JAKARTA — Indonesia’s largest fertilizer maker, Pupuk Kaltim, is accelerating its expansion to help fill a global market gap sparked by Russia’s invasion of Ukraine, with demand set to stay high for some time.
The state-owned company, flush with proceeds from two straight years of record profits, is speeding up at least $1.5 billion in spending for projects to meet rising demand resulting both from the war and lingering effects of the coronavirus pandemic.
President Director Rahmad Pribadi said the company booked 14.5 trillion rupiah ($974 million) in net income last year. The figure is more than double the approximately 6 trillion rupiah Pupuk Kaltim made in 2021, which was already higher than pre-pandemic levels.
The soaring incomes were driven by a significant jump in exports as fertilizer prices hit record highs halfway through the pandemic and after Russia launched its assault on Ukraine in February last year.
Western sanctions against major fertilizer producers Russia and aly Belarus, while formally exempting agricultural products, prompted supply disruptions across the global fertilizer market, fueling food inflation. Prices also soared on rising costs of natural gas — of which Russia is a major producer — used both as a feedstock and power source in fertilizer production.
Rahmad Pribadi, Pupuk Kaltim’s president director, says the company is “actively” looking for overseas acquisition opportunities to support Indonesia’s long-term food security. (Photo courtesy of Pupuk Kaltim)
Pribadi said that so far in 2023 fertilizer prices have fallen off their highs, projecting less volatility in the market through the remainder of the year. He added, however, that it will be “quite a long time” before prices return to pre-pandemic levels.
“Why? Because reviving shut factories takes time — 70% of [fertilizer] factories were shut down in Europe and many were shut down in many other countries too,” he told Nikkei Asia during an interview in his office in Jakata last month.
Building new ones such as for ammonia and urea — two common fertilizer types — typically takes around four years, Pribadi added. In the meantime, “demand has started to pick up as COVID lockdowns have ended.”
The International Fertilizer Association has forecast a 3% recovery in global fertilizer consumption this year, after a 5% decline in 2022 and 2% shrinkage in 2021. But the International Food Policy Research Institute said in March that prices are still high historically, and the fertilizer sector “remains vulnerable to trade and energy shocks, and the war and other global problems continue to pose serious risks.”
The World Economic Forum, meanwhile, ranked a looming food supply crisis as one of the top four threats facing the world in its 2023 Global Risks Report, predicting “the lagged effect of a price spike in fertilizer” would hit food production across the world this year.
As for Pupuk Kaltim — also one of the largest fertilizer producers in Southeast sia — exports overtook domestic sales as it entered a number of new markets amid the supply disruption, including Australia for urea, Japan for ammonia, and South America.
Despite windfall profits, the company wants to help reduce market volatility by being “a reliable supplier,” Pribadi said.
“Nearly every industry player, whoever they are, doesn’t like volatility,” said Pribadi, who earned a master’s degree in public administration from Harvard University. “I think we’ll have quite a sizable impact on balancing the market because Pupuk Kaltim is the largest urea and ammonia producer in Southeast Asia. For ammonia, we even rank fourth in the Asia-Pacific, and for urea we rank sixth.”
Currently, Pupuk Kaltim’s biggest expansion project is a new factory costing more than $1 billion in Fakfak regency in West Papua province, tagged as of “national strategic” importance by the Indonesian government. Construction is slated to start in the third quarter, with commercial operations targetd for 2027.
The facility will produce 1.1 million tonnes of urea and 825,000 tonnes of ammonia annually. That will add to Pupuk Kaltim’s current annual output of 3.4 million tonnes of urea, 2.7 million tonnes of ammonia and 300,000 tonnes of NPK, or nitrogen, phosphorus and potassium, fertilizers — all produced in the 13 factories located in its sprawling production complex in Bontang, East Kalimantan province.
A Pupuk Kaltim employee shows urea produced at one of the company’s production lines in Indonesia’s East Kalimantan province. (Photo by Erwida Maulia)
Pupuk Kaltim has also embarked on diversification projects totaling roughly $500 million, including for a new facility that will produce ammonium nitrate — both a fertilizer and material for explosives commonly used in mining — scheduled to start operating this year. And it is preparing to build a factory for soda ash, a feedstock for glass and clothing detergent manufacturing. Just last week, it also announced a new joint sudy with Danish modular reactor startup Copenhagen Atomics and a few other companies for a potential green ammonia production project using a Thorium-based nuclear technology.
The company is also revamping some aging facilities to make them more energy efficient, with Pribadi emphasizing cost management to boost Pupuk Kaltim’s competitiveness.
Indonesia is one of the world’s top producers of nitrogen-based fertilizers like ammonia and urea, which dominate global fertilizer consumption. But Pupuk Kaltim says phosphate and potash fertilizers — of which Russia and Belarus are major producers and for which raw materials are not available in Indonesia — are important.
Pribadi said the company is “actively” looking for opportunities to acquire phosphate and potash assets overseas to support Indonesia’s long-term food security. Like other fertilizer makers under state holding company Pupuk Indonesia, Pupuk Kaltim is also obligated to apportion certain levels of output to back the governmnt’s subsidized fertilizer program.
The government is pushing some major state-owned enterprises to privatize, and local media reported Pupuk Kaltim was planning an initial public offering of up to $500 million in 2023. But Pribadi said the company has not decided whether to launch the IPO this year or in 2024, citing the lackluster global capital market situation and political uncertainties that could further affect market sentiment ahead of Indonesia’s presidential and legislative elections set for February.
“We don’t want to miss a maximum valuation due to wrong timing,” he said, confident the company can bring in more than the reported amount.
But it may have already missed a good opportunity as emerging local nickel companies Harita Nickel and Merdeka Battery Materials listed this year after both brought in more than $600 million, making Indonesia a rare global IPO hot spot.
Minus IPO proceeds, Pupuk Kaltim is planning to finance a large part of its expansion using a combinatin of internal cash and other options made possible by its strong performance.
“To carry the projects through to the end, we’ll need external financing for sure. But while [other companies] usually source 70% of their financing from loans and 30% from equity, Pupuk Kaltim can have a much larger equity portion with the … profits we’ve accumulated in the past two years,” Pribadi said. “We’re not under time pressure to immediately do the IPO. We can wait.”
