Company and substantial experience in related industries, including the manufacturing and textiles industries. Our senior managers have led us through a number of business cycles and we have grown significantly under their leadership.
Our team has in-depth knowledge and experience of both the paper industry as well as the geographic regions in which we operate and to which we export and has a proven track record of expanding our markets on a global scale. Our President Director and Chief Executive Officer, Yustinus Yusuf Kusumah has served on our Board of Directors since 1998 and, prior to this, worked at the Company as a marketing manager from 1995 to 1998. Roy Teguh, who has been a member of our Board of Directors since 1993, previously served as our purchasing manager following over 17 years in purchasing and procurement roles in the textiles industry.
Our management's broad experience in exporting to various Asia markets effectively positions us to continue our expansion throughout the region while growing our Indonesian-based production to meet consumer demands.
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Our Business Strategies
We aim to be a world class consumer paper packaging company that generates value and quality through responsible recycling and sustainable manufacturing. Our business strategies to achieve this goal are as follows:
Focus on core competencies
We are focused on maintaining and further developing our core competencies, including the following:
Increase high-performance, lightweight paper production and market penetration
We developed our high-performance, lightweight paper products in 2015. In 2016, we commenced sales of high-performance, lightweight CMP of 125 gsm and 100 gsm (with strength equivalent to standard CMP of 150 gsm and 125 gsm, respectively) and high-performance, lightweight KLB of 125 gsm (with strength equivalent to standard KLB of 150 gsm). Each of our paper machines other than PM1 and PM2 currently produces only high-performance, lightweight packaging paper. High-performance, lightweight paper accounted for 53% and 71% of our net sales for the years ended December 31, 2016 and 2017, respectively. We believe that there is significant demand potential for high-performance, lightweight paper from our customers. We believe our high-performance, lightweight CMP and KLB products can reduce our customers' costs because the increased volume of paper per tonne facilitates the production of more boxes per tonne of containerboard. We believe that our customers typically replace their box manufacturing equipment every three years. Our research and development team intends to engage with our customers to discuss and understand their requirements so as to recommend the type of lightweight paper and equipment that best suits their needs. We expect high-performance, lightweight paper to account for 85% of our net sales going forward.
Capitalize on Indonesia’s consumer-led growth story and growing e-commerce, while maintaining open access to key export markets
We are primarily focused on selling our products in Indonesia to cater to local demand. According to the RISI Report, e-commerce value in Indonesia is expected to grow at a 26% per year over the five years commencing in 2017 based on data published by Euromonitor International Limited, while the Indonesia FMCG sector is also poised for healthy growth. We believe we are well positioned to benefit from this growth. We determine whether to sell our products in Indonesia or export based on the demand and supply dynamics as well as the ability of the Indonesian market to absorb our products without substantial price erosion. According to the RISI Report, growth in Indonesia's exports of packaging paper was largely due to tighter conditions in China's market due to new Chinese environmental and recovered paper policies that led to reduced domestic production, and increased imports, by China. We believe we are positioned to meet this increased demand, in particular following the commencement of operations of our PM8 paper machine in the middle of 2017. Going forward we expect exports to account for between 40% and 50% of our net sales.
Establish and maintain partnerships within the packaging paper value chain
We maintain relationships with an extensive network of partners across the entire packaging paper value chain, including waste paper suppliers, converters and end-users. We have more than 50 active local suppliers and seek to maintain and build on these relationships while continuing to diversify our supplier base, and raw materials mix. To secure our supply of domestic waste paper, we plan to continue our practice of assisting smaller Indonesian suppliers of waste paper to purchase baling press machines, in exchange for a guaranteed percentage of such supplier's supply of waste paper for a specified term. We
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seek to improve and stabilize our revenue pipeline by entering into long-term offtake agreements. We will also continue to offer exceptional customer service and prompt delivery of our products, which resulted in a customer complaint rate of approximately 0.02% in the year ended December 31, 2017. We also seek to increase our direct engagement with end-users and increase the proportion of our net sales that is derived from "direct marketing" arrangements with end-users for sales to converters appointed by such end-users, pursuant to which we negotiate price and volume directly with end-users in respect of contracts to be entered by a converter appointed by the end-users. Such arrangements accounted for approximately 30% of our net sales for the year ended December 31, 2017.
Focus on sustainability and demonstrate compliance with international standards and best practices
We intend to maintain our focus on environmental sustainability, which we believe is a source of competitive advantage both for purposes of marketing and due to cost reduction by reducing our energy and waste disposal requirements. We believe our environmental certifications, in particular our FSC chain of custody certification, affords access to certain customers and end-users to which our competitors may not be eligible to sell their products.
Well-timed and measured expansion
We take a prudent and measured approach to investment and expansion. We plan to continue to invest in the development of new products such high-performance, lightweight paper and opportunistically assessing organic capacity expansion at defined utilization thresholds. Our Subsidiary has entered into a conditional sales and purchase agreement in connection with the expected acquisition of the East Java Assets for the purpose of expanding our production capacity into East Java, with closer access to our customers based in Central Java and East Java. The East Java Assets have been dormant since 2014 and we expect to fund part of the costs of refurbishment and modification of the East Java Assets with a view to commencing production from the East Java Assets in 2019. We expect the acquisition to help add capacity in a shorter time frame and with less required investment than would otherwise be the case in the establishment of new greenfield capacity. Also, we expect the East Java Assets to enable us to target a new customer base in East Java, while also adding CDB capacity.
We are focused on manufacturing consumer packaging paper products and do not have any current intention to diversify our operations to expand upstream into waste paper collection or production of virgin pulp.
Maintain efficient, low-cost and environmentally sustainable operations
We seek to optimize our use of raw materials, in particular by identifying and implementing the right mix of waste paper of varying grades, and chemicals, to products that meet our customers' needs. We seek to retain our substantial in-house engineering expertise and capabilities and continue to take steps to optimize our operations, including by debottlenecking our production process and conducting regularly scheduled maintenance on our equipment. We will continue to strive to distinguish us from our competitors in terms of product and service quality and customer satisfaction. We continue to strive for a low customer complaint rate, which was approximately 0.02% in the year ended December 31, 2017. In addition, we have been ISO 9001 certified since 1995, and were upgraded to ISO 9001: 2008 in 2010, which helps to assure our customers of the soundness of our quality control procedures.
Optimize capital structure
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We typically fund our investments with a combination of debt and equity, with the equity component typically comprising between 10% and 20% of the total investment. We seek to improve our liquidity and also intend to regularly return cash to shareholders.
Our Products
We produce containerboard, which is primarily used in corrugated sheets and boxes, and boxboard, which is primarily used in retail packaging. Currently, each of our products is produced from 100% recycled paper. High-performance, lightweight containerboard accounted for approximately 71% of our total net sales and 78% of our net sales of containerboard in 2017. We believe our high-performance, lightweight paper products are particularly well received by consumers and e-commerce end-users due to the related cost-savings resulting from the ability to produce more boxes per tonne of containerboard.
The end-users of our containerboard and boxboard products principally comprise manufacturers of consumer products, such as food and beverages, cosmetics, pharmaceuticals, garments, electronics, home appliances, household and personal care, toys and shoes. Many of these end-users are leading international and Indonesian companies such as Indofood, Pocari Sweat, Shopee and Coca-Cola.
We developed our high-performance, lightweight paper products in 2015. In 2016, we commenced sales of high-performance, lightweight CMP of 125 gsm and 100 gsm (with strength equivalent to standard CMP of 150 gsm and 125 gsm, respectively) and high-performance, lightweight KLB of 125 gsm (with strength equivalent to standard KLB of 150 gsm). Each of our paper machines other than PM1 and PM2 currently produces only high-performance, lightweight packaging paper.
Containerboard
Our principal containerboard products are corrugated medium paper, or CMP, and kraft liner board, or KLB.
CMP is a brown, thin (90 to 135 gsm) containerboard and is used as the middle corrugated layer of corrugated sheets and boxes to absorb shock and vibration, and to provide stacking strength. KLB is a brown containerboard of medium thickness (110 to 275 gsm) with a smooth finish and is used in the inner and outer layers of corrugated sheets and boxes.
Our CMP is branded as "Fajar Medium" and our KLB is branded as "Fajar Liner." We sell CMP and KLB to third-party converters in rolls of varying widths, which are mainly used to produce transportation and consumer packaging.
Our high-performance, lightweight containerboard products are generally preferred by end-users, other than for purposes of packaging heavy products, such as major appliances, which require ordinary containerboard.
Boxboard
Our principal boxboard product is coated duplex board, or CDB, with a thickness of between 250 and 500 gsm.
CDB is principally used to produce light-weight packaging materials such as boxes for shoes, household and personal care, toys, tissue and cereal and has a white top and gray bottom layer and a smooth coated finish on one side for printing purposes.
Our CDB is branded as "Fajar Board" and sold to printing companies for conversion into folding cartons with detailed printing to serve as display packaging for consumer goods such as shoes, food, electronics,
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pharmaceuticals and other consumer products. Approximately 70% of our sales of CDB are to two distributors that distribute our CDB to small printing companies, while approximately 30% of our sales of CDB are direct to large printing companies.
Customers and Sales
The bulk of our net sales are to the Indonesian domestic market. Historically, our exports typically increase for a period following the commencement of operations of additional capacity, such as the commencement of operations of PM8 in June 2017, as the Indonesian market may not be in a position to absorb all of the new capacity immediately. For example, exports accounted for 15.4% of our net sales for the year ended December 31, 2017, but only 1.5% of our net sales for the year ended December 31, 2016. Due to recent growth in the Chinese market for packaging paper, which is expected to be sustained, exports to China are an important part of our sales strategy going forward.
Pricing for domestic sales and exports reflect market pricing, which is generally consistent globally, subject to adjustment for shipping costs, which are typically borne by the seller. However, a variety of factors may affect the supply or demand, and therefore the price, in a given market. For example, in 2017, according to the RISI Report, growth in Indonesian exports benefitted from tighter conditions in China's market, due to new Chinese environmental and recovered paper polices that led to a recovered paper shortage, resulting in rising prices for containerboard in China and Chinese buyers increasing their imports of containerboard.
Global market pricing is in U.S. dollars. While our domestic sales in Indonesia are denominated in Rupiah and reflect local market conditions, pricing is based on U.S. dollar rates. Our export sales are denominated in U.S. dollars and reflect market conditions in the applicable market.
Approximately 70% of our sales of CDB are to two distributors that distribute our CDB to small printing companies, while approximately 30% of our sales of CDB are direct to large printing companies.
The following table sets out our sales volume by product type for the years ended December 31, 2015, 2016 and 2017.
Sales Volume by Product Type
Years ended December 31,
2015 % 2016 % 2017 %
Domestic (in tonnes, except percentages) Containerboard
CMP ................................367,212 38 416,027 45 410,991 39 KLB ................................352,332 37 381,557 41 376,247 35
Boxboard CDB ................................98,030 10 119,881 13 107,392 10
Sub Total................................817,574 85 917,465 99 894,631 84
Export Containerboard
CMP ................................91,884 10 10,780 1 141,542 13 KLB ................................34,837 4 3,025 0 25,509 2
Boxboard CDB ................................15,036 1 3,092 0 1,908 0
Sub Total ................................141,757 15 16,897 1 168,959 15
Total Sales ................................959,331 100.0 934,362 100.0 1,063,590 100.0
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For the year ended December 31, 2017, our single largest customer accounted for 12% of our net sales (and no other single customer accounted for more than 10% of our net sales), and our top 10 customers accounted for approximately 51% of our net sales.
The following table sets out our sales value by product type for the years ended December 31, 2015, 2016 and 2017.
Net Sales by Product Type
Years ended December 31,
2015 % 2016 % 2017 %
Domestic (Rp. in billions, except percentages) Containerboard
CMP ................................1,783 36 2,470 42 2,709 37 KLB ................................1,877 38 2,432 41 2,652 36
Boxboard CDB ................................577 12 885 15 848 12
Sub Total ................................4,237 85 5,787 99 6,210 85
Export Containerboard
CMP ................................441 9 51 1 932 13 KLB ................................184 4 16 0 180 2
Boxboard CDB ................................ 98 2 21 0 15 0
Sub Total ................................723 15 88 1 1,128 15
Total Sales ................................4,960.0 100.0 5,874.7 100.0 7,337.2 100.0
Domestic Sales
Our domestic sales of containerboard are generally to non-integrated box-makers and packaging converters that do not have their own paper manufacturing mills, typically on 30 to 60 days credit terms. While the majority of our net sales are pursuant to offtake agreements that we negotiate directly with converters, we also engage in “direct marketing” arrangements with end-users for sales to converters appointed by such end-users, pursuant to which we negotiate price and volume directly with end-users in respect of contracts to be entered by a converter appointed by the end-users, primarily in the FMCG sector. Our domestic sales of boxboard are generally to domestic printing companies, typically on 30 to 60 days credit terms. Domestic sales are denominated in Rupiah and are either on a spot basis or pursuant to offtake agreements that provide for a specified volume for a specified period. Sales pursuant to offtake agreements accounted for approximately 70% for the year ended December 31, 2017.
Exports
We export our products primarily to China and also to various countries in Southeast Asia, South Asia and the Middle East. For the year ended December 31, 2017, exports to China accounted for 14% of our net sales and 89% of our total exports. We typically engage agents to conduct our export sales on a spot basis in exchange for commissions. Export sales are primarily denominated in U.S. dollars in exchange for letters of credit pursuant to which we typically receive funds within 14 days following delivery. We also require certain agents to provide an upfront deposit prior to shipment.
The following table sets out our export sales by country for the years ended December 31, 2015, 2016, 2017.
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Export Sales by Country
Years ended December 31,
2015 2016 2017
(tonnes) (Rp. in millions)
(tonnes) (Rp. in millions)
(tonnes)
(Rp. in millions)
China(1) ............................. 9,057 43,759 10,045 47,582 148,106 1,003,094 United Arab Emirates ...........................35,808 176,954 65 428 3,325 18,716
Vietnam ............................37,080 184,322 2,024 10,918 9,003 50,926
Malaysia ...........................23,020 123,668 1,938 11,838 2,157 11,000
Others(2)............................36,792 194,738 2,825 16,926 6,368 43,884
Total Export Sales ..........141,757 723,441 16,897 87,692 168,959 1,127,620
Domestic Sales .................817,574 4,236,558 917,465 5,787,053 894,631 6,209,565
Total Sales .......................959,331 4,959,999 934,362 5,874,745 1,063,5
90 7,337,185
Notes:
(1) Includes products sold to Hong Kong and Macau.
(2) "Others" include exports made to Thailand, Philippines, Singapore, Sri Lanka, Bangladesh, Pakistan, Saudi Arabia, and other Middle East and African nations.
Distribution and Marketing
We promote our products by participating in both domestic and international paper exhibitions, and conducting client visits. Our marketing department is dedicated to maintaining existing client relationships and expanding our customer base.
We sell our containerboard products to converters and we also engage directly with end-users of our containerboard products to encourage end-users to purchase from converters, boxes, cartons and/or other packaging produced by such converters using our products. In order to attract new converter customers, we proactively offer newly established converters advice and solutions on initial production and also offer free trial-run samples. While we do not sell our products directly to end-users, we do engage in such "direct marketing" arrangements with several large end-users for a contract with a term of at least three months and then work together with the end-user to identify an appropriate converter or converters to be appointed by the end-user and we enter into a contract with such converter. Sales pursuant to such "direct marketing" arrangements accounted for approximately 28% of our net sales for the year ended December 31, 2017, while the remainder of our net sales for such periods were pursuant to offtake agreements negotiated with box converters. These "direct marketing" arrangements are not pursuant to contracts between our Company and end-users.
We sell our boxboard to printing companies for conversion into folding cartons with detailed printing to serve as display packaging for consumer goods such as shoes, food, electronics, pharmaceuticals and other consumer products.
To maintain our customers relationships, we provide prompt and reliable customer service, including frequent customer visits and close client contact to obtain feedback and product requirements. We also provide technical assistance for our existing customers and end-users as after sales service.
Pricing
Markets for paper and packaging products are extremely sensitive to changes in global industry capacity, global output levels and cyclical changes in the world economy. The prices at which our products are sold are primarily dependent on the supply and demand dynamics of both the Indonesian and global markets for paper and packaging products. Although our domestic sales are denominated in Rupiah, prices are based on U.S. dollar rates and hence, we monitor global rates and set our benchmark rate for our products
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accordingly. A tariff of 5% is applied to packaging paper imported from outside Indonesia, except countries that are members of the ASEAN, South Korea and China. This tariff effectively reduces competition from imported packaging paper products. See "Risk Factors – We rely upon certain customers for a majority of our net sales and demand has been driven in part by markets trends that may not continue."
Our prices are also affected by changes in the prices of our raw materials, fluctuations and cyclical changes in the local and world economy and applicable regulations, including environmental and conservation regulations. See "Risk Factors – Risks Relating to our Business - Our product and raw material prices are subject to fluctuations due to cyclical and other factors."
Raw Materials and Supply
The principal raw materials we use in our production process are waste paper and chemicals. Waste paper currently accounts for 100% of our fiber raw material requirements. For periods prior to the fourth quarter of 2017, we also used very small quantities of virgin pulp in the production of CDB. Our procurement department oversees the procurement of raw materials. Our paper production also requires substantial amounts of water and energy.
Waste Paper
We satisfy nearly all of our fiber requirements by dissolving waste paper. Waste paper is a form of recycled fiber that comprises post-consumer and post-production paper, including old corrugated containers, officer ledgers, old newspapers and mixed waste paper. We use bleached fiber to produce the white layer in certain of our boxboard products. We satisfy a significant proportion of our bleached fiber requirements by chemically dissolving and de-inking waste paper to produce de-inked pulp. De-inked pulp can almost completely replace short-fiber virgin pulp to be used in producing the light outer layers of CDB. By relying almost exclusively on de-inked pulp derived from less expensive waste paper, compared to virgin pulp, we have been able to lower our cost of production. We believe that, depending on grades, the price of waste paper can be as low as one-fourth of the price of virgin pulp.
Generally, locally sourced waste paper is less expensive than imported waste paper, however, due to supply constraints, we are unable to source all of our waste paper in Indonesia and rely on imports for a portion of our waste paper requirements. For the year ended December 31, 2017, 51% of our waste paper requirements were sourced locally and 49% of our waste paper requirements were imported. Pricing for waste paper sourced locally are denominated in Rupiah and dependent on local demand and supply conditions. Pricing for imported waste paper is denominated in U.S. dollars and is dependent or linked to global prices of raw materials and paper products. We believe that maintaining local and a variety of foreign sources of waste paper suppliers provides us with the ability to switch between various sources as circumstances may require.
We source waste paper locally principally through waste collectors who are organized by a network of waste paper packers. We have more than 50 active local suppliers. These local suppliers supply waste paper to us based on prices we offer, payment terms, ease of delivery and service provided. Waste paper is collected by hand which minimizes the risk of contamination that can arise when collection is carried out through the use of automated processes. We typically purchase waste paper on a spot basis and do not have contractual arrangements or obligations to purchase waste paper from our current suppliers, though we believe we are able to leverage our long-term relationships with our suppliers to secure waste paper. Whereas our competitors typically pay waste paper suppliers up to seven days following delivery, we provide same day payment in cash. We believe this makes us a more attractive buyer compared to our competitors because local suppliers collect waste paper from many small collectors with cash payments and our ability to offer same day payment assists the local suppliers to meet this daily cash requirement.
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The other main source of domestic waste paper is box-makers and converters, many of whom are our customers and from whom trimming and rejects from their production process are purchased by us at an agreed price. Three of our paper machines are able to produce packaging paper with multiple layers, which allows us to use less expensive, lower quality waste paper while still meeting our customer's production specifications. For example, our paper machines can produce either containerboard or boxboard from mixed waste paper, whereas certain of our competitors use more expensive virgin pulp.
We have assisted certain smaller Indonesian suppliers of waste paper to purchase a total of more than 29 baling press machines, which are used to bundle waste paper, in exchange for a guaranteed percentage of such supplier's supply of waste paper for a term of two to four years pursuant to contracts entered into with such suppliers. In such cases, we typically fund between Rp. 60 million and Rp. 2.2 billion towards the cost of the baling machine, in return for a guaranteed supply of waste paper over the term of the guarantee period.
Our wastepaper imports are conducted through agents that purchase waste paper from recycling facilities in countries including the United States, Germany, the United Kingdom, Australia and Singapore, among others. Because we have been working with, evaluating and carefully selecting our import suppliers for many years, we believe we currently have reputable and reliable import suppliers. We do not rely on imports from any single country. We also purchase waste paper directly from waste paper suppliers in Indonesia. We do not have exclusive or long-term supply arrangements for waste paper and typically purchase waste paper on a spot basis from our agents. We typically are required to make payment to our agents within six to nine months following delivery, and the agents bear the cost of shipping to our warehouse.
We typically maintain inventories of waste paper sufficient to meet our expected requirements for 45 to 60 days and may from time to time stock up on waste paper when prices are favorable.
Virgin Pulp
We currently use only waste paper, and no virgin pulp, in the production process. Two basic types of virgin pulp are used in the production of paper, namely (i) short-fiber pulp; and (ii) long-fiber pulp. Short-fiber pulp is the principal pulp used for the production of most paper, while long-fiber pulp is added to add strength to paper.
Chemicals
We use chemicals for both paper production and for our water treatment plant. The principal chemicals used in paper production are aluminum sulfate, hydrogen peroxide, clay, coagulants, flocculent, caustic soda, latex, dye stuffs, calcium carbonate, sizing agent and starch. The principal chemicals used in the water treatment plant are flocculent, coagulants and pH neutralizers. These chemicals and the other chemicals used in paper production are readily available from a number of suppliers in Indonesia and internationally.
Water
Our paper-making process requires large quantities of water. We obtain our water requirements from the Cikarang River, which runs through our production complex in Cikarang Barat, West Java. Before using water drawn from the river in our production process, we treat the water with coagulant and flocculants and use a sedimentation process to remove contaminants.
We have two renewable contracts with Perusahaan Umum Jasa Tirta II, a state-owned water company, granting us the right to draw water from the Cikarang River. The current terms of these contracts will
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expire in September 2018 and December 2019. We are presently in the process of renewing the contract that will expire in September 2018. The East Java Assets are located adjacent to the Sungai Berantas (Berantas River) from which we expect to source water for our operation of the East Java Assets.
Our water treatment plant has a treatment capacity of 68,000 cubic meters and enables us to reuse 80% of our used water in the paper production process. See "—Manufacturing Facility and Process – Environment-related Equipment and Certifications – Water Treatment Plant."
Energy
We require significant amounts of electricity and steam for our production process, which we obtain from our gross 32.5 MW gas-powered cogeneration power plant, or Cogen1, our gross 35 MW gas-powered cogeneration plant, or Cogen2, and our gross 55 MW cogeneration power plant, or Cogen3. Cogen1 and Cogen2 were supplied by General Electric and Cogen3 was supplied by Shanghai Power Equipment Research Institute.
We source the natural gas to power Cogen1 and Cogen2 pursuant to a natural gas supply contract with Pertamina, a Government-owned oil company which expires in 2021. We expect the East Java Assets to use energy sourced from PLN, though the East Java Assets do currently contain one gas turbine plant, which is not currently operational.
We have coal supply agreements with two suppliers to supply coal to power Cogen3 based on pre-determined pricing formulae. However there is no minimum offtake under this agreement and we are free to source coal on the spot market depending on market pricing.
Our three cogeneration plants are collectively capable of meeting all of our electricity requirements in addition to a portion of our steam requirements, from the drying state of the paper production process.
We maintain our existing 50kVA connection to the power grid of PLN, a state owned electricity company, for backup purposes in the event that our cogeneration power plants encounter shutdowns during the maintenance process, or any operational difficulties. To secure the availability of the connection for our use, we have entered into a power purchase agreement with PLN, which commits PLN to supply up to 42.5 MW of electricity to us. A computerized control center constructed with Cogen1, Cogen2 and Cogen3 allows us to switch quickly between our three cogeneration plants and our PLN connection or to take from different sources at the same time.
Manufacturing Facility and Process
Our existing paper manufacturing facility is located at a single complex on a 48.5 hectare site in Cikarang Barat, West Java, Indonesia. The site is located approximately 30 km east of Jakarta, Indonesia's capital city, which allows convenient access to our customers, and to international container port facilities, Java's major trucking routes and local suppliers of raw materials, including waste paper. A substantial number of Indonesian box-making converters are located in Jakarta, which gives us proximity to our domestic customers.
Our Subsidiary has entered into a conditional sales and purchase agreement in connection with the expected acquisition of the East Java Assets for the purpose of expanding our production capacity into East Java, with closer access to our customers based in Central Java and East Java. See "—East Java Assets Acquisition."
We have extensive knowledge and experience in constructing and maintaining machinery and equipment from a combination of new parts and second-hand machinery without compromising quality, durability and efficiency. Since we have adopted the practice of combining second-hand machinery with new parts,
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we have not experienced any difficulties in replacing or upgrading parts of our machinery. We also have the capability to recondition or fabricate missing or defective parts in our in-house workshops staffed by in-house engineers.
Equipment
Our existing principal production equipment currently includes six paper machines, three cogeneration plants, two incinerator plants, a de-inking machine, a water treatment plant and two demineralization plants.
Paper Machines
Our PM1, PM2 and PM7 paper machines are capable of producing different types of paper products to meet potential changes in customer requirements or market demand. However, each of our paper machines is devoted to the production of a particular type of paper to minimize change-overs from one paper type to another and to avoid several hours of machine downtime and lost production.
Our manufacturing equipment operates 24 hours a day, 330 days a year, taking into account scheduled maintenance downtime. None of our manufacturing equipment has experienced long periods of unscheduled downtime that was not covered by insurance. See "— Insurance" and "Risk Factors – Risks Relating to our Business – Our business is dependent on our manufacturing facility and the loss of or shutdown of operations of the manufacturing facility could adversely affect our business or results of operations."
For the year ended December 31, 2017, the aggregate Utilization Rate (weighted by capacity) across our six paper machines was 82.5%.
We perform regular maintenance on our machines, typically on a monthly basis for a total of 30 days per year, to seek to maximize uptime and minimize downtime. Regular maintenance is performed by our in-house engineers, supported by third party service providers. Our paper machines are depreciated over a thirty-year period, although, with appropriate investments to maintain their operating condition, their actual service life can be significantly longer. For example, our PM1 was commissioned in 1990 and continues to operate at design parameters following certain modifications and upgrades.
The following table sets forth the designated products, Design Capacity, production and Utilization Rate for each of our paper machines for the periods specified:
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For the years ended December 31,
2015 2016 2017
Products
Design
Capacity(1)
(ktpa)
Productio
n (ktpa)
Utilization Rate(
2) (%) Product
s
Design
Capacity(1)
(ktpa)
Production
(ktpa)
Utilization Rate(
2) (%) Product
s
Design
Capacity(1)
(ktpa)
Production
(ktpa)
Utilization Rate(2
)(3)
(%)
PM1
CDB 150 112 74.7 CDB 150 122 81.1 CDB 150 120 80.0
PM2
CMP and
KLB
200 153 76.5 CMP
and KLB
150 147 98.2 CMP
and KLB
150 164 109.3
PM3
CMP 200 183 91.5 CMP
150 136 90.6 CMP
150 137 91.3
PM5
CMP 350 278 79.4 CMP
250 248 99.2 CMP
250 246 98.4
PM7
CMP and
KLB
300 253 84.3 CMP
and KLB
300 258 85.9 CMP
and KLB
300 271 90.3
PM8
CMP and
KLB
- - - CMP
and KLB
- - - CMP
and KLB
300 135 45.0(3)
Totals: 1,200 979 81.6 1,000 911 91.1 1,300 1,073 82.5
Notes:
(1) Design Capacity for the period based on the products designated to be produced by the applicable paper machine during the period.
(2) Actual production volume for the period divided by Design Capacity for the period. Utilization Rate can exceed 100% if the actual products produced have a gsm that is higher than the gsm that is assumed for purposes of calculating Design Capacity.
(3) Represents a partial year of operations, as PM8 commenced operations in June 2017.
PM1 is a 3.6-meter five layer-type paper machine capable of producing packaging paper consisting of five layers of paper, and is equipped with an online coater. PM 1 is capable of producing CDB and KLB. It first began operation in 1990 and was rebuilt in 1994.
PM2 is a 4.35-meter three-layer type fourdrinier system paper machine with a size press. It produces CMP and KLB. PM2 started paper production in 1989 and was modified and upgraded in July 1994, whereby the head box was replaced, and then was later modified in 2012 to improve its chemical and energy consumption efficiencies.
PM3 was constructed in 1995 and is a 5-meter one-layer fourdrinier system paper machine that produces CMP.
PM5 is a 7-meter one-layer fourdrinier paper machine and started production in 2010. PM5 produces CMP.
PM7 is a 6.4-meter two-layer fourdrinier machine with a design operating speed of 850 meters per minute. PM7 commenced operations in September 2006 and is capable of producing both CMP and KLB. In 2012, PM7 was modified to increase its capacity and improve its chemical and energy consumption efficiencies.
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PM8 is a 7-meter one-layer gap former-type machine. PM8 commenced operations in June 2017 and produces CMP.
Cogeneration Plants
Cogen1 is a Frame 6 General Electric Gas Turbine Generator, coupled with a Storke's Waste Heat Steam Generator. Installed in 1996, Cogen1 has a gross capacity of 32.5 MW and produces on average 30 MW of electrical power and 80 to 115 tonnes of steam per hour.
Cogen2 is a 35 MW cogeneration power plant which supplies the electricity and steam requirements for PM7. It consists of two primary components: a Gas Turbine Generator GE 6B purchased from General Electrics, Inc, coupled with an Alstom's Heat Recovery Steam Generator. Cogen2 is designed to produce 100 to 150 tonnes of steam per hour.
Cogen3 is a 55 MW cogeneration power plant which supplies the electricity and steam requirements for our mill. It consists of two boilers, one steam turbine, one generator and two demineralizers. Cogen3 is designed to produce 110 tonnes of steam per hour.
De-inking machine
We also operate a de-inking machine with a capacity of 150 tonnes per day. The de-inking machine is mainly used to remove ink from relatively high-grade waste paper to produce de-inked pulp, which substantially replaces the use of virgin pulp to produce the white top layer of certain boxboard products in our production process.
Incinerators
Solid waste is part of the production residue resulting from the paper manufacturing process and is typically disposed of by paper manufacturers in landfills. We are one of the few paper manufacturers in Indonesia that own solid waste incinerators. We have two solid waste incinerators, which we use to burn accumulated solid waste, thereby eliminating the need to dispose solid waste in landfills. Both incinerators also generate energy savings because steam, which provides energy for our paper production process, is the by-product of the incineration process.
We installed our first incinerator in 2001, which has a capacity to burn 95 bone-dry tonnes of sludge/solid contaminants per day and generates 12 tonnes of steam per hour used in the production of finished paper to reduce energy costs. This incinerator was funded through a grant under a joint program between the Indonesian Trade and Industry Ministry and the Japanese government under the New Energy and Industrial Technology Development Organization, or NEDO.
We installed a second incinerator in 2011 with a total burning capacity of up to 150 bone-dry tonnes per day handling sludge and solid waste from the existing paper machines and generating 28 tonnes of steam per hour for the production process. The total steam of 40 tonnes per hour produced from both incinerators helps us to realize annual energy savings of approximately US$5 million.
Through the incineration of sludge and solid contaminants, we avoid the use of landfills, thereby reducing carbon emissions from the decomposition of the production residue of our manufacturing processes. We have applied for and been registered for Carbon Emission Reduction certification under the United Nations Framework for Climate Change Convention Clean Development Mechanism in respect of the burning of sludge and solid contaminants using our second incinerator. The period to receive credits commenced August 2012 and continues for 10 years until July 2022 covering 43,800 metric tonnes of CO2 equivalent per year in certified emission reductions (CERs). We have recently increased the solid
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waste concentrations of the production residue that we incinerate with a view to increasing the efficiency of our incinerators.
Water Treatment Plant
We have a water treatment plant comprising two effluent water treatment units which are used to treat the effluent discharged by the paper machines before it is emptied into the Cikarang Bekasi Laut, a designated river to channel industrial waste. Our water treatment plant has a combined capacity of 68,000 cubic meters per day, adequate to treat the aggregate effluent generated by our six paper machines.
To limit the volume of raw water that we need to draw from the Cikarang River, 80.0% of the treated water is re-used in our paper production process. Solid and semi-solid waste resulting from the water treatment plant is typically filtered to extract fiber that may be re-used as raw material for producing paper and any remaining waste is stored at our plant site pending disposal in accordance with Indonesia's environmental regulations. The remainder of the treated effluent is discharged to the Cikarang Bekasi Laut.
Effluent quality is tested daily by shift operators in our quality control department as well as our laboratory. In addition, monthly tests are conducted by Sucofindo and Balai Besar Pulp & Kertas of the Ministry of Industry and Trade. Our results for the effluent stream quality are in line with governmental standards.
Demineralization Plants
We have two demineralization plants to generate boiler feedwater. Our demineralization plants, which commenced operations in 2006 and 2017, respectively, provide treated water to the production mill by purifying water obtained from groundwater wells through a reverse osmosis process. These plants are also capable of purifying water drawn from the Cikarang River prior to usage in the production process.
Material Agreements
From time to time we may enter into sales and leaseback arrangements for certain equipment that we use in our operations. Specifically, on June 6, 2017, we entered into such an arrangement with PT Mitsubishi UFJ Lease & Finance Indonesia involving a gas turbine heat recovery steam generator, a unit incinerator and a screw press, among other equipment, amounting to a total value of 135.0 billion Rupiah and a lease term of three years at an annual interest rate of 10.75%. More recently, on June 26, 2018 and on May 30, 2018, we entered into two sales and leaseback arrangements with PT Indomobil Finance Indonesia for various equipment and with each arrangement consisting of a three year term and 15% annual interest rate. The aggregate value of these two arrangements with PT Indomobil Finance Indonesia was approximately 399.0 billion Rupiah.
East Java Assets Acquisition
Our Subsidiary has entered into a conditional sales and purchase agreement in connection with the expected acquisition of the East Java Assets for the purpose of expanding our production capacity into East Java, with closer access to our customers based in Central Java and East Java. These assets have been dormant since 2014 and we expect to fund part of the costs of refurbishment and modification of the East Java Assets with a view to commencing production from the East Java Assets in 2019.
We have provided a corporate guarantee for two debt facilities in the aggregate principle amounts of Rp. 346.5 billion and US$45.0 million from PT Bank Central Asia Tbk, PT Bank OCBC NISP Tbk and Oversea-Chinese Banking Corporation Limited, the proceeds of which are to be applied to finance the planned acquisition and refurbish the assets to be acquired, such that PT Bank Central Asia Tbk, PT Bank
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OCBC NISP Tbk and Oversea-Chinese Banking Corporation Limited will have direct recourse to our Company in connection with such indebtedness. Furthermore, our Subsidiary will be required to make substantial interest payments to service such indebtedness, which could adversely impact our ability to invest in other aspects of our business. We expect that our Subsidiary will apply all borrowings under this facility to finance the debt component of the total cost of the East Java Assets acquisition (including all related transaction expenses incurred by us or our Subsidiary) and the refurbishment of the East Java Assets (including with respect to relevant trade facilities and new equipment related to such refurbishment).
See "Risk Factors – The planned acquisition of the East Java Assets by our Subsidiary, and any future acquisitions or investments that we may undertake or seek to undertake, may not be completed, may not be successful and could involve operating difficulties, delays and other adverse consequences."
Production Process
The following depiction describes our production process, in general:
We produce packaging paper from waste based fiber. For the production of the white top layer in the CDB we use sorted white ledger from which the ink and other contaminants contained in the waste are removed through our de-inking facility. We mix different grades of waste paper, and currently do not use virgin pulp, to produce packaging paper with the properties required by our customers.
Waste paper, our principal raw material, is initially broken up to form a pulp by mixing it with in a machine, called a hydropulper. Centrifugal cleaners and screens are then used to remove plastics, sand, and other contaminants from the pulp mixture, which are then incinerated in our incinerators to produce steam for our production process. The clean fiber is then fed into the paper machines to form a layer, which can be joined to other layers, depending on the product requirement. Once the paper is formed, it enters a press and dryer section where water is removed, to reduce the moisture content to about 50%.
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The paper is then fed through steam heated cylinders for further drying and starch can be added to increase the paper's strength, and also for improved printing properties. In the case of coated paper, layers of coating are also applied in the process. Depending on the grade of paper, the paper is then calendared by passing the paper sheet through steel rollers, to give the paper a final smoothness. The paper is then wound onto a reel and a further process produces rolls of the correct size to meet the customers' requirements.
Environmental Matters
We have a number of certifications that demonstrate our intent to remain responsible in managing the environmental impact of our operations. Our second incinerator has CDM certification for carbon credits and we are certified under the FSC and ISO 14001, ISO 9001 for quality management system, ISO 14001:2015 for environmental compliance, OHSAS 18001 for occupational health and safety management systems and Ecolabelling certification under the Indonesia Ministry of Environment and Forestry's Ekolabel Indonesia Scheme.
We are committed to a responsible approach to environmental management. We have held our FSC chain of custody certification since 2012. FSC is a global, not-for-profit organization dedicated to the promotion of responsible forest management worldwide and enabling consumers to make informed choices about the products they buy and, in our case, the packaging being used. We believe that many of our customers, especially dealing with international end-users, recognize the value that this certification conveys and the competitive advantage gained.
Our operations require the use of significant amounts of water and power, and involve the emission and generation of large amounts of waste, including scrap paper, plastics, incinerator ash, boiler ash and sludge from waste water treatment. Our environmental compliance is supervised by the local government and the state Ministry of Environment and Forestry. In addition, government inspectors visit our manufacturing facility from time to time to confirm adherence to applicable environmental standards.
We were rated "Blue" by the Ministry of Environment and Forestry (Kementerian Lingkungan Hidup) on December 6, 2016, which means that we have complied with the standard applicable Indonesian environmental regulations. Blue is the third of five possible rankings, with Blue and above representing compliance, and the two rankings above Blue indicating that the relevant entity has taken extra steps that the Ministry of Environment and Forestry determines exceed applicable regulations. Failure to comply with laws and regulations relating to the environment may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations and the issuance of orders enjoining some or all of our operations in affected areas. In November 2017, the Ministry of Environment and Forestry inspected our manufacturing facility for toxic and hazardous materials in connection with our storage of incinerator ash and silica sand powder, which is a chemical composition of boiler and incinerator ash. As a result of this inspection, in December 2017, the Ministry of Environment and Forestry ordered us, among other things, to conduct recovery and rehabilitation of contaminated land where waste products were stored. We prepared and submitted our draft land recovery plan to the Ministry of Environment and Forestry in August 2018 and continue to work with the Ministry of Environment and Forestry. See "Risk Factors – In 2017, the Ministry of Environment and Forestry identified suspected hazardous waste on our land and ordered us to investigate and conduct rehabilitation as appropriate."
