Indonesia. Cotton and Products Annual. Apr 2013 May 3, 2013
Some Indonesian cotton spinners are still recovering from a challenging 2011 calendar year (CY) with regard to the international cotton market. However, the Indonesian textile industry is generally recovering from that period of price volatility. While several Indonesian spinners with pending contracts have been added to the default list, a number of large mills are expanding their operations. For marketing year (MY) 2012/13, Post expects that Indonesian cotton imports will slightly increase to 2.1 million bales, over 1.975 million bales in MY 2011/12. In MY 2012/13, the market share for U.S. cotton in Indonesia is estimated to decline, primarily due to strong competition from Brazil and Australia.
The Indonesian Ministry of Industry reported that in CY 2012, Indonesia was the world’s 10th largest textile exporter, with total exports valued at $12.5.1 billion. However, volatile international cotton prices during CY 2011 slowed Indonesian demand for cotton imports. Some small cotton spinners are currently closing down their operations. Conversely, some larger mills are expanding. Although there is a general slowdown in demand for Indonesian textiles and textile products in the United States and Europe, Indonesian yarn exports to China for the period of January – November 2012 have increased by 39 percent compared to the same period in 2011. As a result, Post estimated MY 2012/13 Indonesian cotton imports will increase to 2.1 million bales. In MY 2011/12, Brazil overtook the United States as the largest supplier of cotton to Indonesia.
Indonesia produces only 0.3 percent of its total domestic demand for cotton. Indonesian cotton producers receive little support from the Government of Indonesia (GOI) and cotton farmers generally find greater economic incentives to grow other crops. Increased land conversion to nonagricultural uses also reduces the area dedicated to cotton. However, favorable weather during 2012 provided opportunities for a slight expansion of cotton area. Most of the cotton crops are grown on marginal land on South Sulawesi, East Java, West Nusa Tenggara, and Central Java. Farmers have a very limited access to high yielding varieties and proper cultivation practice due to financial constraints. Therefore, Post estimates that in MY 2012/13 and MY 2013/14, Indonesia’s cotton production will remain stagnant at 30,000 as in MY 2011/12.
According to a local industry publication, the Indonesian textile and textile products sector employs about 1.5 million workers, which equated to just over 10 percent of the total Indonesian manufacturing workforce in 2012. The Indonesian textile industry also plays a significant and strategic role in the overall Indonesian macro-economy. In 2011 there were a total of 2,880 textile and textile production companies in the country with a total investment of Rp. 151.77 trillion ($ 15.6 billion). The Indonesian National Statistics Agency (Badan Pusat Statistik, BPS) estimates that textile products contributed almost 1.56 percent toward total Indonesian national gross domestic product (GDP) in 2012. According to data from BPS, during the period of January to December 2012, the Indonesian textile and related product exports amounted to 6.58 percent of total Indonesian national exports. In CY 2011, Indonesia exported about 35 percent of its textile and textile products to the United States, 19 percent to the European Union, 5.2 percent to other ASEAN countries, and 7.5 percent to Japan.
According to industry publications, the volume of Indonesia’s textile and related product exports in CY 2011 declined by 1.4 percent to 1.94 million tons over CY 2010. However, the actual value increased by 18.1 percent to $13.3 billion. Indonesian textile industry grew by 5 percent in 2012 compared to 2011 after experiencing a contraction in 2007 and 2008. However, in 2013 the Indonesian Textile Association (Asosiasi Pertekstilan Indonesia, API) estimates that Indonesian textile and related products exports will decline by 6 percent due to contracting demand in Europe and the United States for Indonesian textiles.
In the domestic market, Indonesian textiles and related products face tough competition from imported products, but domestic demand for local textiles remain strong. In CY 2011, Indonesia imported approximately 1.68 million tons of textile products, valued at $8.43 billion. China (29.6 percent) and the Republic of Korea (19 percent) account for the largest suppliers of textiles to Indonesia. Chinese products are generally cheaper than domestically produced textiles and are considered comparable in terms of quality.
In CY 2011, Indonesian textile mills ran at about 70 - 80 percent capacity - with a total of 9.2 million spindles and 117,256 rotors. Several fundamental problems hampered the growth of the industry. The majority of the machines used by the Indonesian industry are at least 20 years old. Since 2007, GOI has launched the industry revitalization program. In 2012 a total of 149 textile companies registered to join this program and a total of IDR 147.52 billion of assisting funding has been distributed. However, high interest rates make it more difficult for textile businesses to get commercial bank loans.
The fluctuating prices of cotton in 2011 still has continued impacts on small and medium sized cotton spinners. A number of Indonesian spinners with pending contracts have been added to the default list. The Indonesian Cotton Spinners Association reported that currently there are 5 to 6 companies on the default list and the default list is growing. Some smaller mills have been forced to close operations. API also reports that cotton trading is normally conducted between Indonesian spinners and cotton agents who are located outside of Indonesia. The lack of local representation and/or offices makes it more difficult to settle defaults. Conversely, some large mills, as well as those not on the default list are in a better position to expand operation. To avoid the contract default problems due to price volatility from recurring in the future, currently there are some local large mills who buy extra cotton to be sold to the small mills. However, there are some concerns that in the future these large mills will act as agents and will bring cotton prices higher due to longer supply chain. Some of the large cotton agents also tried to avoid problems from highly fluctuating price of cotton by having stocks stored within the region.
The United Nations International Labor Organization (ILO) projected that the economic growth in Southeast Asia and the Pacific reached 5.2 percent in 2012, following 4.6 percent growth in 2011. Regional growth is supported by Indonesia, which is Southeast Asia’s largest economy. Indonesian GDP growth has been both robust and steady in recent years; between the first quarter of 2011 and the second quarter of 2012, year-on-year quarterly GDP growth has ranged between 6.3 percent and 6.5 percent. The ILO, which bases its data on the Conference Board Total Economy Database January 2012, ranks Indonesia third in growth in output per worker in selected Asian countries, following China and Vietnam.
