Indonesia’s manufacturers hit hard by Middle East energy shock, domestic gas crunch

[JAKARTA] Indonesia’s manufacturers are being doubly squeezed as Middle East tensions drive up energy costs and a prolonged domestic gas crunch curbs supply. This is forcing many factories to scale back output.

Against that backdrop, many businesses are urging the government to curb exports and prioritise supply to fulfil local demand.

Industry players warn that the dual shock is compressing margins, disrupting production and eroding competitiveness at a time when manufacturers are already struggling to secure reliable gas supplies.

Edy Suyanto, chairman of the Indonesian Ceramic Industry Association, said the industry is now facing a “gas crisis”.

Ceramic factories were running at only 70 per cent capacity in the first quarter, below the industry’s 80 per cent target and slightly lower than last year’s 73 per cent average.

“We (are upset by) the ongoing gas supply disruptions and urge the government to take immediate action by implementing a domestic market obligation for natural gas and reducing export allocations,” Suyanto said.

Domestic supply crunch

The ongoing conflict in the Middle East has made imported energy an expensive alternative for industries in South-east Asia’s largest economy – a net fuel importer.

At the same time, domestic gas production has been disrupted since August 2025, intensifying the supply crunch.

The shortfall was largely driven by gas supply disruptions from state-owned distributor Perusahaan Gas Negara. This was triggered by unplanned upstream outages, including maintenance issues, that hit key manufacturing hubs in West Java and East Java.

The situation has prompted the government to significantly cut allocations under its industrial gas pricing scheme. Gas supply allocations under the subsidised scheme to several industrially dense regions have fallen by as much as 30 per cent.

Ceramic manufacturers are among seven manufacturing sub-sectors currently benefiting from subsidised gas prices, alongside fertiliser, petrochemicals, oleochemicals, steel, glassware and rubber gloves.

A gas supply crunch brought ceramic manufacturers in East Java to a standstill for a week in January, with tightening supply also sending gas prices sharply higher.

The squeeze has since rippled through cost structures, with energy now accounting for up to 35 per cent of total production costs, up from 25 per cent four years ago.

“The pressure has been compounded by the rupiah’s depreciation against the US dollar, as gas payments are denominated in dollars,” Suyanto said, noting that currency weakness has added another layer of strain for producers.

Dual hit

The ceramic industry is facing a high-stakes moment, with mounting pressures threatening both costs and output.

Beyond rising costs and supply disruptions, manufacturers are also facing intensifying competition from imports, a trend that could worsen amid the Middle East conflict.

The association warned that exporters from China and India may redirect shipments to Indonesia as their traditional markets in the Middle East are disrupted by the war.

This could further pressure local producers, who are already contending with higher production costs and, in some cases, what the association describes as unfair trade practices.

Rising raw material costs

The prolonged conflict in the Middle East is expected to weigh on Indonesia, a significant importer of petrochemical products.

Despite being an oil producer, its domestic production cannot meet high demand, with more than 55 per cent of key polymers imported to meet requirements.

Indonesia’s plastics industry, which is highly dependent on crude oil and petrochemical products, is beginning to feel the strain of supply disruptions and rising costs.

Fajar Budiono, secretary-general of the Indonesia Olefin, Aromatic and Plastic Industry Association, noted that downstream petrochemical plants are currently operating at around 70 per cent utilisation.

He said output has held relatively steady as manufacturers met seasonal demand in the lead-up to Ramadan and the Eid holiday. However, he warned that more pronounced disruptions could emerge in the second week after the holiday break as supply constraints begin to take hold.

Indonesia remains heavily reliant on imported plastic raw materials. For key products such as polypropylene and polyethylene, imports account for more than half of total demand, with over 50 per cent sourced from the Middle East.

Production disruptions and force majeure conditions at petrochemical plants in the region have had an immediate impact on global supply chains.

The tightening supply has driven a sharp increase in plastic raw material prices. Polymer prices have surged from around US$1,100 to US$1,700 per tonne in the past week.

Tight spot

Yusri Usman, executive director of the Center of Energy and Resources Indonesia, said that Indonesia, one of South-east Asia’s major gas suppliers, is facing a complex challenge as domestic supply constraints intersect with existing export commitments.

Any adjustments in gas allocation could affect investor confidence and future production planning, requiring policymakers to carefully balance domestic demand with international contractual obligations.

In 2025, Indonesia’s total gas production hit 5,600 billion British thermal units per day, with nearly 70 per cent consumed domestically and the remainder exported.

With no major new pipeline gas supply expected until at least 2028, the country has increasingly turned to liquefied natural gas (LNG) to fill the gap, a costly solution as prices soar amid rising tensions in the Middle East.

Yusri added: “While ensuring domestic supply remains a priority, Indonesia is bound by long-term LNG export contracts that carry legal and financial implications if modified or cancelled.”