We firmly believe, and are committed to, a culture of environmental protection through sustainable and responsible manufacturing and development processes. As a leading manufacturer of paper, we are a large contributor to environmental preservation by converting waste paper into high-quality paper. To the maximum extent possible, we seek to utilize waste paper in our production of finished products.
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Transportation
Our products are typically transported to purchasers in Java by trucks owned and operated by third parties. We ship our products to foreign purchasers and to domestic purchasers on islands other than Java by vessels that are also owned and operated by third parties. We do not have long term arrangements with such truck and vessel operators, as we typically deal with them on a case by case basis.
Our imported raw materials are generally transported from the container port of Tanjung Priok near Jakarta to our manufacturing facility in Cikarang Barat by trucks owned by third parties. Locally sourced raw materials such as chemicals and waste paper are also transported to our production complex by trucks either owned by third parties or the suppliers themselves. We have agreements with three trucking companies to transport our raw materials and from time to time we also engage other trucking companies.
We typically have 30 days credit terms for transportation arrangements.
Quality Control
The quality control department ensures that the quality of our products meets the specifications provided by converters and international standards for strength, resistance and other qualities. This department also ensures that we fulfill certain quality standards set by end-users based on their intended use for our products, or by the local industry standards of countries to which we export our products for example due to humidity among other factors. It is also responsible for monitoring our operations and constantly seeks to increase operational efficiency through technical improvements to our production processes and to reduce overall production costs.
The quality control department is also responsible for carrying out quality analysis on both fibrous and non-fibrous material, setting and maintaining quality standards, the quality control of finished products, customer complaints and for the internal relaying of information required internally.
Strict tests are carried out at every stage to check process and product quality which has contributed to a customer complaint rate of approximately 0.02% in the year ended December 31, 2017. We have been ISO 9001 certified since 1995, and were upgraded to ISO 9001: 2008 in 2010, which helps to assure our customers of the soundness of our quality control procedures. The ISO 9001 certification is audited by TÜV SÜD annually.
Inventory Control
We store our inventory of finished goods in warehouses maintained at our manufacturing facility. Raw materials are stored in a separate warehouse for raw materials as well as in open space. We maintain separate warehouses for finished goods produced by PM1, PM2, PM3, PM5, PM7 and PM8. We have a combined warehouse storage capacity, including owned and leased warehouses, of 80,000 tonnes of finished goods and a combined open space storage capacity of 288,000 tonnes for raw materials. We maintain an integrated computer system for our inventory to record their volume and value which is updated whenever raw materials are used in the production process.
Research and Development
We have a research and development team, which is responsible for coordinating the development of new products and the enhancement and improvement of existing products, together with the marketing and production department. The research and development team is also responsible for improving mixtures of raw materials and chemicals so as to maximize product and cost efficiency.
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Our research and development team works with suppliers of our machinery and raw materials to develop innovative products to benefit our customers. For example, in 2015 we introduced high-performance, lightweight packaging paper to the Indonesia market. Our high-performance, lightweight packaging paper has a lower paper weight which reduces our customers' costs because, for a given volume of containerboard purchased by a given customer, the customer is able to produce more boxes to sell to end-users. High-performance, lightweight paper has become a strength of our company, accounting for 71% of our net sales in 2017.
Properties
We own approximately 486,618 square meters of land located at Jalan Gardu Sawah Rt. 001/1-1, Kalijaya, Cikarang Barat, West Java and Harjamekar, Cikarang Utara, West Java, both of which are located near the Cikarang River. Our manufacturing facility, including our cogeneration plants, is located on this land.
We rent 2,200 square meters of building space that resides on 1,522 square meters of land, which is used for our registered office at Jalan Abdul Muis No. 30, Jakarta, from Ms. Lila Noto Pradono, a former member of our Board of Commissioners. The current lease will expire on March 20, 2019. See "Risk Factors – Our controlling shareholders' interests may differ from those of our other shareholders and there may be conflicts of interest between us and them and between us and certain other parties."
We have two leases for land buildings in Cikarang Barat for our warehouses. The current leases will expire in December 2024 and May 2026.
Competition
The markets for our consumer packaging paper products are highly competitive. Selling prices tends to be cyclical, rising during periods in which growth in demand is faster than growth in supply and declining as supply increases relative to demand. Although the principal competitive factor is price and quality, some customers give substantial weight to other factors such as service, reliability of supply, business relationships and integrity.
Our main competitors in the Indonesian market include PT Indah Kiat Pulp & Paper Tbk which manufactures culture paper, pulp and industrial paper and PT Pabrik Kertas Indonesia which manufactures pulp, paper and paper products.
In our principal export market of Asia, we compete primarily with producers from Indonesia, Thailand, Taiwan and South Korea, whereas in the Middle East, we compete primarily with producers from Europe and North America. In our export markets we also compete with domestic producers in those markets as well as, in some cases, vertically integrated competitors, such as in Thailand.
A tariff of 5% is applied to packaging paper entering the Indonesian market and sourced from other countries, except countries that are members of the ASEAN, South Korea and China. A reduction or elimination of the import tariff could lead to increased competition in the domestic industry. However, we believe that a reduction in, or the elimination of, the import tariff will not have a significant impact on our sales and results of operations.
While we believe that price is generally the predominant competitive factor in markets outside Indonesia, certain non-price factors are significant in Indonesia. We believe that our service, our consistent product quality and our reliability as a supplier play an important part in our ability to attract and retain our customers in the domestic market. We have tried to establish competitive advantages on the basis of the range and quality of our products, especially our high-performance, lightweight paper, low-cost
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production, on-time delivery, fast customer response, commitment and integrity, and close communication and relationship.
While the primary competitive factor in the international markets is price, we believe that the relatively low cost of raw materials, labor and energy in Indonesia, as well as Indonesia's proximity to other Asian markets, may give Indonesian paper manufacturers an advantage over certain foreign competitors in Asian export markets. In addition, there are significant barriers to entry in this industry. As a leading producer of consumer packaging paper, we believe we benefit from economies of scale (in relation to overall cost control, etc.) and long-term client relationship building that are not easy to replicate.
Intellectual Property Rights
We have registered all trademarks and copyrights in relation to our FajarPaper logo and our product brand names at the General Registry of Inventions with the Directorate of Property Rights, Patents and Trademarks of the Ministry of Law and Human Rights of the Republic of Indonesia. Other than the aforementioned, we do not rely on any other intellectual property rights in connection with our business. We do not have any trademark or copyright registrations outside Indonesia.
Insurance
We maintain insurance policies which cover our buildings, vehicles, machinery, equipment, raw materials and finished goods inventories against damage caused by fire, earthquake, volcanic eruption and tsunamis in an aggregate amount of US$1,015.5 million. All of the insurance proceeds with respect to properties that serve as collateral for our debts are pledged to the relevant lenders.
We do not anticipate having any difficulties renewing any of our insurance policies and believe that our insurance coverage is reasonable in amount and consistent with industry standards in Indonesia.
In December 2016 a technical malfunction at Cogen2 resulted in approximately one month of unscheduled downtime and the need to procure certain new parts. Our applicable insurance policies paid us a total of US$9.7 million in respect of our claims for spare parts required and business interruption resulting from this incident.
Legal Proceedings
We may, from time to time, become party to certain proceedings brought by private parties. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these proceedings will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Labor and Employee Relationships
We had the following number of employees for the years ended December 31, 2015, 2016 and 2017, as set forth in the table below.
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Role
As of December 31,
2015 2016 2017
Manufacturing facility ................................................................ 2,515 2,596 2,653 Administration ................................................................................................ 117 120 129 Total ................................................................................................ 2,632 2,716 2,782
We view our employees as an important asset and regularly provide in-house training, on-the-job training as well as employment development programs to motivate our staff. We also periodically arrange for our employees to attend training courses conducted by third-party organizations.
The majority of our employees are members of the Federasi Serikat Pekerja Kimia, Energy dan Pertambangan Konfederasi Serikat Pekerja Seluruh Indonesia labor union. Our relationship with such employees is governed under a collective bargaining agreement with terms that are consistent with the relevant requirements under the applicable employments laws in Indonesia. Our current collective bargaining agreement, which typically has a two year term, would have expired in September 2018, but we expect to receive approval from the Government to extend the term for an additional six months, such that the current collective bargaining agreement would expire in March 2019.
We believe that we have good relations with our employees and their labor union. Apart from a half-day strike in 2012, we have not experienced any strikes or material labor disputes since our inception.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (i) with respect to the years ended December 31, 2015 and 2016 our selected standalone financial and operating data and our standalone audited and unaudited financial statements and the related notes thereto, (ii) with respect to the year ended December 31, 2017, our selected consolidated financial and operating data and our consolidated audited and unaudited financial statements and the related notes thereto, and (iii) other financial data included elsewhere in this Document.
The following discussion and analysis includes forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those expressed in such forward-looking statements as a result of numerous factors, including those set forth in the sections entitled “Forward-Looking Statements” and “Risk Factors” in this Document. Our consolidated financial statements have been prepared in accordance with Indonesian FAS. Indonesian FAS differs in certain material respects from IFRS.
Overview
We are one of the largest packaging paper manufacturers in Indonesia, based on capacity. We own and operate six paper machines with aggregate Design Capacity of 1.3 million tonnes per annum for the year ended December 31, 2017. According to the RISI Report, we account for 28% of Indonesian containerboard production capacity and 7% of the Indonesian boxboard production capacity. We believe we are a pioneer in the development and production of high-performance, lightweight packaging paper, which is currently lighter by up to 20% in comparison with regular packaging paper in Indonesia.
We produce containerboard and boxboard from recycled paper for fabrication by box-makers into corrugated boxes, folding cartons and other packaging products, with a focus on the consumer packaging paper segment. Our principal containerboard products are corrugated medium paper, or CMP, which is used to box products such as electronic appliances and food, and kraft liner board, or KLB, which is used as the inner and outer layers of corrugated sheets and boxes. We sell CMP and KLB primarily to independent box-makers in Indonesia and export the balance to customers in more than 20 export markets including China and various countries in Southeast Asia, South Asia and the Middle East. For the year ended December 31, 2017, exports accounted for 15.4% of our net sales. Our principal boxboard product is coated duplex board, or CDB, which is used primarily in retail packaging for household and personal care, toys, shoes, cereal and other products. We sell our CDB primarily in Indonesia to end-users, printers, and a few independent third party distributors. While the majority of our net sales are pursuant to offtake agreements that we negotiate directly with converters, we also engage in "direct marketing" arrangements with end-users for sales to converters appointed by such end-users, pursuant to which we negotiate price and volume directly with end-users in respect of contracts to be entered by a converter appointed by the end-users, primarily in the FMCG sector.
We believe our high-performance, lightweight CMP and KLB products can reduce our customers' costs because the increased volume of paper per tonne facilitates the production of more boxes per tonne of containerboard. Our high-performance, lightweight containerboard accounted for approximately 71% of our total net sales of containerboard in 2017. Notwithstanding the availability of high-performance, lightweight containerboard, the remainder of our end-users continue to require ordinary containerboard for certain uses, such as for heavy appliances.
All of our products are currently made from 100% recycled waste paper. We currently do not use virgin pulp in our production process. We do not engage in any forestry or logging activities. We are
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committed to the environment and to green initiatives. Also, we have the FSC chain of custody certification, which certifies that the source of our raw materials used is not sourced from illegal logging. We are registered under the clean development mechanism of the United Nations Framework Convention on Climate Change and accredited under the Joint Crediting mechanism of the Government of Japan, which provides support in the form of grants and technical assistance to projects in developing member countries of the Asian Development Bank. Our products have Ecolabelling certification under the Indonesia Ministry of Environment and Forestry's Ekolabel Indonesia Scheme as having a reduced environmental impact over the product’s life-cycle compared with uncertified products. We have also received ISO 14001:2015 certification for our environmental management system and OHSAS 18001 certification for our occupational health and safety management system.
Our manufacturing facility comprises of six paper machines located at a single complex in Cikarang Barat, West Java, Indonesia. At this site, we also own and operate three cogeneration power plants, two fluidized bed incinerator plants and one waste water treatment plant. Our two gas-powered and one coal-powered cogeneration power plants have aggregate gross capacity of around 122.5 MW of electricity and 420 tonnes of steam per hour. We supplement the steam supply from our cogeneration plants with two fluidized bed incinerator plants that incinerate solid waste and convert the heat generated by the incineration process into a total of approximately 40 tonnes per hour of additional steam for our manufacturing facility. The power and steam generated by our cogeneration plants and incinerator plants are sufficient to meet the requirements of our manufacturing processes. We also have a 42.5 MW connection to the power grid of PLN, a state owned electricity company, for backup power. Our water treatment plant has a treatment capacity of 68,000 cubic meters and enables us to reuse 80% of our used water in the paper production process.
Our Subsidiary has entered into a conditional sales and purchase agreement in connection with the expected acquisition of the East Java Assets for the purpose of expanding our production capacity into East Java, with closer access to our customers based in Central Java and East Java.
Key factors affecting our results of operations
Our results of operations have been, and are expected to continue to be, affected by our production capacity and capacity utilization, including the expected increase in capacity due to the planned acquisition of the East Java Assets, our product pricing and margins, the cost of raw materials, the domestic-export mix of our sales, our energy and water costs, trends in the packaging paper industry and the economy generally, our access to and cost of financing and fluctuations in foreign currency exchange rates. We expect our capital expeditures to increase due to expenses related to the refurbishment of the East Java Assets in connection with our Subsidiary's acquisition of the East Java Assets. See "—Liquidity and Capital Resources — Capital Expenditures."
We believe that the growth in our industry has been driven in part by the recent growth of the Indonesian economy and that demand for our products should grow, as the Indonesian consumer economy continues to develop and modernize. Many of our products are used to package consumer goods such as food and beverage, household and personal care products, pharmaceuticals, garments, electronics, home appliances, toys and shoes. Hence, demand for our products is directly affected by developments in the consumer economy, especially in Indonesia. The continued growth of the consumer industry in Indonesia as well as our performance and the quality and growth of our customer base and product offerings are necessarily dependent on the health of the overall Indonesian economy.
Our Production Capacity and Capacity Utilization
The level of our sales is driven by our production volume, which in turn is dependent on our total production capacity and our capacity utilization rate. Both our capacity and our utilization rates have
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increased through historical expansion plans that have included the introduction of new paper machine lines and modifications of existing paper machine lines with a view to improving volume and quality, and reducing energy cost.
Our PM8 paper machine commenced operations in June 2017, increasing our production capacity. The planned acquisition of the East Java Assets by our Subsidiary is currently expected to add production capacity in 2019, following the refurbishment of the East Java Assets.
We plan our production according to current customer demand to avoid over-production, high warehousing costs and write-offs, while maintaining a certain production volume to be cost-effective and efficient. A significant amount of inventory may result in additional storage and handling fees, increase the risk of obsolescence and put pressure on our working capital, and we therefore actively monitor and review our inventory levels on a regular basis and seek to maintain a reasonable level of inventories throughout our production process. Any changes in our production capacity, along with our rate of utilization of such capacity, will affect the volume of products we are able to sell which, in turn, affects our net sales and has a significant impact on our results of operations.
From the time of installation of a new paper machine or modification of an existing machine, we generally require several months of ramp-up and troubleshooting before we are able to produce at the full expanded capacity. The implementation of new capacity may also be delayed beyond the expected date of commencement of operations. For example, the installation of our PM8 paper machine commenced in 2014 but was put on hold for approximately 18 months due to a change in the location of the project.
Our capacity utilization is also affected by mechanical and other technical difficulties in our paper machine lines or with respect to our other infrastructure, as well as the supply-demand scenario for our products in the Indonesian market and abroad. The supply-demand scenario for a given market is impacted by changes in domestic production capacity, the supply of raw materials and the levels of imports and exports, among other factors. According to the RISI Report, from 2013 through 2017 Indonesia's total packaging paper production capacity increased at an annual growth rate of 4.9%. The capacity expansion includes our PM8 paper machine, which commenced operations in June 2017.
Our exports typically rise for a period following the commencement of operations of additional capacity as the Indonesian market may not be in a position to absorb all of the new capacity immediately. For example, exports accounted for 15.4% of our net sales for the year ended December 31, 2017 as our PM8 paper machine commenced operations in June 2017. Exports accounted for only 1.5% of our net sales for the year ended December 31, 2016.
The following table sets forth the designated products, Design Capacity, production and Utilization Rate for each of our paper machines for the periods specified:
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For the years ended December 31,
2015 2016 2017
Products
Design
Capacity(1)
(ktpa)
Productio
n (ktpa)
Utilization Rate(
2) (%) Product
s
Design
Capacity(1)
(ktpa)
Production
(ktpa)
Utilization Rate(
2) (%) Product
s
Design
Capacity(1)
(ktpa)
Production
(ktpa)
Utilization Rate(2
)(3)
(%)
PM1
CDB 150 112 74.7 CDB 150 122 81.1 CDB 150 120 80.0
PM2
CMP and
KLB
200 153 76.5 CMP
and KLB
150 147 98.2 CMP
and KLB
150 164 109.3
PM3
CMP 200 183 91.5 CMP
150 136 90.6 CMP
150 137 91.3
PM5
CMP 350 278 79.4 CMP
250 248 99.2 CMP
250 246 98.4
PM7
CMP and
KLB
300 253 84.3 CMP
and KLB
300 258 85.9 CMP
and KLB
300 271 90.3
PM8
CMP and
KLB
- - - CMP
and KLB
- - - CMP
and KLB
300 135 45.0(3)
Totals: 1,200 979 81.6 1,000 911 91.1 1,300 1,073 82.5
Notes:
(1) Design Capacity for the period based on the products designated to be produced by the applicable paper machine during the period.
(2) Actual production volume for the period divided by Design Capacity for the period. Utilization Rate can exceed 100% if the actual products produced have a gsm that is higher than the gsm that is assumed for purposes of calculating Design Capacity.
(3) Represents a partial year of operations, as PM8 commenced operations in June 2017.
Product Pricing and Margins
Our results of operations are significantly dependent on the pricing of our products. Markets for paper and packaging products are sensitive to changes in global industry capacity, global output levels, environmental regulations and cyclical changes in the world economy. The prices at which our products are sold are primarily dependent on the supply and demand dynamics of both the Indonesian and global markets for paper and packaging products. For example, an increase in competition may cause us to lose market share, lose customers, or compel us to reduce prices to remain competitive, which could result in reduced margins for our products. Competitive pressures may not only reduce our margins but may also impact our revenues and our growth which could adversely affect our results of operations. Our selling prices are also affected by prices of raw materials such as waste paper and chemicals. Increases in raw material prices generally result in an increase in selling prices for paper and packaging products. However, we may not be able to pass such increases to our customers. See "— Cost of Raw Materials."
For sales in Indonesia only, we accept product returns within four months of delivery for specified grounds relating to product quality and product condition, as verified by our quality control department. Also, from time to time we may offer discounts to selected customers based on negotiated rates and market conditions. Returns and discounts have historically been negligible.
For the years ended December 31, 2015, 2016 and 2017, most of our products were sold in the domestic market. There may be pricing differences between Indonesia and export markets due to specific demand
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and supply factors in the various markets. Our domestic sales are denominated in Rupiah and reflect domestic market dynamics and raw materials costs. Our pricing is generally set on a monthly basis, other than for "direct marketing" arrangements with end-users for sales to converters appointed by such end-users, pursuant to which we negotiate price and volume directly with end-users in respect of contracts to be entered by a converter appointed by the end-users. Such "direct marketing" arrangements typically provide for a three to six month term with fixed pricing. A tariff of 5% is applied to packaging paper sourced from countries other than Indonesia, China, South Korea and other ASEAN member countries.
The following table sets forth average realized sales prices charged by us for our products for the periods indicated:
Average Realized Sales Prices For the years ended December 31,
2015 2016 2017
Rp. Rp. Rp.(in Rp. thousands/tonne and US$/tonne)
Domestic Containerboard
CMP ................................................................ 4,854 5,938 6,592
KLB ................................................................ 5,327 6,374 7,050
Boxboard
Coated Duplex .................................................. 5,888 7,379 7,896
Export Containerboard
CMP ................................................................ 4,804 4,740 6,586
KLB ................................................................ 5,277 5,320 7,066
Boxboard
Coated Duplex .................................................. 6,531 6,630 7,990
Overall Average Realized Sales Prices ............................................................ 5,170 6,287 6,899
Costs of Raw Materials
Raw materials accounted for 70.6%, 65.4% and 71.7% in the years ended December 2015, 2016 and 2017, respectively. Accordingly, the profitability of our operations and cash flows are significantly affected by changes in the price of raw materials. The primary raw materials used in our production process are waste paper and various chemicals. We currently use only waste paper, and no virgin pulp, in the production of our products although, in the past, we have used very small quantities of virgin pulp in the production of boxboard only. Our raw materials costs are expected to increase upon the commencement of operations of the East Java Assets, which are expected to be acquired by our Subsidiary in connection with its entry into a conditional sales and purchase agreement for the East Java Assets.
Prices for waste paper, our main raw material, have generally followed the same cyclical trend as prices for our products, although there have been time lags between increases or decreases in prices of our raw materials and our finished products on account of our maintaining an inventory of approximately six weeks' to two months’ supply of waste paper inventory at any given time. The price of raw materials and the price of our products typically move in the same direction, as we aim to pass through raw material price increases to our customers. However, while we are, to some extent, able to pass on higher input prices to our customers, our ability to pass on raw materials price increases is, to a large extent, dependent upon market conditions and our relative cost position as compared to competitors. In addition, it typically takes at least one month for increases in raw materials costs to be reflected in our pricing. There may be periods of time in which we may not be able to fully recover increases in the cost of raw materials due to
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weaknesses in demand for, or oversupply of, our products. To the extent we cannot pass on some or all of any increases in the price of raw materials to our customers, any such increases could have a material effect on our business and results of operations.
While we strive to keep our cost structure competitive by controlling the costs of raw materials, based on expected continued growth of the Indonesian economy, we expect that demand for raw materials will likely remain strong and that there will therefore be upward pressure on raw materials prices.
In the years ended December 31, 2015, 2016 and 2017, domestically sourced waste paper comprised 56%, 49% and 51%, respectively, of our total waste paper requirements, while imported waste paper comprised the remaining 44%, 51% and 49%, respectively. We source a portion of our waste paper requirements from outside Indonesia due to constraints on the domestic supply of waste paper. Waste paper purchased locally generally costs less than imported waste paper, however in certain cases, imported waste paper may cost less, such as during periods when the Rupiah appreciates substantially against the U.S. dollar. Also, market distortions may increase the global supply of waste paper, resulting in reduced prices for imported waste paper. For example, according to the RISI Report, various environmental and recovered paper policies have been adopted in China, including a ban on the import of mixed paper beginning in 2018. Prices of waste paper sourced domestically are denominated in Rupiah while prices of imported waste paper are denominated in U.S. dollars. These prices are generally dependent on rates which are based on, or linked to, global prices of raw materials.
The following table sets forth the average prices we have paid for our domestic and imported waste paper, for the periods indicated:
Waste Paper Prices For the years ended December 31,
2015 2016 2017
Rp. Rp. Rp.(in Rp. thousands/tonne or US$/tonne)
Domestic ................................................... 2,318 2,450 2,802 Waste paper
Import ....................................................... 2,472 2,533 3,112 Waste paper
Overall Average Realized Purchase Prices ........................................... 2,386 2,494 2,967
Domestic-Export Mix of Sales
In the years ended December 2015, 2016 and 2017, 85.6%, 98.7% and 84.6% of our total products by net sales were sold in domestic markets. Exports for 2017 increased due to the commencement of operations of our PM8 paper machine in June 2017. Our operating margins are generally lower for products we sell into the export markets when compared to sales of those products in the domestic markets, principally due to higher freight costs for our export sales, excluding exports to China. There may also be pricing differences between Indonesia and export markets due to specific demand and supply factors in the various markets. Due to the supply and demand conditions of the Indonesian packaging paper market, there is a point at which additional domestic sales of our products (coming from additional capacity) may adversely impact pricing and at this point we seek to sell our marginal production outside of Indonesia instead. For future years we expect our exports to account for approximately 40% to 50% of our total net sales, due to recent increased demand from China, which we expect will be sustained.
Energy and Water Costs
Energy and water costs typically constitute approximately 15% of our total manufacturing costs.
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We currently operate three cogeneration power plants, capable of producing both electricity and steam. Two of the power plants (Cogen1 and Cogen2) are powered with natural gas that we source pursuant to a supply contract with Pertamina, a Government-owned oil and gas company. The third power plant, Cogen3, is powered with coal that we source from purchases on the spot market. We also maintain our existing 42.5 MW connection to the power grid operated by the state-owned electricity company, PLN ("PLN"), as backup in the event that our cogeneration power plants undergo maintenance, or encounter operational difficulties.
We have two renewable contracts with Perusahaan Umum Jasa Tirta II, a state-owned water company, granting us the right to draw water from the Cikarang River. The current terms of these contracts will expire in September 2018 and December 2019. We are in the process of renewing the contract that expires in September 2018.
Our cogeneration plants have generally provided us with energy at a lower cost than supply from PLN and other third-party sources. Increases in the costs of either or both would have an impact on our operating costs and hence gross margins. In addition, any downtime for our cogeneration plants that causes us to rely on PLN for power may increase our energy costs. For example, in December 2016 a technical malfunction at Cogen2 resulted in approximately one month of downtime, although the resulting costs were mostly covered by our business interruption insurance, pursuant to which we recognized Rp. 40.4 billion in connection with this technical malfunction, which included our business interruption claim in part to cover excess costs incurred as a result of relying on our backup power supply to supply power that was not produced by Cogen2 during this period of downtime.
Our energy and waters costs are expected to increase upon the commencement of operations of the East Java Assets, which are expected to be acquired by our Subsidiary in connection with its entry into a conditional sales and purchase agreement for the East Java Assets.
Industry and Economic Trends
We believe that certain industry trends have had and will continue to have a significant impact in our business. With environmental impact becoming an increasingly important consideration around the world, regulators and consumers are increasingly expecting packaging materials to be energy saving, toxin-free, reusable and degradable. Government mandates as well as consumer preference make paper a more environmentally friendly substitute for metal, plastic or glass as packaging material. Our results of operations are also affected by general trends in the economies of Indonesia and other countries where end-users of our packaging paper products are based, as demand for end-users' products and, in turn, our products, tends to be correlated with general economic trends. We believe the foregoing trends offer significant continued growth potential for our products in Indonesia.
Access to and Cost of Financing
Our investments in our manufacturing facility are funded with significant bank financing. We have also provided a corporate guarantee for loan facilities in the aggregate principle amounts of up to Rp. 346.5 billion and US$45.0 million entered into by our Subsidiary in connection with its acquisition of the East Java Assets. Other than with respect to working capital facilities, our indebtedness is generally secured by our assets, including our paper machines, cogeneration plants and the other assets at our manufacturing facility. Our ability to obtain financing, as well as the cost of such financing, affects our results of operations and financial condition. Our access to funding and cost of financing are also affected by factors such as the amount of our outstanding indebtedness, any restrictions under our credit agreements or other loan documents in respect of incurrence of further debt, and changes in benchmark interest rates. We have established relationships with a number of banks and other financial institutions, including Euler
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Hermes Group SA, Finnvera plc, China Export and Credit Insurance Corporation, Oesterreichische Kontrollbank AG and the Export Credit Agency.
Fluctuations in Foreign Currency Exchange Rates
Our domestic sales in Indonesia are denominated in Rupiah. and our accounts and financial records are reported in Rupiah. However, the majority of our borrowings and certain of our expenses are denominated in U.S. dollars, such that fluctuations in the exchange rate between the Rupiah and the U.S. dollar can affect our results of operations. The majority of our borrowings are denominated in U.S. dollars, with the remainder denominated in Rupiah. At the balance sheet date, monetary liabilities denominated in foreign currencies are translated into Rupiah using the prevailing exchange rates at that date. The resulting gains or losses are credited or charged to current operations. Depreciation of the Rupiah against the U.S. dollar would increase the principal and interest amounts that we are obligated to pay in Rupiah.
In addition to repayments of foreign currency denominated debt, some of our raw materials are also imported and denominated in foreign currencies, mainly U.S. dollars. Transactions during the year involving foreign currencies are recorded at the rate of exchange prevailing at the time the transactions are made. Export sales are denominated mainly in U.S. dollars. Our domestic sales in Indonesia are denominated in Rupiah based on a price set by reference to U.S. dollar international prices, but generally with 30 to 60 days credit terms such that we are exposed to exchange rate fluctuations during this period. See "Risk Factors— Risks Relating to our Business — We are exposed to exchange rate fluctuations."
With a view to reducing our exposure to foreign exchange risks, from time to time we enter into currency forwards contracts with financial institutions whereby we sell Rupiah and purchase U.S. dollars on future dates at present rates. In addition, we have also entered into a call spread option contract to hedge a portion of our foreign currency exposure in connection with indebtedness denominated in U.S. dollars. These derivative financial instruments are initially measured at fair value on the contract date and are re-measured to fair value at subsequent reporting date. Gains or losses on derivative financial instruments are recognized in earnings, which can affect our results of operations. Pursuant to a Bank Indonesia policy adopted in October 2015, we are required to hedge a portion of our foreign currency exposure. Pursuant to our internal policy adopted in 2016, we hedge most of our foreign currency exposure.
Critical accounting policies and estimates
Our consolidated financial statements included elsewhere in this Document were prepared in accordance with Indonesian FAS. Note 3 to our consolidated financial statements includes a summary of the significant accounting policies we adopted in preparing these consolidated financial statements, and Note 4 to our consolidated financial statements describes certain critical accounting estimates and judgments that our directors are required to make in applying our accounting policies. Our actual results may differ significantly under different assumptions or conditions. The accounting policies and estimates that we believe are the most critical to a full understanding and evaluation of our reported financial results include the following:
Revenue and Expense Recognition
Revenue from sales of goods is recognized when all of the following conditions are satisfied:
• We have transferred to the buyer the significant risks and rewards of ownership of the goods;
• We retain neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
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• The amount of revenue can be measured reliably;
• It is probable that the economic benefits associated with the transaction will flow to us; and
• The cost incurred or to be incurred in respect of the transaction can be measured reliably.
Interest revenue is accrued on time basis, by reference to the principal outstanding and at the applicable interest rate while expenses are recognized when incurred.
Expenses are recognized when incurred.
Inventories
Inventories are stated at the lower of cost and net realizable value, whichever is lower. Cost is determined by using the weighted average method. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.
Analysis for decline in value of inventories is conducted and based on estimated future usage of such inventories. While it is believed that the assumptions used in the estimation of the allowance for decline in value of inventories are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of the allowance for decline in value of inventories, which ultimately will impact the result of our operations.
Property, Plant and Equipment – Direct Acquisition
Property, plant and equipment held for use in the production or supply of goods or services, or for administrative purposes, are stated at cost, less accumulated depreciation and any accumulated impairment losses.
Depreciation is recognized so as to write-off the cost of assets less residual values using the straight-line method based on the estimated useful lives of the assets as follows:
Years Assets 20 Building and improvements 10-30 Machinery and equipment 5 Vehicles 5 Furniture, fixture and equipment
Assets under finance lease are depreciated based on the same estimated useful life as owned assets or depreciated over the lease period or useful life whichever is shorter.
The estimated useful lives, residual values and depreciation method are reviewed by management at each year end, with the effect of any changes in estimate accounted for on a prospective basis. Land is stated at cost and is not depreciated.
The cost of maintenance and repairs is charged to operations as incurred. Other costs incurred subsequently to add to, replace part of, or service an item of property, plant and equipment, are recognized as an asset if, and only if, it is probable that future economic benefits associated with the item will flow to the entity and the cost of the item can be measured reliably.
When assets are retired or otherwise disposed of, their carrying values and the related accumulated depreciation and any impairment loss are removed from the accounts and any resulting gain or loss is reflected in profit or loss.
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Construction in progress is stated at cost which includes borrowing costs during construction on debts incurred to finance the construction. Construction in progress is transferred to the respective property, plant and equipment account when completed and ready for use.
Employee Benefits
The determination of provision for postemployment benefits is dependent on selection of certain assumptions used by management in calculating such amounts. Those assumptions include discount rate and rate of salary increase. Actual results that differ from our assumptions are recognized in the statement of financial position to reflect the full value of the plan deficit or surplus.
While we believe that our assumptions are reasonable and appropriate, significant differences in actual results or significant changes in assumptions may materially affect our provision for postemployment benefit.
Impairment Loss on Receivables
We assess our receivables for impairment at each reporting date. In determining whether an impairment loss should be recorded in profit or loss, our management makes judgments as to whether there is an objective evidence that a loss event has occurred. Our management also makes judgments as to the methodology and assumptions for estimating the amount and timing of future cash flows which are reviewed regularly to reduce any difference between loss estimates and actual loss.
Fair Value Measurement of Land
Our owned land is measured based on its fair value. We used independent appraiser registered in OJK to estimate the value of land. In the determination of fair value, the valuation method used requires certain estimates, including comparison with similar transactions of the selling price, adjusted among others by location and size of land.
Income Tax
Under the tax laws of Indonesia, we submit tax returns on the basis of self-assessment. The tax authorities may assess or amend taxes within the statute of limitation under prevailing regulations. We have exposure to income taxes since significant judgment is involved in determining our provision for income taxes. There are certain transactions and computations for which the ultimate tax determination is uncertain during the ordinary course of business. We recognize liabilities for expected tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recognized, such differences will impact the income tax provisions in the period in which such determination is made.
Certain Income Statement Items
Net Sales
For the years ended December 2015, 2016 and 2017, our net sales comprised sales of CMP, KLB and CDB. Accordingly, our net sales are based on our selling prices for and our total sales volume of these products. For sales in Indonesia only, we offer discounts to selected customers based on negotiated rates and market conditions and we accept product returns within four months of delivery for specified grounds relating to product quality and product condition, as verified by our quality control department. Net sales are calculated by deducting discounts and products returns from gross sales.
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The following table sets forth information on the breakdown of our net sales and each item as a percentage of our revenues for the years ended December 31, 2015, 2016 and 2017. For information related to domestic and export sales, see "— Key factors affecting our results of operations — Domestic-Export Mix of Sales."
Net Sales Years Ended December 31,
2015 2016 2017
Rp. Rp. Rp.
(Rp. in billions)
Related party PT Prokemas Adhikari Kreasi - - 53.2 Third parties
Local sales 4,247.6 5,796.2 6,164.5
Export sales 723.4 87.7 1,127.6
Gross sales 4,971.1 5,883.9 7,345.3 Sales returns and discounts Related parties - - (1.1) Third parties (11.1) (9.1) (7.0)
Net Sales 4,960.0 5,874.7 7,337.2
Cost of Goods Sold
Our cost of goods sold mainly comprises the cost of raw materials (principally waste paper, in addition to chemicals and, prior to 2017, very small quantities of virgin pulp), utilities (such as water and energy) and other overhead expenses such as labor expenses and depreciation. Research and development costs are expensed, primarily as indirect labor as part of factory overhead costs.
In the years ended December 2015, 2016 and 2017, cost of raw materials used accounted for 69.5%, 67.6% and 71.5%, respectively, of our total manufacturing cost.
The following table sets forth the breakdown of our cost of goods sold and each item as a percentage of our total cost of goods sold for the periods indicated:
Cost of Goods Sold Years Ended December 31,
2015 2016 2017
Rp. % Rp. % Rp. %
(Rp. in billions except percentages)
Raw materials
At beginning of period
212.4 4.6 233.5 5.0 261.8 4.4
Purchases 3,248.5 71.1 3,101.7 66.0 4,538.7 76.6
At end of period (233.5) (5.1) (261.8) (5.6) (551.1) (9.3)
Raw materials used 3,227.4 70.6 3,073.4 65.4 4,249.5 71.7
Direct labor 87.4 1.9 91.4 1.9 94.6 1.6
Factory overhead
Electricity, gas and water
724.0 15.8 710.9 15.1 890.2 15.0
Depreciation 249.6 5.5 214.5 4.6 207.0 3.5
Indirect labor 167.3 3.7 174.7 3.7 207.3 3.5
Repairs and maintenance
35.7 0.8 90.4 1.9 54.5 0.9
Others 156.7 3.4 191.4 4.1 245.8 4.1
Total factory overhead
1,333.3 29.2 1,382.0 29.4 1,604.8 27.1
Total manufacturing cost
4,648.0 101.7 4,546.8 96.8 5,948.9 100.4
Work in progress
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Cost of Goods Sold Years Ended December 31,
2015 2016 2017
Rp. % Rp. % Rp. %
(Rp. in billions except percentages)
At beginning of period
1.3 0 2.8 0.1 1.7 0
At end of period (2.8) (0.1) (1.7) (0) (5.5) (0.1)
Cost of goods manufactured
4,646.5 101.7 4,547.9 96.8 5,945.0 100.4
Finished goods
At beginning of period
385.2 8.4 461.6 9.8 313.4 5.3
At end of period (461.6) (10.1) (313.4) (6.7) (334.4) (5.6)
Cost of goods sold 4,570.0 100.0 4,696.2 100.0 5,924.0 100.0
Selling Expenses
Selling expenses include outward freight charges, commissions to export agents and salaries. In the years ended December 2015, 2016 and 2017, outward freight charges accounted for 89.0%, 89.4% and 84.9%, respectively, of our total selling expenses.
Outward freight charges are dependent on our export sales volume and country of destination, as well as transportation to local customers. For example, outward freight charges for exports to China are relatively lower than outward freight charges for exports to other countries in Asia and the Middle East. In 2015, exports accounted for 14.6% of net sales and were primarily to customers in various countries in Asia and the Middle East. In 2016, exports accounted for only 1.5% of net sales. For the year ended December 31, 2017, exports accounted for 15.4% of net sales and were primarily to customers in China.
Our exports typically rise for a period following the commencement of operations of additional capacity as the Indonesian market may not be in a position to absorb all of the new capacity immediately. See "- Key factors affecting our results of operations – Production capacity and capacity utilization."