As of early October 2012, the GOI increased 2013 provincial minimum wages. The new minimum wages are effective per January 7, 2013 and are noted below.
The minimum wage increases are creating challenges for the Indonesian textile industry. API reported that the wage increases have made it difficult for the textile industry to absorb another 11,000 new workers as initially expected. The wage increases have forced some textile manufactures to relocate their factories from Jakarta to West Java, Central Java or East Java, as these areas have lower minimum wages. Some textile manufacturers also unsuccessfully pushed the GOI to postpone the change in the minimum wage. Other textile manufacturers who have reached agreements with their labor unions to increase the wages gradually are unable to do so as it will violate the regulation.
For manufacturing process, the Indonesian textile industry sources about 70 percent of its energy needs from the National Electricity Company (Perusahaan Listrik Negara, PLN). The balance is met by self-owned generators, and gas and/or coal powered industrial equipment. Compared to other Asian countries, Indonesian electricity tariffs are relatively high. The electricity supply is also inconsistent, which can lead to production slow-downs and/or stoppages.
The PLN usually increases the electricity tariff which adds additional expenses to the textile industry every year. In 2012 the GOI has decided to postpone any electricity tariff hikes to 2013. In early January 2013, the PLN announced the increase of electricity tariff and the decision to increase it every quarter.
The Indonesian textile industry must also cope with problems related to the distribution of textiles and textile products. Indonesian port fees are considerably higher than other Asian countries. GOI also requires that these fees be paid in U.S. dollars rather than in the local currency.
Road conditions for ground transportation to and from Indonesian ports are mostly bad, highly congested, and subject to traffic. This creates inefficiency and high transportation costs. The textile industry reports that the higher minimum wage, electricity tariffs, and high terminal handling charge will increase the price of textile and textile products by 16 percent and will lower the competitiveness of Indonesian textile products in international market. It will eventually decrease Indonesian export of textile and textile products by six percent in CY 2013. However, textile industry reported that the decline in exports will be more than offset by the selling of Indonesian textile and textile products in domestic market that is estimated to increase by five percent despite facing fierce competition with imported products.
As a result of the aforementioned situation, Post estimates that MY 2012/13 Indonesian cotton consumption will slightly increase to 2.1 million bales compared to 1.95 million bales in previous marketing year of MY 2011/12. Indonesian cotton consumption is forecast to continue to increase to 2.2 million bales partly due to stronger demand for cotton shirts for political parties campaign in the upcoming 2014 general election.
In line with the increased cotton imports, Post estimates that MY 2012/13 Indonesian ending stocks of cotton will increase slightly to 499,000 bales. Post expects that the increase of ending stocks to continue to 519,000 bales in MY 2013/14 due to increase of imports in that MY.
The Indonesian industry’s outdated textile machines amount to lower productivity levels, and increased energy and power usage. In 2007, the Indonesian Ministry of Industry launched a textile industry revitalization program under Minister of Industry Decree No. 141/M-IND/PER/10/2009 (Please refer to GAIN Report ID1112). The regulation was amended by the issuance of Ministry of Industry Decree number 15/M-IND/PER/2/2012. This new regulation, aptly titled “Machines Restructuring Program for Textile and Textile Products and Leather and Leather Products Small and Medium Enterprises”, reduced the percentage of reimbursement provided to any textile company that purchased new textile machines to 10 percent. Additionally, if the new machines are domestically produced, the program provides a subsidy of up to a 25 percent of the cost of the machines. The reimbursement provided is has been increased , but is not allowed to exceed Indonesian Rupiah (IDR) 3 billion ($ 326,513) per company annually.
In CY 2009, the Ministry of Industry reported that 2,853 textile companies broken into subsectors of consisting of: 1. fiber (30 companies), 2. yarn (225 companies), 3. fabric (1,067 companies), 4. garment (996 companies), and 5. others (535 companies). The textile industry representatives report the following factors affect the current conditions of Indonesian spinners:
1. Some spinning mills still suffer from the high price contracts in 2011 that led to tight cash flows. However, there are some large manufacturers that expanded operations.
2. The flat trend of textile exports to major destination countries such as the United States, Europe, and other Asian countries.
3. Strong demand for Indonesian textile products in domestic market although competition with lower priced and quality imported textile and textile products.
Given the above-mentioned situation and referring to the data provided by the Global Trade Atlas and the Indonesian Cotton Spinners Association, Post estimates that Indonesian imports of cotton in MY 2012/13 will slightly increase to 2.1 million bales compared to 1.975 million bales in previous MY. Post forecasts that MY 2013/14 cotton import levels to continue increase to 2.2 million bales, assuming that some cotton spinners will recover from the impact of the fluctuating prices of cotton in 2011, an expected increase of 5-10 percent in domestic sales, stronger demand for cotton shirt in the face of the upcoming 2014 general election, and improving world economy that may increase demand of Indonesian textile and textile products in major exporting countries.
Some contracts default as a result from the cotton price volatility in 2011 has led to a declined share of U.S. cotton exports to Indonesia. According to the Global Trade Atlas, in MY 2011/12, Brazil overtook the United States as the leader in the market with a total market share of 31 percent, followed by Australia with 20 percent market share, and the United States with 16 percent market share. Despite high levels of contamination, the quality of cotton from India, Brazil, and African countries are considered adequate by Indonesian industry standards. During the period of January – November 2012, Indonesia exported most of its yarn to China (39 percent), Japan (24 percent), South Korea (9 percent), and Hong Kong (6 percent)