The success of companies in the coal and palm oil sector is proving too much of a temptation for Barito Pacific to resist. Using proceeds from the sale of shares in the Chandra Asri Petrochemical Center to the Siam Cement Group, Barito will expand its footprint in the two business areas.
Who can resist the smell of success? Apparently not Prajogo Pangestu, the born-again tycoon who switched from plywood to petrochemicals and now wants to enter the coal and palm oil industries.
His Barito Pacific Timber was once the world’s largest plywood producer, until illegal logging in the late 1990s destroyed his resource base. Then he went quiet for nearly a decade before resurfacing to take control of PT Chandra Asri Petrochemical, dropping the ‘timber’ from his holding company’s name in the process.
He’s still in timber, through Mangole Timber Producers and Tunggal Agathis Wood Industries, but the enterprises are overshadowed by Chandra Asri and its related companies, which produce 90% of the group’s income. Property is another interest, under PT Griya Idola, which manages the group’s Wisma Barito Pacific Building in Jakarta and some other projects.
“We will expand into the business of palm oil and coal mining,” says Prajogo, with his normal cool demeanor. Indeed, he is not a total newcomer to palm oil. From 29,000 hectares of land bank, the group has planted 9,600 hectares.
Now watching operations from above as chairman of the group, Prajogo says planted area will be expanded to 25,000 hectares by 2015. While most of that will come through organic growth, he is open to acquisitions of other plantations.
By the end of this year, palm oil subsidiary PT Grand Utama Mandiri targets 12,000 hectares of planted area. Of this, “2,000 hectares will be ready for harvest at the end of the year,” adds Reza Andriansyah, president director of the company.
Group investments in the sector now total Rp700 billion, concentrating on Prajogo’s home province of West Kalimantan. In addition to plantations, the funds are being used to build a palm oil processing plant with capacity of 450,000 tons per year. Construction is targeted for completion in 2013.
Reza is optimistic that the crude palm oil business continues on a strong growth curve despite the problems in the global economy. “We are not concerned about the competition, the space for this industry is still wide open. Demand for palm oil always exceeds supply.”
Coal, on the other hand, is an entirely new venture. “We still doing our preparations to enter the business,” Prajogo states. But, he says, given that many companies have been entering the business as demand is expected to continue to rise, the Barito Group does not want to be left out of the game.
Generating the cash for expansion ceased to be a problem after the sale in September of 7.13% of Barito’s shares in PT Chandra Asri Petrochemical to SCG Chemicals Co. Ltd., a subsidiary of Thailand’s Siam Cement Group, at Rp4,088 per share. The sale netted the group around Rp893 billion ($101million), much of which will be used for diversification.
Siam Cement, where the Thai royal family’s Crown Property Bureau owns 30% of the action, has been aggressively expanding overseas, and especially in Southeast Asia.
At the same time, Appleton Investment Ltd., a subsidiary of Singapore government investment vehicle Temasek Holdings, sold all its 22.87% of Chandra Asri to SCG. The Thai company now holds 30% of the shares in Chandra Asri, for a value of Rp3.76 trillion.
Cholanat Yanaranop, president director of SCG Chemicals, sees the scope in Indonesia’s petrochemical market as still very wide compared to Thailand. “For example, Thailand with a population of 65 million produces 6 million tons of olefins, compared to Indonesia with 240 million people producing only 1 million ton.
“This is a great potential for us to enter the market. That’s why we chose to invest in Indonesia. In the short term, our concern is to support the Chandra Asri plan for the expansion of its cracker and its downstream operations.”
For Chandra Asri itself, the entry of SCG Chemicals represents a strategic move to enhance corporate value and support the development of the business. With SCG Chemicals’ track record as the leading petrochemical company in Asia, Barito hopes to improve synergies and add value in the Chandra Asri operation.
With its plants located in Cilegon in Banten province, in 2010 Chandra Asri booked sales of $1.86 billion for its products such as polyethylene, polypropylene, styrene monomer and various olefins. The company has the capacity to produce each year 600,000 tons of ethylene, 320,000 tons of propylene, 320,000 tons of polyethylene, 480,000 tons of polypropylene, 220,000 tons of crude C4 and 340,000 tons of monomer.
Chandra Asri president director Erwin Ciputra adds that the strategic partnership with SCG Chemicals will accelerate the company’s expansion plan for its cracker unit, the essential factor in the petrochemical process. Ultimately, it wants to build an integrated petrochemical operation, from upstream to downstream.
The company is now owned 64.87% by Barito Pacific and 30% by SCG Chemicals, with 5.13% held by the public. For full-year 2010, Barito reported revenue of Rp16.9 trillion but made a loss of Rp558 billion.
The result is one good reason for the diversification plan. “We will accelerate the growth of our subsidiaries, and are looking to acquire assets in the palm oil and coal mining sectors. At the least, we have set aside $50 million for this action plan,” says Barito’s president director, Loeki S Putera.
The business diversification program has become a must, as the management doesn’t want to depend only on the petrochemical industry in the future, adds senior vice president Agustinus Sudjono. “The concept is to balance the growth of each business unit of the groups.”
This year, Barito Pacific is also injecting an additional $580,000 into subsidiary PT Petrogas Pantai Madura, a new member of the group acquired in May last year. Barito Pacific holds 49% of the company, which holds a 10% share in the Madura Offshore block. GA