The following table sets forth the breakdown of our selling expenses and each item as a percentage of our total selling expenses for the period indicated:
Selling Expenses Years Ended December 31,
2015 2016 2017
Rp. % Rp. % Rp. %
(Rp. in billions except percentages)
Freight 149.5 89.0 107.5 89.4 127.0 84.9
Salaries and allowance
7.6 4.5 7.4 6.2 10.5 7.0
Commission 3.8 2.3 0.3 0.2 6.2 4.1
Travel 0.5 0.3 0.6 0.5 0.6 0.4
Others 6.6 3.9 4.4 3.7 5.3 3.5
Total 168.0 100.0 120.2 100.0 149.6 100.0
General and Administrative Expenses
General and administrative expenses primarily comprise salaries and employees’ benefits and also include professional fees, rents, representation and donation (including amounts paid in connection with community outreach and religious festivals), depreciation, repairs and maintenance, impairment losses recognized on receivable, tax and permit and others. Since 2015, general and administrative expenses as a
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percentage of total operating expenses has increased substantially as a result of increased salaries and employees' benefits due to both salary increases and additional employees, primarily in connection with the commencement of operations of our PM8 paper machine in June 2017. We may also be required to add substantial employees in connection with the refurbishment and operation of the East Java Assets.
In 2016, we recognized an impairment loss on receivables of Rp. 6.4 billion in connection with receivables from two customers that were experiencing financial difficulties and/or liquidation, which were deemed to be uncollectable.
The following table sets forth the breakdown of our general and administrative expenses and each item as a percentage of our total general and administrative expenses for the periods indicated:
General and Administrative Expenses Years Ended December 31,
2015 2016 2017
Rp. % Rp. % Rp. %
(Rp. in billions except percentages)
Salaries and employees’ benefits 49.4 72.2 51.2 57.0 70.1 66.3
Professional fee 2.9 4.2 8.1 9.0 8.3 7.9
Rents 4.3 6.3 4.6 5.1 4.8 4.5
Representation and donation 3.3 4.8 2.8 3.1 2.2 2.1
Depreciation 1.4 2.0 1.3 1.4 1.2 1.1
Repairs and maintenance 0.5 0.7 0.9 1.0 1.2 1.1
Impairment losses recognized on receivable - - 6.4 7.1 - -
Others 6.6 9.6 14.5 16.1 18.0 17.0
Total 68.4 100.0 89.8 100.0 105.7 100.0
Financial Costs
Financial costs comprise interest paid to financial institutions in connection with our loans. Our financial costs increased substantially in 2016 and 2017 as we incurred additional indebtedness in connection with the construction of our PM8 paper machine and our Cogen3 cogeneration power plant. We expect financial costs to increase due to loans associated with our Subsidiary's acquisition of the East Java Assets.
Gain (loss) on Foreign Exchange - net
Gain (loss) on foreign exchange – net comprises realized and unrealized gains and losses associated with transactions involving currencies other than the Rupiah. The majority of our borrowings, and certain of our expenses, are denominated in U.S. dollars and unrealized mark to market gains and losses comprise the majority of our gain (loss) on foreign exchange - net.
Transactions involving foreign currencies are recorded at the rate of exchange prevailing at the time a given transaction is made. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are adjusted to reflect the rate of exchange prevailing at the balance sheet date. The resulting gains or losses are credited or charged to consolidated current operations as gain (loss) on foreign exchange - net.
Gain (loss) on Derivative Financial Instruments – net
We have entered into forward hedging arrangements with several financial institution counterparties to hedge part of our exposure to fluctuating foreign exchange rates.
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The majority of our borrowings and certain of our expenses are denominated in U.S. dollars, while our sales are primarily denominated in Rupiah. To manage exposure to foreign exchange risks, from time to time we enter into currency forward contracts with financial institutions whereby we sell Rupiah and purchase U.S. dollars on future dates at present rates. These derivative financial instruments are initially measured at fair value on the contract date and are re-measured to fair value at subsequent reporting dates. Gains or losses on derivative financial instruments are recognized in earnings.
Pursuant to a Bank Indonesia policy adopted in October 2015, we are required to hedge a portion of our foreign currency exposure. Pursuant to our internal policy adopted in 2016, we hedge most of our foreign currency exposure, partially by entering into derivative financial instruments and partially as a result of the natural hedge that results from our export sales being denominated in U.S. dollars. During periods when we have significant export sales, our use of derivative financial instruments to hedge our foreign currency exposure is reduced accordingly.
Our policy is to use derivative financial instruments to reduce risk and not for speculative purposes.
Others – net
Others – net comprises extraordinary gains and losses, including the proceeds of insurance claims and sales of excess materials. In 2017, we recognized Rp. 40.4 billion in connection with the proceeds of an insurance claim relating to a technical malfunction at our Cogen2 cogeneration power plant, which resulted in approximately one month of downtime. The insurance claim covered the required replacement part in addition to business interruption, subject to the terms of our insurance policy.
Other Comprehensive Income
Other comprehensive income includes re-measurement of defined benefit obligations, net of tax, and gain on revaluation of property, plant and equipment (including land).
As of December 31, 2015, we changed our accounting policy from the cost model to the revaluation model on land applied prospectively. Land values are stated at their revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated impairment losses.
Effective July 1, 2016, the Company changed the estimated useful life of our machinery. As a result, the assessment of the remaining useful life of such assets is 30 years. The change in estimated useful life is supported by the appraisal which was prepared by KJPP Amin, Nirwan, Alfiantori & Rekan, an independent appraiser, dated September 13, 2016.
Results of Operations
The following table sets forth results of operations data as a percentage of net sales for the periods indicated:
Years Ended December 31,
2015 2016 2017
Rp. Rp. Rp.
(Rp. in billions)
NET SALES 4,960.0 5,874.7 7,337.2
COST OF GOODS SOLD 4,570.0 4,696.2 5,924.0
GROSS PROFIT 390.0 1,178.6 1,413.2
Selling expenses (168.0) (120.2) (149.6)
General and administrative expenses (68.4) (89.8) (105.7)
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Years Ended December 31,
2015 2016 2017
Rp. Rp. Rp.
(Rp. in billions)
Financial costs (150.0) (197.2) (293.4)
Gain (loss) on foreign exchange - net (384.3) 101.0 (49.2)
Gain (loss) on derivative financial instruments - net (2.6) (41.7) (31.1)
Others - net (19.6) (3.9) 40.4
PROFIT (LOSS) BEFORE TAX (402.9) 826.7 824.5
TAX BENEFIT (EXPENSE) - NET 94.0 (48.7) (228.7)
PROFIT (LOSS) FOR THE YEAR (308.9) 778.0 595.9
Other comprehensive income
Items that will not be reclassified subsequently
to profit or loss:
Re-measurement of defined benefit obligation,
net of tax (0.7) (10.1) (17.0)
Gain on revaluation of property, plant and
equipment 1,176.0 4.6 1.9
Total other comprehensive income for
current year 1,175.3 (5.4) (15.0)
TOTAL COMPREHENSIVE INCOME FOR
THE YEAR 866.4 772.6 580.8
Year ended December 31, 2017 compared to year ended December 31, 2016
Net sales
Net sales increased 24.9% to Rp. 7,337.2 billion for the year ended December 31, 2017 from Rp. 5,874.7 billion for the year ended December 31, 2016 primarily due to increased sales volume resulting from increased production due to commencement of operations of PM8 and increased pricing for both domestic sales and, to a lesser extent, export sales. Exports increased significantly to 15.4% of our net sales for 2017 from 1.5% of our net sales for 2016, as our PM8 paper machine commenced operations in June 2017 and our increased capacity exceeded domestic demand for our products at prices exceeding export prices. New Chinese environmental and recovered paper policies resulted in a recovered paper shortage and reduced production of packaging paper in China, which led to in increased demand for our products in China.
Cost of goods sold
Cost of goods sold increased 26.1% to Rp. 5,924.0 billion for the year ended December 31, 2017 from Rp. 4,696.2 billion for the year ended December 31, 2016, primarily due to increased sales volumes resulting from our increased capacity, as our PM8 paper machine commenced operations in June 2017. In addition, in the first quarter of 2017, strong Chinese demand for imported waste paper led to temporarily increased pricing for imported waste paper in Indonesia, which then reversed through the rest of the year due to decreased Chinese demand resulting from the increased prices.
Selling expenses
Selling expenses increased 24.5% to Rp. 149.6 billion for the year ended December 31, 2017 from Rp. 120.2 billion for the year ended December 31, 2016, primarily due to increased outward freight and commission resulting from a significant increase in our export sales to 15.4% of our net sales for 2017 from 1.5% of our net sales for 2016.
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General and administrative expenses
General and administrative expenses increased 17.7% to Rp. 105.7 billion for the year ended December 31, 2017 from Rp. 89.8 billion for the year ended December 31, 2016, primarily due to salaries and employees’ benefits, associated with annual increases in wages and new employees in connection with the commencement of operations of our PM8 paper machine in June 2017.
Financial costs
Financial costs increased 48.8% to Rp. 293.4 billion for the year ended December 31, 2017 from Rp. 197.2 billion for the year ended December 31, 2016, primarily due to drawdowns under our syndicated loan facility with a principal amount of up to US$290.0 million arranged by HSBC in 2013, in connection with the construction and operation of PM8 and Cogen3. In addition, increased sales resulting from increased production partially due to the commencement of operations of PM8 and Cogen3, led us to increase drawdowns under our working capital facilities, which also increased finance costs.
Gain/(loss) on foreign exchange – net
We recognized a loss of Rp. 49.2 billion for the year ended December 31, 2017, compared to a gain of Rp. 101.0 billion for the year ended December 31, 2016, primarily due to depreciation of the Indonesian Rupiah against the U.S. dollar in 2017, which increased our liabilities, as measured in Rupiah, in connection with our U.S. dollar borrowings.
Gain/(loss) on derivative financial instruments – net
Our loss on derivative financial instruments decreased 25.4% to Rp. 31.1 billion for the year ended December 31, 2017 from Rp. 41.7 billion for the year ended December 31, 2016, primarily due to reduced exposure to derivatives instruments. In 2017, we hedged a smaller proportion of our U.S. dollar denominated expenses compared with 2016 because our exports increased resulting in a greater proportion of our 2017 sales being denominated in U.S. dollars as compared with 2016.
Others - net
We recognized an others – net gain of Rp. 40.4 billion for the year ended December 31, 2017, compared to a net loss of Rp. 3.9 billion for the year ended December 31, 2016, primarily due to the proceeds of an insurance claim in connection with a technical malfunction at our Cogen2 cogeneration power plant, which resulted in approximately one month of downtime.
Profit before tax
As a result of the foregoing, profit before tax decreased 0.3% to Rp. 824.5 billion for the year ended December 31, 2017 from Rp. 826.7 billion for the year ended December 31, 2016.
Tax expense – net
Tax expense – net increased 369.6% to Rp. 228.7 billion for the year ended December 31, 2017 from Rp. 48.7 billion for the year ended December 31, 2016, primarily because our 2016 tax expense was substantially reduced by a tax loss carry forward in connection with our losses incurred in 2015. Our loss in 2015 primarily resulted from the weak Indonesian economy and substantial research and development expenses in connection with our development of high-performance, lightweight paper products. Our tax loss carry forward from 2015 was fully utilized to partially offset our 2016 tax liability and was therefore not available to offset our 2017 tax liability.
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Profit for the period
As a result of the cumulative effect of the foregoing, profit decreased 23.4% to Rp. 595.9 billion for the year ended December 31, 2017 from Rp. 778.0 billion for the year ended December 31, 2016.
Year ended December 31, 2016 compared to year ended December 31, 2015
Net sales
Net sales increased 18.4% to Rp. 5,874.7 billion for the year ended December 31, 2016 from Rp. 4,960.0 billion for the year ended December 31, 2015, primarily due to increased average selling prices in 2016 as a result of price increases in the packaging paper industry generally and our introduction of high-performance, lightweight packaging paper products in Indonesia.
Cost of goods sold
Cost of goods sold increased 2.8% to Rp. 4,696.2 billion for the year ended December 31, 2016 from Rp. 4,570.0 billion for the year ended December 31, 2015, primarily due to sales from our inventory of finished goods rather than new production, which was partially offset by increased repair and maintenance costs in connection with routine maintenance of our equipment.
Selling expenses
Selling expenses decreased 28.5% to Rp. 120.2 billion for the year ended December 31, 2016 from Rp. 168.0 billion for the year ended December 31, 2015, primarily due to reduced outward freight and commission resulting from a significant reduction in our export sales to 1.5% of our net sales for 2016 from 14.6% of our net sales for 2015. Our exports were relatively high in 2015 due to lower demand for our products as a result of weakened demand due to a contraction in the Indonesia market.
General and administrative expenses
General and administrative expenses increased by 31.3% to Rp. 89.8 billion for the year ended December 31, 2016 from Rp. 68.4 billion for the year ended December 31, 2015, primarily due to a one-time Rp. 6.4 billion charge for impairment of account receivables.
Financial costs
Financial costs increased 31.5% to Rp. 197.2 billion for the year ended December 31, 2016 from Rp. 150.0 billion for the year ended December 31, 2015, primarily due to drawdowns under our syndicated loan facility with a principal amount of up to US$290.0 million arranged by HSBC in 2013 in connection with the construction of PM8 and Cogen3.
Gain/(loss) on foreign exchange – net
We recognized a gain of Rp. 101.0 billion for the year ended December 31, 2016, compared to a loss of Rp. 384.3 billion for the year ended December 31, 2015, primarily due to appreciation of the Indonesian Rupiah against the U.S. dollar in 2016, which reduced our liabilities, as measured in Rupiah, in connection with our U.S. dollar borrowings.
Gain/(loss) on derivative financial instruments – net
Our loss on derivative financial instruments – net increased by 1,503.8% to Rp. 41.7 billion for the year ended December 31, 2016 from Rp. 2.6 billion for the year ended December 31, 2015, primarily due to
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increased exposure to derivatives instruments. In 2016, we hedged a greater proportion of our U.S. dollar denominated expenses compared with 2015 because our exports decreased resulting in a smaller proportion of our sales being denominated in U.S. dollars as compared with 2015.
Other losses
Other losses decreased by 80.1% to Rp. 3.9 billion for the year ended December 31, 2016 from Rp. 19.6 billion for the year ended December 31, 2015, primarily due to reduced sales of unused material. In 2015 we incurred substantial losses in connection with significant sales of excess pulp, which we no longer use in the production of our products.
Profit/(loss) before tax
As a result of the foregoing, profit before tax was Rp. 826.7 billion for the year ended December 31, 2016, compared to a loss of Rp. 402.9 billion for the year ended December 31, 2015.
Tax expense – net
Tax expense – net was Rp. 48.7 billion for the year ended December 31, 2016, compared to tax benefit of Rp. 94.0 billion for the year ended December 31, 2015, due to our income before tax in 2016 compared with our loss before tax in 2015. Our tax expense for 2016 was reduced by the application of our tax loss carry forward in connection with our losses incurred in 2015, which primarily resulted from the weak Indonesian economy and substantial research and development expenses in connection with our development of high-performance, lightweight paper products.
Profit for the period
As a result of the cumulative effect of the foregoing, profit was Rp. 778.0 billion for the year ended December 31, 2016 compared with a loss of Rp. 308.9 billion for the year ended December 31, 2015.
Liquidity and Capital Resources
Our principal sources of funds for our business have come from the net cash generated by our operations, as well as from financing activities. We typically fund our investments with a combination of debt and equity, with the equity component typically comprising between 10% and 20% of the total investment. Our principal historical uses of funds have been for working capital, capital expenditures related to the expansion and maintenance of our manufacturing facility, debt service and repayment and dividend payments.
Cash Flows
The following table sets forth selected cash flow data from our consolidated statements of cash flows for the periods indicated:
Years Ended December 31,
2015 2016 2017
Rp. Rp. Rp.
(Rp. in billions except percentages)
CASH FLOWS DATA
Net Cash Provided by Operating Activities ...............................72.9 2,206.9 1,113.4
Net Cash Used in Investing Activities ................................(525.8) (1,285.0) (340.8)
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Net Cash Provided by (Used in) Financing Activities ................................................................455.7 (761.9) (708.5)
NET INCREASE IN CASH ON HAND AND IN BANKS ................................................................2.8 160.0 64.1
CASH ON HAND AND IN BANKS AT BEGINNING OF THE YEAR ................................61.0 63.8 223.7
CASH ON HAND AND IN BANKS AT THE END OF THE YEAR ................................
63.8 223.7 287.9
Cash flows provided by operating activities
Cash from operating activities comprises receipts from customers, interest income and income tax refund, partially offset by payments relating to suppliers and for other operational expenses, employees, financial charges and income taxes.
In the year ended December 31, 2017, net cash from operating activities was Rp. 1,113.4 billion, comprising receipts from customers of Rp. 7,106.1 billion, income tax refund of Rp. 14.6 billion and interest income of Rp. 2.1 billion, partially offset by payments relating to (i) suppliers and other operational expenses of Rp. 5,280.5 billion, which was substantially higher than in 2016 due to the commencement of operations of PM8 and Cogen3 in the middle of 2017, (ii) employees of Rp. 379.3 billion, (iii) financial charges of Rp. 261.2 billion which increased compared to the year ended December 31, 2016 due to drawdowns relating to our construction of PM8 and Cogen3, and (iv) income taxes of Rp. 88.5 billion.
In the year ended December 31, 2016, net cash from operating activities was Rp. 2,206.9 billion, comprising receipts from customers of Rp. 5,436.3 billion, income tax refund of Rp. 8.7 billion and interest income of Rp. 2.0 billion, partially offset by payments relating to (i) suppliers and other operational expenses of Rp. 2,664.6 billion, (ii) employees of Rp. 322.3 billion, (iii) financial charges of Rp. 196.8 billion, and (iv) income taxes of Rp. 56.4 billion.
In the year ended December 31, 2015, net cash from operating activities was Rp. 72.9 billion, comprising receipts from customers of Rp. 5,090.4 billion, income tax refund of Rp. 35.1 billion and interest income of Rp. 1.1 billion, partially offset by payments relating to (i) suppliers and other operational expenses of Rp. 4,587.8 billion, (ii) employees of Rp. 311.2 billion, (iii) financial charges of Rp. 140.1 billion, and (iv) income taxes of Rp. 14.6 billion.
Cash flows used in investing activities
Net cash used in investing activities primarily comprises payments of advances for purchase of property, plant and equipment.
In the year ended December 31, 2017, net cash used in investing activities was Rp. 340.8 billion, primarily comprising payment for the acquisition of property, plant and equipment of Rp. 327.9 billion primarily relating to PM8 and Cogen3.
In the year ended December 31, 2016, net cash used in investing activities was Rp. 1,285.0 billion, primarily comprising payment for acquisition of property, plant and equipment of Rp. 1,251.1 billion relating to PM8 and Cogen3.
In the year ended December 31, 2015, net cash used in investing activities was Rp. 525.8 billion, primarily comprising payments of advances for purchase of property, plant and equipment of Rp. 292.9 billion and acquisition of property plant and equipment of Rp. 237.6 billion, in each case relating to PM8
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and Cogen3, with respect to which we were required to make payment in several phases over multiple years.
Cash flows provided by (used in) financing activities
Net cash provided by (used in) financing activities primarily comprises of proceeds from long-term loans from banks and financial institution, proceeds from bank loans, payment of long-term bank loans and financial institution, payment of bank loans, payment of finance lease obligations and dividend payment
In the year ended December 31, 2017, net cash used in financing activities was Rp. 708.5 billion, primarily comprising payment of bank loans of Rp. 2,673.3 billion, payment of long-term bank loans and financial institution of Rp 2,612.2 billion, dividend payment of Rp. 451.0 billion comprising the 2016 annual dividend and 2017 interim dividend, and payment of finance lease obligations of 124.7 billion, partially offset by proceeds from long-term bank loans and financial institution of Rp. 2,471.0 billion, proceeds from bank loans of Rp 2,537.9 billion and proceeds from a sale and leaseback transaction of Rp. 143.9 billion. In 2017, we entered into a sale and leaseback transaction with a leasing company pursuant to which we sold and leased back one incinerator for proceeds of Rp. 89.9 billion and one gas turbine for proceeds of Rp. 54.1 billion. The leaseback period is three years.
In the year ended December 31, 2016, net cash used in financing activities was Rp. 761.9 billion, comprising payment of bank loans of Rp. 2,098.7 billion, payment of long-term bank loans and financial institution of Rp 1,934.9 billion and dividend payment of Rp. 59.5 billion for the 2016 interim dividend, partially offset by proceeds from long-term bank loans and financial institution of Rp. 2,473.8 billion and proceeds from bank loans of Rp 857.3 billion.
In the year ended December 31, 2015, net cash provided by financing activities was Rp. 455.7 billion, comprising proceeds from long-term bank loans and financial institution of Rp. 2,809.5 billion and proceeds from bank loans of Rp 1,396.4 billion, partially offset by payment of long-term bank loans and financial institution of Rp. 2,044.1 billion, payment of bank loans of Rp. 1,669.0 billion and dividend payment of Rp. 37.2 billion relating to the 2014 annual dividend.
Cash on Hand and in Banks
We had cash on hand and in banks of Rp. 63.8 billion, Rp. 223.7 billion and Rp. 287.9 billion as of December 31, 2015, 2016 and 2017, respectively. Any excess cash on hand is usually used to repay working capital loans in order to reduce interest cost and to avoid negative carry.
Description of Material Indebtedness
Below is a summary of certain material terms of our current material indebtedness. This summary is not complete and qualified in its entirety by the relevant loan agreements. See Notes 14, 19 and 20 to our audited consolidated financial statements for a further discussion of our outstanding and historical debt.
Syndicated Loan 2013
In September 2013, we entered into a syndicated loan agreement, as amended by an amendment letter dated June 20, 2018, that provides for multiple facilities in an aggregate principle amount of up to US$240.0 million. The syndicated loan agreement was arranged by The Hongkong and Shanghai Banking Corporation Limited and the syndicate includes Oversea-Chinese Banking Corporation Limited, PT OCBC NISP Tbk, United Overseas Bank Limited, PT Bank UOB Indonesia, Standard Chartered Bank and PT Bank Maybank Indonesia Tbk. The syndicated loan agreement provides for the following facilities, each of which bears interest at a floating rate based on LIBOR plus a spread between 3% and 3.75%.
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A US$100.0 million term loan, with an option for the lenders to increase the principle amount to US$150.0 million. This loan will mature in March 2021 and is required to be repaid in quarterly instalments commencing from October 29, 2017.
A US$120.0 million term loan, which will mature in October 2020 and is required to be repaid in 20 quarterly instalments commencing from January 21, 2014.
A US$20.0 million term loan, which matured on September 2, 2018 and was fully repaid by the Company.
These facilities are secured by certain equipment, including our PM7 and PM8 paper machines and our Cogen 2 cogeneration plant and related insurance policies, and a portion of our land. Pursuant to the syndicated loan agreement we are required to comply with various financial and operating covenants, including maintenance of specified financial ratios, and restrictions on our ability to enter into mergers, sell or pledge assets, incur indebtedness and extend credit, among others.
The Hongkong and Shanghai Banking Corporation Limited ("HSBC")
In February 2011, we entered into a term loan agreement in the principal amount of the U.S. dollar equivalent of EUR 9.0 million with HSBC in order to finance a portion of the cost of the modification of our PM7 paper machine. This loan facility bears floating rate interest equal to six month LIBOR plus 1.25%, has a term of 10 years, and is required to be repaid in 20 quarterly instalments, the first of which was due and paid in June 2012. This loan facility is secured by PM7 and related land and insurance policies. Pursuant to this loan agreement, we are required to comply with various financial and operating covenants, including maintenance of specified financial ratios, and restrictions on our ability to sell or pledge assets, incur indebtedness and extend credit, among others.
In May 2016, we entered into a term loan agreement in the principal amount of the U.S. dollar equivalent of EUR 9.0 million with HSBC in order to finance a portion of the cost of construction of our PM8 paper machine and related facilities. This term loan bears floating rate interest equal to six month LIBOR plus 1.2%, has a term of 9.5 years, and is required to be repaid in 17 quarterly instalments, the first of which was due and paid in September 2017. This loan facility is secured by PM8 and related land and insurance policies. Pursuant to this facility, we are required to comply with various financial and operating covenants, including maintenance of specified financial ratios, and restrictions on our ability to and extend credit, among others.
HSBC Bank Australia Limited
In May 2011, we entered into a term loan agreement in the principal amount of the U.S. dollar equivalent of EUR 12.58 million with HSBC Bank Australia Limited in order to finance a portion of the cost of the modification of our PM7 paper machine. This term loan bears floating rate interest equal to six month LIBOR plus 1.25%, has a term of 10 years, and is required to be repaid in 20 quarterly instalments, the first of which was due and paid in June 2012. This loan facility is secured by PM7 and related land and insurance policies. Pursuant to this loan agreement, we are required to comply with various financial and operating covenants, including maintenance of specified financial ratios, and restrictions on our ability to sell or pledge assets, incur indebtedness and extend credit, among others.
PT Bank Rakyat Indonesia (Persero) Tbk (“BRI”)
In March 2018 we entered into a credit agreement with BRI, which provides for working capital facilities in principle amount of up to Rp. 311.9 billion, which bears fixed rate interest at 11% per annum, and in the principle amount of up to US$40.0 million, which bears fixed rate interest at 5% per annum. The interest rate for each facility is subject to review on a monthly basis. These facilities are secured by our
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PM1 and PM2 paper machines and related equipment, land and insurance policies. Pursuant to this credit agreement, we are required to comply with various covenants, including limitations on our ability to invest in other companies and guarantee debt of third parties.
Facilities in connection with the East Java Assets
See "Facilities – East Java Assets Acquisition" for a description of facilities entered into by our Subsidiary and guaranteed by our Company in connection with our Subsidiary's planned acquisition of the East Java Assets.
Short-Term Loans
Standard Chartered Bank, Jakarta. We and Standard Chartered Bank have entered into a short term loan facility for up to US$55.0 million (or its equivalent in other currencies), which bears interest at the bank's cost of funds plus a spread of 2.5% per annum; an import loan facility for up to US$55.0 million (or its equivalent in other currencies), which bears interest at the bank's cost of funds plus a spread of 2.25% per annum; and an export invoice financing facility for up to US$40.0 million (or its equivalent in other currencies), which bears interest at the bank's cost of funds plus a spread of 2% per annum. Each of these facilities is available through November 2018 and will be automatically extended for 12 months unless otherwise determined by the bank.
PT Bank Central Asia Tbk. We and PT Bank Central Asia Tbk have entered into a letter of credit facility for up to US$70.0 million (or its equivalent in other currencies) and a trust receipt and revolving loan facility with a maximum credit limit Rp 1,000.0 billion or US$70.0 million. These facilities bear floating rate interest based on LIBOR plus a spread of 3% per annum for borrowings denominated in U.S. dollars and fixed rate interest at the rate of 9% per annum for borrowings denominated in Rupiah. These facilities are available until June 2019 and will be automatically extended for another 12 months until otherwise determined by the bank. Pursuant the agreement governing these facilities, we are required to comply with various financial and operating covenants, including maintenance of specified financial ratios, and restrictions on our ability to sell or pledge assets, incur indebtedness and extend credit, among others.
PT Bank OCBC NISP Tbk. We and PT Bank OCBC NISP Tbk have entered into a combined trade and letter of credit facility for up to US$90.0 million, which bears floating rate interest based on LIBOR plus 2.75% per annum; a demand loan facility for up to US$10.0 million, which bears floating rate interest based on LIBOR plus 2.75% per annum; a demand loan facility for up to Rp. 256.7 billion, which bears fixed rate interest at the rate of 9.25% per annum; a foreign exchange transaction facility for up to US$60.0 million, which bears floating rate interest based on LIBOR plus 2.75% per annum.
Capital Expenditures
The following table sets forth a summary of our capital expenditures during the periods indicated:
Years Ended December 31,
2015 2016 2017
Rp. Rp. Rp.
(Rp. in billions)
Lands ..................................................... 10.9 0.2 -
Buildings and land improvements ...................... - - -
Machineries and equipment ................................ 122.6 110.3 121.4
Vehicles .............................................................. 1.9 1.7 2.5
Furniture, fixtures and equipment ....................... 3.0 4.4 1.6
Assets under finance lease ................................ - - 164.2
Construction in progress .......................... 119.6 1,450.3 223.6
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Years Ended December 31,
2015 2016 2017
Rp. Rp. Rp.
(Rp. in billions)
Total ................................................................ 258.0 1,566.9 513.3
The following table sets forth a summary of our planned capital expenditures, primarily in connection with the East Java Assets, for the periods indicated:
For the years ended September 30,
2019 2020 2021
Rp. Rp. Rp.
(unaudited, in billions) Capital expenditure planned ....................................................
Land ......................................................................................... - - -
Buildings and land improvements ............................................ - - -
Machines and equipment .......................................................... 60 300 -
Total ......................................................................................... 60 300 -
Market Risk Disclosures
Our market risk is primarily related to fluctuations in foreign exchange rates and interest rates. The following discussion includes forward-looking statements, which involve risk and uncertainties, summarize our exposure to fluctuations in foreign exchange rates and interest rates and the policies we have implemented to mitigate and control these and other market risks to which we are exposed. It is difficult to accurately predict changes in economic or market conditions and anticipate the effects of such changes on our financial performance and business operations. See Note 28 to our consolidated financial statements for more information on our exposure to market risks.
Foreign Currency Risk
Our domestic sales in Indonesia are denominated in Rupiah. and our accounts and financial records are reported in Rupiah. However, the majority of our borrowings and certain of our expenses are denominated in U.S. dollars. We undertake routine foreign currency transactions including those for the purchase of waste paper materials or equipment for maintenance and expansion, for refinancing and the sale of products to overseas markets. There is an exchange risk exposure inherent in these transactions as a result of currency movements, and this is monitored daily. We actively manage balances of receivables and payables in foreign currency to manage the impact of exchange rate volatility
The majority of our borrowings are denominated in U.S. dollars, with the remainder denominated in Rupiah. At the balance sheet date, monetary liabilities denominated in foreign currencies are translated into Rupiah using the prevailing exchange rates at that date. The resulting gains or losses are credited or charged to current operations. Depreciation of the Rupiah against the U.S. dollar would increase the principal and interest amounts that we are obligated to pay in Rupiah.
In addition to repayments of foreign currency denominated debt, some of our raw materials are also imported and denominated in foreign currencies, mainly U.S. dollar. Transactions during the year involving foreign currencies are recorded at the rate of exchange prevailing at the time the transactions are made.
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Export sales are denominated mainly in U.S. dollars. Our domestic sales in Indonesia are denominated in Rupiah based on a price set by reference to U.S. dollar international prices, but generally with 30 to 60 days credit terms such that we are exposed to exchange rate fluctuations during this period.
With a view to reducing our exposure to foreign exchange risks, from time to time we enter into currency forwards contracts with financial institutions whereby we sell Rupiah and purchase U.S. dollars on future dates at present rates. These derivative financial instruments are initially measured at fair value on the contract date and are re-measured to fair value at subsequent reporting date. Gains or losses on derivative financial instruments are recognized in earnings. Pursuant to a Bank Indonesia policy adopted in October 2015, we are required to hedge a portion of our foreign currency exposure. Pursuant to our internal policy adopted in 2016, we hedge most of our foreign currency exposure.
In addition to entering into derivative transactions to partially reduce foreign exchange risks, we seek to maintain tight working capital management to manage our exposure to foreign exchange rate fluctuations between the Indonesian rupiah and other currencies, primarily the U.S. dollar. Furthermore, our export sales can be scaled up to provide a U.S. dollar income stream to partially offset our U.S. dollar expenses and debt. These export sales, in part, serve to balance our exposure to foreign currency risk with respect to domestic sales denominated in Rupiah and we supplement this with our use of forward covers and options.
We have conducted a sensitivity analysis of our exposure to exchange rate risk. If the U.S. dollar had strengthened against the Rupiah by an additional 4.28% with all other variables held constant, our net income for the year ended December 31, 2017, net of tax, would have decreased by Rp. 137.7 billion.
Interest Rate Risk
We are subject to interest rate risk through our various credit and financing facilities, many of which bear interest at variable rates. We have conducted a sensitivity analysis of our exposure to interest rate risk. If interest rates had been 40 basis points higher and all other variables were held constant, our profit for the year ended December 31, 2017, net of tax, would have decreased by Rp. 9.8 billion.
Credit Risk
We provide finished products to our customers on credit terms ranging from 30 to 60 days. We therefore have exposure to credit risk for collection of receivables. We have a large number of customers and this reduces the concentration of our credit risk of customers. Export sales based on sight letters of credit normally paid in 14 days from shipment. Our derivative instruments also expose us to counterparty credit risk. We have spread our derivative contracts among several credit-worthy financial institutions to mitigate this risk.
Liquidity Risk
We are subject to the risk that we will not have sufficient funds to meet our operating requirements and financial obligations when they fall due. We manage our liquidity risk by maintaining cash on hand and in banks generated from operations and proceeds of maturing financial assets in amounts deemed adequate to finance our operations and to mitigate the effects of fluctuations in cash flows.
Effects of Inflation
Indonesia had an annual inflation rate of approximately 3.61% in 2017, 3.02% in 2016 and 3.35% in 2015, according to the Indonesian Central Bureau of Statistics (Biro Pusat Statistik). Inflation in Indonesia could adversely affect our net income and cash flow to the extent we are unable to increase our
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revenue to cover any increases in our operating expenses resulting from inflation. We have in the past, and may in the future, be constrained in our ability to raise our selling price in response to inflation because of competition and Government regulation, among other factors.
Non-GAAP Financial Measures
We use adjusted EBITDA to provide additional information about our operating performance. Adjusted EBITDA refers to our profit for a period before the following items:
• depreciation and amortization;
• foreign exchange rate gain loss or gain, net;
• financial costs - net;
• Gain (loss) on derivative financial instruments, net;
• other charges (income); and
• income tax expenses.
Adjusted EBITDA is not a standard measure under either IFRS or Indonesian FAS. As our business is capital intensive, capital expenditure requirements and levels of debt and interest expenses may have a significant impact on the net income of companies with similar operating results.
As a measure of our operating performance, we believe that the most directly comparable Indonesian FAS and IFRS measure to adjusted EBITDA is net income. We use adjusted EBITDA in addition to net income because net income includes many accounting items associated with capital expenditures, such as depreciation, as well as non-operating items, such as interest income and interest expense and foreign exchange gains and losses. These accounting items may vary between companies depending on the method of accounting adopted by each company. Funds depicted by adjusted EBITDA may not be available for debt service due to covenant restrictions, capital expenditure requirements and other commitments.
The following table reconciles our profit for the period under Indonesian FAS to our definition of adjusted EBITDA for the periods indicated:
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Years Ended December 31,2015 2016 2017
Rp. Rp. Rp.
(Rp. in billions) Profit (loss) for the period ...................... (308.9) 778.0 595.9Adjustments:
Depreciation........................................... (251.0) (215.9) (208.2)Amortization .......................................... (5.6) (5.9) (3.7)Gain (loss) on foreign exchange -
net ...................................................... (384.3) 101.0 (49.2)Financial cost ......................................... (150.0) (197.2) (293.4)Gain (loss) in derivative instruments (2.6) (41.7) (31.1)Others - net ............................................ (19.6) (3.9) 40.4Tax benefit (expenses) - net ................... 94.0 (48.7) (228.7)
Adjusted EBITDA 410.1 1,190.4 1,369.8
You should not consider our definition of adjusted EBITDA in isolation or construe it as an alternative to profit for the period or as an indicator of operating performance or any other standard measure under Indonesian FAS or IFRS.
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RISK FACTORS
This Document also contains forward-looking statements that involve risks and uncertainties including those described under “Forward-Looking Statements” elsewhere in this Document. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this Document.
Risks relating to our Business
Our business is dependent on our manufacturing facility and the loss of or shutdown of operations of the manufacturing facility could adversely affect our business or results of operations.
Our business is currently dependent on our sole manufacturing facility, which is located at Cikarang Barat, West Java, Indonesia, which is subject to operating risks, such as the breakdown or failure of equipment, power supply or processes, performance below expected levels of output or efficiency, labor disputes, fire, flood, natural disasters, industrial accidents and the need to comply with the directives of relevant government authorities. Any significant damage to our manufacturing facility or any significant difficulties in production could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects. Our manufacturing facility uses heavy equipment and machinery, and while that equipment and machinery is insured, any breakdown or failure of such equipment or machinery may result in us having to make repairs or procure replacements, which may take considerable time or expense. For example, in December 2016 a technical malfunction at Cogen2 resulted in approximately one month of unscheduled downtime and the need to procure certain new parts. Furthermore, we perform regular monthly maintenance on our machines, typically for a total of 30 days per year for each machine. Regular maintenance involves scheduled downtime, is not covered by our business interruption insurance. Any significant operational problems or the loss of our equipment for an extended period of time could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
The planned acquisition of the East Java Assets by our Subsidiary, and any future acquisitions or investments that we may undertake or seek to undertake, may not be completed, may not be successful and could involve operating difficulties, delays and other adverse consequences.
Our Subsidiary has entered into a conditional sales and purchase agreement in connection with the expected acquisition of the East Java Assets, which comprises of eight paper machines, a cogeneration power plant, buildings and roads, a water treatment plant and other related infrastructure and land. Our Subsidiary's acquisition of the East Java Assets is expected to facilitate the expansion of our production capacity into East Java, with a view to providing closer access to our customers based in Central Java and East Java. The East Java Assets have been dormant since 2014 and will require substantial refurbishment and investments prior to their commencement of operations, which we currently expect to take place in 2019. There can be no assurance that the East Java Assets can be made to operate within the expected timeframe and on commercially reasonable terms or at all. See "Business – East Java Assets Acquisition."
We have provided a corporate guarantee for two debt facilities in the aggregate principle amounts of Rp. 346.5 billion and US$45.0 million from PT Bank Central Asia Tbk, PT Bank OCBC NISP Tbk and Oversea-Chinese Banking Corporation Limited, the proceeds of which are to be applied to finance the planned acquisition and refurbish the assets to be acquired, such that PT Bank Central Asia Tbk, PT Bank OCBC NISP Tbk and Oversea-Chinese Banking Corporation Limited will have direct recourse to our Company in connection with such indebtedness. However, there can be no assurance that our Subsidiary will complete the planned acquisition of the East Java Assets. Furthermore, our Subsidiary will be required to make substantial interest payments to service such indebtedness, which could adversely impact our ability to invest in other aspects of our business.
