Government Prepares Incentives to Import Industrial Raw Materials from the Middle East

Anticipating disruption in the Middle East, the Ministry of Industry is preparing incentives for imports of industrial raw materials.

KOMPAS/BENEDIKTUS KRISNA YOGATAMA

Minister of Industry Agus Gumiwang Kartasasmita when met by journalists during the Eid al-Fitr halalbihalal at the Ministry of Industry Office, Jakarta, Tuesday (16/4/2024).

JAKARTA, KOMPAS — The Ministry of Industry is preparing incentives for importing raw materials for domestic industry from the Middle East. This policy is to anticipate the risk of disruption to logistics distribution from the Middle East following the Iran-Israel conflict. One of the industries that requires raw materials from this area is upstream chemical industry.

Minister of Industry Agus Gumiwang Kartasasmita said that his office is preparing incentive policies for domestic industries that import their raw materials from the Middle East. This is because the supply of raw materials may be disrupted due to the geopolitical tension between Israel and Iran.

"Relaxation of imports of certain raw materials is also needed to make it easier to obtain raw materials considering that other countries are also competing to find alternative suppliers to meet their industrial raw material needs," said Agus, Thursday (18/4/2024).

Relaxation of imports of certain raw materials is also needed to make it easier to obtain raw materials.

She added that the Ministry of Industry continues to monitor the global geopolitical situation that is currently turbulent. The government needs to analyze and prepare policies to mitigate the impact on the domestic manufacturing sector.

The Ministry of Industry will soon coordinate with industry actors. "At the moment, the Ministry has mapped out the issues and is working to mitigate solutions in order to secure the industrial sector from the impact of the ongoing conflict," said Agus.

BENEDIKTUS KRISNA YOGATAMA

Distribution of imports by type of goods in February 2024. Source: Central Statistics Agency (BPS).

The Secretary General of the Indonesian Olefin, Aromatic, and Plastic Industry Association (Inaplas), Fajar Budiono, stated on Friday (19/4/2024) that one of the industries that heavily relies on raw material supply from the Middle East region is the upstream chemical industry.

The raw material for upstream chemical industry production is naphtha, a type of oil that can be processed to produce downstream industrial products. Some of its downstream products include plastic, packaging, children's toys and automotive components.

He explained that this industry requires around 3 million tons of naphtha. Currently, 100% of the domestic upstream chemical industry's naphtha needs are still being imported from countries in the Middle East region. Domestic oil companies produce naphtha, but not for industrial supply. Naphtha in the country is used to be processed into subsidized fuel oil.

Also read: Manufacturing Industry Does Not Expect Escalation of the Iran-Israel Conflict to Increase

Currently, Fajar explained that the upstream chemical industry is faced with various challenges. The depreciation of the rupiah has caused the prices of imported raw materials to rise as well. Production costs are also becoming more expensive.

The conflict between Iran and Israel has also made it difficult to obtain raw material supplies. This is because trade and shipping through the waters around the Middle East are directly disrupted.

Fajar estimates that the shipment of nafta will take longer. Operating ships also become more limited. Moreover, entrepreneurs are competing for delivery services.

KOMPAS/ PRIYOMBODO

Exhibition participants displayed recycled plastic at the 2019 Plastic and Rubber Exhibition at the Ministry of Industry's Exhibition Plaza in Jakarta on Tuesday (9/7/2019).

This situation will cause an increase in production costs. For example, in February 2024, when there was tension in the Suez Canal, the delivery of goods was delayed for two weeks from the schedule. Shipping costs also increased by 20-40 US dollars per ton, more expensive than in normal conditions.

Regarding the plan to provide incentives for importing industrial raw materials from the Middle East, Fajar welcomes it. However, he is not yet aware of the scheme. What is certain is that currently, import duties for nafta are already at zero percent.

He proposed that the government could provide incentives for reducing import duties on natural gas (liquid petroleum gas/LPG) which could be an alternative raw material for the upstream chemical industry. Currently, the LPG import duty rate is still 5 percent.

Fajar explained that the United States (US) supplies LPG which can be processed into raw materials for the petrochemical industry. In Indonesia, all plants still use naphtha as a raw material for production. However, plant engines in Indonesia can be modified to accommodate at least 30 percent of LPG to be processed into petrochemical production raw materials.

When contacted separately, economist analyst of the Indonesian Employers Association (Apindo), Ajib Hamdani, said that geopolitical conflicts and global economic instability have disrupted economic supply chains. This can result in increased prices of imported commodities, including raw materials, oil, or logistics costs.

This will trigger an increase in the cost of sales, which in turn will boost inflation. Throughout 2023, inflation in Indonesia is expected to be 2.6 percent, in accordance with the macroeconomic framework that has been established.

Inflation is projected to be between 1.5-3.5 percent throughout 2024. The condition of rising import commodity prices will provide a negative sentiment in terms of inflation. "Maintaining market psychology like this is very much needed to maintain economic stability," said Ajib.

KOMPAS/PRIYOMBODO

The atmosphere at PT Valuta Artha Mas foreign exchange center in Jakarta was busy on Tuesday (16/4/2024). Referring to the Jakarta Interbank Spot Dollar Rate (Jisdor) reference rupiah exchange rate set by Bank Indonesia, trading on April 16, 2024 was at Rp 16,176 per US dollar. The weakening of the exchange rate was caused by several global developments during the Lebaran holiday.

The Chairman of the Indonesian Chamber of Commerce and Industry (Kadin), Arsjad Rasjid, stated that the business world continues to adapt to various external challenges, especially in sectors and industries most affected by the increase in imported raw material costs, through several anticipatory measures.

In the short term, what can be done includes calculating to reduce business burdens through efficiency measures, delaying expansion or investment, implementing currency hedging to minimize exchange rate fluctuations, and finding alternative sources of raw materials to reduce dependence.

"In the long term, anticipatory measures are also taken by the business world by encouraging the government to provide various incentives to anticipate rising costs, including relaxation or facilitation of the import of necessary raw materials," said Arsjad.

Also read: Indonesia Anticipates Impact of Iran-Israel Conflict