Market demand is driving PT Chandra Asri Petrochemical Tbk. to add value by becoming the first in the country to make butadiene, the raw material for synthetic rubber. With steady economic growth pushing demand for synthetic rubber in the automotive industry. The company has invested $145 million in a plant operated by subsidiary PT Petrokimia Butadiene Indonesia.
Hundreds of millions of people around the world travel billions of kilometers every year on tires made mostly from synthetic rubber. That substance is made from butadiene, a petrochemical product that can be processed to become styrene butadiene rubber (SBR), acrylonitrile butadiene styrene (ABS), styrene butadiene latex (SBL) and other useful compounds. It is SBR that is used to produce tires.
According to the Association of Indonesian Tire Companies (APBI) demand for motorcycle tires in 2011 reached 42 million units, while 47.2 million car tires were sold. Growth in sales figures for tires inevitably keeps pace with the total number of vehicles – with two, four or even more wheels – on the roads.
The Indonesian Automotive Industry Association (Gaikindo) states that retail car sales totaled 888,335 units last year, a 19.2% increase from 744,895 units in 2010. Further rises are expected this year, though they won’t be as dramatic as 2011.
Sudirman Maman Rusdi, a Gaikindo chairman, states that although there is concern over the global economic crisis, Indonesian automotive sales will continue to grow a modest 3-5%. Yet despite all of the tires being made from butadiene, all Indonesia’s supply has been imported up until now.
Minister of Trade Gita Wirjawan, speaking at the groundbreaking ceremony for the new plant at Cilegon, Banten province’s heavy industry center, emphasized that even though Indonesia’s road infrastructure is still very poor, automotive sales continue to grow. “This means that production of butadiene is necessary to meet demand from the synthetic rubber industry, which continues to grow in line with the growth of the automotive industry.”
The new plant will start production in the second quarter of 2013. With the operation of the butadiene plant, the production chain of the tire industry in Indonesia will have been connected from upstream to downstream.
Djongkie Sugiarto, who also sits on the Gaikindo board, welcomes the expansion of Chandra Asri into butadiene production, saying this will increase the competitiveness of the domestic automotive industry. Domestic production means cheaper prices for butadiene, allowing the automotive industry to reach a higher percentage of local content.
To build the plant, the company will use a combination of internal cash and bank loans. Chandra Asri has already won a commitment on a $150 million syndicated loan from DBS Bank, Standard Chartered Bank, Bank Danamon and HSBC.
For Erwin Ciputra, the president director of Chandra Asri, the aim of the new plant is twofold. First, to increase the value-added aspect of production; second to move further toward a fully integrated petrochemical operation. The plant will have a production capacity of 100,000 tons per year and will also be equipped with butane-1 extraction equipment to produce 40,000 tons per year of butane.
“The plant will process C4, one of our products that has only been exported as a raw material, into butadiene and butane-1. The butadiene product will be sold to meet domestic market demand and for export. Butane-1 will be used as an auxiliary material in our production of polyethylene. Up until now, the synthetic rubber companies have had to import butadiene.”
Suryandi, the senior vice president of Chandra Asri, adds that production of butadiene will potentially double revenue at the company, rather than exporting unprocessed C4. “As an illustration, the average price of C4 recently has been $1,450 per ton, while the price of butadiene can reach $3,000 per ton,” says Suryandi. With the internal rate of return expected to reach between 20% and 25%, the investment is expected to break even in a mere four to five years.
Erwin notes that the investment represents the benefit of the entry to the company of SCG Chemicals. The Thai-based company spent $442 million in September last year for a 30% share in Chandra Asri.
It purchased 7.13% from Chandra Asri’s parent, Prajogo Pangestu’s Barito Pacific, and a further 22.87% from Appleton Investment Ltd., a subsidiary of Singapore government investment vehicle Temasek Holdings.
SCG Chemicals is a unit of Siam Cement Group, where the Thai royal family’s Crown Property Bureau owns 30% of shares. Its entry into Chandra Asri leaves Barito Pacific with 64.87% of the expanding operation. A further 5.13% is held by the public.
Cholanat Yanaranop, president director of SCG Chemicals, says Indonesia’s petrochemical market is wide open compared to Thailand. He compares olefins production between both countries: Thailand with a population of 65 million produces 6 million tons, while Indonesia with 240 million people produces only 1 million tons.
“There is great potential for us to enter the market. In the short term, our concern is to support the Chandra Asri plan for the expansion of its downstream operations,” said Yanaranop.
With its track record as the leading petrochemical company in Asia, Erwin hopes that the entry of SCG Chemicals will improve synergies and add value in the Chandra Asri operation to support development of the business. “This is our first step after the entry of SCG Chemicals toward building an integrated petrochemical operation, from upstream to downstream.”
In the first nine months of 2011, Chandra Asri booked sales of $1.745 billion from products including polyethylene, polypropylene, styrene monomer and various olefins. GA