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Our Subsidiary is expected to complete its acquisition of the East Java Assets from PT Surabaya Agung Industri Pulp & Kertas Tbk. ("SAIPK") and PT Capital Management Indonesia ("CMI"), pursuant to a conditional sale and purchase agreement dated August 9, 2018 (the "CSPA"). SAIPK and CMI are affiliated parties to the Company because our Commissioner and Shareholder, Winarko Sulistyo, is the uncle of each of Rasmachahjana Sulistyo, who is the president director of SAIPK, and Zhang Hui Han Sindu, who is a director of SAIPK. The CSPA is conditional on approval from the shareholders of SAIPK, which was obtained in an extraordinary general meeting of the shareholders of SAIPK held on September 19, 2018, among other conditions. There can be no assurance that the terms of the CSPA are at least as favorable to us and our Subsidiary as the terms that we or our Subsidiary could have obtained to acquire comparable assets from any other party.
The anticipated benefits of our Subsidiary's planned acquisition of the East Java Assets, and any future acquisition or investment that we or our Subsidiary may undertake, may not materialize, in particular if the East Java Assets are unable to produce packaging paper in the expected quantities, and within the expected timeframe, or at all, or that we will be able to secure new customers in Central or East Java. The acquisition may also result in contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition or results of operations. We could incur significant upfront capital expenditures and development costs that we may be unable to recover through returns from operations. In particular, we intend to refurbish the machinery and equipment to make them operational and integrate them into our operations. We currently expect such refurbishment and other investments to cost approximately US$30 million and production will resume gradually and may take up to 24 months to complete. However, there can be no assurance that these refurbishments and investments will be completed on time or made at all. For example, construction of our PM8 paper machine commenced in 2014 but was put on hold for approximately 18 months due to a change in the location of the project, with construction eventually resuming in 2015. In addition, any acquisitions or investments, and their integration into our existing operations, could divert management’s time and focus from operating our business. Integrating assets is risky and may result in unforeseen operating difficulties and expenditures. We may fail to realize expected synergies, growth opportunities and other benefits from the acquisition of the East Java Assets and any future acquisitions or investments that we may undertake.
Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
In 2017, the Ministry of Environment and Forestry identified suspected hazardous waste on our land and ordered us to investigate and conduct rehabilitation as appropriate.
The production residue from our manufacturing processes and facilities are scrap paper, plastics, incinerator ash, boiler ash and sludge from our waste water treatment plant. Scrap paper and the sludge from our waste water treatment facilities are re-used in our manufacturing process and the excess, if any, is burned on-site in our incinerators. Plastic waste, which comprises a portion of the production residue from our manufacturing processes, is also burned in our incinerators. Any excess plastic is stored on-site at our manufacturing facility.
Incinerator ash and boiler ash are collected by third parties for use as raw materials in cement production, with any excess collected by a licensed company specializing in waste collection and disposal services. In situations where the third parties are unable to collect and remove all of the ash, we have deposited the ash material onto land within our site area.
Following an inspection of our production facilities in November 2017, the Ministry of Environment and Forestry had ordered us to recover the land where we had disposed waste residue. We have since met with and corresponded with the Ministry of Environment and Forestry several times to clarify their requirements and discuss the remediation measures to comply with these requirements. We have also
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regularly communicated with the Ministry of Environment and Forestry our progress in complying with these requirements.
In March 2018, we engaged an independent licensed surveyor to conduct chemical tests to determine the presence and level of residual hazardous waste on our land. These test results were negative for hazardous waste under applicable national regulations. However, we do not regularly conduct chemical testing of the residue and offer no assurance that hazardous waste is not handled or deposited on our land.
Also in March 2018, we entered into a cooperation agreement with a certified technical consultant to help us prepare a land recovery plan for implementation. The land recovery plan was submitted to the Ministry of Environment and Forestry for approval in August 2018.
We have also taken a variety of steps to comply with the requirements of the Ministry of Environment and Forestry, including removing the existing incinerator ash residue and silica sand powder from our land for disposal by a company specializing in collection and disposal services for hazardous material, storing incinerator ash and boiler ash in a licensed storage facility rather than on-site at our manufacturing facility, measuring the air quality of turbine gas emissions and our coal boiler and improving record keeping and account preparation with respect to our hazardous material management system.
While we believe that we have adequately addressed the concerns raised by the Ministry of Environment and Forestry and that we are currently in compliance with applicable regulations, there can be no assurance that the Ministry of Environment and Forestry will not raise further issues in connection with our waste disposal or any other matter in the future.
We may not be able to implement our business strategies on schedule or within our budget or at all.
We have implemented and may from time to time implement strategies to meet strategic objectives of our business including but not limited to focusing on core competencies, undertaking well-timed and measured expansions, maintaining efficient, low-cost and environmentally sustainable operations and optimizing capital structure.
The successful implementation of our business strategies is subject to significant business, economic and competitive uncertainties and contingencies, any of which could delay or inhibit the implementation of our business strategies. For example, the planned acquisition of the East Java Assets by our Subsidiary involves a number of risks and uncertainties. See “—The planned acquisition of the East Java Assets by our Subsidiary, and any future acquisitions or investments that we may undertake or seek to undertake, may not be completed, may not be successful and could involve operating difficulties, delays and other adverse consequences.” Any failure to successfully implement our business strategies could result in a loss or delayed receipt of revenue, an increase in financing costs or the failure to grow our business or increase our profitability, any of which may materially and adversely affect our business, financial condition, results of operations and prospects.
Any reduction or interruption in our supply of electricity, or increased electricity costs, may adversely affect our business, financial condition, results of operations and prospects.
Our operations consume significant amounts of electricity. Our manufacturing facility uses electricity from our three cogeneration power plants, two of which are gas-powered and one of which is coal-powered. There can be no assurance that we will be able to obtain gas and coal in sufficient quantities, or on commercially reasonable terms, for our cogeneration plants to supply sufficient electricity for our manufacturing facility. Moreover, while we have a back-up power supply, we cannot assure you that it will be effective in all instances, that it could be sustained in extended disruptions to our power supply or that, since our back-up power supply is more costly than power generated by our cogeneration plants, it
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will provide electricity at prices that are comparable to our costs for generating power from our cogeneration power plants. Any disruption to our supply of electricity could therefore cause a similar disruption to our manufacturing operations and our business which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Electricity and fuel prices are unpredictable and fluctuate based on events we cannot control, such as geopolitical developments, supply and demand for oil and gas, war and unrest in oil producing regions and weather concerns. We cannot assure you that our operations will not be materially adversely affected in the future if electricity and fuel costs increase or if the supply is limited or interrupted. We obtain our supply of oil and coal from domestic suppliers pursuant to fixed price contracts, and we also have the option of sourcing coal at spot rates based on market conditions. We do not hedge our exposure to the spot prices of gas and coal. Any increase in our costs to source fuel, or reduction or interruption in the supply of electricity and fuel used by us, could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
We have a substantial amount of debt that could limit our flexibility in operating our business.
We have provided a corporate guarantee for two debt facilities in the aggregate principle amounts of Rp. 346.5 billion and US$45.0 million from PT Bank Central Asia Tbk, PT Bank OCBC NISP Tbk and Oversea-Chinese Banking Corporation Limited, the proceeds of which are to be applied to finance the planned acquisition and refurbish the East Java Assets, such that PT Bank Central Asia Tbk, PT Bank OCBC NISP Tbk and Oversea-Chinese Banking Corporation Limited will have direct recourse to our Company in connection with such indebtedness. However, there can be no assurance that our Subsidiary will complete the planned acquisition of the East Java Assets. Furthermore, our Subsidiary will be required to make substantial interest payments to service such indebtedness, which could adversely impact our ability to invest in other aspects of our business. All such indebtedness is secured by certain of our assets, including our land, paper machines and power plants. In addition, we may incur additional indebtedness in the future, subject to the limitations imposed by our financing arrangements.
As a result of our significant indebtedness and interest expense over the next several years, we will require substantial cash flows to meet our obligations under our current and anticipated indebtedness. In the past, we have had to refinance our loan repayments. Although we believe that our current levels of cash flows from operations and working capital borrowings are sufficient to service our existing debt and make necessary capital expenditures, a substantial part of our cash flow from operations in the future may not be available for our business operations or to fund any significant expansion.
The terms of our financing arrangements may also:
• limit our ability to obtain necessary financing or better financing terms in the future for working capital, capital expenditures, debt service requirements or other purposes;
• limit our ability to pay dividends or make other distributions;
• limit our ability to invest in our business and to take advantage of future business opportunities;
• place us at a competitive disadvantage to our competitors with less indebtedness;
• limit our ability to react to changing market or business conditions, changes in the paper industry or economic downturns;
• limit our ability to enter into any amalgamation, merger or demerger with another company;
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• limit our ability to make capital expenditures for the growth of our business; and
• limit our ability to create or permit to exist any liens on any property revenues or assets, with the exception of those already existing.
Our failure to comply with any of the covenants contained in our financing arrangements could result in a default thereunder which would permit the acceleration of the maturity of the indebtedness under such agreements and, to the extent such indebtedness is secured by our assets, the enforcement of such security. Furthermore, some of our financing arrangements contain cross-acceleration or cross-default provisions. If we are unable to refinance in a timely fashion or on acceptable terms, such inability could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
Our product and raw material prices are subject to fluctuations due to cyclical and other factors.
Prices for our paper products are based upon or affected by global prices for such products, which tend to be cyclical. The markets for paper products are sensitive to changes in industry capacity and output levels and changes in the world and Asian economies, all of which can have a significant impact on selling prices. Our profitability is affected by worldwide and regional levels of demand for consumer packaging paper, along with price competition. Moreover, weak economic conditions or changes in consumer preferences, whether worldwide, in Asia or in Indonesia specifically, may reduce demand and put pressure on margins. Fluctuations in prices may adversely affect our business, financial condition, results of operations, cash flows and prospects. In addition, the prices of our key raw materials, also tend to fluctuate. We obtain our supply of raw materials from suppliers in Indonesia and abroad at prices that vary with the applicable spot price and we do not engage in long-term hedging of our exposure to the spot prices of our raw materials. For a portion of our supply of waste paper we rely on imported waste paper, which tends be more costly than domestically sourced waste paper. For example in the first quarter of 2017, strong Chinese demand for imported waste paper led to temporarily increased pricing for imported waste paper in Indonesia, which then reversed through the rest of the year due to decreased Chinese demand resulting from the increased prices. Currently, the prices of imported waste paper are significantly lower due to recent policy changes in Chinese recovered paper imports regulations. In addition, the Government could increase import duties, tariffs or undertake other similar actions on our raw materials or other governments could impose trade restrictions on exports of our raw materials. To the extent that we cannot pass along increased prices for our raw materials to our customers, our business, financial condition, results of operations, cash flows and prospects will be adversely affected.
Our ability to pass on increases in the cost of raw materials to our customers is dependent upon market conditions and our cost position compared to competitors. In addition, it typically takes at least one month for increases in raw materials costs to be reflected in our pricing. There may be periods of time in which we may not be able to fully recover increases in the cost of raw materials due to a decrease in demand for, or oversupply of, our products. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
Also, as certain of our costs are denominated in currencies other than Rupiah, our costs are affected by prevailing rates of exchange, and subject to translation and transaction risks related to the fluctuation of foreign currency exchange rates. See “ –We are exposed to exchange rate fluctuations.”
Our business is dependent on the availability of raw materials and other inputs.
The principal raw materials we use in our production process are waste paper and chemicals. Waste paper currently accounts for 100% of our fiber raw material requirements. For periods prior to the fourth quarter of 2017, we also used very small quantities of virgin pulp in the production of CDB.
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We source both waste paper and chemicals primarily from domestic packers and other domestic and overseas suppliers. If packers or third party suppliers are unable or unwilling, for any reason, to provide us with raw materials at acceptable costs and in a timely manner, our business, financial condition, results of operations, cash flows and prospects will be adversely affected. Our products are made from 100% recycled waste paper.
We use natural gas as fuel in two of our cogeneration power plants. We receive our natural gas through a supply contract with PT Pertamina Persero, or Pertamina, a Government-owned oil company. If Pertamina is unable to supply us with natural gas or does not renew our contract when it expires in 2021, we may not be able to obtain natural gas at reasonable prices or at all. We use coal as fuel in our third cogeneration power plant. We source coal on the spot market and do not have a long term contract in place. There can be no assurance that we will be able to continue to source coal on the spot market at acceptable prices or at all. Any of the foregoing could adversely affect our business, financial condition, results of operations, cash flows and prospects.
We also use large quantities of water for our paper making process. We obtain our water requirements from the Cikarang River and have two renewable contracts with Perusahaan Umum Jasa Tirta II, a state-owned water company, granting us the right to draw water from the Cikarang River. The current terms of these contracts will expire in September 2018 and December 2019. We are in the process of renewing the contract that expires in September 2018. If Perusahaan Umum Jasa Tirta II does not renew the contracts when they expire, we may not be able to obtain sufficient water at reasonable prices or at all, which would adversely affect our business, financial condition, results of operations, cash flows and prospects. The East Java Assets are located adjacent to the Sungai Berantas (Berantas River) from which we expect to source water for our operation of the East Java Assets. We depend on a number of suppliers for our raw materials and any interruption in our supply of raw materials, or increased costs for raw materials, would harm our business and financial performance.
Most of our raw material requirements are sourced from third party suppliers. As a consequence, we are highly dependent on these suppliers for an uninterrupted supply of our raw materials. In addition, we do not have written contracts with some of our suppliers, and many of our contracts can be terminated on short notice. Such supply could be disrupted for a wide variety of reasons, many of which are beyond our control.
The primary raw material used in our manufacturing process is waste paper. For the year ended December 31, 2017, 51% of our waste paper requirements were sourced locally and 49% of our waste paper requirements were imported. Generally, locally sourced waste paper is cheaper than imported waste paper, however due to supply constraints we are unable to source all of our waste paper in Indonesia and rely on imports for a portion of our waste paper requirements. Prices of waste paper vary with global prices of raw materials and paper products and increases in the market price for waste paper, or a change in the mix of locally sourced waste paper and imported waste paper, may increase our costs and adversely impact our business. For example in the first quarter of 2017, strong Chinese demand for imported waste paper led to temporarily increased pricing for imported waste paper in Indonesia, which then reversed through the rest of the year due to decreased Chinese demand resulting from the increased prices. Currently, prices of imported waste paper are significantly lower due to recent policy changes in Chinese recovered paper imports regulations. It typically takes at least one month for increases in raw materials costs to be reflected in our pricing.
We do not have exclusive or long-term supply arrangements with our raw materials suppliers, and typically purchase waste paper on a spot basis from suppliers of varying sizes and sophistication. We typically are required to make payment to import suppliers within six to nine months following delivery, and such suppliers bear the cost of shipping to our warehouse. We typically are required to make payment to domestic suppliers upon delivery to our warehouse.
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Any interruption in the supply of, or increase in the price of, raw materials could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
Supply of inferior quality or defective products, or shipment difficulties, could harm our reputation and business.
We cannot assure you that our quality control measures and systems are or will continue to be adequately maintained. The consequences of not being able to do so, due to accidental or malicious raw material contamination, or due to supply chain contamination caused by human error or faulty equipment, could be severe. Such consequences may include adverse effects on our reputation, loss of customers and market share, financial costs or loss of revenue. If manufacturers of the end-products that utilize our packaging produce inferior quality or defective products, our industry, or our end-products' industries, could be negatively impacted, which could have adverse effects on our business.
In addition, if any of our products are found to be defective, we could be required to recall such products, which could result in adverse publicity, significant expenses and a disruption in sales and could affect our reputation and that of our products. Although we maintain product liability insurance coverage, potential product liability claims may exceed the amount of insurance coverage or potential product liability claims may be excluded under the terms of the policy.
Furthermore, we are responsible for shipping our products to our customers and we rely on third party logistics providers in order to do so. There can be no assurance that such third parties will deliver our products in proper condition and/or in a timely manner, or that any recourse we may have against such third parties would offset our liability to our customers in full or at all.
Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
We sell our products on credit with payment terms ranging from 30 to 60 days. This may cause us to encounter cash flow difficulties.
A significant portion of our domestic net sales are made on payment terms ranging from 30 to 60 days and more than 90% of net sales for the years ended December 31, 2015, 2016 and 2017 were on these terms. Export sales are based on sight letters of credit that are normally paid within 14 days of the shipment. If we encounter significant delays or defaults in payment by our customers or are otherwise unable to recover our trade receivables, our cash flows from operations may be inadequate to meet our working capital requirements. Our business, financial condition, results of operations, cash flows and prospects may be adversely affected.
We do not, however, enjoy similarly favorable payment terms with our suppliers and are generally required to pay suppliers, including suppliers of raw materials such as waste paper and chemicals, in periods ranging from one day to 270 days. However, from time to time, our receipts may lag behind the expenses associated with sales to the extent that we are required to pay for the supplies before we receive payment for our sales. This has caused us to experience negative operating cash flow, and we expect to continue to experience negative operating cash flow or difficulties with operating cash flow, particularly if we encounter a sudden increase in demand for our products or rapid increase in our production levels. If we are unable to meet our immediate cash needs through sales because of the imbalance of terms, we have in the past and may in the future be required to borrow short-term funds, which may not be on favorable terms or have to forego opportunities to sell more products if no such funds are available on economic terms. Although we are currently able to borrow short-term funds on what we believe are reasonable terms, we may not be able to continue to borrow on such terms in the future. Such difficulties
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could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
We are exposed to exchange rate fluctuations.
For the year ended December 31, 2017, 84.6% of our net sales was derived from domestic sales denominated in Rupiah. However, because a substantial majority of our debt is denominated in U.S. dollars and prices for imported waste paper, natural gas, spare parts and certain chemicals are generally denominated in U.S. dollars, we are exposed to risks associated with exchange rate fluctuations between the Rupiah and other currencies, primarily the U.S. dollar. Although we have significant export operations that provide a ready market in case there is a decrease in domestic demand and access to U.S. dollar receivables (which provides us a natural hedge, as a U.S. dollar income stream that can be used to pay U.S. dollar expenses and debts), to the extent that we are not able to increase the Rupiah prices for our products sold in Indonesia to reflect any depreciation of the Rupiah against the U.S. dollar for whatever reason, our business, financial condition, results of operations, cash flows and prospects could be adversely affected.
In addition, a depreciation of the Rupiah against the U.S. dollar beyond our hedge position would increase the principal and interest amounts we are obligated to pay in Rupiah terms, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects. We recognized a loss of Rp. 49.2 billion for the year ended December 31, 2017, primarily due to depreciation of the Indonesian Rupiah against the U.S. dollar in 2017, which increased our liabilities, as measured in Rupiah, in connection with our U.S. dollar borrowings. The weakness of the Rupiah against the U.S. dollar has continued in 2018 as the Rupiah has recently fallen to 20-year lows against the U.S. dollar. Furthermore, to the extent we hedge our exposure to exchange rate fluctuations, we may not fully benefit from exchange rate movements that would otherwise be in our favor, in particular any strengthening of the Rupiah. In addition, we are required to re-measure the fair value of our currency forward contracts as of each balance sheet date pursuant to "mark-to-market" rules, which may cause us to incur losses.
Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
Our current operations require a substantial number of regulatory licenses, approvals and permits.
Our current operations require us to obtain a substantial number of regulatory licenses, approvals and permits. In addition, our Subsidiary has entered into a conditional sales and purchase agreement in connection with the expected acquisition of the East Java Assets to expand our operations, an area in which we do not currently operate and we are in the process of applying for the applicable permits. We cannot assure you that we will obtain or maintain licenses, approvals or permits necessary for our current operations or our Subsidiary's planned operation of the East Java Assets, or that upon the expiration of our existing licenses, approval or permits, we will be able to successfully renew them. In addition, if the relevant authorities enact new regulations, we cannot assure you that we will be able to successfully meet their requirements. If we fail to obtain or renew necessary regulatory licenses, approvals and permits, we may have to suspend our expansion plans, cease construction of our new facility and/or operation of our existing facility, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
Our inability to comply with, and changes in, environmental regulations may adversely affect us.
We are in the business of manufacturing consumer paper packaging products, which requires the use of significant amounts of water and power, and involves the emission and generation of large amounts of liquid waste, both of which may adversely affect the environment. We are subject to Indonesian national
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and regional environmental and health and safety laws, regulations and other legal requirements. These laws govern discharge of substances into the air and water, the management and disposal of hazardous substances and waste, site cleanup, groundwater quality and availability and plant and wildlife protection. In particular, our operations are supervised by the local government and the State Ministry of Environment and Forestry, or SMOE, which are responsible for monitoring our implementation of environmental laws and regulations. We are obliged to submit periodic environmental reports to the relevant regional environmental agency.
In addition, we are required to obtain, maintain and comply with certain licenses and clearances from the relevant authorities for the collection, treatment, storage and disposal of hazardous waste. The Government has the power to take action against companies for failure to comply with applicable environmental regulations, including the imposition of fines, clean-up costs and revocation of licenses. We do not carry environmental liability insurance coverage for our facility and would therefore be fully liable for any such fines and/or costs. We believe that our operations are currently in compliance in all material respects with all environmental regulations and standards applicable to it. However, we have in the past been found not to be compliant with certain environmental regulations. See "— In 2017, the Ministry of Environment and Forestry identified suspected hazardous waste on our land and ordered us to investigate and conduct rehabilitation as appropriate." There can be no assurance that the Government or SMOE will not change existing regulations or enact additional more stringent regulations, which would require us to incur additional capital expenditure or operating expenses, or that we will be able to obtain, renew or maintain licenses and clearances necessary to continue our operations. See "Business – Environmental Matters" and "Regulation – Environmental Related Regulations."
In addition, certain of our exports are subject to environmental laws in the country to which it exports or to specific standards set by the end-user of our products. Our failure to adhere to such standards could result in fines and other penalties and/or the loss of key export markets or customers or otherwise could negatively affect or harm our reputation generally.
Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
Our insurance coverage may not adequately protect it against possible risk of loss.
We carry property all-risk, machinery breakdown, earthquake, business interruption, public liability and fire insurance on our manufacturing facility, with policy specifications and limits (including loss sublimits) customary for similar facilities in the industry in which it operates. However, some types of losses, such as losses resulting from wars or acts of terrorism generally are not insured because they are either uninsurable or not economically practical. Should an uninsured loss or a loss in excess of insured limits occur, we could lose capital invested in that property as well as the anticipated future revenues derived from the manufacturing activities conducted at that property, while still remaining obligated for any financial obligations related to the property. Any such loss could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
We may be subject to liability in connection with employee and/or workplace accidents at our manufacturing facility.
Our operations involve the operation of heavy machinery, and accidents resulting in employee injuries or deaths may occur. We cannot assure you that employee and/or workplace accidents at our manufacturing facility, whether due to machinery malfunctions or other reasons, will not occur in the future. In such an event, we may be liable for loss of life and property, medical expenses, medical leave payments and fines or penalties for violation of applicable health and safety laws and regulations in Indonesia. We may also be subject to business interruptions or negative publicity as a result of equipment shutdowns for
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government investigation or implementation or imposition of safety measures as a result of such accidents. These types of accidents or enhanced safety measures imposed by the relevant authorities in Indonesia could have a material adverse effect on the manner in which we conduct our operations, and, in turn, our business, financial condition, results of operations, cash flows and prospects.
The consumer packaging paper industry is highly competitive.
Our competitors include domestic paper manufacturers as well as paper manufacturers in China, South Korea, Thailand, Taiwan and Vietnam and other foreign countries. Many of these entities may have greater financial resources, shorter time-to-market and larger production levels that may provide them with greater economies of scale. The packaging paper industry is particularly sensitive to price fluctuations as well as other factors including quality and service, with varying emphasis on these factors depending on the product line.
The combination of these market influences has created an intensely competitive environment in which our customers continuously evaluate their suppliers, often resulting in downward pricing pressures and the need for continuous introduction and commercialization of innovative new products, continuing improvements in customer service and the maintenance of strong relationships with large, high-volume purchasers. Furthermore, to the extent that we do innovate, we may not be able to obtain protection for any intellectual property that we develop such that we would not have legal recourse if a competitor were to copy such innovations. For example, our high-performance, lightweight consumer packaging paper, which we introduced to the Indonesian market in 2015 and is critical to our business, is not patented. As a result of these factors, we may experience reduced sales and profitability if a competitor were to produce high-performance, lightweight consumer packaging paper or other competitive products. Our ability to recover our cost increases through price increases is limited by competition, among other factors.
We believe we are a pioneer in the production of high-performance, lightweight consumer packaging paper in Indonesia, which we believe can reduce our customers' costs because the increased volume of paper per tonne facilitates the production of more boxes per tonne of containerboard purchased. Also, we have the FSC chain of custody certification, which certifies that the source of our raw material used is not sourced from illegal logging and allows a number of large end-users to use our products and not those of our domestic competitors without such certification. If our domestic competitors were to produce lightweight consumer packaging paper or obtain FSC chain of custody certification in the future we would face increased competition. Further, if we fail to maintain the FSC chain of custody certification, either in our current and/or future operations or in the integration of the East Java Assets, this may result in increased competition to our business.
Our competitive position could be adversely impacted by a host of factors including any negative perceptions of us relative to our competitors, whether among our customers, end-users, consumers or others. Any negative publicity, even if untrue, could adversely impact our competitive position and our ability to attract and retain customers.
There can be no assurance that we can continue to effectively compete with domestic producers in the future. To the extent that one or more of our competitors becomes more successful with respect to any key competitive factor, our ability to attract and retain customers could be materially adversely affected, which could diminish our sales volumes and revenues. See “Business — Competition.”
Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
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We rely upon certain customers for a majority of our net sales and demand has been driven in part by markets trends in certain markets that may not continue.
We sell our products in the domestic markets and also export them to several countries. The bulk of our net sales are to the Indonesian domestic market, primarily to domestic box manufacturers. Our top 10 customers accounted for 51% of our total revenue for the year ended December 31, 2017.
A tariff of 5% is applied to packaging paper sourced from outside Indonesia, except for countries that are members of the ASEAN, South Korea and China. A reduction or elimination of the import tariff could lead to increased competition in the domestic industry, which could cause certain customers to reduce or cease their purchases of our products.
For the year ended December 31, 2017, exports accounted for 15.4% of our net sales and were primarily to customers in China for each respective time period. We believe that demand for our products in China has benefitted from, among other factors, an increase in e-commerce activity spurring demand for packaging paper in order to ship goods to consumers. There can be no assurance that demand from customers in China will continue to be strong. In particular, it is possible that future regulatory changes in China may adversely impact demand for our products there. Furthermore, e-commerce in Indonesia is not as developed as it is in China and there can be no assurance that it will ever be as developed as in China. There can be no assurance that any reduction in demand from China would be offset in whole or in part by increased demand from customers in Indonesia.
Thus, our business, financial condition, results of operations, cash flows and prospects would be materially and adversely affected if we were to lose any of our major customers, or if we were unable to find new customers.
Our business and financial performance may be harmed by changes in consumer lifestyle, eating habits, nutritional preferences and health-related and environmental concerns.
Many of our products are used by end-users to manufacture packaging for food or beverage products. Approximately 70% of our products are used by converters to make boxes for end-users in the food and beverage sector. Any reduction in consumer demand for these product types as a result of lifestyle, environmental, nutritional or health considerations could have a significant impact on our customers and hence on our financial condition and results of operations. Product stewardship and resource sustainability concerns, including the recycling of products and product packaging and restrictions on the use of potentially harmful materials in products, have received increased attention in recent years and are likely to play an increasing role in brand management and consumer purchasing decisions. Our financial position and results of operations might be adversely affected to the extent that such environmental concerns or changes in consumer lifestyle reduce demand for our products.
Our business and financial performance may be adversely affected by downturns in the target markets that we currently serve or intend to serve.
Many of our products are used by end-users for packaging of products manufactured by other companies, so demand for our products is directly affected by consumer consumption of the products sold in the packages we produce. General economic conditions affect consumption in our primary end-user markets, including food and beverage, electronics, footwear, household and personal care and other packaged consumer products. We depend on market conditions in the retail industry and consumer demand for retail products, which are also affected by general economic conditions.
Downturns or periods of economic weakness or increased prices in these consumer markets have resulted in the past, and could result in the future, in decreased demand for our products. In particular, our
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business has been in the past, and could be in the future, adversely affected by any economic downturn that results in difficulties for any of our major customers, including retailers. For example, any uncertainty about future economic conditions globally, and in Southeast Asia and throughout Asia-Pacific in particular, could negatively impact our customers and adversely affect our results of operations. These conditions are beyond our control and may have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
We have a heavily unionized work force and may not be able to manage our labor costs.
The majority of our employees were members of a labor union. Other than a half-day strike during 2012, we have not experienced any strikes or work stoppages. However, we could be involved in labor disputes and can make no assurances that disruptions or work stoppages will not occur in the future, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects. Furthermore, efforts by labor unions to organize our employees may divert management's attention and increase operating expenses and we may be unable to negotiate acceptable collective bargaining agreements with those who have chosen to be represented by unions, which could lead to union-initiated work stoppages, including strikes. Our current collective bargaining agreement, which typically has a two year term, would have expired in September 2018, but we expect to receive approval to extend the term from the Government for an additional six months, such that the current collective bargaining agreement would expire in March 2019. There can be no assurance that we will be able to secure similar terms to our current collective bargaining agreement or at all. Labor disputes are not uncommon in Indonesia and no assurances can be made that such disputes will not arise in the future. Many of the employees of our major suppliers and customers are also members of labor unions. Any strikes or work stoppages conducted by such employees could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
We rely on senior management, key engineers and production facility operators, and the loss of the services of any such personnel or the inability to attract and retain them may negatively affect our business.
We depend on the services of experienced key senior management, including our President Director, Mr. Yustinus Yusuf Kusumah, for setting our strategic direction and managing our business, which are crucial to our success, and it would be difficult to find and integrate replacement personnel in a timely manner or at all if we lose their services. We also employ highly skilled engineers and facility operators at our manufacturing / production facility. The loss of the services of any of our senior management or key engineers or operational personnel, or the inability to attract new qualified personnel for our current operations and our planned operation of the East Java Assets, could have a material adverse effect on our operations.
Our ability to retain senior management as well as other senior and experienced personnel will, in part, depend on our ability to have appropriate remuneration and incentive schemes in place. We cannot be sure that the remuneration and incentive schemes we have in place will be sufficient to retain their services. We additionally face competition for such personnel from competitors in our industry. If we are unable to attract or retain our key senior management and senior and experienced personnel with respect to our current operations or in our expected future operation of the East Java Assets and are unable to replace such personnel as necessary, our business, results of operations or financial condition could be materially and adversely affected.
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Our controlling shareholders' interests may differ from those of our other shareholders and there may be conflicts of interest between us and them and between us and certain other parties.
Through their control of PT. Intercipta Sempana and PT. Intratata Usaha Mandiri, as well as through their direct ownership, Mr. Winarko Sulistyo, and his family beneficially own approximately 88.9% of the outstanding voting common shares of the Company. Nominees of Mr. Sulistyo hold positions on our board of commissioners ("Board of Commissioners") and board of directors ("Board of Directors"), which nominees include, for the Board of Commissioners, Mr. Winarko Sulistyo himself, and have the ability to exercise a controlling influence over our business. Through their shareholding interest, Mr. Sulistyo, together with his family, will continue to have control over the election of commissioners and directors, amendments to articles of association and other major corporate decisions. The interests of Mr. Sulistyo may differ from the interests of the Company and the other shareholders and there can be no assurance that they will not take actions that conflict with the interests of the Company or other shareholders.
We lease our Jakarta office space pursuant to a leasing agreement for land and building with Ms. Lila Noto Pradono, wife of Mr. Winarko Sulistyo. This leasing agreement was most recently renewed in March 2018. This transaction is a related party transaction and may involve conflicts of interest which may be detrimental to us and there can be no assurance that the terms of the this leasing agreement are at least as favorable to us as the terms that we could have obtained for a similar lease from any other party.
On August 9, 2018, our Subsidiary entered into the CSPA with SAIPK and pursuant to which our Subsidiary is expected to acquire the East Java Assets. SAIPK and CMI are affiliated parties to the Company because our Commissioner and Shareholder, Winarko Sulistyo, is the uncle of each of Rasmachahjana Sulistyo, who is the president director of SAIPK, and Zhang Hui Han Sindu, who is a director of SAIPK. There can be no assurance that the terms of the CSPA are at least as favorable to us and our Subsidiary as the terms that we or our Subsidiary could have obtained to acquire comparable assets from any other party.
Any disruption, failure or delay in the operation of our information systems may disrupt our operations and cause an unanticipated increase in costs.
We have implemented various information technology solutions that are critical to our operations. For example, we have implemented SAP software, which allow us to use performance management software to monitor performance, set targets and optimize resources. These and other customized planning, optimization and scheduling tools allow us to adjust our operations by, for example, increasing throughput and improving process efficiencies. Any disruption or failure in the operation of these systems may result in loss of information, and unanticipated increase in costs. Further, these systems are potentially vulnerable to malfunctioning, damage or interruption from a variety of sources, including due to employee error or default, virus infection as well as power outage, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
We may be subject to litigation claims in the ordinary course of our business.
From time to time, we may be subject to litigation arising out of our operations. Damages claimed under any such litigation may be material or may be indeterminate, and the outcome of such litigation could materially impact our business, results of operations or financial condition. While we assess the merits of each lawsuit and defend ourselves accordingly, we may be required to incur significant expenses or devote significant resources to defending ourselves against such litigation. In addition, the adverse publicity surrounding such claims could have a material adverse effect on our business. For more details, see "Business – Legal Proceedings."
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We rely upon independent third-party service providers for all of our product shipments and are subject to potential increased transportation costs and other logistical challenges.
We rely on local transportation companies for the distribution of merchandise from our warehouses to our customers throughout Indonesia. We have maintained long-standing relationships with several of our service providers. However, our service providers may terminate our relationships, and we may be unable to find alternative providers on reasonable terms or at all. In addition, with the breadth of our distribution network and export markets, the weather conditions that affect Indonesia (including frequent landslides and flash floods) and the overall standard of Indonesian infrastructure, we may from time to time face logistical challenges managing the distribution of our products. Shipments could also be disrupted by transportation bottlenecks, labor strikes and natural disasters. Any of the foregoing could increase our costs or reduce sales, which could materially and adversely affect our business, profitability and competitiveness.
In addition, our logistics network may not be adequate to support our growth plans. As we expand into less developed regions of Indonesia, we will need to secure efficient distributors and service providers to support our new markets. Regions that are relatively less developed may not have adequate logistics networks for delivering our products. Less developed regions are often hampered by poor infrastructure, such as inadequate seaports, roads and power supplies and other logistical challenges. Our failure to maintain effective logistics networks could have a material and adverse effect on our expansion plans, operating costs and our results of operations. See “Business—Transportation” for details.
Our margins may be affected by increases in our operating and other expenses.
Our margins may be affected as a result of an increase in our operating and other expenses. Such operating and other expenses may increase due to a number of factors, including any of the following:
• increases in cost of raw materials;
• increases in inventory costs;
• increases in labor costs;
• increases in construction, design, repair and maintenance costs for our manufacturing facilities;
• changes in laws, regulations or government policies which increase the cost of compliance with such laws, regulations or policies;
• increases in the rate of inflation or volatility in exchange rates;
• adverse changes in the cost of existing and future debt financing;
• increases in insurance premiums;
• increases in the cost of utilities; and
• increases in custom duties, business taxes, property taxes and other statutory charges.
Any increase in the above operating and other expenses will have an impact on our cash flows. Furthermore, any sustained increases in our operating and other expenses could result in all or a portion of our operations becoming unprofitable. If we do not generate revenue sufficient to meet our operating
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expenses and debt service and capital expenditure requirements, our business, financial condition and results of operations could be materially and adversely affected.
Our operations and growth may require significant capital expenditure in the future.
Our operations and growth may require capital expenditures for the maintenance, refurbishment and expansion of our production. While we generally fund our capital expenditures from our operating activities, there may be instances where this is not possible. At such times, we may not be able to obtain additional debt or equity financing. Our ability to finance our capital expenditure plans is subject to a number of risks, contingencies and other factors, some of which are beyond our control. Furthermore, any adverse developments in the Asian and international equity capital or credit markets may be a barrier to raising financing and may increase our overall cost of funds. We may also require additional financing to fund day-to-day operational needs and debt service payments. Additional financing, when needed, may not be available on acceptable terms, or at all. If we incur additional debt, it will result in increased debt service obligations and could result in additional operating and financing covenants, or liens on our assets, that could restrict our operations. Without the required financing, we may not be able to continue our operations, implement our planned growth, hire, train and retain employees or respond to competitive pressures. The lack of adequate funding facilities on acceptable terms, or at all, could materially and adversely affect our ability to fund the development and expansion of our business. Our inability to obtain sufficient funding to support our operations or strategies could have a material adverse effect on our business, financial condition and results of operations.
A portion of our expenses for raw material purchases is transacted in cash and our internal controls in relation to cash management may not be able to address all the risks associated with the handling of cash and cash transactions.
A portion of our expenses are transacted in cash. Our internal controls in relation to cash management may not be able to address all the risks associated with handling cash and cash transactions. We are therefore exposed to risks such as the loss or theft of cash used in our transactions. In the event that such risks materialize, they may impact our business, financial condition and results of operations.
Our actual results may vary significantly from the industry forecasts, projections and estimates set forth herein.
This Document includes certain industry forecasts, projections and estimates. This industry information is based on both assumptions and estimates made by an independent third party, RISI. These forecasts, projections and estimates are based on a number of assumptions, which are inherently subject to uncertainty. Many of these factors are not within our control and some of the assumptions with respect to industry growth are subject to change and actual results may vary materially from those estimated, anticipated or projected and such differences may be material and may affect the market price of our common shares. Specifically, but without limitation, future realized prices of our products may differ from forecasts, capital costs could increase, projects could be delayed and anticipated improvements in production, capacity or performance might not be fully realized. The underlying assumptions, calculations and methodologies of the industry forecasts, projections and estimates provided by RISI and included in this Document have not been verified or ascertained by us or the Joint Bookrunners. Accordingly, prospective purchasers are cautioned not to place undue reliance on such information.
Risks relating to Indonesia
We and our Subsidiary are incorporated in Indonesia and all of our commissioners, directors and officers are based in Indonesia. Substantially all of our operations and our assets are also located in Indonesia. As a result, future political, economic, legal and social conditions in Indonesia, as well as certain actions and
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policies which the Government may, or may not, take or adopt, or omit from taking or adopting may have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
Emerging markets such as Indonesia are subject to greater risks than more developed markets, and if those risks were to materialize, their consequences could disrupt our business and you could suffer a significant loss to your investment.
