Image by Irwan Zahuri ar Pexels

Almost half of the global population is choosing their next leaders this year, making 2024 a record-election year. 275 million of them are Indonesian. About 165 million, 81% of the eligible Indonesian voters, went to the polls on the 14th of February in the world’s third-largest democracy. 

The people of the former Dutch colony mesh together across 1,300 ethnic groups, 700 languages, in 7,000 of the 13,000 islands inhibited between the Indian and Pacific Oceans. This wildly diverse population found a common denominator in candidate Prabowo Subianto, who won decisively with 58% of the vote in the first round. The new president will take office in October, closing the end of a decade under Joko Widodo, known as “Jokowi,” the outgoing president. “Jokowinomics,” the highly popular infrastructure-led economic development model, a signature of Jokowi, is hoped to stay,  together with the nationalistic policies starting to contour more of Indonesia’s chemical industry. Many expect the new president, Mr. Subinato, to follow in the footsteps of his predecessor, but this is certainly not a given.

Indonesia has been described repeatedly as the biggest invisible country. Invisibility is an absurd description for the world’s fourth-largest population and an economy projected to grow into the top 10 globally in the next few decades. And yet Indonesia has been systematically overlooked. While the world was busy paying more attention to louder Asian giants, namely China and India, Indonesia grew tacitly. That said, its chemical industry has not grown in tandem with its economy and can deservingly be said to be invisible in the global theatre. As ASEAN’s largest economy by far, with both an enviable market base and access to local natural resources, Indonesia has a disproportionately small chemical industry. In 2022, Indonesia exported US$40 billion worth of chemicals, less than half compared to tiny Singapore. 

The strategic importance of chemicals for the country’s downstream manufacturing sectors, as well as the hefty bill Indonesia pays on chemical imports every year, were reasons enough for President Jokowi to declare ambitious goals: He wants Indonesia to become the largest petrochemical base in Southeast Asia, to the extent that it can stop imports altogether by 2027. To get there, the administration must work on two ends: One is to build industrial capacity; and the other, more unorthodox measure, to put barriers on imports. The two are closely linked. Indonesia does not have the opportunity to invest in capacity if it is flooded with competitive stock from abroad. Nor can it cut imports without risking the flight of investors in local production. Meddling with free-market principles is tricky. Not doing it, can also be tricky for the country’s dying local industries, not to mention the political risks. 

To grow its petrochemical base, Indonesia is first looking at its oil and gas sector, which it can then integrate with the downstream by building refineries and crackers. Indonesia’s 600,000 bpd oil and gas production goes mostly into the gasoline and diesel markets, with little left to provide a platform large enough even to meet current petrochemical demand, let alone expanded capacities. Indonesia used to produce 1.6 million bpd of oil and gas during the sectors’ heyday in 1995, according to S&P Global, but production has fallen steadily over the years due to maturing oil blocks and declining investment. With a goal to lift 1 million bpd of oil and 12 bcf/d of gas by 2030, the country is offering 54 oil and gas blocks between 2024 and 2028, but optimism is restrained after some blocks offered last year have not received any bids. Among these forsaken blocks is the Natuna D-Alpha exploration block, estimated to hold 230 trillion cubic feet of gas, among the largest in the world. Natuna’s high CO2 content has kept bidders at a distance. 

President Jokowi’s nationalistic inclinations have been partially blamed for the demise in the oil and gas sector. After his predecessor approved a 7.5 million tons per year (tpa) FLNG facility for the giant Masela gas block, the incumbent president mandated that the project be developed as an onshore facility, which comes with much higher costs. The president’s intervention is said to have precipitated Shell’s exit (who operated Masela), bringing the block to a standstill. Pertamina, the national energy company, saw itself compelled to buy the asset in the Arafura Sea. The Masela project would need billions in capital to be brought into production. 

