Marketing Review

Indocement registered significant sales growth in markets outside of Java, such as in Sumatra, Kalimantan and other parts of Indonesia, where the growth in some of these areas could reach as high as 16% or more.

Indocement capitalized on strong production capacity in addition to a well-established brand and a nationwide distribution network to record significant domestic sales growth in 2008. In fact, following the record-high monthly sales of 1.1 million tons of cement in November 2007, Indocement followed up with 10 straight months of record sales until August 2008, thus making the total sales of cement in 2008 the Company’s best ever.

Total sales of cement and clinker amounted to 14.7 million tons in 2008, compared with 14.6 million tons in 2007. Net revenues increased by 33.5% from IDR7,324 billion in 2007 to IDR9,780 billion in 2008.

Domestic Sales

Domestic sales volume increased by 15% to a total of 12.3 million tons in 2008. The increase came mainly asa result of robust market demand, which saw the cement market growing by 11% in 2008, compared to a growth of 7% in 2007. Indocement registered significant sales growth in markets outside Java, such as in Sumatra, Kalimantan and other parts of Indonesia, where the growth in some of these areas could reach as high as 16% or more. The extra income that whole communities had enjoyed from the rising price of commodities such as coal and palm oil in the outer Java Island, as well as agricultural products throughout Java, led home owners to either build, renovate or buy new houses, spurring real estate developments and dwelling construction with the corollary demand for cement. Sustained commercial construction in Java’s major centers also fuelled demand for cement and aggregate products, as well as renewed preliminary construction of toll roads, power plants and other infrastructure projects.

The market demand was very strong, especially in the first nine months that allowed Indocement to increase average selling price on a sustained basis over the first three quarters of 2008 in an attempt to offset fuel costs. Quarter-by-quarter sales still increased and market share remained stable or increased slightly despite the sales price increases. Only in November and December 2008 did market demand decline perceptibly, resulting in lower sales as an impact of global crisis.

The domestic sales of Portland Composite Cement (PCC) continued to grow, increasing by 14% from 9.4 million tons in 2007 to 10.8 million tons in 2008. PCC now accounts for 87% of Indocement’s total domestic cement sales during the year.

Export Sales

Indocement continued to use the export market as a lever to supplement total sales and maintain optimum utilization of capacity. Indocement has long viewed that supplying cement to the export markets is important to maximize production efficiency and currency balance. With that in mind, Indocement continued with its strategy of redirecting excess clinker capacity for the export market, and thereby maintaining healthy export sales. However, with an exceptionally strong domestic market in 2008, reduced excess capacity made it difficult for Indocement to maintain high export volumes. As a result, export sales declined from 3.8 million tons in 2007 to 2.3 million tons in 2008.

Sales Outlook

The stable and steady growth of the Indonesian economy over the past few years has been a strong impetus in the recovery of the domestic cement market since the last Asian financial crisis a decade ago. This was especially true in 2008, when the market seemingly broke free from the pent-up demand of the past decade. While the going was good while it lasted, nevertheless, we believe that the market growth in 2008 was an anomaly and therefore could not be sustained over an extended period. In fact, the last two months of 2008 gave a pretty good indication of where the market is likely to head in 2009.

The current global economic recession, combined with the collapse of commodity prices, are likely to curtail demand for cement. The question is, to what extent?

The Indonesian economy, contrary to what might be expected of a large Asianbased economy, is not overly reliant on exports. In fact, industry figures cite that exports account for less than 30% of the country’s total GDP. This means that some 70% of the nation’s economic activities are domestically driven and not directly exposed to declining demands in the international markets.

Indocement believes that because of this unique feature of the Indonesian economy, a considerable level of consumer demand can be sustained in the domestic market, and with it, also, the demand for cement. Another argument in cement’s favor is that, as part of the current worldwide trend in economic stimulus that is needed to counter recession, the government of Indonesia is expected to jump start infrastructure spending, mainly in the construction of highways, power plants, ports, housing, schools and other associated social projects. All this would require cement consumption, either in sack or bulk, as well as ready-mix and aggregates.

Based on these assessments, we believe that cement consumption will not grow significantly, but neither will it fall precipitously. Our assumption is that cement consumption in 2009 will at best be stagnant in the small housing sector and will decline in the commercial sector despite possible offsets from infrastructure spending.