In the years ended December 2015, 2016 and 2017, 85.6%, 98.7%, 84.6% of our total products by net sales were sold in domestic markets. Emerging markets such as Indonesia have historically been characterized by significant volatility, and their political, social and economic conditions can differ significantly from those in more developed economies. Specific risks that could have a material impact on our business, financial condition, results of operations, cash flows and prospects include:
• political, social and economic instability;
• acts of warfare, terrorism and civil conflicts;
• state intervention, including tariffs, protectionism and subsidies;
• regulatory, taxation and legal structure changes;
• difficulties and delays in obtaining or renewing licenses, permits and authorizations;
• arbitrary or inconsistent governmental action;
• deficiencies in transportation, energy and other infrastructure; and
• expropriation of assets.
Generally, investing in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved in investing in such markets. You should note that political and related social developments in Indonesia have been unpredictable in the past, are subject to rapid change and, consequently, that the information set out in this Document may become outdated relatively quickly. If any of the risks associated with investing in emerging markets, and in Indonesia in particular, were to materialize, our business, financial condition, results of operations, cash flows and prospects could be materially adversely affected, and the value of your investment could decline significantly.
Domestic, regional or global economic changes may reduce demand for our products and adversely affect our business.
Demand for our products tends to vary with economic conditions, such that our business may suffer in the event of an economic downturn or market volatility.
Indonesia’s economy was significantly affected by the Asian financial crisis of 1997. The crisis was characterized in Indonesia by, among other effects, currency depreciation, a significant decline in real gross domestic product ("GDP"), high interest rates, social unrest and extraordinary political developments. These conditions had a material adverse effect on Indonesian businesses. In addition, the economic crisis resulted in the failure of many Indonesian companies to meet their debt obligations. Indonesia’s economy was also significantly affected by the global economic crisis that began in late 2008. The resulting adverse financial developments were characterized by, among other things a shortage in the availability of credit, a reduction in foreign direct investment, the failure of global financial institutions, a
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drop in global stock markets, a slowdown in global economic growth and a drop in demand for certain commodities. These extremely negative economic developments adversely affected both developed economies and developing markets, including Indonesia and other ASEAN countries.
Indonesia and other ASEAN countries have been negatively affected, along with developing market countries globally, by the unprecedented financial and economic conditions in developed markets. Although the Government has taken many steps to improve these conditions, with the aim of maintaining economic stability and public confidence in the Indonesian economy, continuation of these unprecedented conditions may negatively impact economic growth, the Government’s fiscal position, the Rupiah’s exchange rate and other facets of the Indonesian economy. In addition, the Government continues to have a large fiscal deficit and a high level of sovereign debt, its foreign currency reserves are modest, the Rupiah continues to be volatile and/or decline with poor liquidity, and the banking sector suffers from high levels of non-performing loans. Recent, global emerging market volatility in both financial markets and economic conditions of certain countries, such as China, may also adversely affect perceptions of the economy, or the actual economy, of Indonesia. Recent international trade disputes, and the uncertainties created by these disputes, may disrupt the international flow of goods and services and may adversely affect the Indonesian economy as well as global market and economic conditions. If the global economy continues to be volatile or declines, Indonesia’s economic growth, its fiscal position, the Rupiah’s exchange rate and other facets of its economy may be negatively affected.
There can be no assurance that the recent improvement in Indonesia’s economic condition will be maintained. In particular, any changes in the regional or global economic environment that result in a loss of investor confidence in the financial systems of emerging and other markets, or other factors, may cause increased volatility in the Indonesian financial markets and inhibit or reverse the growth of the Indonesian economy. Any such increased volatility, slowdown or negative growth could materially and adversely affect our business, financial condition, results of operations, cash flows and prospects.
Political and social instability in Indonesia may adversely affect the economy, which in turn could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
Following the collapse of President Suharto's regime in 1998, Indonesia has experienced a process of democratic change and successfully conducted its first free elections for parliament and president in 1999. In 2004, Indonesians directly elected the President, the Vice-President and representatives of the Indonesian Parliament through a proportional voting system for the first time. Direct elections were also held in 2009 and 2014 in Indonesia to elect the President, Vice-President and representatives in the Indonesian Parliament. Increased political activity can be expected in Indonesia as a result of these democratic developments in its political system. Although the 2004, 2009 and 2014 elections were conducted peacefully, any future political campaigns and elections may bring a degree of political and social uncertainty to Indonesia. As a new democratic country, Indonesia continues to face various socio-political issues and has, from time to time, experienced political instability and social and civil unrest.
For instance, there have been numerous demonstrations involving thousands of Indonesians in Jakarta and other Indonesian cities both for and against many of Indonesia’s former presidents and current President Joko Widodo as well as in response to specific issues, including fuel tariff increases, fuel subsidy reductions, potential increases in electricity tariffs, labor matters, privatizations of state assets, anti-corruption measures, decentralizations and provincial autonomy, actions of former Government officials and their family members and the U.S.-led military campaigns in Afghanistan and Iraq. Although these demonstrations were generally peaceful, some have turned violent.
Historically, separatist movements and clashes between religious and ethnic groups have resulted in social and civil unrest in parts of Indonesia. In the provinces of Aceh and Papua (Irian Jaya), there have been
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clashes between supporters of those separatist movements and the Indonesian military. On May 19, 2003, the Government imposed martial law in Aceh. In Papua, continued activity by separatist rebels has led to violent incidents, in the province of Maluku, clashes between religious groups have resulted in casualties and displaced persons, and, in the province of Kalimantan, clashes between ethnic groups have produced fatalities and refugees over the past several years.
In October 2005, the Government terminated fuel subsidies on premium and regular gasoline and decreased fuel subsidies on diesel, which resulted in increases in fuel prices of approximately 87.5%, 104.8% and 185.7% for premium gasoline, regular gasoline, and diesel fuel, respectively. Several non-violent mass protests were organized in opposition to the increases in domestic fuel prices, and political tensions have resulted from the Government's decision. In March 2012, thousands of protesters marched peacefully along Jakarta’s main thoroughfare to the presidential palace to oppose the government’s plans to increase subsidized fuel prices by 33%. Although these demonstrations were generally peaceful, some have turned violent. There can be no assurance that this situation will not lead to further political and social instability.
In 2014, a presidential election was conducted to elect a successor to Susilo Bambang Yudhoyono, who had served two terms between 2004 and 2014. The election result was contested by both candidates, Prabowo Subianto and Joko Widodo, and both claimed victory based on separate quick counts. Out of fear that tension could lead to riots, hundreds of police were stationed in central Jakarta. On July 22, 2014, the day that the National Election Commission announced the election result, Prabowo withdrew from the recapitulation process after having insisted on his victory ever since the initial quick counts. The National Election Commission gave Joko Widodo a victory of 53.15% of the vote to Prabowo’s 46.85%. Prabowo then took an appeal against the election result to the Constitutional Court of Indonesia, alleging “structured, systematic and massive” violations and that the votes were contained irregularities. On August 21, 2014, the court delivered a unanimous verdict in favor of rejecting all aspects of the appeal. There can be no assurance that any future election disputes or results will not lead to further political and social instability in Indonesia. In 2015, based, in part, on a weak Indonesian economy that may have resulted from, in part, such instability, we recognized a loss of approximately 308.9 billion Rp.
The next presidential election in Indonesia is expected to be held in 2019 and Joko Widodo and Prabowo Subianto are the presidential candidates registered at the General Elections Commission (Komisi Pemilihan Umum or KPU) prior to the August 10, 2018 deadline. Joko Widodo’s program which focuses on structural reforms aimed at strengthening the Indonesian economy, including the construction of infrastructure, may not be completed prior to the next election date. If Joko Widodo is unable to secure a second term up to 2024, a handover to a new president who may not share the current administration's views on policies and reform in Indonesia may result in the curtailment and/or suspension of such policies and reform, which may lead to a slowdown in economic growth in Indonesia and in turn, may materially and adversely affect our business, financial condition, results of operations, cash flows and prospects. Political campaigns leading up to the 2019 presidential elections may also bring a degree of political and social uncertainty which may cause capital flows and domestic investment to become more volatile. A material change in the political or macroeconomic environment may also require us to incur additional expenditures in order to adapt to and comply with such new environment.
Political and social developments in Indonesia have been unpredictable in the past and, as a result, confidence in the Indonesian economy has remained low. Any resurgence of political instability could adversely affect the Indonesian economy, which could adversely affect our business. There can be no assurance that social and civil disturbances will not occur in the future and on a wider scale, or that any such disturbances will not, directly or indirectly, materially and adversely, affect our business, financial condition, results of operations, cash flows and prospects.
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Terrorist attacks and activities could cause economic and social volatility.
In Indonesia during the last ten years, there have been numerous bombing incidents directed towards the Government and foreign governments and public and commercial buildings frequented by foreigners, including the Jakarta Stock Exchange Building and Jakarta’s Soekarno-Hatta International Airport. On October 12, 2002, over 200 people were killed in a bombing at a tourist area in Bali. In April 2003, bombs exploded outside the main United Nations building in Jakarta and in front of the domestic terminal at Jakarta’s Soekarno-Hatta International Airport. On August 5, 2003, a bomb exploded at the JW Marriott Hotel in Jakarta, killing at least 13 people and injuring 149 others. On September 9, 2004, a car bomb exploded in front of the Australian Embassy in Jakarta, killing more than six people. On May 28, 2005, bomb blasts in Central Sulawesi killed at least 21 people and injured at least 60 people. On October 1, 2005, bomb blasts in Bali killed at least 23 people and injured at least 101 others. On July 17, 2009, two separate bomb explosions occurred at the JW Marriott Hotel and the Ritz Carlton Hotel in Jakarta, killing at least nine people and injuring 40 others. On January 14, 2016, two suicide bombers and two gunmen exchanged gunfire with police before bombing a police post and cafe in central Jakarta, killing at least four people and injuring more than 20. Indonesian, Australian and U.S. government officials have indicated that these bombings may be linked to an international terrorist organization. On May 24, 2017, two explosions occurred at a bus terminal in Kampung Melayu, East Jakarta. The Islamic State of Iraq and the Levant claimed responsibility. While in response to the terrorist attacks, the Government has institutionalized certain security improvements and undertaken certain legal reforms which seek to better implement anti-terrorism measures, and some suspected key terrorist figures have been arrested and tried, there can be no assurance that further terrorist acts will not occur in the future.
Following military involvement of the United States and its allies in Iraq, a number of governments have issued warnings to their citizens in relation to a perceived increase in the possibility of terrorist activities in Indonesia, targeting foreign, particularly U.S. interests. Such terrorist activities could destabilize Indonesia and increase internal divisions within the Government as it considers responses to such instability and unrest, thereby adversely affecting investors’ confidence in Indonesia and the Indonesian economy. Violent acts arising from and leading to instability and unrest have in the past had, and could continue to have, a material adverse effect on investment and confidence in, and the performance of, the Indonesian economy, and in turn our business. Our projects may be particularly vulnerable to, and adversely affected by, terrorist attacks because of the large numbers of people they attract and the general public access provided. Political unrest in Indonesia may disrupt the operation of our developments or make them less attractive to buyers. We cannot assure you that our properties will not be subject to acts of terrorism, violent acts and adverse political developments which may materially and adversely affect our business, financial condition, results of operations, cash flows and prospects.
Downgrades of credit ratings of the Government or Indonesian companies could adversely affect our business.
As of the date of this Document, Indonesia’s sovereign foreign currency long-term debt is rated “Baa2” by Moody’s Investors Service (“Moody's”), “BBB-” by S&P Global Ratings (“S&P”) and “BBB” by Fitch Ratings Inc. (“Fitch”), and its short-term foreign currency debt is rated “P-2” by Moody’s, “A-3” by S&P and “F2” by Fitch, with a stable outlook from Moody’s, a stable outlook from S&P and a stable outlook from Fitch. These ratings reflect an assessment of the Government’s overall financial capacity to pay its obligations and its ability or willingness to meet its financial commitments as they become due. Even though the recent trend in Indonesian sovereign ratings has been positive, no assurance can be given that Moody’s, S&P, Fitch or any other statistical rating organization will not downgrade the credit ratings of Indonesia or Indonesian companies in general. Any such downgrade could have an adverse impact on liquidity in the Indonesian financial markets, the ability of the Government and Indonesian companies, including ourselves, to raise additional financing and the interest rates and other commercial terms at
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which such additional financing is available and could in turn have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.
Labor activism or increases in labor costs could adversely affect Indonesian companies, including us, which in turn could affect our business, financial condition, results of operations, cash flows and prospects.
Laws and regulations which facilitate the forming of labor unions, combined with weak economic conditions, have resulted and may continue to result in labor unrest and activism in Indonesia. In 2000, the Government issued Law No. 21 of 2000 on Labor Union (the “Labor Union Law”). The Labor Union Law permits employees to form unions without employer intervention. In March 2003, the Government enacted Law No. 13 of 2003 on Labor (the “Labor Law”) which, among other things, increased the amount of required severance, service, compensation payments payable to employees upon termination of employment and required employers with 50 or more employees to establish bipartite forums with the participation of employers and employees. The Labor Law requires further implementation of regulations that may substantively affect labor relations in Indonesia. The Labor Law requires bipartite forums with participation from employers and employees and the participation of more than 50.0% of the employees of a company in order for a collective labor agreement to be negotiated and creates procedures that are more permissive to the staging of strikes. Under the Labor Law, employees who voluntarily resign are also entitled to payments for, among other things, unclaimed annual leave and relocation expenses. Following the enactment, several labor unions urged the Indonesian Constitutional Court to declare certain provisions of the Labor Law unconstitutional and order the Government to revoke those provisions. The Indonesian Constitutional Court declared the Labor Law valid except for certain provisions, including relating to the right of an employer to terminate its employee who committed a serious mistake and criminal sanctions against an employee who instigates or participates in an illegal labor strike.
In addition, our expenses for security, cleaners, messengers and laborers are affected by increases in the minimum wages. In recent years, the minimum wage in Indonesia has increased significantly. For example, the minimum wage in Jakarta increased by 10.6% from 2014 to 2015, by 14.8% from 2015 to 2016 and by 8.3% from 2016 to 2017. Any national or regional inflation of wages will directly and indirectly increase our operating costs and thus decrease our profit margin.
Inflation may make it more difficult for us to accurately estimate or control our costs, which may adversely impact our business prospects.
For the year ended December 31, 2017, the inflation rate in Indonesia was approximately 3.6%, while the rate of GDP growth was approximately 5.1% according to according to the Indonesian Central Bureau of Statistics (Biro Pusat Statistik). The Government's official targets for GDP growth and inflation in 2018 are approximately 5.1% to 5.5%. Accordingly, high rates of inflation could increase our employee costs and decrease our operating margins, which could have an adverse effect on our business, financial condition, results of operations, cash flows and prospects.
Indonesia is located in an earthquake zone and is subject to significant geological risk that could lead to social unrest and economic loss.
The Indonesian archipelago is one of the most volcanically active regions in the world. Because it is located in the convergence zone of three major lithospheric plates, it is subject to significant seismic activity that can lead to destructive earthquakes, tsunamis or tidal waves. A 7.9 magnitude earthquake struck Bengkulu and West Sumatra on September 12, 2007, resulting in 25 deaths, numerous injuries and the evacuation of some 115,000 people. In January 2009, a 7.6 magnitude earthquake struck approximately 95 miles north of Manokwari, followed by another big earthquake and a string of
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aftershocks. These killed at least four people and injured at least 37 people. Electricity was also cut off in the city with a population of approximately 160,000 people. From October 26, 2013 to November 5, 2013, Mount Merapi, a volcano located in the border between Central Java and Yogyakarta erupted a number of times, killing more than 380 people. In early February 2014, Mount Sinabung located in Sumatra erupted, killing 15 people. Finally, from July 29, 2018 to August 26, 2018, a series of earthquakes struck the area in and around Lombok, resulting in the deaths of over 500 people. These earthquakes, tsunamis and volcanic eruptions resulted in significant loss of life and injury and widespread destruction of property.
In addition to these geological events, Indonesia has also been struck by other natural disasters such as heavy rains and flooding. In January and February 2007, many parts of Jakarta and its surrounding areas suffered extensive flooding. Approximately 100 people were killed and 100,000 people in Jakarta and its surrounding areas were evacuated to safe and dry areas due to the flood. Flooding and landslides in Central and East Java that occurred between the end of 2007 to early 2008 caused approximately 100 deaths and estimated damage amounting to approximately Rp. 2.0 trillion. In January 2009, torrential rain caused a colonial-era dam to burst outside Jakarta, sending a wall of muddy water crashing into a densely packed neighborhood and killing at least 58 people. The flood also left scores missing and submerged hundreds of homes. More recently, in October 2013, at least 158 people died and 148 people were declared missing in a flash flood in Wasior district, West Papua. These floods resulted in loss of lives, the displacement of large numbers of people and widespread destruction of property.
While these seismic events and meteorological occurrences have not had a significant economic impact on Indonesian capital markets, the Government has had to spend significant amounts on emergency aid and resettlement efforts. Most of these costs have been underwritten by foreign governments and international aid agencies. We cannot assure you that such aid will continue to be forthcoming, or that it will be delivered to recipients on a timely basis. If the Government is unable to timely deliver foreign aid to affected communities, political and social unrest could result. Additionally, recovery and relief efforts are likely to continue to impose a strain on the Government’s finances, and may affect its ability to meet its obligations on its sovereign debt. Any such failure on the part of the Government, or declaration by it of a moratorium on its sovereign debt, could trigger an event of default under numerous private-sector borrowings, including ours, thereby materially and adversely affecting our business, financial condition, results of operations, cash flows and prospects.
In addition, we cannot assure you that future geological occurrences, will not significantly impact the Indonesian economy. A significant earthquake or other geological disturbance in any of Indonesia’s more populated cities and financial centers could severely disrupt the Indonesian economy and undermine investor confidence, thereby materially and adversely affecting our business, financial condition, results of operations, cash flows and prospects.
Regional autonomy may adversely affect our business through imposition of local restrictions, taxes and levies.
Indonesia is a large and diverse nation covering a multitude of ethnicities, languages, traditions and customs. During the administration of the former President Suharto, the central government controlled and exercised decision making authorities on almost all aspects of national and regional administration, including the allocation of revenues generated from extraction of national resources in the various regions. This led to a demand for greater regional autonomy, in particular with respect to the management of local economic and financial resources. In response to such demand, the Indonesian Parliament in 1999 passed Law No. 22 of 1999 on Regional Autonomy and Law No. 25 of 1999 on Fiscal Balance between the Central Government and the Regions. Law No. 22 of 1999 was replaced by Law No. 23 of 2014 which was recently amended by law No. 9 of 2015. Similarly, Law No. 25 of 1999 was later
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replaced by Law No. 33 of 2004 on the same subject matter. Under these regional autonomy laws, regional autonomy was expected to give the regions greater powers and responsibilities over the use of ‘national assets’ and to create a balanced and equitable financial relationship between central and local governments. However, under the pretext of regional autonomy, certain regional governments have put in place various restrictions, taxes and levies which may differ from restrictions, taxes and levies put in by other regional governments and/or are in addition to restrictions, taxes and levies stipulated by the central government. Our business and operations are located throughout Indonesia and may be adversely affected by conflicting or additional restrictions, taxes and levies that may be imposed by the applicable regional authorities.
We prepare our consolidated financial statements in accordance with Indonesian FAS, which differs in certain respects from IFRS.
Our consolidated financial statements and other financial information included in this Document were prepared in accordance with Indonesian FAS, which differ in certain respects from IFRS. This Document does not contain a reconciliation of our consolidated financial statements to IFRS, and we cannot assure you that such reconciliation would not reveal material differences. Prospective investors should consult their professional advisers for an understanding of such differences and how they might affect the financial information contained in this Document.
We operate in a legal system in which the application of various laws and regulations may be uncertain.
As Indonesia is a developing market, its legal and regulatory regime may be less certain than other markets and may be subject to unforeseen changes. At times, the interpretation or application of laws and regulations may be unclear and the content of applicable laws and regulations may not be immediately available to the public. Under such circumstances, consultation with the relevant authority in Indonesia may be necessary to obtain a better understanding or clarification of applicable laws and regulations.
Indonesia’s legal system is a civil law system based on written statutes, and decided legal cases do not constitute binding precedent. The administration of laws and regulations by courts and Government agencies may be subject to considerable discretion. In addition, because relatively few disputes relating to commercial matters and modern financial transactions and instruments are brought before Indonesia’s courts, such courts do not necessarily have the experience of courts in other countries. There is no certainty as to how long it will take for proceedings in Indonesian courts to be concluded, and the outcome of proceedings in Indonesian courts may be more uncertain than that of similar proceedings in other jurisdictions. Accordingly, it may not be possible for investors to obtain timely and equitable enforcement of their legal rights.
Indonesian judges operate in an inquisitorial legal system and have very broad fact-finding powers and a high level of discretion in relation to the manner in which those powers are exercised. As a result, the administration and enforcement of laws and regulations by Indonesian courts and Indonesian governmental agencies may be subject to considerable discretion, uncertainty and inconsistency. Furthermore, corruption in the court system in Indonesia has been widely reported in publicly available sources.
Indonesian legal principles relating to the rights of shareholders, or their practical implementation by Indonesian courts, differ from those that would apply within the United States or the European Union. Absent a binding precedent system, the rights of shareholders under Indonesian law might not be as clearly evident as in most United States and European Union jurisdictions. In addition, under Indonesian law, companies may have rights and defenses to actions filed by shareholders that these companies would not have in certain other jurisdictions.
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Outbreak of an infectious disease, or fear of an outbreak, or any other serious public health concerns in Asia (including Indonesia) and elsewhere may adversely impact our business and financial condition.
The outbreak of an infectious disease in Asia (including Indonesia) or elsewhere, or fear of an outbreak, together with any resulting restrictions on travel or quarantines imposed, could have a negative impact on the economy and business activity in Indonesia and thereby adversely impact our revenue. An outbreak of an infectious disease, including Severe Acute Respiratory Syndrome (SARS) in Asia, Avian influenza, or bird flu, Influenza A (H1N1), Middle East Respiratory Syndrome (MERS), the Ebola virus, the Zika virus, diphtheria or another contagious disease or measures taken by the governments of affected countries, including Indonesia, against potential or actual outbreaks, could seriously interrupt our operations or those of our distributors, suppliers and customers, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects. The perception or future outbreak of an infectious disease or any other serious public health concern in Asia (including Indonesia) and elsewhere may adversely affect our business, financial condition, results of operations, cash flows and prospects.
Obligations arising under the Currency Law and Bank Indonesia Regulation on the Mandatory Use of Rupiah may affect us.
On June 28, 2011, the Government enacted the Law Number 7 of 2011 on the National Currency (the “Currency Law”), which took immediate effect. Article 21(1) of the Currency Law requires the mandatory use of the Rupiah (as the local currency) in certain transactions conducted in Indonesia including (i) all transactions which have a purpose of payment, (ii) settlement of obligations which have to be satisfied with a cash payment and (iii) other financial transactions. However, Article 21(2) provides exemptions for: (a) certain transactions related to the implementation of the state budget, (b) receipt or grant of offshore grants, (c) international trade transactions, (d) bank deposits in foreign currency, or (e) international financing transactions. Article 23 of the Currency Law prohibits any party from refusing to accept Rupiah as payment or in fulfillment of its obligations, which must be satisfied in Rupiah, and for other financial transactions in Indonesia except where there is doubt as to the authenticity of the Rupiah paid. Failure to comply with the Currency Law may result in imprisonment of up to one year and fines of up to Rp. 200 million, and if the violation is committed by a company, the imprisonment term and fines will be increased by one-third.
In 2015, Bank Indonesia enacted (i) Bank Indonesia Regulation No. 17/3/PBI/2015 on Mandatory Use of Rupiah within the Territory of the Republic of Indonesia (“PBI 17/2015”) and (ii) Circular Letter of Bank Indonesia No. 17/11/DKSP, as the implementation of Currency Law, which requires any party to use Rupiah for any transaction conducted within the territory of Indonesia. PBI 17/2015 stipulates that a recipient is prohibited from refusing to receive Rupiah as means of payment or for the settlement of Rupiah obligations or other financial transactions within Indonesia, unless there is doubt as to the authenticity of the Rupiah paid in a cash transaction and payment or the settlement of an obligation in a foreign currency is agreed in writing by the parties. Article 10(3) of PBI 17/2015 further clarifies that the exemption applies only for:
(a) agreements relating to transactions exempted from the mandatory use of Rupiah as referred to in PBI 17/2015 (e.g., international financing transactions); or
(b) agreements for “Strategic Infrastructure Projects” which have been approved by Bank Indonesia, such as transportation infrastructure (including airport services, port services, and railways facilities and infrastructure), roads, irrigation, drinking water infrastructure, sanitation infrastructure, telecommunication and information infrastructure, power infrastructure, and oil and gas infrastructure, funded by offshore borrowings from bilateral
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and multilateral agencies (such as the International Finance Corporation, the Japan Bank for International Cooperation, the Japan International Cooperation Agency, the Asian Development Bank, the Inter-American Development Bank).
As an exemption, PBI 17/2015 also stipulates that any agreements on payment or settlement of obligations in foreign currency which are made prior to July 1, 2015 are still valid until the expiry of the agreements. This exemption applies only for agreements relating to non-cash payment or settlement of obligations. However, the exemption will not be applicable for any extension or amendment of the agreements (particularly any amendments relating to the subject and/or object of the agreements).
Effectively, PBI 17/2015 (i) requires us to adjust the relevant existing U.S. dollars denominated agreements to conform with the requirements under PBI 17/2015 (whenever there is an extension or amendment to those agreements) and (ii) prohibits us from entering into new U.S. dollars denominated agreements with counterparties for transactions conducted within the territory of Republic of Indonesia after July 1, 2015. The elucidation of PBI 17/2015 further explains that an amendment relates to a change of “subject” and “object” of the written agreement. However, there is no further explanation on the object of the agreement itself. If Bank Indonesia adopts a conservative approach, all amendments after July 1, 2015 to such agreements will be subject to PBI 17/2015. A breach of the requirements of PBI 17/2015 will be subject to (i) administrative, criminal or monetary sanctions up to Rp. 1 billion and (ii) loss of business licenses and/or interruption of business activities of the violating entity, if Bank Indonesia recommends so to the relevant authorities. The restrictions on our ability to enter into, or renew or amend, our Rupiah denominated contracts may limit our ability to naturally hedge or service our non-Rupiah denominated liabilities or obtain or refinance non-Rupiah financing in the future.
The inability or failure of the Government to implement reforms necessary to receive assistance from multilateral agencies could cause the economy and our business to be adversely affected.
The Asian economic crisis, which began in 1997, had a significant adverse impact on Indonesia, causing, among other adverse changes, a significant depreciation in the value of the Rupiah and depletion of Indonesia’s currency reserves. The crisis caused the Government to turn to the International Monetary Fund (“IMF”) for financial assistance and, in October 1997, the IMF agreed to provide relief contingent upon the implementation of economic reforms, such as the Government undertaking asset sales and abolishing subsidies for commodities and other consumer products. Indonesia left the IMF-supported program at the end of 2003. The World Bank has also been an important source of funding for the Government which has received assistance from the World Bank since late 1997. The World Bank’s 2001 base target for lending in Indonesia was US$1.3 billion, but this amount was subsequently reduced due to the slow pace of institutional reforms in Indonesia as well as concern that the Government’s decentralization plan, and particularly empowerment of provincial governments to borrow, could adversely affect the Government’s ability to service its debts. In December 2003, the World Bank approved an Indonesian lending program from 2004 to 2007 ranging from US$450 million to US$850 million per year. As of December 31, 2017, total external indebtedness of the Government and private sector companies in Indonesia amounted to US$352.2 billion, which was approximately 34% of Indonesia’s GDP for that year.
The members of the Paris Club and the Consultative Group on Indonesia (“CGI”) are sources of funding for the Government. The Paris Club is an informal voluntary group of 19 creditor countries that seeks to coordinate solutions for payment difficulties experienced by debtor nations. The CGI is a group of 19 donor countries and 13 international organizations that meet annually to coordinate donor assistance to Indonesia and is led by the World Bank. The CGI is the successor organization to the Inter-Governmental Group of Indonesia (“IGGI”), an international group of lenders established in 1967 by The Netherlands to coordinate multi-lateral aid to Indonesia. Most of the members of CGI were previously members of
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IGGI, such as Japan, United States, Australia, France, Germany, Italy, the World Bank, and the IMF. The Paris Club and the CGI accounted for approximately two-fifths of the Government’s total debt at the end of 2005. The Government has several times successfully rescheduled its foreign debt to multilateral institutions. However, the Paris Club has publicly stated that as a result of the Government’s decision to end the IMF program, it would no longer reschedule payments of debts owed to its members or to other creditors by the Government, although there were further debt reschedulings as a result of the earthquake and tsunami in December 2004.
In the absence of funding from the IMF, World Bank or similar agencies or creditor support for debt rescheduling, the Government may not be able to secure alternative funding and may default on its payment obligations, which may result in an economic crisis. Funding restrictions may also result in the Government being unable to fund subsidies for staples such as food and fuel which, in turn, could have serious social, economic and political consequences. These may in turn have a material adverse impact on our business and the value of our common shares. The Government may, in connection with future agreements with the World Bank or other lenders, undertake additional economic or structural initiatives the effects of which are presently unknown.
An Indonesian law requiring agreements involving Indonesian parties to be written in the Indonesian language may raise issues as to the enforceability of agreements entered into.
On July 9, 2009, the Government enacted Law No. 24 of 2009 on Flag, Language, Coat of Arms and National Anthem (“Law No. 24/2009”) requiring that agreements involving Indonesian parties be written in the Indonesian language. Where an agreement also involves foreign parties, it may also be executed in both the Indonesian language and a foreign language, provided that the agreement in the foreign language and the agreement in the Indonesian language are equally authoritative. Law No. 24/2009 is silent on the governing language if there is more than one language used in a single agreement. Article 40 of Law No. 24/2009 states that further stipulation on the use of Bahasa Indonesia shall be regulated by the implementing regulations to be issued. Accordingly, until such implementing regulations are issued, it is unclear whether Bahasa Indonesia will be stipulated as the governing language of agreements related to our business, and when such implementing regulations are issued, English might not be recognized as the governing language of such agreements, even if agreed to by the contracting parties.
Although where certain agreements will be prepared in English and Indonesian versions as required under Law No. 24/2009, since one or more parties to such agreements will be incorporated under the laws of Indonesia, we cannot assure you that, in the event of inconsistencies between the Indonesian language and English language versions of these agreements, an Indonesian court would hold that the English version would prevail. Some concepts in the English language may not have a corresponding term in the Indonesian language and the exact meaning of the English text may not be fully captured by the Indonesian language version. If this occurs, we cannot assure you that the terms of such agreements will be interpreted and enforced by the Indonesian courts as intended.
In addition, on June 20, 2013, the District Court of West Jakarta ruled in a decision No. 451/Pdt.G/2012/PN.Jkt.Bar (the “June 2013 Decision”) that a loan agreement entered into between an Indonesian borrower, PT Bangun Karya Pratama Lestari, as plaintiff, and a non-Indonesian lender, Nine AM Ltd., as defendant, was null and void under Indonesian law. The governing law of the loan agreement was Indonesian law and the agreement was written in the English language. The court ruled that the agreement had contravened Article 31(1) of Law No. 24/2009 and declared it to be invalid. In arriving at this conclusion, the court relied on Articles 1320, 1335 and 1337 of the Indonesian Civil Code, which taken together render an agreement void if, inter alia, it is tainted by illegality. The court held that as the agreement had not been drafted in the Indonesian language, as required by Article 31(1), it therefore failed to satisfy the “lawful cause” (sebab yang halal) requirement and was void from the outset, meaning that a valid and binding agreement had never existed. On May 7, 2014, the Jakarta High
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Court rejected the appeal submitted by Nine AM Ltd. and affirmed the June 2013 Decision in its entirety (the “Jakarta High Court Decision”). Further, on August 31, 2015, the Supreme Court rejected the cassation that Nine AM Ltd submitted and affirmed the Jakarta High Court Decision (the “Supreme Court Decision”). Indonesian court decisions are generally not binding precedents, as would typically be the case in common law jurisdictions such as the United States and the United Kingdom. However, there can be no assurance that a court will not, in the future, issue a similar decision to the Supreme Court Decision in relation to the validity and enforceability of agreements which are made in the English language.
On July 7, 2014, the Government issued Government Regulation No. 57 of 2014 on Development Fostering, and Protection of Language and Literature and Enhancement of the function of the Indonesian Language, to implement certain provisions of Law No. 24/2009. While this regulation focuses on the promotion and protection of the Indonesian language and literature and is silent on the question of contractual language). As Law No. 24/2009 does not specify any sanctions for non-compliance, we cannot predict how the implementation of Law No. 24/2009 (including its implementing regulation) will impact the validity and enforceability in Indonesia of the agreements entered into.
Indonesia may suffer from governmental or business corruption.
We operate and conduct our business and operations in Indonesia, which is perceived to have corrupt governmental and business environments as it is ranked 90 out of 176 in Transparency International’s 2016 Corruption Perception Index. We interact with government officials in the ordinary course of business to, among other things, apply for and obtain the necessary licenses, permits and other approvals for our business and operations. Corrupt practices by government officials may have a material adverse effect on our business, financial condition, results of operations, cash flows or prospects. For example, in the event that a government official requests us for a payment or promise of benefit beyond those required or permitted by law, we will not be able to comply with the request and the issuance of the license, permit or approval may be delayed, which may prevent us from conducting our business and operations, which may materially and adversely affect our business, financial condition, results of operations, cash flows and prospects.
Risks Relating to Ownership of our Common Shares
The trading price of our common shares has been, and may continue to be, volatile.
The trading price of our common shares has been, and may continue to be, subject to large fluctuations. The price of our common shares may increase or decrease in response to a number of events and factors, including perceptions of our business prospects, our results of operations, factors affecting the Indonesian paper industry in general or us in particular, government regulation, economic conditions in Indonesia, changes in accounting policies and other factors discussed in this Document.
Your right to participate in future rights issues could be limited, which would cause dilution to your holdings.
If we offer our shareholders rights to purchase or subscribe for common shares or otherwise distribute common shares to our shareholders, we will have discretion as to the procedure to be followed in making such rights available to our shareholders or in disposing of such rights for the benefit of our shareholders and making the net proceeds available to such shareholders. To the extent permitted by Indonesian law, we may choose not to offer such rights to those of our shareholders having an address in a jurisdiction where such an offering would require registration or would otherwise be restricted or we may choose not to permit such shareholders to exercise their rights in this respect. In particular, U.S. holders will be
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unable to exercise such rights for our common shares unless a registration statement under the Securities Act is effective or an exemption from registration under the Securities Act is available.
Whenever we make a rights or similar offering of our common shares, we will evaluate the costs and potential liabilities associated with, and our ability to comply with, the regulations of each of the jurisdictions in which our shareholders are located, including the U.S., for any such registration statement and any other factors we consider appropriate. We do not currently expect to file any such registration statement in any jurisdiction outside of Indonesia. If we do not file a registration statement in a given jurisdiction and no exemption from registration under the relevant securities laws, including the Securities Act, is available, then holders of our common shares who are located in those jurisdictions would be unable to participate in rights or similar offerings and would suffer dilution of their shareholdings. There may also be other restrictions in these jurisdictions that affect our ability to offer rights and make other share offerings in such jurisdictions. Consequently, we cannot assure you that you will be able to maintain your proportional equity interests in us. Because rights issues in Indonesia generally enable participants to purchase common shares at a discount to the recent trading price, your inability to participate could cause you material economic harm.
The value of the Rupiah has experienced significant volatility and has recently suffered from a substantial decline in value. Future changes in the value of the Rupiah against the U.S. dollar or other currencies will affect the foreign currency equivalent of the value of our common shares and any dividends and may adversely impact our operations.
One of the most important immediate causes of the economic crisis which began in Indonesia in mid-1997 was the depreciation and volatility of the value of the Rupiah as measured against other currencies, such as the U.S. dollar. Although the Rupiah has appreciated considerably from the low point of approximately Rp. 17,000 per one U.S. dollar in January 1998, the Rupiah continues to experience significant volatility and has experienced a recent decline in value. This volatility affects the amount in foreign currency received upon conversion of cash dividends or other distributions paid in Rupiah by us, the Rupiah proceeds received from any share sale, the book value of foreign currency assets and liabilities, and the income and expenses and cash flows in our financial statements.
The Rupiah has generally been freely convertible and transferable (except that Indonesian banks may not transfer Rupiah to accounts held by non-Indonesians at a bank within or outside of Indonesia who lack a bona fide trade or investment purpose). On occasion, however, Bank Indonesia has intervened in the currency exchange markets in furtherance of its policies, either by selling Rupiah or by using its foreign currency reserves to purchase Rupiah. There can be no assurance that the Rupiah will not be subject to depreciation and continued volatility, that the current exchange rate policy will remain the same, or that the Government will, or will be able to, act when necessary to stabilize, maintain or increase the value of the Rupiah, and will not act to devalue the Rupiah, or that any such action, if taken, will be successful. Fluctuations in the exchange rate between the Rupiah and the U.S. dollar, our reporting and functional currency, and other currencies will affect the foreign currency equivalent of the Rupiah price of our common shares on the IDX. Such fluctuations will also affect the amount in foreign currency received upon conversion of cash dividends or other distributions paid in Rupiah by us on, and the Rupiah proceeds received from any sales of, our common shares, as well as the book value of foreign currency assets and liabilities, and income and expenses and cash flows in our financial statements.
In addition, a sustained and significant depreciation of the Indonesian Rupiah against the U.S. dollar may result in increasing inflation in Indonesia that may decrease consumers spending on discretionary goods, which may have a material adverse effect on our business, financial condition and results of operations.
Modification of the current floating exchange rate policy could also result in significantly higher domestic interest rates, liquidity shortages, capital or exchange controls or the withholding of additional financial
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assistance by multinational lenders. This in turn could result in a recession, increased loan defaults and an increased price of imports.
Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
Indonesian law contains provisions that could discourage a takeover of the Company.
Under OJK regulations, in the event that there is a change of control of a publicly listed company in Indonesia, the new controlling party must carry out a tender offer of the remaining public shares (not including common shares of the other controlling shareholders and/or certain shareholders that are excluded, if any). Under OJK Regulation No. 9/POJK.04/2018, dated July 25, 2018 regarding Takeover of Publicly Listed Companies ("Regulation No. 9/POJK.04/2018"), a takeover of a publicly listed company is defined as an action which directly or indirectly causing changes in the controlling party of that publicly listed company. A controlling party of a publicly listed company is:
• a party that owns more than 50% of all shares with voting rights that have been paid-up in full of the publicly listed company; or
• a party that has the direct or indirect ability to determine the management and/or policy of the publicly listed company.
