In conducting business activities, our company faced several business risks such as competition, availability of raw materials and financial liquidity that can be controlled by company, and other risks that can not be controlled by company such as natural disasters, foreign exchange rates against Rupiah, government policies such as monetary or non-monetary policies, and global economy condition.
In 2016, risk management for business risks that can be controlled by company still indicate its effectiveness where in 2016 the company did not face any challenges in obtaining raw materials or liquidity challenges, and was able to open new domestic market resulting in the increasing of utilized capacity of paper production, as well as increasing sales quantity of paper products and finance its capital expenditure by using internal cash.
In 2016, there were 84 paper mills and pulp in Indonesia with total installed capacity of paper industry amounted to 12.9 million MT per year, with average utilization level reaching 80.1% per year. Based on this installed capacity, our company only represented 1.7%. However, by relying on the flexibility of our machines and our positioning as niche player, we succeeded in increasing our utilization from 86.5% in 2015 to 91.6% in 2016.
Data shown by APKI stated that Indonesia has 124 million hectares of forests in which approximately 72.1 million hectares are production forests, while approximately 28.9 million hectares are industrial plant forests. Within those forest areas, only 4 – 5 million hectares are used for pulp and paper sectors, therefore providing big room for Indonesian paper industry to grow in the future. Meanwhile, the tropical climate of Indonesia enables harvesting of pulp feedstock crops 3 – 4 times faster than countries with cold climate. Data by APKI also showed that approximately 60% - 70% of total national paper production allocated to fulfill domestic market demands resulting enough paper waste to be reused by paper industry. In 2016, waste paper recovery rate in Indonesia has exceeded 70%. Supported by 3 full operated de-inking pulp machines, our company continuously develop the portion of waste paper consumption in order to increase it constantly and to minimize the risk of raw materials shortage, especially pulp material.
In 2016, the growth of national banking loan slightly decreased by 7.9% from its previous growth of 10.1% in 2015 with credit growth in Rupiah reaching 9.15%, credit growth in foreign currency reaching 0.92%, and non-performing loan ratio reaching 2.9%. Therefore, national banking still has adequate room for improving its loan. The low growth of national banking load, stronger Rupiah currency against USD, and high interest rate may result in the lack of liquidity risk for our company, particularly to cover the funding necessities regarding additional working capital for Paper Machine no. 9. Hence, with supports from referenced bank with 29 years of partnership in performing strict cash flow management, our company is able to self-finance our funding towards our work capital. Furthermore, in 2016 our company was able to fund capital expenditure by using internal cash of approximately USD 1.9 million.
Changes in Foreign Exchange Rate
The risk of USD exchange rate is inevitable, since our company still has obligations in the form of bank loan for working capital and long term debt in USD currency. The loaned working capital is still required due to our company still importing raw materials and supplies by 24% and 32% respectively from its total purchases in 2016. Hence, the fluctuation of Rupiah against USD will create relatively high business risk for our company. In order to minimize this risk, we consistently implement commercial hedging strategy to obtain export sales in USD that are equal with our annual import requirement, and also by reducing portion of import purchase and substitute it with local content.