Excess capacity in the cement, steel, and nickel industries demonstrates that large scale does not automatically equate to lower costs. The theory of returns to scale explains why.
JAKARTA, JurnalPost.com — For decades, the recipe for industrial growth sounded simple: produce more, lower the cost per unit, and increase profits. However, that recipe is now being tested by reality.
In many sectors, factories stand with massive capacity, but their machines are not running at full tilt because demand is insufficient. In such conditions, increasing production volume does not always succeed in protecting profit margins.
Capacity Outpacing Demand
The national cement industry is one of the clearest examples.
The industry's installed capacity is in the range of 120–124 million tons per year, but the factory utilization rate is only around 51–56 percent, far below the ideal range of 80–85 percent according to ASPERSSI data as of July 2026.
Cement demand in 2025 was reported to have fallen by approximately 2–2.5 percent, while growth in 2026 is projected to be only in the 1–2 percent range.
A similar pattern is occurring globally.
The OECD in its Steel Outlook 2026 noted that global steel production capacity reached a record of approximately 2,445 million tons in 2025, while demand declined for the fourth consecutive year.
Global steel overcapacity is estimated to reach approximately 640 million tons and has the potential to increase to 745 million tons by 2028.
In the nickel sector, Bisnis.com reported in June 2026 that about half of the domestic smelter capacity was not operating due to limited ore supply.
When Volume Strategy Backfires
In a situation of overcapacity, a volume over price strategy that pursues market share by increasing production even as selling prices are suppressed can become counterproductive.
Additional production does not automatically improve a company's relative cost position. On the contrary, larger production volumes potentially increase the amount of goods that must be absorbed by an already saturated market.
As a result, pressure on prices intensifies and profit margins grow thinner.
Bain & Company notes that overcapacity is often structural, triggered in part by excessive optimism regarding market growth that fails to materialize.
The firm also notes that while many companies target profit growth up to four times the rate of market growth, only about 7 percent of industrial companies are able to achieve it.
Furthermore, operational efficiency programs carried out systematically without investment in modernization generally only manage to reduce costs per ton by about 7–10 percent.
China provides another example through price wars in the electric vehicle, battery, and solar panel sectors.
Prices for some solar products even fell below cash costs in the first half of 2025.
According to MERICS in September 2026, the implementation of price floors in anti-involution campaigns has begun to increase profits in a number of markets to nearly 10 percent.
This condition shows that margin recovery does not always come from increasing volume, but can also stem from price discipline.
Reading the Phenomenon Through Returns to Scale Theory
To understand why increasing production volume does not always result in efficiency, the phenomenon can be analyzed using the theory of returns to scale .
Returns to scale explain the relationship between changes in the amount of input and changes in output in the long run.
In general, there are three main conditions:
Increasing returns to scale(increasing returns to scale): output increases more than the increase in input. This condition is the theoretical basis for economies of scale, when the long-run average cost ( LRAC
) decreases.Constant returns to scale(constant returns to scale
): output increases in proportion to the addition of input, so the LRAC tends to be stable.Decreasing returns to scale(decreasing returns to scale ): output increases less than the increase in input. If input prices remain constant, the LRAC increases anddiseconomies of scale
may emerge.
The transition from increasing returns to scale to decreasing returns to scale is generally influenced by internal company factors.
The division of labor, which initially increases efficiency, can turn into a source of saturation and demotivation when specialization is carried out excessively.
Larger companies also face increasingly complex communication structures, slower decision-making, and more difficult managerial control. This phenomenon is often referred to asdiminishing returns to management
.
Unabsorbed Fixed Costs
The problem becomes more severe when decreasing returns to scale occur simultaneously with low capacity utilization.
Fixed costs such as machinery, buildings, maintenance, and energy must be borne even if the factory is not producing at optimal capacity.
When production volume is too low, these fixed costs must be charged to a smaller number of products, causing the cost per unit to rise.
The effect is twofold: high fixed costs per unit, while technical inefficiency also potentially increases.
Cement industry data illustrates this condition.