Further, in order to ensure that the public continues to hold at least 20% of the equity of the issuer or public company. The regulation requires the new controlling party to divest its shareholding in the equity issuer or public company within two years after completion of the mandatory tender offer if, as the result of the mandatory tender offer, the new controlling party holds more than 80% of the equity of the issuer or public company's total paid-up capital. If, as a result of the take-over, the new controlling party already holds more than 80% of the equity of the issuer or public company's total paid-up capital, it must still carry out a mandatory tender offer, even though it will later have to divest a portion of the common shares it acquires in the mandatory tender offer.
Although such take-over provisions are intended to protect the interests of shareholders by requiring any acquisitions of our common shares that may involve or threaten a change in control to also be extended to all shareholders on the same terms, these provisions may discourage or prevent such transactions from taking place. Some of our shareholders may be disadvantaged as a transaction of that kind might have allowed the sale of common shares at a price above the market price.
Indonesian law contains provisions that could cause us to forgo transactions that are in our best interest.
In order to provide more legal certainty and protection to shareholders, in particular the independent shareholders, in connection with affiliated party transactions or conflict of interest transactions conducted by an issuer or an Indonesian public company, in November 2009, BAPEPAM-LK issued Rule No. IX.E.1 on Affiliated Party Transaction and Conflict of Interest of Certain Transaction ("Rule No. IX.E.1"), which replaced the previous rule issued in 2008.
Rule No. IX.E.1 requires the issuer or the Indonesian public company to make announcement and disclose information to the public and submit proof of such announcement to OJK of its affiliated party transaction no later than the end of the second working day following such a transaction and further stipulates that any conflict of interest transaction conducted by Indonesian public companies would require prior independent shareholders’ approval of the issuer or the said Indonesian public company,
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unless such affiliated party transaction or conflict of interest transaction meets certain exemptions stipulated under this rule.
Transactions between us and other persons could constitute an affiliated party transaction or conflict of interest transaction under Rule No. IX.E.1. If such a transaction falls under the conflict of interest transaction, the approval of holders of a majority of common shares owned by the independent shareholders would have to be obtained prior to conducting such a transaction. OJK has the power to enforce this rule and our shareholders may also be entitled to seek enforcement or bring enforcement actions based on Rule No. IX.E.1.
The requirement to obtain independent shareholder approval could be burdensome to us in terms of time and expense and could cause us to forego entering into certain transactions which we might otherwise consider to be in our best interests. Moreover, we cannot assure you that approval of the independent shareholders would be obtained if sought.
You may not be subject to limitations on minority shareholders' rights.
The obligations under Indonesian law of majority shareholders, commissioners and directors with respect to minority shareholders may be more limited than those in certain other countries such as the United States and certain other countries. Consequently, minority shareholders may not be able to protect their interests under current Indonesian law to the same extent as in certain other countries. Principles of corporate law relating to such matters as the validity of corporate procedures, the fiduciary duties of our management, directors, commissioners and controlling shareholders and the rights of our minority shareholders are governed by the Company Law and our Articles of Association. Such principles of law differ from those that would apply if we were incorporated in a jurisdiction in the United States or in other jurisdictions. In particular, concepts relating to the fiduciary duties of management are untested in Indonesian courts. Derivative actions have almost never been brought on behalf of companies or been tested in Indonesian courts, and minority shareholders' rights have only been defined since 1995 and are unproven in practice. Accordingly, we cannot assure you that legal rights or remedies of minority shareholders will be the same, or as extensive, as those available in other jurisdictions or sufficient to protect the interests of minority shareholders.
Future sales of our common shares or the prospect of such future sales by any one of our principal shareholders may have a material adverse effect on the market price of the common shares.
Future sales of substantial amounts of our common shares in the public market by them, or the perception that such sales may occur, could adversely affect the prevailing market price of our common shares. These factors could also affect our ability to raise capital through an offering of additional equity or equity-linked securities.
We operate in a legal system in which the application of various laws and regulations may be uncertain, and through the purchase of our common shares, holders of our common shares are exposed to such legal system and may find it difficult or impossible to pursue claims relating to our common shares.
As Indonesia is a developing market, its legal and regulatory regime may be less certain than in more developed markets and may be subject to unforeseen changes. At times, the interpretation or application of laws and regulations may be unclear and the content of applicable laws and regulations may not be immediately available to the public. Under such circumstances, consultation with the relevant authority in Indonesia may be necessary to obtain a better understanding or clarification of applicable laws and regulations.
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Indonesia's legal system is a civil law system based on written statutes, although there remains an area for the application of customary law. Judicial and administrative decisions do not constitute binding precedent and are not systematically published. Indonesia's commercial and civil laws as well as rules on judicial process were historically based on Dutch law as in effect prior to Indonesia's independence in 1945, and some of these laws have not been revised to reflect the complexities of modern financial transactions and instruments. Indonesian courts are often unfamiliar with sophisticated commercial or financial transactions, leading in practice to uncertainty in the interpretation and application of Indonesian legal principles. The application of many Indonesian laws depends, in a large part, upon subjective criteria such as the good faith of the parties to the transaction and principles of public policy, the practical effect of which, absent a binding precedent system, is difficult or impossible to predict.
Indonesian judges operate in an inquisitorial legal system and have very broad fact-finding powers and a high level of discretion in relation to the manner in which those powers are exercised. As a result, the administration and enforcement of laws and regulations by Indonesian courts and Indonesian governmental agencies may be subject to considerable discretion, uncertainty and inconsistency. Furthermore, corruption in the court system in Indonesia has been widely reported in publicly available sources.
Indonesian legal principles relating to the rights of shareholders, or their practical implementation by Indonesian courts, differ from those that would apply within the United States or the European Union ("EU"). Absent a binding precedent system, the rights of shareholders under Indonesian law might not be as clearly evident as in most United States and EU jurisdictions. In addition, under Indonesian law, companies may have rights and defenses to actions filed by shareholders that these companies would not have in jurisdictions such as the United States and EU member states.
We are incorporated in Indonesia and it may not be possible for investors to effect service of process, or enforce judgments on us in the United States or of a foreign court against us in Indonesia.
We are a limited liability company incorporated in Indonesia and all of our operations are located in Indonesia. In addition, most of our commissioners and all of our directors reside in Indonesia and a substantial portion of the assets of such persons is located outside the United States. As a result, it may be difficult for investors to effect service of process, or enforce judgments, on us or such persons within the United States, or to enforce against us or such persons in the United States, judgments obtained in U.S. courts.
We have been advised by our Indonesian legal advisor that judgments of U.S. courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws or the securities laws of any state within the United States, could be admissible as non-conclusive evidence in a proceeding on the underlying claim in an Indonesian court. There is doubt as to whether Indonesian courts will enter judgments in original actions brought in Indonesian courts predicated solely upon the civil liability provisions of the U.S. federal securities laws or the securities laws of any state within the United States. As a result, the claimant would be required to pursue claims against us or such persons in Indonesian courts on the basis of the Indonesian law. The claims and remedies available under Indonesian law may not be as extensive as those available in the United States or other jurisdictions. No assurance can be given that the Indonesian courts will protect the interests of investors in the same manner or to the same extent as would U.S. courts.
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Indonesian law may operate differently from the laws of other jurisdictions, with regard to the convening of, and the right of shareholders to attend and vote at, general meetings of shareholders of the Company.
We are subject to Indonesian law and the continuing listing requirements of the IDX. In particular, the convening and conduct of general meetings of our shareholders will continue to be governed by Indonesian law. The procedure and notice periods in relation to the convening of general meetings of our shareholders, as well as the ability of shareholders to attend and vote at such general meetings, may be different from those of jurisdictions outside Indonesia. For instance, our shareholders who would be entitled to attend and vote at our general meetings of shareholders are, by operation of Indonesian law, those shareholders appearing in our register of shareholders (the "Register") on the market day immediately preceding the day (the "Record Date GMS") on which the notice of general meeting is issued, regardless of whether such shareholders may have disposed of their common shares following the Record Date GMS. In addition, investors who may have acquired their common shares after the Record Date GMS (and before the day of the general meeting) would not be entitled to attend and vote at the general meeting. Accordingly, potential investors should note that they may be subject to procedures and rights with regards to our general meetings of shareholders that are different from those to which they may be accustomed in other jurisdictions.
The regulations governing Indonesian securities markets differ from those in other markets, which may cause the market price of our common shares to be more volatile and less liquid and the limited public ownership of our common shares may contribute to a lack of liquidity.
We cannot assure you that a market will develop for our common shares as movements in domestic and international securities markets, economic conditions, foreign exchange rates and interest rates may affect the market price and demand for the common shares. The common shares and dividends, if any, are quoted and declared in Rupiah. Fluctuations in the exchange rate between Rupiah and other currencies will affect, among other things, the foreign currency value of the proceeds which a shareholder would receive upon sale of the common shares and the foreign currency value of dividend distributions.
Our common shares are listed on the IDX. The Indonesian capital markets are less liquid and more volatile than markets in the United States, the United Kingdom and many other countries.
The IDX, on which the common share are listed, has in the past experienced substantial fluctuations in the prices of listed securities. The IDX has experienced some problems which, were they to continue or recur, could affect the market price and liquidity of the securities of Indonesian companies, including the common shares. These problems have included closures of the exchange, broker defaults and strikes, settlement delays, and the bombing of the IDX building. In addition, the governing bodies of Indonesian stock exchanges have from time to time imposed restrictions on trading in certain securities, limitations on price movements and margin requirements. The levels of regulation and monitoring of the Indonesian securities markets and the activities of investors, brokers and other market participants are not the same as in certain other countries. In addition, the ability to sell and settle trades on the IDX may be subject to delays. In light of the foregoing, a shareholder may not be able to dispose of its common shares at the prices or at times at which such holder would be able to do so in a more liquid or less volatile markets or at all.
There may be less company information available, and corporate governance standards may differ, for public companies listed on the Indonesian securities markets as compared to those listed on securities markets in other countries.
The IDX and OJK have different reporting standards than securities exchanges and regulatory regimes in the United States and many other countries. There is a difference between the level of regulation and
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monitoring of the Indonesian securities markets and the activities of investors, brokers and other participants than that of markets in the United States and other developed economies. OJK and the IDX are the Indonesian governmental securities regulator and Indonesian securities exchange, respectively, that are responsible for improving disclosure and other regulatory standards for the Indonesian securities markets. OJK has issued regulations and guidelines on disclosure requirements, insider trading and other matters. There may, however, be less publicly available information about Indonesian companies than is regularly made available by public companies in other countries. As a result, as a shareholder you may not receive the same amount of information or receive information with the same frequency as you may for companies listed in the United States and many other countries.
In addition, corporate governance standards and practices may not be as strict, including with regard to the independence of boards of directors and audit and other committees. Because of this, the directors of Indonesian companies may have interests that conflict with the interests of shareholders generally, which may result in them taking actions that are contrary to the interests of shareholders.
Our ability to pay dividends in the future will depend upon future earnings, financial condition, cash flows, working capital requirements and capital expenditures and dividends will be paid in Rupiah.
The amount of our future dividend payments, if any, will depend on our future earnings, financial condition, cash flows, working capital requirements and capital expenditures. In addition, we may be subject to certain restrictions on making dividend payments by terms of any further financing.
Our Board of Directors may not recommend and our shareholders may not approve the payment of dividends. We may incur expenses or liabilities that would reduce or eliminate the cash available for distribution of dividends. If we do not pay cash dividends on our common shares, our shareholders may not receive any return on investment in our common shares unless they sell such common shares at a price higher than the price at the time of purchase.
Under the Company Law, we may distribute a final dividend to shareholders only if we booked a positive profit balance after deduction for setting aside part of our positive profit balance for our mandatory reserves at the close of our financial year (i.e., all net profit booked at the close of its financial year covers all accumulated losses from previous financial years). A part of net profits will have to be set aside for our mandatory reserves until the reserve reaches at least 20% of the Company's paid-up and issued capital.
A-1
ANNEX A
INDUSTRY REPORT BY RISI, INC.
RISI has been commissioned by us to prepare the following “Industry Report” annex. The information contained in this annex has not been independently verified by us or any other person. Some information is principally based on estimates and should therefore be regarded as indicative only and treated with the appropriate caution.
The information and data contained in this annex, including but not limited to information and data relating to the paper industry in Indonesia, has been taken from RISI’s databases. Industry and market data compiled and collected by RISI is based on interviews conducted by RISI with various industry participants, as well as information available to RISI from public and other sources, and RISI’s estimates based on its industry and market knowledge. RISI’s methodologies for collecting information and data, and therefore the information discussed in this annex, may differ from those of other sources. Further, this data is subject to change and cannot be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey. Neither RISI nor we have any obligation to announce or otherwise make publicly available updates or revisions to the information or data included in this annex.
2018Indonesia’s Packaging Paperboard Market Overview and Medium-Term
Outlook to 2022An Overview of Containerboard and
Boxboard Markets in Indonesia
March 2018 with September 2018 Updates
0318
The Indonesia’s Packaging Paperboard Market Overview and Medium-Term Outlook to 2022 was authored by:
Beth Lis Senior EconomistLasse Sinikallas Director, MacroeconomicsRianto Wirar Analyst, Paper PackagingSampsa Veijalainen Senior Product ManagerAbdulla Zaid Economist
with the assistance of: Anne-Chantal Bodart Graphic Design ManagerLori Pilla Senior Production Specialist
Disclaimer of WarrantyAlthough RISI, Inc. shall use its best efforts to provide accurate and reliable information, RISI, Inc. does not warrant the accuracy or adequacy thereof. RISI, Inc. MAKES NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO THE RESULTS TO BE OBTAINED FROM THE USE OF ITS SERVICES AND MAKES NO WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. RISI, Inc. SUPPLIES ALL SERVICES ON AN “AS IS” BASIS. If notified of an error in its Services, RISI, Inc. shall take reasonable steps to correct such error.
© 2018, RISI, Inc.All Rights Reserved.
www.risi.com
RISI Indonesia’s Packaging Paperboard Market Overview
March 2018 with September 2018 Updates iii
Table of Contents
List of Tables ............................................................................................................................................................ v
List of Figures .........................................................................................................................................................vii
A Brief Overview of Indonesia's Economy ............................................................................................................... 1
Global Context of Indonesia's Packaging Market .................................................................................................... 5Grade Definitions ...........................................................................................................................................6
Containerboard .......................................................................................................................................6Boxboard .................................................................................................................................................6
Paper Consumption by Major Grade by Region ............................................................................................7
Market Demand and Supply Trends and Outlook .................................................................................................. 11Demand Drivers ...........................................................................................................................................11Containerboard .............................................................................................................................................14China Containerboard Market Update - September 14, 2018 ......................................................................18Boxboard ......................................................................................................................................................21Risks to the Forecast ....................................................................................................................................26
Price and Cost Analysis in Indonesia ................................................................................................................... 29Historical Prices and Costs .........................................................................................................................29
Containerboard ......................................................................................................................................29Boxboard Prices ....................................................................................................................................30
Costs .............................................................................................................................................................31Price Forecast ...............................................................................................................................................33
Market Competition Dynamics .............................................................................................................................. 37Top Paper Packaging Producers in Indonesia ..............................................................................................37
PT Fajar Surya Wisesa ..........................................................................................................................37PT Indah Kiat Pulp & Paper ..................................................................................................................37
Profile Highlights of Five Major Firms in the Containerboard and Boxboard Sectors ...............................37Containerboard ......................................................................................................................................37Boxboard ...............................................................................................................................................40
Trade Dynamics ...........................................................................................................................................42Containerboard ......................................................................................................................................42Boxboard ...............................................................................................................................................47
Barriers to Entry ...........................................................................................................................................49Cash Cost Update .........................................................................................................................................50
RISI Indonesia’s Packaging Paperboard Market Overview
March 2018 with September 2018 Updates v
List of Tables
A Brief Overview of Indonesia's EconomyTable 1 Indonesian Economic Overview, 2013-2017 .................................................................................2Table 2 Indonesian Demographics Look Positive for Economic Growth ..................................................3
Global Context of Indonesia's Packaging MarketTable 3 Comparative Growth in Demand Volumes Across Grades and Regions .......................................9
Market Demand and Supply Trends and OutlookTable 4 Packaging Paperboard Demand Driver Trends, 2013-2022 ........................................................11Table 5 E-Commerce Growth Potential ....................................................................................................13Table 6 Containerboard Demand and Supply Trends, 2013-2017 ............................................................15Table 7 Containerboard Demand and Supply Outlook, 2017-2022 ..........................................................20Table 8 Major Containerboard Capacity Expansions in Indonesia, 2013-2022 .......................................21Table 9 Boxboard Demand and Supply Trends, 2013-2017 .....................................................................22Table 10 Boxboard Demand and Supply Outlook, 2017-2022 ...................................................................25
Price and Cost Analysis in Indonesia Table 11 Containerboard Prices in Indonesia, 2013-2017 ..........................................................................30Table 12 Main Packaging Board Grades Price Outlook in Indonesia, 2018-2022 .....................................35
Market Competition DynamicsTable 13 Profiles of the Top Five Containerboard Producers in Indonesia ................................................39Table 14 Top Indonesian Containerboard Producers, Capacity and Grades ...............................................40Table 15 Profiles of the Top Five Boxboard Producers in Indonesia .........................................................41Table 16 Top Five Indonesian Boxboard Producers, Capacity and Grades ................................................42Table 17 Containerboard Imports and Exports, 2013-2017 ........................................................................44Table 18 Boxboard Imports and Exports, 2013-2017 .................................................................................47
RISI Indonesia’s Packaging Paperboard Market Overview
March 2018 with September 2018 Updates vii
List of Figures
TA Brief Overview of Indonesia's EconomyFigure 1 Real GDP Growth in Indonesia, 1990-2017 ..................................................................................1Figure 2 Indonesian Economic Growth Trends and Outlook, 2007-2022 ...................................................3
Global Context of Indonesia's Packaging MarketFigure 3 World and Asian Demand by Grade, 2017 ....................................................................................7Figure 4 Total Paper and Board and Containerboard Demand by Region, 2017 .........................................8Figure 5 Paper Demand by Grade by Region, 2017 .....................................................................................8Figure 6 Major Southeast Asian Countries Containerboard and Boxboard Consumption,
2017 and 2022 ..............................................................................................................................10Figure 7 Paperboard Consumption per Person/GDP per Capita Comparison of Selected Countries,
2017..............................................................................................................................................10
Market Demand and Supply Trends and OutlookFigure 8 Size of the e-Commerce Market .................................................................................................13Figure 9 Annual Consumer Spending ........................................................................................................14Figure 10 Indonesian Containerboard Demand ............................................................................................16Figure 11 Indonesian Containerboard Production and Net Exports .............................................................16Figure China 1 Recycled Containerboard and OCC Prices in East China ...........................................................19Figure 12 Indonesian Containerboard Capacity Trends, 2013-2022 ............................................................21Figure 13 Indonesian Boxboard Demand .....................................................................................................23Figure 14 Indonesian Boxboard Production and Net Exports ......................................................................24Figure 15 Indonesian Boxboard Supply Trends, 2013-2022 ........................................................................26
Price and Cost Analysis in Indonesia Figure 16 Containerboard Prices versus Main Raw Material Costs, First Quarter 2013 to
Second Quarter 2018 ....................................................................................................................29Figure 17 Coated Duplex Prices versus Main Raw Material Costs, First Quarter 2013 to
Fourth Quarter 2017 .....................................................................................................................31Figure 18 Average Cash Costs by Company/Mill in Indonesia for Corrugating Medium and
Linerboard, Fourth Quarter 2017 .................................................................................................32Figure 19 Average Cash Costs by Company/Mill in Southeast Asia for Corrugating Medium and
Linerboard, Fourth Quarter 2017 .................................................................................................33Figure 20 Quarterly Containerboard and Coated Duplex Prices, First Quarter 2016 to
Fourth Quarter 2019 .....................................................................................................................34
Market Competition DynamicsFigure 21 Indonesian Containerboard Capacity Share, 2018 .......................................................................38
viii March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview List of Figures
Figure 22 Indonesian Boxboard Capacity Share, 2018 ................................................................................40Figure 23 Asian Linerboard Exports by Source, 2013-2017 ........................................................................43Figure 24 Asian Corrugating Medium Exports by Source, 2013-2017 .......................................................43Figure 25 Indonesian Linerboard Exports by Destination, 2013-2017 ........................................................45Figure 26 Indonesian Corrugating Medium Exports by Destination, 2013-2017 ........................................45Figure 27 Recycled Linerboard and Recycled Medium Import Dependence Ratios, 2013-2017 ...............46Figure 28 Recycled Linerboard and Recycled Medium Export/Production Ratios, 2013-2017 ..................46Figure 29 Indonesian Boxboard Exports by Destination, 2013-2017 ..........................................................48Figure 30 Virgin Cartonboard and Recycled Boxboard Grades Import Dependence Ratios, 2013-2017 ...48Figure 31 Total Boxboard Export/Production Ratios, 2013-2017 ...............................................................49Figure 32 Average Cash Cost for Linerboard by Asian Country, Second Quarter 2018 ..............................50Figure 33 Average Cash Cost for Corrugating Medium by Asian Country, Second Quarter 2018 .............51Figure 34 Average Cash Cost for Linerboard for Selected Asian Suppliers, Second Quarter 2018 ............52Figure 35 Average Cash Cost for Corrugating Medium for Selected Asian Suppliers,
Second Quarter 2018 ....................................................................................................................53
RISI Indonesia’s Packaging Paperboard Market Overview
March 2018 with September 2018 Updates 1
Indonesia is Southeast Asia's largest economy and was the 16th largest economy in the world in 2016, according to the World Bank. The economy has maintained fairly steady growth over the past five years with GDP growth averaging 5.1% per year in 2013-2017. The economy had seen GDP growth of about 6% per year in 2010-2012 following the global economic recession in 2009, supported by the global commodities boom and easy global monetary conditions which bolstered investment and exports. GDP growth then slowed to an average of 5.6% in 2013 and 5.0% in 2014 as the global commodities boom ended and Indonesia's central bank raised interest rates to fight inflation and address the growing current account deficit. The rising interest rates, reductions in fuel subsidies and sluggish global economic growth (with China's slowing) served to dampen exports, investment and domestic demand. These same factors continued to restrain growth in 2015 and 2016, even as the government provided stimulus through infrastructure investment and some easing in interest rates in 2016 to maintain growth, given the stagnate global economic picture and weak exports.
In 2017, GDP growth came in at 5.1%, gradually accelerating over the course of the year as exports and investment gained momentum with the global upturn; year-over-year growth in the fourth quarter of 2017 was 5.2%. Growth in gross fixed investment and exports were key contributors in 2017, while private consumption remained steady at 5.0%. Growth in private consumption was reportedly held back somewhat as more disposable income went toward tax payments under the influence of the government's tax amnesty program.
A Brief Overview of Indonesia's Economy
Figure 1Real GDP Growth in Indonesia, 1990-2017
Percent Change
Source: RISI.
Figure 1Real GDP Growth in Indonesia, 1990-2017
Percentage Change
-15%
-10%
-5%
0%
5%
10%
1990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520162017
2 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview A Brief Overview of Indonesia's Economy
In the near term, Indonesian economic growth is predicted to edge higher to 5.3% in 2018 and 5.4% in 2019. Solid supports from the strong global economy are expected to keep export growth healthy in 2018. Generally, the global economy may face some headwinds from slower growth in China, but upturns elsewhere will be supportive, and we expect modest improvement in commodity prices and external demand. Moderately tighter but supportive financial policies should bolster investment, and a slight acceleration in domestic growth due to wage gains and improving confidence are also expected to boost GDP growth. Over the medium term, GDP growth is forecast to average 4.8%, with steady average annual growth of 5.3% in 2018-2021 offset slightly by an assumed cyclical downturn in Indonesia and the world in 2022. This pace is similar to or greater than predicted rates for other countries in Southeast Asia, including Malaysia (4.6%), the Philippines (5.4%), Vietnam (5.8%) and Thailand (3.1%). Generally, Indonesia is in a good position with positive demographics, as its share of working age population is predicted to continue to rise and its dependency ratio is expected to fall (see Table 2; based on UN population data and forecasts). But to take advantage of this "dividend," Indonesia needs to maintain its infrastructure and education expenditures to take advantage of its young and growing work force as the economy continues its longer-term transition from agriculture to being driven more by the industry and service sectors.
There is both upside and downside risk to the forecast, although the downside risk may predominate. In the near term, the upside risk results from the potential for a slightly stronger global picture than expected with higher commodity prices. China's path in 2018 and over the next five years will be important. Downside risk comes from the possibility of slower growth in China than already assumed, global geopolitical risks, trade wars, and the potential for less capital inflow and investment, which will largely depend on US monetary and fiscal policy.
Table 1Indonesian Economic Overview, 2013-2017
Macroeconomic Indicators 2013 2014 2015 2016 2017GDP (Bill 05$) 2,164 2,273 2,382 2,501 2,628
% Change 5.6% 5.0% 4.8% 5.0% 5.1%GDP per Capita (USD/capita) 8,697 9,013 9,323 9,667 10,032
% Change 4.1% 3.6% 3.4% 3.7% 3.8%Industrial Production (% Change) 5.9% 4.6% 4.3% 4.6% 4.4%Population (Millions) 248.8 252.2 255.5 258.7 262.0Urban Share of Working Population* 51% 51% 54% 54% 55%Private Consumption (Trl. IDR 2010) 4,512 4,750 4,980 5,231 5,492Private Consumption (Annual % Growth) 5.5% 5.3% 4.8% 5.0% 5.0%Disposable Income (Trl. IDR 2010) 6,179 6,461 6,626 7,201 --
% Change 5.2% 4.6% 2.6% 8.7% --Exports of Goods and Services (Annual % Growth) -2.0% -2.6% -9.7% 0.2% 15.9%CPI (%) 8.4% 8.4% 3.4% 3.0% 3.6%IDR/USD Exchange Rate 10,463 11,865 13,442 13,344 13,423
Source: IMF, World Bank, BPS-Statistics Indonesia, CEIC, RISI.* Share of Working Population (15 years and Older) that is urban based on August data.
Table 1Indonesian Economic Overview, 2013-2017
March 2018 with September 2018 Updates 3
RISI Indonesia’s Packaging Paperboard Market Overview A Brief Overview of Indonesia's Economy
Figure 2Indonesian Economic Growth Trends and Outlook, 2007-2022
Source: RISI.
Figure 2Indonesian Economic Growth Trends and Outlook, 2007-2022
Percentage Change
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
0
500
1,000
1,500
2,000
2,500
3,000
3,5002007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Real GDP (Billion 2005 USD) Real GDP Growth Industrial Production
Table 2Indonesian Demographics Look Positive for Economic Growth
Total 0-14 15-64 65+2000 211,540 64,914 136,665 9,962 65% 552005 226,712 68,126 147,729 10,857 65% 532010 242,524 70,254 160,509 11,761 66% 512015 258,162 71,921 173,088 13,154 67% 492020 272,223 71,832 184,697 15,694 68% 472025 284,751 71,190 193,818 19,743 68% 472030 295,595 69,246 201,901 24,449 68% 462035 304,759 67,767 207,348 29,643 68% 472040 312,134 66,629 210,715 34,790 68% 482045 317,732 65,480 212,690 39,562 67% 492050 321,551 64,035 213,302 44,213 66% 51
* Calculated as non-working population per 100 workers.Source: United Nations, Department of Economic and Social Affairs, Population Division (2017).
Population
Table 2Indonesian Demographics Look Positive for Economic Growth
Share of Working Age Dependency Ratio*
RISI Indonesia’s Packaging Paperboard Market Overview
March 2018 with September 2018 Updates 5
Global Context of Indonesia's Packaging Market
Paperboard has long been used to package goods because of its strength, versatility and ability to protect the contents of the package during transit. Boxes manufactured from paperboard provide durability, are easily customizable to the size and strength needed, and provide good surfaces that are easily printable, for graphic appeal. Paperboard is manufactured from renewable resources and its recyclability helps limit solid waste entering landfills.
Packaging made from plastic is paperboard's primary competitor. Plastics can be subdivided into rigid plastics (e.g., water bottles) and flexible packaging. According to GlobalData, in Indonesia rigid plastics hold a 25% share of the packaging industry, with paper packaging comprising another 25% share and flexible packaging a 42% share.1 The remainder is other types of packaging including metal and glass.
The increase use of packaging is being driven by rising disposable incomes and changing lifestyles, which are raising demand for pre-packaged and on-the-go food packaging. According to the Indonesian Packaging Federation (FPI), the food and beverages sector is the leader in packaging use. Estimates indicate that as much as 80% of Indonesia's food and beverage products use plastic packaging. In the third quarter of 2016, FPI was projecting that growth in packaging consumption would decelerate to 5-6% in 2016, down from 7% in 2015. Information on prospects across end uses is provided in the "Demand Drivers" sub-section of the "Forecast" section below.
There has been growing concern in Indonesia over the impacts of plastic packaging on the environment. Large quantities of plastic materials are making their way into rivers and oceans and affecting the environment. Indonesia is the second-largest contributor to plastic marine waste in the world behind China. The government is considering policy options to help address this problem. Options may focus on improving waste management systems. Tax options are also under consideration, with the government running a trial excise tax on plastic bags in the largest cities in 2016, and an excise tax on plastic bags has been included in the 2018 proposed budget.
The use of lighter weight paperboard packaging as a means to reduce packaging costs has been a growing global trend. Consumer products companies also find lightweight paperboard desirable as a means toward meeting environmental goals of reducing packaging consumption. Use of lighter weight packaging is possible as technological advances have allowed for production of lighter weight grades that meet performance standards. However, available data make it difficult to quantify the trend. The decline in linerboard basis weights has been much more noticeable than for corrugated boxes. Shifts in box construction are one possible factor, with more corrugating medium possibly being used to maintain strength as linerboard became lighter.
In Indonesia, Fajar Surya Wisesa is the sole producer of high performance lightweight linerboard and corrugating medium grades. The high-performance capabilities mean that Fajar Surya Wisesa's lightweight products provide the same strength and quality characteristics of products that weigh more. For example, Fajar's 125gsm lightweight corrugating medium has the same strength characteristics of a typical 150gsm corrugating medium and its 100 gsm corrugating medium product has the same characteristics as a 125gsm grade. Fajar Surya Wisesa is also the only producer in Indonesia that produces corrugating medium at basis weights of 100gsm and less.
1 GlobalData report, June 2016 as reported at www.prnewswire.com/news-releases/trends-and-opportunities-in-the-indonesian-packaging-industry-analysis-of-changing-packaging-trends-in-the-food-cosmetics-and-toiletries-beverages-and-other-industries-300483851.html.
6 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Global Context of Indonesia's Packaging Market
Grade DefinitionsContainerboard Paperboard that is used to make corrugated containers is usually grouped in two broad categories, linerboard and corrugating medium. Linerboard is used for the outer and inner flat surfaces of the box, while corrugating medium, also called fluting, is used for the corrugated interior section of the sheet. These grades are also split into categories by fiber furnish. Containerboard produced from mainly virgin fiber is called kraftliner or semichemical medium, indicating the process used to produce the pulp, although some recycled fiber is also used to make these products. Recycled containerboard (recycled liner or recycled medium) is produced primarily from recycled fiber, but may contain a small amount of virgin fiber—the board with virgin pulp in the top layer is normally referred to as kraft top liner. Testliner is also a typical grade of recycled linerboard, designed to meet specific industry performance quality tests. Linerboard is also separated into segments by color or printing characteristics. Unbleached is the most common; mottled white has a thin white outer layer, but streaks of unbleached fiber can be seen through the top; white top has a solid top ply of fiber but is unbleached below the surface; and solid bleached is white throughout the sheet.
Fajar's products are produced from 100% recycled paper for both linerboard and medium paper. Fajar produces a range of recycled linerboard grades from testliner to a 100% recycled grade that it classifies as kraftliner board. As described above, Fajar Surya Wisesa is the sole producer of high-performance lightweight linerboard and corrugating medium grades in Indonesia.
BoxboardBoxboard is the term generally given to all paperboard except containerboard. Its most common uses are for folding boxes, food board (liquid packaging, cups and plates, frozen food packaging), tubes, cans and drums, or industrial and construction boards. In this report, we divide boxboard into two major categories: virgin grades and recycled grades. Virgin grades include clay coated solid board, ivoryboard (the virgin-based subgrade of clay coated multi-ply board) and poly coated board (CBP). Recycled grades include coated duplex (recycled subgrade of clay coated multi-ply grade) and uncoated and other boards. It should be noted that RISI classifies bristols as a coated printing & writing paper grade due to their common end use, although it is often produced on machines that also produce boxboard grades.
Fajar's boxboard product is made from 100% recycled paper. It is classified as coated duplex board, the recycled subcategory of the clay coated multi-ply board grade described below.
Clay Coated Solid Board Solid bleached sulfate (SBS) is paperboard manufactured from 100% bleached kraft pulp (both hardwood and softwood). Most SBS is coated with a thin layer of kaolin clay to improve its printing surface. It may also be coated with polyethylene (PE) resin for wet strength in food packaging. It is a virgin grade which is common in North America due to the region's abundance of fiber. There is some SBS production in Indonesia.
Clay Coated Multi-Ply BoardClay coated virgin multi-ply board or ivoryboard is manufactured with bleached kraft pulp on the inner and outer plies and mechanical pulp in the middle. This board can be coated on one or both sides, and the construction of the board varies by end use. There are some gray areas with coated multi-ply board (CBV) as some manufacturers may include a small amount of recovered paper in the furnish mix. It is the higher quality (and priced) board among the multi-ply grades.
Clay coated recycled multi-ply board or coated duplex board includes multi-ply grades that have at least one layer of recovered fiber in their furnish mix. Some common names for products in this category are white lined chipboard (WLC), duplex board, triplex board, grayback board and whiteback board. Board produced on a multi-wire fourdrinier board machine or with significant virgin fiber is classified in this grade under RISI's classification system.
March 2018 with September 2018 Updates 7
RISI Indonesia’s Packaging Paperboard Market Overview Global Context of Indonesia's Packaging Market
Poly Coated BoxboardPoly coated board (CBP) is primarily made from boxboard substrates with close to 100% virgin pulp. Common converted products are cupstock, aseptic and liquid packaging board. This category may also include some unbleached kraft or recycled board that has been coated with polyethylene, although this is not as common as the use of bleached board or virgin multi-ply grades for these purposes. RISI's classification of CBP also classifies boxboard that is poly coated (or "semi-converted") at offsite extruders before being shipped for final converting (e.g., folding cartons, cups, liquid packaging) as CBP.
Uncoated and Other BoardsThis category includes both virgin and recycled uncoated boxboards. Uncoated bleached board (OBB) is composed of both uncoated SBS that is manufactured from 100% bleached kraft pulp and multi-ply multi-furnish board that is made from virgin pulp. This product may be coated at off-site converting plants, particularly in cases where this board goes to food service or liquid packaging applications. Uncoated recycled and other board (OBR) is also referred to as uncoated recycled board (URB). This grade includes other boxboard, uncoated multi-ply recycled board, uncoated unbleached board, poly coated unbleached board and recycled board. Major end-use markets for URB include gypsum wallboard (i.e., drywall for building construction), household product cores, interior packaging partitions, industrial drums, tubes, and rods.
Paper Consumption by Major Grade by RegionPackaging board grades, including containerboard and boxboard, accounted for an estimated 54% of total global paper and board demand in 2017. Containerboard was by far the dominant grade, comprising 40% of global consumption, while boxboard had just a 14% share. Printing & writing paper is the second-largest grouping with a 23% share. For Asia, the share is a little bit higher for containerboard, as it comprises 42% of demand, while boxboard accounts for 14%.
Asia's market dominated worldwide demand for total paper and board. RISI estimates show Asia accounting for 46% of global demand, followed by Europe with a 24% share and North America with 18%. Asia represents 48% of total world containerboard demand and 46% of total boxboard demand.
Figure 3World and Asian Demand by Grade, 2017
Million Tonnes and Percent
Source: RISI.
Figure 3World and Asian Demand by Grade, 2017
Million Tonnes and Percent
42%
14%
24%
5%
6%
9%
Asia, Total: 197 Million Tonnes
Containerboard
Boxboard
Printing & Writing
Newsprint
Tissue
Wrapping and OtherPaper and Board
40%
14%
24%
5%
9%
8%
World, Total: 424 Million Tonnes
8 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Global Context of Indonesia's Packaging Market
Figure 4Total Paper and Board and Containerboard Demand by Region, 2017
Million Tonnes and Percent
Source: RISI.
Figure 4Total Paper and Board and Containerboard Demand by Region, 2017
Million Tonnes and Percent
46%
18%
24%
12%
Total Paper & Paperboard: 424 Million Tonnes
Asia
North America
Europe
Rest of World
48%
18%
21%
13%
Containerboard: 170 Million Tonnes
Figure 5Paper Demand by Grade by Region, 2017
Million Tonnes
Source: RISI.
Figure 5Paper Demand by Grade by Region, 2017
Million Tonnes
0
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Asia North America Europe Rest of World
Containerboard
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Printing & Writing
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Wrapping and Other Paper and Board
March 2018 with September 2018 Updates 9
RISI Indonesia’s Packaging Paperboard Market Overview Global Context of Indonesia's Packaging Market
Containerboard saw the most rapid growth rates of all the paper and board grades in 2017 and over the past five years (Table 3). In 2017, containerboard demand grew 4.2% globally, 4.5% in Asia and 3.0% in Indonesia. Over the past five years, Indonesian containerboard demand has risen 3.8% per year, while Asian containerboard demand has increased 3.4% per year and global demand has climbed 3.1%. Boxboard demand has trailed containerboard slightly, growing 2.8% in Indonesia and 3.1% in Asia in 2017 compared to 2.1% globally. It averaged 2.0% per year growth in Indonesia and 3.3% per year in Asia in 2013-2017 compared to 2.3% globally over the same time period. These growth figures outpace the gains achieved by the graphic paper grades due to the effects of competition with e-media on graphic paper end uses. These trends are expected to continue over the next five years, with containerboard demand growth ranking highest across the major grades except for tissue, and Asia and Indonesia ranking highest across regions.