Downstream at the petrochemical level, the industry has no choice but to rely on feedstock imports. The country’s only naphtha cracker is operated by Chandra Asri, a JV between various Thai and Indonesian firms. The Cilegon cracker anually produces 900,000 tons of ethylene and 490,000 tons of propylene. Following the recent acquisition of Shell’s Bukom refinery in Singapore, Chandra Asri may take naphtha from the Bukom facility for its steam cracker. A second naphtha cracker is in the making, an investment by South Korean player Lotte Chemical, building an integrated 1 million ton/year naphtha cracker and downstream facilities in Merak, also in the city of Cilegon. The US$3.9 billion project is to enter commercial production next year, boosting the country’s availability of ethylene, propylene, polypropylene, and butadiene. 

Besides Cilegon in the Banten province, the other petrochemical hotspot is North Kalimantan, in the Indonesian part of Borneo, an island shared with Malaysia and Brunei. The development of the Tanah Kuning Kalimantan Industrial Park Indonesia (KIPI), touted as the largest integrated industrial area in the world by the government, is a centerpiece of Jokowi’s agenda. KIPI is a cross-industrial park, with a capital requirement of about US$132 billion, as reported in the Associated Press. The first big dollars in the area are coming from China. News came recently of a US$8.6 billion petrochemical complex developed by Tongkun Petrochemical, a JV between Hong Kong Huacan International Trading Co Ltd and Shanghai Qinghong Industrial Co Ltd,  pending Chinese government approval. If approved, the Tongkun Petrochemical Indonesia North Kalimantan Complex would make xylenes, ethylene, and polyethylene, starting in 2029. This would mark the single largest private overseas investment by a Chinese entity. The scale would also be unprecedented, with a nameplate capacity of 4.3 million tons/year of refined oil, 4.85 million tons/year of paraxylene and half a million tons/year of polyethylene (a total of 14.32 million tons of petrochemicals per year). The owners are giants in the polyester space.

Lessons from the nickel industry

North Kalimantan is also envisioned as a hub for mineral value chain integration, at the center of which sits an aluminum smelter worth about US$2 billion. Indonesia has implemented export restrictions on raw bauxite so that its substantial bauxite reserves on the island of Borneo would be processed locally into aluminum. This is a model tested successfully and fully inspired by the country’s nickel policy: Since 2014, Jokowi banned the exports of raw nickel, a resource that Indonesia dominates globally with about a fifth of global reserves. Since then, exports of processed nickel (ferronickel) skyrocketed, going from US$83 million in 2014 to US$5.8 billion in 2022, according to the Economist. The strategy holds dangers, especially when it is being re-applied to other industries, like petrochemicals. 

As part of the plan to make Indonesia a leading petrochemical hub, the government started to implement import quotas on key chemical classes, forcing resin importers and converters to absorb the local products before the imported ones. It began with PP block copolymers, but since March this year, the quotas have extended to polyethylene (PE) and polypropylene (PP) grades. Low-density polyethylene (LDPE) and PE with HS code 390140 are currently exempted because these are not domestically available. 

Indonesia relies on imports of many commodity chemicals, including olefins (33%) and polyolefins (42% for PE and 57% of PP), according to Argus Media, but even in commodities where the local supply can meet demand, the market is overrun by importers. “The irony is that, while local capacity is sufficient to cover domestic demand for PET, we cannot avoid seeing imported products competing with local producers. This pattern is not only happening at the suppliers’ level – the textile industry too has suffered from more aggressive imports, especially as China’s economy softened, on top of weaker export markets in Europe or the US. The double shock has rendered the textile sector in a crisis, with exports declining while imports continue to eat into the local market share,” said Fahrurrozi Zaini, president director, of PT Ineos Aromatics, operating the half-a-million-tons PTA plant in Merak, Indonesia, acquired recently from BP. 