Cement sales in the first semester of 2026 were reported to have grown by double digits, but the industry utilization rate is still estimated to be only around 56 percent. This condition means that pressure on unit costs has not yet fully subsided. Indocement, for example, stopped using its captive
gas turbines due to rising gas prices and switched to using the PLN grid. The company is also developing solar power plants with a capacity of approximately 72 MWp.
The company stated that industry utilization, which is only in the 50–60 percent range, makes cost efficiency increasingly important.
Signs of recovery in the manufacturing sector are indeed beginning to appear.
The S&P Global Indonesia Manufacturing PMI rose to 52.4 in September 2026 from 49.8 in August. New orders and exports were also reported to have increased.
However, the rise in demand does not automatically improve profitability if factory utilization rates remain low.
Priority Evaluation Steps
In facing conditions of overcapacity, companies need to conduct a more thorough evaluation.
Some steps that can be considered include: Measuring capacity utilization against design capacity, effective capacity, and minimum efficient scale
(MES). Mapping the relative cost structure
in detail compared to competitors, down to the factory and product level. Maintaining price discipline
by reducing discounts that lack an economic basis and providing incentives to sales staff who are able to maintain prices. Focusing on profit pools
by allocating volume to customers and products that provide the best margins and reducing unprofitable products. Optimizing assets and human competence
so that growth in scale does not exceed the company's coordination capabilities.
A number of companies have begun taking steps to improve utilization rates.
PT Solusi Bangun Indonesia, according to JawaPos in May 2026, reported a 111 percent increase in profit, which was driven in part by efficiency. The company is also preparing to ship cement to international markets to increase production capacity utilization.
In terms of policy, the government has closed applications for the construction of new cement plants through the OSS system, except in Papua, West Papua, Maluku, and North Maluku. The government has also agreed to a moratorium on new permits for nickel smelters based on Rotary Kiln Electric Furnace
(RKEF) since 2024.
Nevertheless, the Indonesian Nickel Industry Forum (FINI) warned that overly strict restrictions on ore supply could actually cause smelters to run out of raw materials.
Lessons from Nickel Downstreaming
The nickel industry shows how the benefits of scale at one stage of production can diminish or even disappear at the next stage. Integrated industrial estates that combine smelters,captive
power plants, and deep-sea ports are often associated with the creation of scale efficiency.
According to Rikopedia Research analysis in September 2026, Indonesia's share of global refined nickel production increased from about 1 percent in 2014 to about 41 percent in 2023.
However, these figures come from independent analyst sources and should be read with caution.
Rapid production expansion subsequently turned into an oversupply since 2022. According to APNI, this condition is expected to continue until 2029–2030.
This situation has also encouraged the tightening of ore quotas through the 2026 Work Plan and Budget (RKAB).
Bisnis.com reported that about 50 percent of smelter capacity is not operating, while APNI mentioned that three smelters are rumored to have collapsed.
Rising sulfur prices due to conflict in the Middle East also add pressure to industrial input costs.
Why Volume Does Not Guarantee Efficiency
Returns to scale and economies of scale are two related, but not identical, concepts.
Returns to scale discuss the physical relationship between changes in input and output, while economies of scale describe the relationship between production levels and average costs.
Both can move in the same direction if input prices remain constant. However, in practice, input prices can also change following the scale of production.
Large companies, for example, can obtain discounts for purchasing raw materials in large quantities. Conversely, increased demand for labor can drive up wages.
Therefore, there are at least four reasons why large production volumes do not always result in lower costs. First, companies can exceed minimum efficient scale and enter the territory ofdiseconomies of scale
.
Second, input prices can change following volume increases.
Third, coordination and communication become increasingly complicated as the organization grows.
Fourth, low utilization rates mean fixed costs cannot be absorbed optimally.
Big Is Not Necessarily Efficient
The common thread in these various cases is that economies of scale are not an automatic result of large production volumes.
Efficiency depends on a healthy relationship between input and output, adequate capacity utilization, cost control, and the company's ability to coordinate production processes.
For industry players, the relevant question is not just how much goods can be produced.
The more important question is how much product can actually be absorbed by the market with healthy margins. In conditions of overcapacity, volume growth without considering demand, costs, and profitability can actually increase pressure on the company.
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