Within the Asian region, China is the leading consumer of total paper and board as well as packaging grades. The country accounted for 62% of Asian containerboard demand and 59% of Asian boxboard demand in 2017. Southeast Asia (Cambodia, Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) accounted for 13% of Asian containerboard demand and 15% of boxboard demand. Indonesia is the largest of the Southeast Asian markets (Figure 6). It accounted for 13% and 4% of the Southeast Asian and Asian containerboard markets, respectively, and 45% and 7% of the boxboard markets. Indonesian per capita paperboard demand (containerboard and boxboard combined) is relatively low compared to some other markets in Asia on a similar development curve (Figure 7). For example, Vietnam has been climbing faster and is at a higher level than Indonesia, likely a reflection of Vietnam's growing merchandise export business which is a significant end-user of containerboard.
Table 3Comparative Growth in Demand Volumes Across Grades and Regions
Grade Indonesia Asia North America Europe Rest of World WorldContainerboard Percentage Growth in 2017 3.0% 4.5% 3.6% 4.3% 4.2% 4.2%
Average Annual Growth in 2013-2017 3.8% 3.4% 2.1% 3.6% 2.5% 3.1%Average Annual Growth in 2018-2022 3.4% 2.7% 2.4% 2.6% 2.6% 2.6%
Boxboard Percentage Growth in 2017 2.8% 3.1% 0.8% 1.4% 2.2% 2.1%Average Annual Growth in 2013-2017 2.0% 3.3% 0.8% 1.6% 3.2% 2.3%Average Annual Growth in 2018-2022 1.8% 2.3% 0.3% 2.2% 3.1% 2.0%
Printing & Writing Percentage Growth in 2017 2.3% 1.6% -5.5% -1.5% -0.4% -0.7%Average Annual Growth in 2013-2017 1.1% 0.2% -4.1% -2.5% -2.3% -1.6%Average Annual Growth in 2018-2022 2.2% -0.3% -3.7% -3.0% 0.7% -1.4%
Tissue Percentage Growth in 2017 2.9% 4.6% 1.8% 2.5% 4.6% 3.4%Average Annual Growth in 2013-2017 9.5% 5.8% 1.9% 2.4% 3.8% 3.6%Average Annual Growth in 2018-2022 4.8% 4.6% 1.5% 2.5% 4.5% 3.3%
Newsprint Percentage Growth in 2017 2.6% -4.9% -10.8% -7.4% -9.1% -7.0%Average Annual Growth in 2013-2017 -1.7% -4.7% -9.2% -6.3% -9.9% -6.4%Average Annual Growth in 2018-2022 -0.3% -3.5% -7.8% -6.8% -4.6% -5.2%
Total Paper and Board Percentage Growth in 2017 2.9% 2.9% 0.0% 1.1% 2.1% 1.8%Average Annual Growth in 2013-2017 2.6% 2.0% -0.3% 0.5% 0.7% 1.0%Average Annual Growth in 2018-2022 2.7% 1.7% 0.3% 0.6% 2.3% 1.2%
Source: RISI.
Table 3Comparative Growth in Demand Volumes Across Grades and Regions
10 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Global Context of Indonesia's Packaging Market
Figure 7Paperboard Consumption per Person/GDP per Capita Comparison of Selected Countries, 2017
Source: RISI.
Figure 7
Paperboard Consumption per Person/GDP per Capita Comparison of Selected Countries, 2017
IndiaPhilippines
Brazil
Indonesia
Vietnam
ThailandChina
Singapore
UKJapan
Germany
USA
0
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0 20 40 60 80 100 120 140
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ita, P
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onst
ant 2
005
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Paperboard ConsumptionKilograms per Person
Figure 6Major Southeast Asian Countries Containerboard and Boxboard Consumption, 2017 and 2022
Thousand Tonnes
Source: RISI
Figure 6
Major Southeast Asian Countries Containerboard and Boxboard Consumption, 2017 and 2022
Thousand Tonnes
742
10
628
45
488158
1,917
306
2,385
168
2,782
180
1,254
105
3,028
920 986
11
707
60
511154
2097
351
3,566
216
3,236
250
1,382
106
3,579
1,067
Vietnam Cambodia Thailand Myanmar Malaysia Singapore Indonesia Philippines
Boxboard 2017
Containerboard 2017
Boxboard 2022
Containerboard 2022
RISI Indonesia’s Packaging Paperboard Market Overview
March 2018 with September 2018 Updates 11
Demand DriversConsumption of containerboard and boxboard grades is driven by the use of packaging for both durable and non-durable goods, but especially non-durable because of the frequency of purchase. Non-durable goods include items often referred to as fast moving consumer goods (FMCG), which cover end uses such as food and beverages, household supplies, toiletries and medicines, as well as other items with a limited lifetime (including clothes, shoes and some small electronics). Packaging of durables, including appliances and electronics, is also important to consumption.
The potential for growth in these segments is dependent on population growth, income levels, urbanization and changes in consumer spending patterns. The potential to export merchandise goods is also an important factor. Point of purchase is relevant as supermarkets and other large stores tend to use more packaging in their logistics chain and point of purchase than, for example, local produce markets. Rising investment by global consumer goods companies is a positive sign for packaging. Developments in e-commerce also will be significant, as discussed below.
Table 4 summarizes some of the trends in measures that are indicative of the strength of these factors in Indonesia. GDP and private consumption growth decelerated in 2013 and 2014 but have been fairly stable since that time. Inflation rose in 2013-2014 as rising budget deficits contributed to the government's decision to reduce fuel and electricity subsidies. Since then, however, inflation has declined and stabilized. GDP growth in 2017 was supported by higher investment and an upturn in exports as the global economy improved. Retail sales have been strong throughout the recent past but slowed in 2017. One might have expected a better performance given
Market Demand and Supply Trends and Outlook
Table 4Packaging Paperboard Demand Driver Trends, 2013-2022
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022GDP (Bill 05$) 2,164 2,273 2,382 2,501 2,628 2,768 2,917 3,075 3,231 3,325
% Change 5.6% 5.0% 4.8% 5.0% 5.1% 5.3% 5.4% 5.4% 5.1% 2.9%Industrial Production (% Change) 5.9% 4.6% 4.3% 4.6% 4.4% 4.4% 4.6% 4.9% 4.8% 3.3%Population (Million Persons) 248.8 252.2 255.5 258.7 262.0 265.3 268.7 272.1 275.6 279.0GDP per Capita (USD/Capita) 8,697 9,013 9,323 9,667 10,032 10,431 10,857 11,300 11,727 11,916
% Change 4.1% 3.6% 3.4% 3.7% 3.8% 4.0% 4.1% 4.1% 3.8% 1.6%Private Consumption (Trl. IDR 2010) 4,512 4,750 4,980 5,231 5,492 5,761 6,067 6,352 6,669 7,003Private Consumption (% Change) 5.5% 5.3% 4.8% 5.0% 5.0% 4.9% 5.3% 4.7% 5.0% 5.0%Retail Sales (% Change) 12.9% 14.5% 13.3% 11.0% 2.9% — — — — —Retail Sales: Food, Beverage & Tobacco (% Change) 7.3% 15.6% 18.0% 9.9% 7.4% — — — — —Sales of Packaged Food by Volume (Thousand Tonnes) 12,536 13,143 13,747 14,425 15,094 15,809 16,583 17,408 18,289 19,226
% Change 4.9% 4.8% 4.6% 4.9% 4.6% 4.7% 4.9% 5.0% 5.1% 5.1%Sales of Consumer Electronics by Volume (Thousand Units) 71,060 67,476 66,025 64,353 64,673 64,294 65,654 66,597 68,152 69,552
% Change 9.6% -5.0% -2.2% -2.5% 0.5% -0.6% 2.1% 1.4% 2.3% 2.1%Smartphone Users (Millions) 27.4 38.3 52.2 69.4 86.6 103.0 — — — —Merchandise Exports (% Change) -3.9% -3.4% -14.7% -3.7% 16.6% 7.5% 8.2% — — —CPI (% Change) 8.4% 8.4% 3.4% 3.0% 3.6% 3.7% 3.9% — — —
Table 4Packaging Paperboard Demand Driver Trends, 2013-2022
Source: IMF, Consensus Forecasts, Indonesia Central Bureau of Statistics, Bank of Indonesia, CEIC, RISI, eMarketer, Euromonitor.
12 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
the increase in wages and employment, lower interest rates and improving global economy, but consumers apparently held back on purchases of durable goods. The reasons for the hesitancy are not entirely clear but may have resulted from shifting consumption patterns across age groups and impacts of the government tax amnesty program as more disposable income went toward tax payments. Growth in retail sales for food and beverages, an important sector for packaging grades, did remain healthy in 2017.
Moving forward, Indonesia looks to be in a good position for solid growth in several important end-use markets for packaging paper. The economy is slated to see a slight uptick in GDP growth over the next few years, with household consumption experiencing a similar modest acceleration. Inflation has been brought under better control, running at about 3%. Population growth, rising incomes and growth in the middle class should all be supportive. The outlook for exports in the near term is also positive given the outlook for continued solid global economic growth in 2018-2019. There may also be some upside potential from consumption depending on consumer confidence and the ability of the government to continue to improve wage growth.
The outlooks for specific end-use markets that are important drivers for packaging growth, including e-commerce, packaged food, also look positive for Indonesia. First, e-commerce is an important sector with promise for growth that will help drive up containerboard packaging use in Indonesia. E-commerce is just at its beginning stages in Indonesia, with data suggesting that it accounts for about 1-2% of retail sales.
There are a number of factors that indicate that Indonesia's e-commerce sector is poised for growth, including a large population, a growing middle class, rising disposable incomes, growing mobile phone and smartphone use, and increasing Internet penetration. There is a range in the estimates of the size of Indonesia's middle class, depending on the income level used to define it. Some institutions with a lower income criterion estimate the size of the middle class between 45 million and 75 million, while others with a higher income criterion put it at 20 million or less.1 Most analysts are anticipating healthy growth. For example, Euromonitor estimates that Indonesia's middle class was 16.9 million in 2016 and projects that it will rise to 23.9 million by 2030, a 2.5% average annual growth rate.2 Smartphone usage has been rising, but there is still opportunity for more growth. The eMarketer research firm estimates smartphone use in 2016 was 69.4 million, just 27% of the population and 37% of the working population 15 years and older, and predicts it will grow to 103 million in 2018.3 This would reportedly make Indonesia the fourth-leading country for smartphone use, behind China, the USA and India. One reason for the growth will be deals offered by cell phone service providers. In addition, the government currently has an initiative, the Palapa Ring Project, to install an undersea fiber optic cable to provide better Internet service across the country. The Indonesia Internet Service Provider Association estimates that there were 132.7 million Internet users in 2016, a little over half the population, and this project is expected to generate rapid growth in Internet access over the next several years.
Indonesia's e-commerce landscape is also in its early stages. It is dominated by a few larger players, but has many companies involved as indicated by idEA's membership of 250 in early 2017. The largest business-to-consumer websites in the marketspace include Tokopedia, Lazada Indonesia, Bukalapak, Blibli and Shopee Indonesia. Large global companies have taken note of the potential for growth and are starting to invest in Indonesia's e-commerce sector. Tokopedia is the largest and received funding from Japan's Softbank and Sequoia Capital, a US venture capital firm, in 2014, with Alibaba investing to become a minority shareholder in 2017.4 Lazada is another leading firm that is set up as an e-commerce marketplace and provides opportunities for retailers to create their own storefronts—Unilever recently did. China's Alibaba took a controlling interest in this company in 2016.
1 https://www.indonesia-investments.com/news/todays-headlines/value-of-e-commerce-transactions-in-indonesia-predicted-to-soar/item7622
2 https://blog.euromonitor.com/2017/10/income-indonesia-middle-class.html.3 https://www.indonesia-investments.com/news/news-columns/what-do-indonesians-do-with-their-smartphones-on-internet/
item7557?4 https://beta.techcrunch.com/2017/08/17/alibaba-tokopedia/
March 2018 with September 2018 Updates 13
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
A recent report by Google/Temasek predicts that Southeast Asia's e-commerce market will see the fastest growth over the 10 years from 2015 to 2025, with Indonesia experiencing the fastest growth within Southeast Asia. The primary drivers behind this growth are a young, thriving population, increases in Internet speed and access, healthy economic growth, improvements in secure payment systems, and limited access to organized brick and mortar retail space in more rural parts of the country. The number of Internet users is forecast to increase about 14% per year from 2015 to 2020 in Southeast Asia and about 19% in Indonesia. This is predicted to help drive the value of e-commerce up 32% per year over the 10 years from 2015 to 2025 in Southeast Asia and 39% per year in Indonesia.
Euromonitor has a similarly optimistic outlook for growth for e-commerce. Its data on e-commerce value shows the value of Internet retailing climbing from IDR 8.2 billion to IDR 46.6 billion from 2012-2017 and average annual growth rate of 41.6% per year over the five-year period. Its forecast over the next five years shows growth of 26% per year.5
5 Euromonitor International, "Internet Retailing in Indonesia," January 2018.
Table 5E-Commerce Growth Potential
2015 2020 2025 From 2015 to 2020
From 2015 to 2025
Number of Internet Users (Millions)Southeast Asia* 260 480 ~14%Indonesia 92 215 ~19%
Value First-Hand E-commerce Market (Billions US$)**Southeast Asia* 5.5 87.8 ~32%Indonesia 1.7 46 ~39%
** Considers the growth in online sales of first-hand goods and excludes resale of second-hand goods.
Average Annual Growth
Table 5E-Commerce Growth Potential
Source: Google/Temasek, "e-conomy SEA Unlocking the $200 billion digital opportunity in Southeast Asia."* Defined as Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam.
Figure 8Size of the e-Commerce Market
Billions of US Dollars
Confidential / Draft
1
Riders
73
26 22 14 13 11 8 6 4
194
105
57 42 30 26 19 16 13
F&B Leisure Apparel Education Transport Housing andUtilities
Telecom Personal Items Healthcare
2011 2030
(US$bn | Annual consumer spending at 2010 prices)
5.2% 7.5% 5.0% 6.0% 4.6% 4.5% 4.7% 5.3% 6.2%
CAGR (2010-2030)
1.7 0.4 0.5 0.9 1.0 1.0
46.0
7.5 9.7
11.1 8.2
5.4
Indonesia Vietnam Philippines Thailand Malaysia Singapore
2015 2025
(US$bn | e-commerce market size) CAGR (2015-2025)
39% 33% 34% 29% 24% 18%
Source: Google / Temasek
14 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
The FMCG sector and its subgrouping of the food and beverage industry are also poised for healthy growth. Similar to e-commerce, positive factors including rising disposable incomes and a growing middle class will help increase spending in this sector. Urbanization also is expected to be supportive of growth, particularly in packaged food. The urban population currently stands at about 55% of the population and the UN estimates that its share will grow to 67% by 2050.6 The food and beverage segment underperformed expectations slightly in 2017, but still outperformed other retail segments. The retail sales index compiled by the Bank of Indonesia showed sales growth for food and beverages at 7.4% in 2017, compared to just 2.9% for all retail sales. Indonesia's food and beverages industry is also seeing investment, with growth in domestic investment averaging 28% in the five years to 2017. Unilever announced in June 2017 that it would be investing US$500 million over the next five years in its productive capacity in the food and consumer products segments. Euromonitor's recent forecast of sales of packaged food also points to healthy growth. It shows sales by volume rose an average of 4.8% per year in 2013-2017, and a slight uptick to 5.0% per year is projected in 2018-2022. Similarly, Euromonitor's report on consumer electronics shows a pick-up in purchases over the next five years, with growth predicted to average 1.5% per year compared to its flat profile over the previous five years.
ContainerboardIndonesian containerboard demand reached an estimated 3.0 million tonnes in 2017, a 3% increase over its 2016 level. Growth averaged 3.8% per year in 2013-2017. Consumption growth has been driven by rising use of packaging for fast moving consumer goods, both for domestic consumption and export. The path of growth has been variable over the last five years. Growth gradually decelerated in 2013-2015, mirroring the slowing in the economy, but then began to rebound in late 2015 and surged in 2016 as the economy improved. Over the 2013-2017 period, containerboard demand increased by 519,000 tonnes.
Indonesian containerboard production posted solid growth of 5.0% per year in the five years to 2017, a total volume gain of 723,000 tonnes. Indonesian suppliers have expanded production in response to rising domestic demand as well as increasing exports to other parts of the world, especially other parts of Asia. See the "Trade Dynamics" subsection for further discussion of Indonesian exports and destinations.
6 https://www.indonesia-investments.com/news/todays-headlines/indonesia-is-not-reaping-the-full-benefits-of-urbanization/item8428?
Figure 9Annual Consumer Spending
Billions of US Dollars at 2010 Prices
Confidential / Draft
1
Riders
73
26 22 14 13 11 8 6 4
194
105
57 42 30 26 19 16 13
F&B Leisure Apparel Education Transport Housing andUtilities
Telecom Personal Items Healthcare
2011 2030
(US$bn | Annual consumer spending at 2010 prices)
5.2% 7.5% 5.0% 6.0% 4.6% 4.5% 4.7% 5.3% 6.2%
CAGR (2010-2030)
1.7 0.4 0.5 0.9 1.0 1.0
46.0
7.5 9.7
11.1 8.2
5.4
Indonesia Vietnam Philippines Thailand Malaysia Singapore
2015 2025
(US$bn | e-commerce market size) CAGR (2015-2025)
39% 33% 34% 29% 24% 18%
Source: McKinsey
March 2018 with September 2018 Updates 15
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
Table 6Containerboard Demand and Supply Trends, 2013-2017
Thousand Tonnes
Grade 2013 2014 2015 2016 2017 Annual % TonnageTotal Containerboard Consumption 2,633 2,730 2,726 2,939 3,028 3.8% 519
Percentage Change 4.9% 3.7% -0.1% 7.8% 3.0%Production 2,829 2,986 3,000 2,870 3,330 5.0% 723 Percentage Change 8.5% 5.5% 0.5% -4.3% 16.0%Net Exports 196 256 274 -69 302Imports 105 65 62 145 124Exports 302 321 336 76 426Capacity 3,667 3,975 4,125 4,000 4,137 4.9% 887 Operating Rate 77% 75% 73% 72% 80%
Kraftliner Consumption/Imports 23 16 20 18 23Production 0 0 0 0 0Capacity 0 0 0 0 0
Recycled Linerboard Consumption 1,432 1,506 1,499 1,599 1,615 3.8% 278 Production 1,531 1,614 1,615 1,570 1,685 4.1% 305 Net Exports 99 108 116 -29 70Imports 38 33 27 57 60Exports 137 141 143 28 131Capacity 1,984 2,149 2,220 2,188 2,093
Corrugating Medium Consumption 1,178 1,208 1,208 1,322 1,390 3.8% 237 Production 1,298 1,372 1,385 1,300 1,645 6.0% 418 Net Exports 120 164 177 -22 255Imports 45 16 15 71 40Exports 165 181 192 48 295Capacity 1,682 1,827 1,904 1,812 2,044
Source: RISI.
Table 6Containerboard Demand and Supply Trends, 2013-2017
Thousand TonnesGrowth in 2013-2017
16 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
Figure 10Indonesian Containerboard Demand
Thousand Tonnes
Source: RISI.
Figure 10Indonesian Containerboard Demand
Thousand Tonnes
-1.0%
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2.0%
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6.0%
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8.0%
9.0%
-
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1,500
2,000
2,500
3,000
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4,000
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Demand Percentage Change
Figure 11Indonesian Containerboard Production and Net Exports
Thousand Tonnes
Source: RISI.
Figure 11Indonesian Containerboard Production and Net Exports
Thousand Tonnes
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Production (L)
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March 2018 with September 2018 Updates 17
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
Indonesian containerboard production surged in 2017, growing an estimated 16% or 460,000 tonnes. This expansion was driven by healthy growth in domestic demand plus a sharp upturn in net exports following a weak year in 2016. Growth in Indonesian exports benefitted from the tighter conditions in China's market, due to new Chinese environmental and recovered paper polices that led to a recovered paper shortage. Unable to fiber their machines, Chinese buyers were forced to look for containerboard in other parts of the region and suppliers readily filled the void, attracted by the rising prices in China. Indonesia was in a good position to meet the demand in China as Fajar Surya Wisesa brought a 300,000 tonne corrugating medium machine on line in the first quarter of 2017.
There were several Chinese environmental and recovered paper policies that affected the country's fiber and containerboard supplies in 2017. These policies are also expected to affect supplies in 2018 and into the future. First, China controls recovered paper import volumes by requiring companies to have permits (with allowable quantities specified). Historically, the government issued these permits on an annual basis around the beginning of the year, and companies could apply for additional permits when their import level reached 75% of their permits. In 2017, the government unexpectedly stopped this process and did not issue any further permits after May 22. This freeze on the issuing of additional permits arose as the government began to reconsider its recovered paper import policies and moved toward banning mixed paper grades due to the presence of too much garbage and contamination in these supplies. The government also became concerned about contamination levels in other grades of recovered paper and improper handling of recovered paper imports. It undertook intensive inspections at mills that import and process recovered paper. Many mills inspected were found to be in violation, possibly due to improper storage or handling of waste generated from processing recovered paper. As a consequence, supply contracted as mills were forced to close at least temporarily as they worked to come into compliance. Costs of recovered paper supplies rose because as Chinese paper and board producers used up their existing licenses, they were forced to rely on domestically sourced recovered paper, which caused a surge in domestic recovered paper prices, or turn to a more expensive fiber like pulp. The government ultimately chose to implement the ban and imports of mixed paper are no longer permitted beginning in 2018. It also chose to implement a strict contamination level limit of 0.5% on imported recovered paper that went into effect on March 1, 2018—this is a much stricter level than the 1.5% contaminant level used in much of the rest of the world.
The other major policy initiative was focused on reducing air and water pollution emitted and/or created by the paper and paperboard industry. In the first half of 2017, special investigation teams were deployed by China's central government to carry out inspections of air and water emissions at pulp and paper facilities. Reports in the spring indicated that the Chinese government's intense scrutiny of paper and board mills' environmental compliance hit small and medium-sized producers across the country hard, especially those with capacity below 200,000 tonnes per year, as smaller plants usually lack facilities to adequately control emissions. Therefore, many small and medium-sized paper and board mills, many of which manufacture recycled containerboard, were ordered to cease production. By the end of June 2017, all paper and board mills were required to have emission certificates. This caused contractions in supply as not all mills were able to obtain discharge permits. Mills not receiving permits were expected to make improvements at the mill to comply or cease production permanently.
Looking to 2018 and the future, government implementation of policies to improve the environment and reduce air and water pollution are likely to continue to affect the paper and board industry in China. Specifically, the ban on mixed paper imports and the new contamination level limit is affecting import levels in 2018 and thus recovered paper and local containerboard supplies. Some lag in the issuing of the permits is also affecting fiber supplies. These factors are likely to continue to have an impact on the market this year, although as participants become more accustomed to the system and the government potentially becomes satisfied with compliance, there could be some easing in the degree of disruptions and acceleration in the issuing of permits. But there is also some chance that the government could get stricter in its policies. In any case, supplies from outside of China are likely to remain in demand as buyers seek to control costs and maintain consistent sources of supply.
The outlook for containerboard demand is healthy, with Indonesian demand predicted to rise an average of 3.4% per year in 2018-2022. We anticipate growth of 3.8% in 2018 as the economy shows some modest acceleration and export conditions are positive. Growth is then projected to remain fairly steady in 2019-2021, before slowing
18 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
China Containerboard Market Update - September 14, 2018RISI's current assessment of China's containerboard market has turned more bearish. After the strong demand growth in China in 2017, when demand rose 5.3% or 2.6 million tonnes, RISI estimates that Chinese containerboard growth has now turned negative in 2018. Our current prediction is that demand will drop 2% this year. We note there is significant uncertainty in terms of the precise level of decline and the drop could be more severe.
The reasons for the drop are numerous. The first factor is the deceleration in Chinese economic growth, as the government's ongoing efforts to address high debt levels by tightening credit are affecting the economy. Growth in fixed asset investment has been on the wane, and growth in industrial production and retail sales also has softened in the past few months. Second, we suspect that the trade war with the USA is having some impact, with export growth somewhat sluggish (and prospects worsening) and China's PMIs trending downward. A third factor behind the demand weakness is substitution from paper packaging to plastics. Market reports indicate that end-users have reacted to the higher prices by finding cheaper alternatives. For example, e-commerce companies have reportedly been working to reduce their packaging footprint, in part through the use of reusable plastic bins.
A fourth factor that has left us believing that demand is weak is the trend in prices. Containerboard pricing has been relatively weak in the last few months, which is in sharp contrast to developments in 2017. During both last year and this year, shortages in fiber supplies due to government policies have been affecting the market. In 2017, these shortages and the resulting increase in domestic recovered paper prices played a key role in driving up recycled containerboard prices beginning in July, with a spike in September. In contrast, even with similar fiber shortages, we did not see a similar acceleration in prices in June-August of this year. Instead, prices have been sliding, inventories are reportedly high and some producers have been taking downtime.
There are differences between 2018 and 2017 that help explain the lack of upward momentum. First, prices already are relatively high. For example, June 2018 levels were RMB 535/tonne to RMB 705/tonne higher for recycled containerboard grades in East China than in June 2017, but by August 2018, prices were RMB 175/tonne to RMB 415/tonne lower for recycled containerboard than in August 2017. Second, box manufacturers have been better able to plan ahead and are turning to lower-priced imports to help meet their demand. Third, it does seem that new capacity has continued to come on line, although it is less clear how much has closed given current fiber costs and constraints. Even considering these factors, we would have expected a little more of a price response in July and August in advance of the approaching traditionally strong demand season.
On the supply side, we have continued to see growth in Chinese containerboard net imports in 2018. This growth is resulting because local production is being held back by higher fiber costs and availability constraints brought on by the new government policies controlling recovered paper imports. These are helping to keep containerboard prices in East China relatively high and higher than in other parts in Asia, making China an attractive market for other Asian producers.
The outlook for 2019-2020 and over the next decade is for positive but somewhat dampened demand growth in China. In the near term, we are anticipating sluggish demand growth as prices remain somewhat elevated for reasons similar to 2018, as the government continues to restrict recovered paper imports. Also, China's economic growth is predicted to remain somewhat diminished as the government continues its efforts to reduce debt levels. Over the longer term, China's continued solid economic growth and growing domestic consumption should drive up containerboard demand. But there are several factors that are likely to hold it down somewhat. For example, as e-commerce continues to grow, packaging considerations may
March 2018 with September 2018 Updates 19
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
continue to change, as packaging will play less of a marketing role and more of a protection and delivery role. Furthermore, the trade war—depending on how long it lasts—as well as wage growth in China could lead manufacturers to continue to consider moving factories to other lower-cost Asian countries. However, longer term trends may push back towards substitution from plastic to paper due to environmental considerations, which would be a positive for paper packaging demand.
On the supply side, the list of expansion projects in China in the near term is extensive. However, many of these may be cancelled or delayed, other mills will likely be closed and production is expected to continue to be constrained because of policies that the Chinese government is considering. One major policy currently being discussed is a complete ban on all solid waste imports, including all grades of recovered paper. The Central Committee of the Communist Party and the State Council announced in June that China will try to eliminate all imports of solid waste by the end of 2020. The Chinese Ministry of Ecology and Environment released a draft for comment version of the Law on Solid Waste Pollution Prevention and Control in mid-July which suggested that the ban could occur at the end of 2019. Most of China's large suppliers seem to be taking this seriously and are investigating options and making investments in alternative fiber supplies or capacity outside China. In any case, it does seem like a ban will be implemented sooner or later and this will drastically affect how containerboard is produced and supplied in China. Productions costs will surely rise as producers will be forced to rely on domestic recovered paper supplies, and indications are suppliers will turn to imported recycled pulp (pulp manufactured from recycled paper). A second, more local policy, but one that could possibly extend elsewhere in the future, is a mandate by the City of Dongguan for many existing mills to convert their power plants from coal to natural gas by the end of 2018. This will also raise production costs and is likely to disrupt containerboard supplies next year. In light of the fiber constraints and rising production costs, our forecast shows an ongoing increase in Chinese containerboard imports over the coming years.
Figure China 1Recycled Containerboard and OCC Prices in East China
Renminbi per Tonne
Figure China 1Recycled Containerboard and OCC Prices in East China
Renminbi per Tonne
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
OCC at China from USA* Post-consumer OCC China**
Kraft Top Liner 170 gsm Testliner 140 gsm
Corrugating Medium 120 gsm
20 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
modestly in 2022 when RISI assumes the next cyclical global economic downturn will occur. Demand will expand a total of 550,000 tonnes in 2018-2022.
The supply forecast shows containerboard production advancing 3.4% over the 2018-2022 forecast period, mirroring the rate of growth in demand. Net exports are predicted to continue to rise over the next three years to a peak of about 600,000 tonnes in 2020 before retreating in 2021-2022 as growth in export markets slows and competition intensifies. In 2018, China's appetite for more imports is forecast to remain as the implementation of the new recovered paper import policies continues to restrain production growth. Indonesia will benefit from this growing demand and raise its exports to China and other parts of Asia. Indonesian containerboard capacity is predicted to grow an average of 2.4% per year in 2018-2022 for a total increase of 540,000 tonnes. This will allow operating rates to continue to improve through 2020 and then stabilize with a modest dip in 2022.
Table 7Containerboard Demand and Supply Outlook, 2017-2022
Thousand Tonnes
Grade 2017 2018 2019 2020 2021 2022 Annual % TonnageTotal Containerboard Consumption 3,028 3,144 3,246 3,357 3,474 3,579 3.4% 551
% Change 3.0% 3.8% 3.3% 3.4% 3.5% 3.0%Production 3,330 3,562 3,746 3,956 3,973 3,940 3.4% 610% Change 16.0% 7.0% 5.2% 5.6% 0.4% -0.8%Net Exports 302 418 500 599 499 361 3.6% 59Imports 124 94 75 66 72 73Exports 426 512 575 665 571 434Capacity 4,137 4,175 4,375 4,575 4,595 4,675 2.4% 538Operating Rate 80% 85% 86% 86% 86% 84%
Kraftliner Consumption/Imports 23 24 25 25 26 33 2.4% 9Production 0 0 0 0 0 0Capacity 0 0 0 0 0 0
Recycled Linerboard Consumption 1,615 1,677 1,731 1,791 1,853 1,903 3.3% 288Production 1,685 1,781 1,843 1,927 1,935 1,919 2.8% 234Net Exports 70 104 112 136 82 16 -26.0% (55)Imports 60 50 35 30 35 30Exports 131 154 147 166 117 46Capacity 2,093 2,087 2,152 2,228 2,238 2,277 1.7% 183
Corrugating Medium Consumption/Imports 1,390 1,443 1,490 1,541 1,595 1,643 3.4% 253Production 1,645 1,781 1,903 2,029 2,038 2,021 4.1% 376Net Exports 255 338 413 488 443 378 8.2% 123Imports 40 20 15 11 11 10 (30)Exports 295 358 428 499 454 388 93Capacity 2,044 2,087 2,222 2,347 2,357 2,398 3.2% 354
Source: RISI.
Growth in 2018-2022
Table 7Containerboard Demand and Supply Outlook, 2017-2022
Thousand Tonnes
March 2018 with September 2018 Updates 21
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
BoxboardTotal consumption of boxboard in 2017 was an estimated 1.9 million tonnes. The recycled grades accounted for 67% of total demand, while the virgin grades (SBS, ivoryboard, poly coated board) comprised the remainder of the market. Growth in 2013-2017 averaged 2.2% per year, somewhat slower than the 3.6% rate achieved in the prior five years (2008-2012) due to a slowing in economic growth and especially in private consumption. Demand was sluggish in 2013-2015 but then accelerated in 2016 as economic conditions began to improve; inventory shifts may have also played a role. In 2017, demand growth was 2.3%. Over the 2013-2017 period, demand increased by 185,000 tonnes.
Figure 12Indonesian Containerboard Capacity Trends, 2013-2022
Thousand Tonnes
Source: RISI.
Figure 12Indonesian Containerboard Capacity Trends, 2013-2022
Thousand Tonnes
* The top four producers include Fajar Surya Wisesa, Indah Kiat Pulp & Paper, Pelita Cengkareng and Pabrik Kertas Indonesia (Pakerin).
65%
70%
75%
80%
85%
90%
500
1,500
2,500
3,500
4,500
5,500
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Capacity: Top Four* (L)
Capacity: Other Producers (L)
Operating Rate (R)
Table 8Major Containerboard Capacity Expansions in Indonesia, 2013-2022
Thousand Tonnes
Company Name Location Capacity Start-Up Grade CommentPelita Cengkareng Paper Subang, West Java 350 Q1:2013 Recycled Containerboard PM6Indah Kiat Pulp & Paper Perawang, Sumatra 35 Q3:2013 Recycled Containerboard PM9PT Mount Dreams Gresik,Jawa Timur 132 Q2:2014 Recycled Medium PM3Fajar Surya Wisesa Bekasi 300 Q1:2017 Recycled Medium PM8
Source: RISI
Table 8Major Containerboard Capacity Expansions in Indonesia, 2013-2022
Thousand Tonnes
22 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
Table 9Boxboard Demand and Supply Trends, 2013-2017
Thousand Tonnes
Grade 2013 2014 2015 2016 2017 Annual % TonnageTotal Boxboard Consumption 1,748 1,775 1,760 1,873 1,917 2.0% 185
Percentage Change 0.9% 1.5% -0.9% 6.4% 2.3%Net Exports 83 85 100 -73 -27Imports 136 143 145 216 197Exports 219 228 245 143 170Production 1,831 1,860 1,860 1,800 1,890 1.2% 112Percentage Change 3.0% 1.6% 0.0% -3.2% 5.0%Capacity 2,017 2,016 2,018 1,962 2,002 0.7% 68Operating Rate 91% 92% 92% 92% 94%
Recycled Boxboard Consumption 1,200 1,201 1,168 1,253 1,277 1.4% 86Net Exports 137 144 155 12 60Imports 58 55 63 112 97Exports 195 199 218 124 157Production 1,337 1,345 1,323 1,265 1,337 0.5% 34Capacity 1,472 1,458 1,435 1,379 1,419
Virgin Boxboard Consumption 548 574 592 620 640 3.4% 98Net Exports -54 -60 -55 -85 -87Imports 78 88 82 104 100Exports 24 28 27 19 13Production 494 515 537 535 553 3.1% 78Capacity 545 558 583 583 583
Source: RISI.
Table 9Boxboard Demand and Supply Trends, 2013-2017
Thousand TonnesGrowth in 2013-2017
March 2018 with September 2018 Updates 23
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
Indonesian boxboard production rose an estimated 5% in 2017, benefiting from the upturn in demand and rising net exports. Production saw minor growth in 2013-2015, but then turned lower in 2016 as suppliers responded to the weak local demand conditions and tough export markets. Capacity growth averaged just 1% per year in 2013-2017. We have not tracked any specific new machines during this period, but we have assumed that some machine upgrades and grade swings gradually increased capacity, while other capacity was closed due to financial difficulties.
Figure 13Indonesian Boxboard Demand
Thousand Tonnes
Source: RISI.
Figure 13Indonesian Boxboard Demand
Thousand Tonnes
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24 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
In 2018, boxboard demand is predicted to rise 2.5%, similar to 2017's pace. Recycled boxboard demand will increase 2.1%, slightly below the pace of the virgin grades as end uses which favor virgin grades, such as food packaging, will be the leading driver of demand. In 2018-2022, boxboard demand growth will average 1.8% per year, slightly below the pace of the previous five years. The total increase will be 180,000 tonnes, 59% of which will be recycled board grades. On the supply side, there are currently no capacity expansions plans announced for the boxboard sector in 2018-2022. Given this, and the solid production growth resulting in part from some further expansion in exports, operating rates will rise to 95% in 2018-2019. We have assumed some capacity expansion over the second part of the forecast period.
Figure 14Indonesian Boxboard Production and Net Exports
Thousand Tonnes
Source: RISI.
Figure 14Indonesian Boxboard Production and Net Exports
Thousand Tonnes
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Net Exports (R)
March 2018 with September 2018 Updates 25
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
Table 10Boxboard Demand and Supply Outlook, 2017-2022
Thousand Tonnes
Grade 2017 2018 2019 2020 2021 2022 Annual % TonnageTotal Boxboard Consumption 1,917 1,964 2,015 2,061 2,104 2,097 1.8% 180
Percentage Change 2.3% 2.5% 2.6% 2.3% 2.1% -0.3%Net Exports -27 -62 -47 -4 42 11Imports 197 242 227 174 138 139Exports 170 180 180 170 180 150Production 1,890 1,902 1,969 2,057 2,146 2,108 2.2% 218Percentage Change 5.0% 0.6% 3.5% 4.5% 4.3% -1.8%Capacity 2,002 2,002 2,072 2,202 2,332 2,342Operating Rate 94% 95% 95% 93% 92% 90%
Recycled Boxboard Consumption 1,277 1,304 1,337 1,363 1,389 1,383 1.6% 107Net Exports 60 45 75 104 129 108Imports 97 121 91 54 40 33Exports 157 166 166 158 169 141Production 1,337 1,348 1,412 1,467 1,519 1,491 2.2% 154Capacity 1,419 1,419 1,489 1,574 1,654 1,664
Virgin Boxboard Consumption 640 660 678 698 715 714 2.2% 73Net Exports -87 -107 -122 -108 -88 -97Imports 100 121 136 120 98 105Exports 13 14 14 12 11 9Production 553 554 557 590 627 617 2.2% 64Capacity 583 583 583 628 678 678
Source: RISI.
Growth in 2018-2022
Table 10Boxboard Demand and Supply Outlook, 2017-2022
Thousand Tonnes
26 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
Risks to the ForecastThe risk to the demand forecast may be slightly to the upside due to the potential for faster economic growth and therefore healthier growth in packaging paper consumption. There is also a lot of uncertainty associated with the development of e-commerce in Indonesia, which has not really taken off the way it has in China. Our forecast assumes a fairly modest path for e-commerce growth, which therefore means it has the potential to boost demand more than anticipated if it gains market share at a faster pace. There is also downside risk to the demand forecast associated with the economy that stems from global political and economic risk, especially around trade issues.
The risk to the supply forecast lies mostly to the upside, with the potential for higher packaging paper exports given the uncertainty in China's production path moving forward. For containerboard, our current forecast assumes that China continues to absorb more imports in 2018 and 2019, but then the appetite cools a little over the later years of the forecast period. We are predicting that China will continue to add containerboard capacity, focusing on larger machines with good pollution controls. We expect that supply disruptions and fiber supply constraints will become less of an issue over the latter part of the forecast period as the industry adapts to the new policies, domestic collection responds to the rising needs and recovered paper suppliers improve collection practices to maintain or improve quality. There is a definite possibility of a greater increase in Chinese packaging paper imports in the near term given all the uncertainty brought on by the implementation of China's new policies, and depending how strictly it enforces the 0.5% contaminant level restriction for recovered paper imports that went into effect March 1. Indonesian exporters will likely benefit from this greater demand and raise their export levels. There is also a chance of higher Indonesian exports in the latter part of the period depending on China's path and the relative competitiveness compared to other regional and global suppliers.
