CILEGON, Indonesia -- Korean-Japanese conglomerate Lotte Group will invest at least $3.5 billion in what is to be Indonesia's largest petrochemical plant.
For the Korean-Japanese conglomerate, the investment offers a chance to divest from China, a market in which Lotte has struggled since the U.S. deployed a missile defense system in South Korea in 2017. The system angered Beijing because its radar can peer into Chinese airspace.
Lotte's move is also a boost for Indonesia, which is keen to nurture downstream industries that can help the country curb imports and decrease the current-account deficit.
Subsidiary Lotte Chemical Indonesia on Friday held a groundbreaking ceremony for the ethylene cracker and petrochemical complex in Cilegon, Banten Province. The cracker has a production capacity of 1 million tons per year. This will be Indonesia's second ethylene cracker; the other is operated by Chandra Asri Petrochemical, a state-owned enterprise.
Lotte currently produces polyethylene at an existing plant in the country but imports the necessary ethylene. The new complex, slated for completion in 2023, will allow Lotte to produce all the ethylene it needs in Indonesia. Lotte did not rule out exporting some of the ethylene to neighboring countries but plans to use most of the chemical itself or sell it domestically.
Lotte will also start producing polypropylene, used in the automotive, textile and other industries.
"Indonesia's economy is growing at a steady pace," Lotte Group Chairman Shin Dong-bin said. "And the demand [for ethylene] is high."
Shin, who also goes by the Japanese name Akio Shigemitsu, added that rising ethylene prices have sometimes forced the existing plant to run below its maximum capacity. "That led us to think that we needed to supply ethylene ourselves," Shin said.
Indonesia's demand for petrochemical products is set to outpace global demand, according to Chandra Asri. Global demand for polyethylene is forecast to rise at a compound annual growth rate of 3.4% from 2017 through 2023, while Indonesia's demand will rise 4.4%. For polypropylene, global demand will rise 3.6%, while the Indonesia figure is 4.7%.
Lotte's board in October decided to invest 50 trillion won ($44.63 billion) in the five years to 2023, with 20 trillion won earmarked for chemicals and construction. The Indonesia investment is part of this plan, Shin said. The Lotte Group is believed to be prioritizing investments in Southeast Asia due to the fate it suffered in China.
Lotte's investment is a welcome sign for Indonesia as well. President Joko Widodo has said the country's dependence on imported products is contributing to Indonesia's current-account deficit, which widened to 2.9% of gross domestic product in September, nearing what the central bank sees as the safe limit of 3%.
The persistent deficit has sent the Indonesian rupiah falling against the U.S. dollar this year. At one point it was down 11% against the greenback and at a 20-year low.
The president told company CEOs gathered at an event on Monday: "There is no other way but going downstream. I'm calling on all the CEOs and the real sector to immediately engage in industrialization and go downstream. Stop exporting raw materials, reduce [such exports] significantly."
Lotte's Shin said Indonesia currently imports over 50% of its petrochemical products. "Through this project, there will be an import substitution effect of $2.1 billion, and exports will amount to $400 million," he said. The South Korean company has applied for a tax holiday scheme, which is set to be granted in the near future.
Chemicals make up one of the 10 manufacturing sectors that Jakarta has earmarked for its industry upgrade program, Indonesia 4.0. The government wants to use the program -- a mix of policies meant to encourage the adoption of artificial intelligence, the internet of things and other advanced technologies -- to become one of the world's 10 largest economies by 2030.