Like many petrochemical businesses in Indonesia, the domestic market represents the bread-of-butter of Ineos’ plant in the country. Zaini welcomes recently introduced import restrictions on the textile industry, a support shared by other industry players. “For years now, the local textile industry has been slowly dying, with cheap products entering the Indonesian market.  The measure essentially requires importers for a clear reason to import a certain quantity in the country, according to a ‘commodity balance’ mechanism – or the amount that can be made locally,” he told GBR.

With a new president in waiting, investors and the industry may be wondering what will come next for Indonesia. Those who voted for Subianto certainly hope he will carry on Jokowi’s legacy – after all, Jokowi’s endorsement of Subianto is why many voted for the contestant in the first place. Jokowi is so well-regarded in Indonesia that some even hoped he might fiddle with the constitution to stay in place beyond his two current mandates. Instead, he weighed in his support to Subianto, a former opponent in the two presidential races in 2014 and 2019. After losing behind Jokowi in 2019, Subianto claimed the elections were stolen, sparking protests that led to the death of eight people. Nevertheless, Jokowi, in a keep-your-enemies-even-closer move, made Subianto his defense minister. In a gesture of undeniable support, Subianto’s running mate is no other than Jokowi’s eldest son.

Subinato used the Jokowi brand to success, but the two men are very different. While Jokowi was more of an everyman figure, as a former furniture salesman, Subianto is an immensely rich former general. He married the daughter of Indonesia’s late dictator, Suharto, who ruled the country for 32 years until 1998. Jokowi practiced prudent economic management, transforming Indonesia from one of the “fragile five” emerging economies into one of the world’s best-performing economies in recent years, at above 5% growth. By contrast, Subianto makes lavish promises of tearaway growth in the double-digit range. 

More concerning is Subianto’s dark past, as a former special-forces commander associated with war crimes in East Timor (now Timor Leste), when this was invaded by Indonesia in 1975. He was found guilty of the kidnappings of democracy activists, discharged from his post, and even barred from the US, until former president Trump lifted the ban in 2020. However, with that past long behind him, the 72-year-old incoming president presents himself to Indonesian young voters on Tiktok as a “grandpa” figure who loves his cat, Bobby. His social media campaign has been a hit, personality winning over politics. Despite the makeover, analysts remain nervous about his authoritarian instincts.

Jokowi left behind a stronger economy and infrastructure, but not a stronger democracy. Cronyism is at home in Indonesia. The outgoing president controversially used his family connections, namely his brother-in-law who happens to be the chief justice at Indonesia’s constitutional court, to allow his eldest son, Gibran Rakabuming Raka, to run as Subianto’s running mate. The rule is that candidates under 40 cannot run in a presidential race. Gibran is 36.

Jokowi was careful to not altogether alienate investors and warp the economy. His “omnibus” law helped remove restrictions on foreign management, despite being met with resistance by unionists; his HGBT policy benefited petrochemical companies to access gas at a cheaper price. Jokowi applied an almost clinical protectionism, but Subianto announcements promise a more fiery nationalism: “Some would have us sell raw materials to foreigners at cheap prices. I say: all our wealth must undergo domestic downstream processing!,” called Subianto in one of his speeches reported by the Economist, referring to the policies that push foreign firms to process metals like nickel and bauxite in the country. A similar rhetoric would not be surprising in the petrochemical space either.

A continuation of Jokowism under Subinato’s is not easily believable. Subianto has run amok from the official line even in his role as defense minister. For instance, he suggested a peace plan for Ukraine that seemed to favor Russia, even though Indonesia’s position was one of neutrality. These “erratic” actions commentators fear could undo the progress achieved by Jokowi, one of the few presidents to have met Joe Biden, Xi Jinping, Vladimir Putin, and Volodymyr Zelensky in 2022. Maintaining those contrasting relationships is challenging for any president, and certainly for one believed to act erratically in diplomatic situations. 

Indonesia is no longer invisible. Its significance on the world economy is growing, and with economic power comes a more central seat at the diplomatic table. We are soon to find out what the Subianto model will look like and how much it will borrow from Jokowinomics.