For boxboard, there is some risk associated with our assumed capacity expansion. With developments in China, including the ban on mixed paper imports and the closure of many smaller mills, Southeast Asian suppliers are expected to have the opportunity to serve the growth in this market. This is one of the reasons we have assumed some new capacity in Indonesia. However, this expansion may not occur, and operating rates could remain higher, but production and exports likely would also be lower. In addition, there is a chance that duplex demand growth across the region could be weaker than predicted, and this would affect our capacity, production and trade estimates.
Figure 15Indonesian Boxboard Supply Trends, 2013-2022
Thousand Tonnes
Source: RISI
Figure 15Indonesian Boxboard Supply Trends, 2013-2022
Thousand Tonnes
* The top four producers include Indah Kiat Pulp & Paper, Surya Pamenang , Fajar Surya Wisesa, and Pabrik Kertas Indonesia (Pakerin).
85%
88%
91%
94%
97%
100%
0
500
1,000
1,500
2,000
2,500
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Capacity: Top Four (L) Capacity: Other Producers (L) Operating Rate (R)
March 2018 with September 2018 Updates 27
RISI Indonesia’s Packaging Paperboard Market Overview Market Demand and Supply Trends and Outlook
RISI Indonesia’s Packaging Paperboard Market Overview
March 2018 with September 2018 Updates 29
Price and Cost Analysis in Indonesia
Historical Prices and Costs ContainerboardRecycled containerboard prices for imports to major Southeast Asian ports gradually trended lower in 2014 and 2015 as Old Corrugated Cardboard (OCC) costs declined and export markets were amply supplied, partly due to Chinese producers raising their export levels. Prices then stabilized over the first three quarters of 2016 before rising in the fourth. The increases in the fourth quarter were prompted by the surge in prices in China which spilled over into the Southeast Asian markets. The jump in prices in China was brought on by rising costs (coal, transport and fiber) and tighter market conditions caused by stronger-than-anticipated demand growth, forced closures and downtime (related to events or for environmental reasons), low inventories and panic buying. This led Chinese buyers to look to outside suppliers, which consequently tightened market conditions in Southeast Asia. The increases in the fourth quarter averaged US$50/tonne for recycled linerboard grades and US$70/tonne for recycled medium. For 2016 as a whole, testliner and recycled medium prices still showed a 1% slide.
Figure 16Containerboard Prices versus Main Raw Material Costs, First Quarter 2013 to Second Quarter 2018
US Dollar per Tonne
Source: RISI, Fajar Paper.
Figure 16Containerboard Prices versus Main Raw Material Costs, First Quarter 2013 to Second Quarter 2018
US Dollars per Tonne
* Bleached Hardwood Kraft, Acacia, from Indonesia, CIF (Cost, insurance and freight) to main ports in East Asia. East Asia includes South Korea, Japan, Taiwan and Southeast Asia.
0
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Testliner Imports SE Asian Ports Recycled Medium SE Asian PortsOCC from the USA to China OCC Indonesian DomesticTestliner Indonesian Domestic Recycled Medium Indonesian DomesticBHK, Acacia from Indonesia (Imports, Net Price)*
30 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Price and Cost Analysis in Indonesia
In the first half of 2017, recycled containerboard prices for imports to Southeast Asian ports were steady as suppliers were able to hold onto the gains achieved in the fourth quarter of 2016. Improving regional demand as global economic conditions gathered strength, rising OCC costs, and uncertainty in China's market due to ambiguity over the impacts of recovered paper and environmental policies being discussed and implemented in China all helped to support containerboard prices. In the second half of the year, prices climbed as developments in China once again influenced Southeast Asian prices. In particular, Chinese limits on recovered paper imports caused fiber shortages and affected Chinese production at the same time that demand picked up seasonally, leading to a huge surge in prices in August and September. This caused Chinese buyers to once again turn to outside suppliers, which led to a sharp increase in Chinese recycled containerboard imports, largely sourced from other parts of Asia. These resulted in a roughly US$200/tonne jump in Southeast Asian import prices in October, but by December prices had retreated back to September levels as pressure from China abated (Chinese prices plunged in November 2017). Overall for 2017, testliner prices for imports to Southeast Asian ports rose an estimated 21%, while recycled medium prices rose 27%.
Domestic recycled containerboard prices tend to follow a similar trend as import prices, but with some variances that arise due to differences in local market conditions. This can be seen in the developments in 2016, when local prices rose due to some tight market conditions with supply shortages during the strong demand season ahead of the Lebaran/Idul Fitri holiday. Indonesian domestic prices also rose in 2017, climbing 12% for recycled linerboard and 10% for recycled medium.
Boxboard PricesCoated duplex prices for imports to Southeast Asian ports trended gradually lower in 2013-2015. The primary factors behind this were high supply and declining costs. Exports from China, where prices were lower, contributed to the ample supply in Southeast Asia; weak demand was also a factor in 2015. Prices then stabilized
Table 11Containerboard Prices in Indonesia, 2013-2017
US Dollars per Tonne
2013 2014 2015 2016 2017Containerboard GradesIndonesian Domestic Prices
Testliner 471 447 396 476 531% Change -6% -5% -11% 20% 12%
Recycled Medium 435 406 363 447 493% Change -6% -7% -11% 23% 10%
Import Prices, CIF to Southeast Asian PortsTestliner 125 gsm 426 408 378 375 453
% Change 1% -4% -7% -1% 21%Recycled Medium 110gsm 375 358 335 338 430
% Change 1% -5% -6% 1% 27%
Grayback Coated Duplex 350 gsmImport Prices, CIF to Southeast Asian Ports 496 475 458 460 520
% Change -4% -4% -4% 1% 13%
IDR/USD Exchange Rate 10,463 11,865 13,442 13,344 13,423
Source: RISI, Fajar Paper
Table 11Containerboard Prices in Indonesia, 2013-2017
US Dollars per Tonne
March 2018 with September 2018 Updates 31
RISI Indonesia’s Packaging Paperboard Market Overview Price and Cost Analysis in Indonesia
through most of 2016 until the sudden price increases in China had a knock-on effect on Southeast Asian import prices as markets tightened. Similar to but to a lesser extent than for recycled containerboard grades, coated duplex prices in China surged due to rising costs and tighter markets, drawing more volumes back toward China. Cost pressures also were rising at that time. This led to a US$40/tonne increase in coated duplex prices for imports to Southeast Asian ports. For the year as a whole, prices rose just 1%.
In the first half of 2017, prices stabilized at the fourth quarter 2016 levels as developments in China (reductions in supply and uncertainty about future policies) allowed producers to hold on to the increase in spite of it being the slow seasonal demand period. Coated duplex import prices then climbed US$30/tonne in the third quarter as rising costs and increases in prices in China once again affected Southeast Asia. Then, like the recycled containerboard grades, coated duplex prices experienced a sharp swing in the fourth quarter with a huge spike of up to US$200/tonne in October, but then gradually retreated, dropping back to September levels in December.
For 2017, coated duplex import prices in Southeast Asia rose 13%.
CostsAs mentioned, recycled containerboard prices in Indonesia are highly dependent on fiber prices as fiber makes up the largest share of costs. Fiber comprised 71% of average cash costs for recycled linerboard producers in Indonesia and 68% of costs for corrugating medium.
Fajar Surya Wisesa ranked among the lowest cost suppliers in Indonesia in terms of cash costs for both recycled linerboard and recycled medium in the fourth quarter of 2017 (Figure 18).
Figure 17Coated Duplex Prices versus Main Raw Material Costs, First Quarter 2013 to Fourth Quarter 2017
US Dollar per Tonne
Source: RISI.
Figure 17
Coated Duplex Prices versus Main Raw Material Costs, First Quarter 2013 to Fourth Quarter 2017US Dollar per Tonne
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32 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Price and Cost Analysis in Indonesia
Figure 18Average Cash Costs by Company/Mill in Indonesia for Corrugating Medium and Linerboard, Fourth Quarter 2017
Source: RISI.
Figure 18
Average Cash Costs by Company/Mill in Indonesia for Corrugating Medium and Linerboard, Fourth Quarter 2017
Faja
r Pap
er
Faja
r Pap
er
Indonesia and Fajar Surya Wisesa are both highly competitive within Asia's recycled containerboard markets. Figure 19 shows average cash costs by mill by product across China, Japan, South Korea, Taiwan and Southeast Asia. Fajar Surya Wisesa ranks in the first quartile across both standard and lightweight linerboard and medium grades. China's costs are running higher due to higher recovered paper costs caused by supply shortages there brought on by the Chinese government's new policies that limited all recovered paper imports in the fourth quarter of 2017 and banned mixed paper imports beginning in January 2018. This policy and China's implementation of a 0.5% contaminant limit on recovered paper imports effective March 2018 are expected to lower costs for recovered paper imports across Southeast Asia as a glut of OCC builds in the global markets due to Chinese buyers limiting their OCC purchases to double-sorted grades to avoid having a shipment turned back at the port because it fails inspection.
March 2018 with September 2018 Updates 33
RISI Indonesia’s Packaging Paperboard Market Overview Price and Cost Analysis in Indonesia
Price ForecastIn 2018, recycled containerboard prices for imports to Southeast Asian ports are forecast to rise, driven higher by pressure from developments in the Chinese market. In China, prices are predicted to remain volatile and continue to increase due to uncertainty and limits on fiber supplies. The high prices in China will continue to lead Chinese buyers (box plants) to look outside China for imports to control costs and other Asian suppliers will remain interested in servicing this demand due to the price level. These developments will continue to influence Southeast Asian prices, driving them higher during periods of strong demand. Our forecast shows testliner and recycled medium prices for imports to Southeast Asian ports rising 11-12% in 2018. Southeast Asian suppliers are expected to benefit from lower OCC costs, at least over the first half of the year, as a glut of OCC on the global market arises due to the more stringent contamination standards in China that went into effect on March 1. This is causing Chinese buyers to seek only higher quality OCC (OCC#12, double-sorted), which leaves an excess of standard OCC (OCC#11) that is being sold at lower prices in other markets. Mixed recovered paper costs are also seeing sharply lower prices in early 2018 as China has banned imports of this grade. This leaves the world in extreme oversupply to the point that some mixed paper in the USA is reportedly being landfilled for lack of buyers.
In 2019-2020, recycled containerboard prices for imports to Southeast Asian ports are predicted to continue to rise at a more modest rate of 4-5% per year. These increases will largely be driven by rising costs. Markets also are forecast to stay reasonably balanced as Asian capacity growth is expected to remain fairly modest outside of China; although capacity growth in China looks like it could be substantial given project announcements, fiber supplies and government policies are expected to keep the growth somewhat in check, at least minimizing spillover effects in terms of rising trade into other Asian markets.
Figure 19Average Cash Costs by Company/Mill in Southeast Asia for Corrugating Medium and Linerboard, Fourth Quarter 2017
Source: RISI.
Figure 19
Average Cash Costs by Company/Mill in Southeast Asia for Corrugating Medium and Linerboard, Fourth Quarter 2017
Corrugating Medium Linerboard
Faja
rPa
per
Faja
rPa
per
34 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Price and Cost Analysis in Indonesia
Similarly, for coated duplex, we are forecasting that over the first half of 2018 prices for imports to Southeast Asian ports will stabilize at levels from December 2017. Despite it being the slow demand season and recovered paper costs declining (at least for imports), prices held firm over the first two months of 2018, and we expect this will continue as tightness in China's market influences the Southeast Asian markets. Prices are then predicted to climb in the second half of the year as demand picks up seasonally in the region. Overall, we are anticipating a 7% increase in coated duplex prices in Asia in 2018. Further gains of 6% per year are projected for 2019-2020 as market conditions are predicted to remain fairly tight with little or no announced capacity expansions in Asia during this period.
Figure 20Quarterly Containerboard and Coated Duplex Prices, First Quarter 2016 to Fourth Quarter 2019
US Dollar per Tonne
Source: RISI
Figure 20
Quarterly Containerboard and Coated Duplex Prices, First Quarter 2016 to Fourth Quarter 2019
US Dollar per Tonne
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Testliner Recycled Medium
OCC from USA to China Coated Duplex
March 2018 with September 2018 Updates 35
RISI Indonesia’s Packaging Paperboard Market Overview Price and Cost Analysis in Indonesia
There is significant risk associated with the containerboard and boxboard price forecasts, especially in the near term, due to the uncertainty associated with China's recovered paper import policies, including the stringency of implementation of its new contaminant level standards on imports and the level of import permits it will issue. Currently, Chinese papermakers appear to be holding back on using all their licenses until it becomes clearer how the new contamination policy will be enforced. As of March 1, 2018, the maximum level of contaminants in recovered paper bales is now 0.5%. This is well below the 1.5% threshold in other major areas of the world. If the Chinese government does in fact reject cargoes that have contamination levels above 0.5%, then a significant portion of imports will not be available to Chinese papermakers. The recovered paper that does meet the new standard will cost considerably more than regular grades since extra sorting will have to be done. It is hard to imagine that domestic Chinese recovered paper suppliers are meeting the 0.5% contamination standard that has been set for imports. There are likely ongoing discussions between the Chinese government and various governments and organizations representing companies exporting recovered paper to China about the tighter standards being set for imports versus domestic collections and restricting trade. There has been a lot of concern expressed about the ability of inspectors to measure contamination levels down to 0.5%, at least on a consistent basis. Chinese papermakers are delaying imports of recovered paper to the latter part of March to be able to better assess the efforts of government inspectors to enforce the 0.5% standard.
Table 12Main Packaging Board Grades Price Outlook in Indonesia, 2018-2022
US Dollar per Tonne
4Q17 1Q18 2Q18 3Q18 4Q18 1Q19Import Prices, CIF to Southeast Asian Ports
Testliner 125 gsm 543 467 450 503 597 542Recycled Medium 110gsm 520 430 430 483 577 522Coated Duplex Grayback 350 gsm 600 533 533 553 609 573
Import Prices, CIF to Southeast Asian Ports 2018 2019 2020 2021 2022Testliner 125 gsm 504 527 552 567 504
% Change 11.4% 4.5% 4.7% 2.9% -11.1%Recycled Medium 110gsm 480 503 524 536 480
% Change 11.6% 4.8% 4.2% 2.2% -10.3%Coated Duplex Grayback 350 gsm 557 591 626 646 609
% Change 7.1% 6.2% 5.9% 3.2% -5.8%
Cost Indicators: Main Fiber Prices Delivered to ChinaOCC from the USA* 213 248 274 260 223
% Change
Source: RISI* Price of OCC, CIF China from the USA.
Table 12Main Packaging Board Grades Price Outlook in Indonesia, 2018-2022
US Dollar per Tonne
Quarterly
Annually
RISI Indonesia’s Packaging Paperboard Market Overview
March 2018 with September 2018 Updates 37
Top Paper Packaging Producers in IndonesiaCombined, the two major paperboard producers in Indonesia, PT Fajar Surya Wisesa and PT Indah Kiat Pulp & Paper (IKKP), have a 46% share of total containerboard and boxboard supply in Indonesia in 2018. More specifically, they hold a 55% share of containerboard capacity and a 29% share of boxboard.
PT Fajar Surya WisesaFajar Surya Wisesa is the largest containerboard producer in Indonesia, with a 28% market share of the country's containerboard capacity in 2018. About 88% of the company's capacity is in the containerboard sector, with a new corrugating machine brought on line in the first quarter of 2017. The company also has one coated duplex boxboard machine that comprises 7% of Indonesia's total boxboard capacity. Fajar Surya Wisesa uses 100% recycled fiber, sourced domestically and internationally, as the sole furnish for its paperboard.
Fajar Surya Wisesa largely concentrates on the domestic market, although it did expand its export sales in 2017 after pulling back in 2016. Domestic sales accounted for 85% of the company's total net sales (in rupiah) in 2017, matching its share in 2015; this share had risen to 99% in 2016. Fajar Surya Wisesa's gross profit margin was comparable to IKPP's at 20.1% in 2016 and 19.3% in 2017.
According to RISI's Analytical Cornerstone, Fajar Surya Wisesa and IKPP have very similar cash costs and are virtually tied for the leading position in manufacturing cash cost competitiveness for recycled testliner and medium in Indonesia. They also rank among the most competitive producers in Asia.
PT Indah Kiat Pulp & PaperPT Indah Kiat Pulp & Paper is a subsidiary of Asia Pulp & Paper (APP) and is an integrated pulp and paper producer. At its three mills located at Perawang, Serang and Tangerang, it produces pulp, graphic paper and paperboard grades. The firm also owns manufacturing plants for corrugated shipping containers, which are converted from containerboard. Overall, IKPP accounts for 25% of Indonesia's containerboard and boxboard capacity. Specifically, it controls 27% and 22% of containerboard and boxboard capacity, respectively.
Of IKPP's net sales in 2016, 40% came from pulp, 26% from paper and 34% from packaging. In 2016, IKPP exported 48.5% of its product, while the remaining 51.5% went to local markets. Its consolidated gross profit margin in 2016 was 21.4% and its consolidated gross profit margin for packaging products was 18.7%.
Profile Highlights of Five Major Firms in the Containerboard and Boxboard SectorsContainerboardLocal Indonesian mills only produce recycled grades, and five major producers control 80% of domestic capacity. Specifically, following Fajar Surya Wisesa's capacity expansion last year, Fajar Surya Wisesa now has a 28% market share, while IKPP has a 27% market share. Fajar Surya Wisesa focuses on 100% recycled-fiber-based testliner and corrugating medium grades of varying weights. It is the sole producer of high-performance lightweight linerboard and corrugating medium grades. The high-performance capabilities mean that Fajar Surya Wisesa's lightweight products provide the same strength and quality characteristics of products that weigh more. For example, Fajar's 125 gsm lightweight corrugating medium has the same strength characteristics of a typical 150 gsm corrugating medium and its 100 gsm corrugating medium product has the same characteristics as a 125 gsm grade. Fajar Surya Wisesa is also the only producer in Indonesia that makes corrugating medium at basis weights of 100 gsm and less. IKPP has the capability to produce white top and kraft top grades—with virgin pulp in the top layer, on PM4 and PM5 at the Serang Mill—as well as testliner and medium.
Market Competition Dynamics
38 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
Figure 21Indonesian Containerboard Capacity Share, 2018
Source: RISI
Figure 21Indonesian Containerboard Capacity Share, 2018
28%
27%13%
8%
5%
20% PT Fajar Surya Wisesa
PT Indah Kiat Pulp & Paper
PT Pelita Cengkareng
PT Pabrik Kertas Indonesia(Pakerin)
PT Mount Dreams
Others
March 2018 with September 2018 Updates 39
RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
Table 13Profiles of the Top Five Containerboard Producers in Indonesia
Company PT Fajar Surya WisesaLocation Jln. Kampung Gardu Sawah, RT. 001/1-1, Desa Kalijaya Cikarang Barat, Bekasi, West Java, 17520 IndonesiaNumber of Machines 5 (PM2, PM3, PM5, PM7, PM8)Capacity 1,150,000 tonnes per yearGrade Recycled liner and corrugating mediumEmployees 2,632Ownership Public Shareholders (100%)
Company PT Indah Kiat Pulp & PaperLocation Jln. Raya Serang Km. 76, Desa Kragilan, Jawa Barat Serang, West Java, 42184 IndonesiaNumber of Machines 4 (PM1, PM2, PM4, PM5)Capacity 1,130,000 tonnes per yearGrade Recycled liner and corrugating mediumEmployees 4,315Ownership Asia Pulp & Paper
Company PT Pelita CengkarengLocation Jln. Raya Daan Mogot Km. 18 Cengkareng, Tangerang, West Java, 15122 IndonesiaNumber of Machines 3 (PM1, PM3, PM5)Capacity 174,000 tonnes per yearGrade Recycled liner and corrugating mediumEmployees 500Ownership Wijayaraya Sejahtera (33%), Sarirasa Sejahtera Best (36%)
Company PT Pelita CengkarengLocation Jl. Raya Pabuaran KM 1.8 Subang, West Java, IndonesiaNumber of Machines 1 (PM7)Capacity 350,000 tonnes per yearGrade Recycled liner and corrugating mediumEmployees 400Ownership Wijayaraya Sejahtera (33%), Sarirasa Sejahtera Best (36%)
Company PT Pabrik Kertas Indonesia (Pakerin)Location Jln. Kertopaten No. 3 Surabaya, Jawa Timur, 60145 IndonesiaNumber of Machines 3 (PM3, PM5, PM6)Capacity 338,000 tonnes per yearGrade Recycled liner and corrugating mediumEmployees 1,250Ownership Private owner (100%)
Company PT Mount DreamsLocation Jl. Pertamina 77, Kec. Wringinanom, Gresik, East Java, 61176 IndonesiaNumber of Machines 2 (PM1,PM3)Capacity 200,000 tones per yearGrade Recycled liner and corrugating mediumEmployees 480Ownership PT Mount Dreams Indonesia
Source: RISI
Table 13Profiles of the Top Five Containerboard Producers in Indonesia
40 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
BoxboardThe five major producers listed in Table 16 account for 48% of the nation's total boxboard capacity in 2018, with IKPP, the single largest producer, accounting for 22% of the market. IKPP produces virgin-fiber-based cartonboard grades, which comprise up to 64% of its total boxboard capacity, as well as coated duplex grades. Fajar Surya Wisesa is tied for second place with PT Surya Pamenang, with each accounting for a market share of 7%. Fajar Surya Wisesa's 150,000 tonnes of capacity are dedicated solely to recycled based coated duplex board.
Table 14Top Indonesian Containerboard Producers, Capacity and Grades
Thousand Tonnes per Year
2018Company Name Location Ownership Start-Up Capacity Grade
PT Fajar Surya Wisesa Bekasi, West Java PT Fajar Surya Wisesa 1989 1,150 Recycled Liner, Corrugating Medium
PT Indah Kiat Indah Kiat Pulp & Paper
Serang, West Java Asia Pulp & Paper 1991 1,130 Recycled Liner, Corrugating Medium
PT Pelita Cengkareng Tangerang, West Java PT Pelita Cengkareng 1976 524 Recycled Liner, Corrugating Medium
PT Pabrik Kertas Indonesia (Pakerin)
Mojokerto, East Java PT Pabrik Kertas Indonesia (Pakerin)
1980 338 Recycled Liner, Corrugating Medium
PT Mount Dreams Gresik, East Java PT. Mount Dreams Indonesia 1996 200 Recycled Liner, Corrugating Medium
Sum 3,342National Total (2018) 4,175
Source: RISI
Table 14Top Indonesian Containerboard Producers, Capacity and Grades
Thousand Tonnes per Year
Figure 22Indonesian Boxboard Capacity Share, 2018
Source: RISI
Figure 22Indonesian Boxboard Capacity Share, 2018
22%
8%
7%
7%4%
52%
PT Indah Kiat Pulp & Paper
PT Fajar Surya Wisesa
PT Surya Pamenang
PT Pabrik Kertas Indonesia(Pakerin)
PT Papertech Indonesia
Others
March 2018 with September 2018 Updates 41
RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
Table 15Profiles of the Top Five Boxboard Producers in Indonesia
Company PT Indah Kiat Pulp & PaperLocation Jln. Raya Serang Km. 76, Desa Kragilan, Jawa Barat Serang, West Java, 42184 IndonesiaNumber of Machines 2 (PM3, PM6)Capacity 440,000 tonnes per yearGrade Ivoryboard and coated duplex boardEmployees 4,315Ownership Asia Pulp & Paper
Company PT Fajar Surya WisesaLocation Jln. Abdul Muis No. 30 Jakarta, 10160 IndonesiaNumber of Machines 1 (PM1)Capacity 150,000 tonnes per yearGrade Coated duplex boardEmployees 2,632Ownership Public Shareholders (100%)
Company PT Surya PamenangLocation Jln. Raya Kediri Kertosono Km 7 Kediri, East Java, 64182 IndonesiaNumber of Machines 1 (PM1)Capacity 150,000 tonnes per yearGrade IvoryboardEmployees 500Ownership PT Surya Pamenang
Company PT Pabrik Kertas Indonesia (Pakerin)Location Desa Bangun, Kec Pungging Mojokerto, East Java, 61384 IndonesiaNumber of Machines 3 (PM1, PM2, PM7)Capacity 130,000 tonnes per yearGrade Coated greyback duplex and uncoated coreboardEmployees 1,250Ownership Private owner (100%)
Company PT Papertech IndonesiaLocation Jl. Raya Cipeundeuy KM1, Desa Cipeundeuy Subang, West Java, 41272 IndonesiaNumber of Machines 1 (PM1)Capacity 60,000 tonnes per yearGrade Uncoated coreboardEmployees 103Ownership PT Papertech Indonesia
Company PT Papertech IndonesiaLocation Jl. Sanggrahan Gatak No. 23 Blabak, Mungkid, Central Java, 56511 IndonesiaNumber of Machines 1 (PM1)Capacity 26,000 tonnes per yearGrade Uncoated coreboardEmployees 80Ownership PT Papertech Indonesia
Source: RISI
Table 15Profiles of the Top Five Boxboard Producers in Indonesia
42 March 2018 with September 2018 Updates
RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
Trade DynamicsContainerboardIn 2017, we estimate that Indonesia exported 131,000 tonnes of linerboard. This made Indonesia the fifth-largest Asian exporter of linerboard, with a share of 8%. Taiwan was the leading exporter with a 24% share, followed by Japan, South Korea and Thailand, each with a 14-16% share (Figure 23). At 295,000 tonnes, corrugating medium imports comprised a larger share of Indonesia's containerboard exports in 2017 (69%). Taiwan again was the leading Asian exporter, with a 29% share. Indonesia and Japan ranked second among Asian exporters, each with a 19% share (Figure 24).
Table 16Top Five Indonesian Boxboard Producers, Capacity and Grades
Thousand Tonnes per Year
Company Name Location Ownership Start-Up Capacity Grade
PT Indah Kiat Pulp & Paper Serang, West Java Asia Pulp & Paper 1991 440 Ivoryboard, Coated Duplex BoardPT Fajar Surya Wisesa Bekasi, West Java PT Fajar Surya Wisesa 1989 150 Coated Duplex BoardPT Surya Pamenang Kediri, East Java PT Gudang Garam 1993 150 IvoryboardPT Pabrik Kertas Indonesia (Pakerin)
Mojokerto, East Java PT Pabrik Kertas Indonesia (Pakerin)
1980 130 Coated Duplex Board, Uncoated Recycled Board
PT Papertech Indonesia Mungkid, Central Java PT Papertech Indonesia 1997 60 Uncoated Recycled BoardPT Papertech Indonesia Subang, West Java PT Papertech Indonesia 1997 26 Uncoated Recycled Board
Sum 956National Total (2018) 2,002
Source: RISI
Table 16Top Five Indonesian Boxboard Producers, Capacity and Grades
Thousand Tonnes per Year
March 2018 with September 2018 Updates 43
RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
Figure 23Asian Linerboard Exports by Source, 2013-2017
Thousand Tonnes
Source: RISI* Malaysia, India and the Philippines.
Thousand TonnesAsian Linerboard Exports by Source, 2013-2017
Figure 23
38% 38% 33% 36% 34%
7%8% 10%
13%16%
16%11% 12%
14%
14%
14%13% 14%
14%
14%
12%11% 11%
2%
8%
9%14% 17% 19%
5%
5%
4%4% 2% 2%
3%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2013 2014 2015 2016 2017
Taiwan Japan South Korea Thailand
Indonesia China Vietnam Other*
Figure 24Asian Corrugating Medium Exports by Source, 2013-2017
Thousand Tonnes
Source: RISI* Malaysia, India and the Philippines.
Thousand TonnesAsian Corrugating Medium Exports by Source, 2013-2017
Figure 24
31% 26% 22%35% 29%
19% 18% 19%4%
19%10% 15% 16% 19%
19%
18%21% 27% 22%
13%
10%7%
7% 7%
8%
6%
7%8%
6% 8%
3%
5%4%
4% 4%
3%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2013 2014 2015 2016 2017
Taiwan Indonesia Japan Thailand
South Korea Vietnam China Other*
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RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
Most of Indonesia's exports of linerboard are shipped to other Asian markets and the Middle East. As shown in Figure 23, Asia including China accounted for 47% of Indonesia's linerboard exports, but there was a huge increase in the volume that went to China. The Middle East accounted for 41% of Indonesia's linerboard exports in 2017.
Most of Indonesia's corrugating medium exports also go to other Asian markets, but there was a significant shift in the trade pattern in 2017, with 76% of Indonesia's medium exports destined for China, up from 5% in 2015 and 38% in 2016. The share for Asia excluding China fell to 18% in 2017, from 58% in 2015 and 55% in 2016. The Middle East was an important destination in 2014-2015, but exports to this region fell to just 3% of total exports in 2016-2017.
Table 17Containerboard Imports and Exports, 2013-2017
Thousand Tonnes
Grade 2013 2014 2015 2016 2017
Total Containerboard Imports 196 88 69 93 85% Change -55.2% -21.6% 34.8% -8.6%Exports 105 65 62 145 124% Change -38.5% -4.5% 134.5% -14.7%
Kraftliner Imports 0 0 0 0 0Exports 0 0 0 0 0
Recycled Linerboard Imports 1,531 1,614 1,615 1,570 1,685Exports 99 108 116 -29 70
Semichemical Medium Imports 0.1 0.0 0.1 0.1 0.5Exports 0 0 0 0 0
Recycled Medium Imports 1,178 1,208 1,208 1,322 1,390Exports 1,298 1,372 1,385 1,300 1,645
Source: RISI
Table 17Containerboard Imports and Exports, 2013-2017
Thousand Tonnes
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RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
Figure 25Indonesian Linerboard Exports by Destination, 2013-2017
Thousand Tonnes
Source: RISI
Thousand TonnesIndonesian Linerboard Exports by Destination, 2013-2017
Figure 25
13% 12% 10%8%
12%
43% 49%40%
41%
20%
43%
1%
27%
38%49%
49%
41%
0% 1% 0%
1%
0%
0
20
40
60
80
100
120
140
160
2013 2014 2015 2016 2017
Africa
Asia X China
China
Middle East
Rest of World
Figure 26Indonesian Corrugating Medium Exports by Destination, 2013-2017
Thousand Tonnes
Source: RISI
Thousand TonnesIndonesian Corrugating Medium Exports by Destination, 2013-2017
Figure 26
4% 11% 9% 4% 3%
48% 62% 58%
55%18%
46%
5%
38%
76%
1%
27%28%
3%
3%
0
50
100
150
200
250
300
350
2013 2014 2015 2016 2017
Africa Asia X China
China Middle East
Rest of World
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RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
Indonesia is largely self-sufficient in containerboard, with its import share of consumption remaining low. For linerboard, imports accounted for 2-4% of demand over the past five years with an import share of 4% in 2017. For corrugating medium, imports comprised 1-5% of demand in 2013-2017 with a share of 3% in 2017.
Figure 27Recycled Linerboard and Recycled Medium Import Dependence Ratios, 2013-2017
Source: RISI
Figure 27
Recycled Linerboard and Recycled Medium Import Dependence Ratios, 2013-2017
0%
1%
2%
3%
4%
5%
6%
2013 2014 2015 2016 2017
Recycled Linerboard
Recycled Medium
Figure 28Recycled Linerboard and Recycled Medium Export/Production Ratios, 2013-2017
Source: RISI
Figure 28
Recycled Linerboard and Recycled Medium Export/Production Ratios, 2013-2017
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2013 2014 2015 2016 2017
Recycled Linerboard
Recycled Medium
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RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
Exports account for a relatively low share of total Indonesian containerboard production as suppliers are mostly focused on the local markets.
We are forecasting that Indonesia will expand its exports over the next few years due to available capacity and rising demand in other Asian markets, especially China, given the fiber availability issues currently facing that market. As discussed above, Chinese buyers are expected to continue to look to other parts of the region to secure supplies as prices in China remain relatively elevated because of higher costs of recovered fiber due to the new recovered paper policies and as China continues to implement polices to maintain and improve its environment. Indonesia is well placed to meet some of this increase as it is highly cost competitive with other Asian suppliers, and some Asian suppliers are currently running at high operating rates and therefore have limited ability to raise their export shipments levels. Over the latter part of the forecast period, we are predicting less growth due to rising capacity in China—assuming fewer fiber supply issues and as new machines with proper environmental control technologies come on line—as well as rising demand in Indonesia's domestic market that will consume more of the local output. There is some upside potential for Indonesian exports relative to our forecast because of risks that China's fiber supply issues could remain a problem for Chinese producers depending on the government's policies, how fast domestic Chinese supplies can grow and how well global recovered paper suppliers can respond and meet China's contaminant limits.
BoxboardWe estimate that Indonesia exported 170,000 tonnes of boxboard in 2017, with recycled grades comprising 92% of these shipments. Indonesia ranks low among Asian exporters, with the region's external shipments dominated by China with a 60% share of Asian boxboard exports and South Korea accounting for 22%. Indonesia and India each accounted for 5% of Asia's boxboard exports, and Taiwan and Thailand accounted for 4%.
Most of Indonesia's boxboard exports go to other Asian markets, with these destinations accounting for 65% of Indonesia's exports in 2017. Vietnam was the leading Asian destination. The Middle East also accounted for a sizeable share of Indonesia's exports at 27%, with Africa accounting for the rest.
Table 18Boxboard Imports and Exports, 2013-2017
Thousand Tonnes
Grade 2013 2014 2015 2016 2017
Total Boxboard Imports 136 143 145 216 197% Change 67.9% 16.9% 7.7% -13.4%Exports 219 228 245 143 170% Change -2.7% 4.2% 1.4% -8.9%
Recycled Boxboard Imports 58 55 63 112 97Exports 195 199 218 124 157
Virgin Boxboard Imports 78 88 82 104 100Exports 24 28 27 19 13
Source: RISI
Table 18Boxboard Imports and Exports, 2013-2017
Thousand Tonnes
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RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
Figure 30Virgin Cartonboard and Recycled Boxboard Grades Import Dependence Ratios, 2013-2017
Source: RISI
Figure 30
Virgin Cartonboard and Recycled Boxboard Grades Import Dependence Ratios, 2013-2017
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2013 2014 2015 2016 2017
Virgin Cartonboard
Recycled Boxboard
Figure 29Indonesian Boxboard Exports by Destination, 2013-2017
Thousand Tonnes
Source: RISI
Thousand TonnesIndonesian Boxboard Exports by Destination, 2013-2017
Figure 29
10% 9% 10%2% 8%
56% 61% 60%
86% 65%
25%29%
11%27%
34%
5%
2%
1%
0%
0
50
100
150
200
250
300
2013 2014 2015 2016 2017
Africa Asia Middle East Rest of World
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RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
Indonesia is also self-sufficient in the recycled boxboard grades, with an import share ranging from 5% to 9% over the last five years and a share of 8% in 2017. Its dependency on imports of virgin grades is a little higher, standing at 16% in 2017. Most of Indonesia's boxboard output is consumed locally; its ratio of exports to production in 2017 was 9%.
Barriers to EntryIn terms of supply position, both the containerboard and boxboard markets are dominated by two major local producers: Fajar Surya Wisesa and IKPP. The two firms together controlled 55% of total containerboard supply and 29% of total boxboard supply in 2018. The barriers to entry are numerous for new players and even smaller players who want to add large, new machines. The first set of barriers are financial and result from the high cost of a new machine and the infrastructure to support it, including power plants, wastewater treatment plants and warehouses. The timeline for installing a new machine is a minimum of one year and a greenfield project would take much longer, starting up in 24-36 months if everything goes smoothly, including all potential permits and supply chain issues. New players will also require access to bank funding for working capital.
A second set of barriers to entry relate to relationships, with both suppliers and buyers. Existing companies have already established long-term relationships with suppliers, with domestic supplies of recovered paper being of particular importance. These relationships take time to develop and limited available resources make it difficult for new firms to set up sources of local supply. Heavy traffic at some ports can also make it difficult to secure recovered paper imports.
Existing firms have spent time building relationships with buyers, meeting their specifications and performance requirements, so switching costs for end-users can be high. Leading producers have also gained some advantages by economies of scale (overall cost control, etc.) and exclusive agreements. Fajar Surya Wisesa has spent time and resources on developing the ability to produce lightweight and high-strength containerboard grades, especially
Figure 31Total Boxboard Export/Production Ratios, 2013-2017
Source: RISI
Figure 31Total Boxboard Export/Production Ratios, 2013-2017
6%
7%
8%
9%
10%
11%
12%
13%
14%
2013 2014 2015 2016 2017
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RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
high-strength corrugating medium, products that differentiate it from other producers, and it would take time for new entrants to learn to make the product range that large consumer product firms may need.
On the trade front, over the past five years import dependence ratios for the recycled containerboard grades were low, while demand for import-reliant grades such as kraftliner and semichemical medium counted for less than 1% of total containerboard consumption. Imports will continue to have a tough time penetrating the market because imports from most countries, with the exception of China, ASEAN and South Korea, are subject to an import tax of 5%. Imports are also not as competitive because of the longer lead time and need to maintain larger inventories due to this.
Cash Cost Update for Second Quarter 2018Figures 32 through 35 provide some updated details on average cash costs for the second quarter of 2018 across Asian countries and selected major suppliers.
Figure 32Average Cash Cost for Linerboard by Asian Country, Second Quarter 2018
US Dollars per Tonne
Figure 32Average Cash Cost for Linerboard by Asian Country, Second Quarter 2018
US Dollars per Tonne
$0
$100
$200
$300
$400
$500
$600
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RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
Figure 33Average Cash Cost for Corrugating Medium by Asian Country, Second Quarter 2018
US Dollars per Tonne
Figure 33
Average Cash Cost for Corrugating Medium by Asian Country, Second Quarter 2018
US Dollars per Tonne
0
100
200
300
400
500
600
700
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Figure 34Average Cash Cost for Linerboard for Selected Asian Suppliers, Second Quarter 2018
US Dollars per Tonne
Figure 34Average Cash Cost for Linerboard for Selected Asian Suppliers, Second Quarter 2018
US Dollars per Tonne
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RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
Figure 35Average Cash Cost for Corrugating Medium for Selected Asian Suppliers, Second Quarter 2018
US Dollars per Tonne
Figure 35Average Cash Cost for Corrugating Medium for Selected Asian Suppliers, Second Quarter 2018
US Dollars per Tonne
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RISI Indonesia’s Packaging Paperboard Market Overview Market Competition Dynamics
