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INDONESIAN COMMERCIAL NEWSLETTER
Novemberr 2011

DEVELOPMENT OF FLAT STEEL INDUSTRY IN INDONESIA

Backgrounds

Currently steel supply in the world market has declined as many producers in various countries cut their production on fear of oversupply amid the market slump as a result of the global economic slowdown in major market such the United States and Europe. According to the World Steel, steel producers in Europe slashed their production by 30%. In Australia the production was cut by 50% and in China by 25%. In India, however, demand for steel remains strong helping push up the price of that material in the world market.

The market prospects are encouraging for steel industry with brisk development of construction, property, infrastructure and automotive industries. In 2011, the country's production of hot rolled coil (HRC) y grew 12.44% to 2,295,000 tons from 2,041,000 tons in the previous year. The production of hot rolled plate increased 3.66% to 849,000 tons from 819,000 tons and the production of Cold Rolled Coil/Sheet grew 5.06% to 872,000 tons from 819,000 tons. 

However, the country's steel industry is balanced between the upstream and downstream sectors. Upstream sector is behind in development that the country remains heavily dependent on imports for upstream products or the basic materials to feed downstream industry. Based on data from Industry Ministry in 2010, the country's production of upstream steel materials totaled only 4.3 million tons falling short of the requirement that reached 6.7 million tons to feed factories in the downstream sector. In the same year, the production capacity of downstream steel industry totaled 24.4 million tons. Currently major consumers of downstream steel products are the automotive, shipbuilding, electronic and construction sectors. Shortage in supplies forced those industries to imports their basic materials.

Meanwhile, the consuming industries such as construction, automotive and electronic industries are growing fast. The property sector including apartment, housing and commercial buildings is also a major consumer of steel materials. Increase in the prices of wooden building materials   resulted in growing demand for steel materials. Demand for the automotive sector has increased from year to year with the leapfrogging increase in car production from 702,000 units in 2010 to 833,000 units in 2011.

Investors still show high interest in steel industry in the country. Foreign investors have built new factories or an acquired local steel factory Investor from Singapore has acquired 3 subsidiaries of Gunung Garuda Group. 

Pohang Steel and Iron Company (Posco) from South Korea cooperates with PT. Krakatau Steel in building a new steel factory to be operational in 2013. ArcelorMittal teaming up with PT Banten Global Development plans to build a new steel factory with capacity of 2.5 million tons per year. The factory is to be operational in 2014. Two Chinese investors a Hangzhou Iron & Steel and Guo Feng Iron Steel also plan to expand operations to Indonesia.

Characteristics of product

HRC/P (hot rolled coil/plate)
Hot rolled coil or plate is produced from steel slab.  HRC could be made thinner by thinning out the slabs through a process in hot strip mill (HSM).

Krakatau Steel (KS) as the main producer of HRC in the country is revitalizing its HSM facility using the technology of SMS Demag from Germany. HSM will produce steel plate with a thickness of 60 mm with a width of 3.5 meters and a capacity of 500,000 tons per year. Currently KS could only produce HRC/plate with a thickness of 20 mm with width of up to 2 meters.

Cold Rolled Coil/Sheet (CRC/S)

Cold Rolled Coil/sheet is produced   in Cold Rolled Mill (CRM) using HRC as the basic material with a thickness of 2mm to 8 mm. HRC is cleaned first through pickling line, and then it is put into CRM, which work in tandem as cold mill or reversing mill to reduce thickness to 0.14 mm. The next process is cleaning in an electrolytic cleaning line and the material is made normal again in the continuous annealing line or batch annealing furnace.

Producers and production capacity   
Slab Industry
PT KS is the only producer of steel slabs in the country. KS produces slabs from two production units SSP-1 which uses the technology of MAN GHH from Germany and SSP-2 which uses the technology of Voest Alpine of Austria.   

HRC/P (Hot Rolled Coil/Plate)
Indonesia has two producers of HR coil PT Krakatau Steel and PT Gunung Raja Paksi and three producers of HR plate PT Krakatau Steel, PT Gunung Raja Paksi, Jayapari Steel and Gunawan Dianjaya Steel in Surabaya.
Krakatau Steel

The KS Group has 10 companies operating in steel industry and related industries from upstream to downstream sectors. The country's largest HRC/plate producer is PT Krakatau Steel with a production capacity of    HRC 1,950,000 tons per year, up from 1,850,000 tons earlier. KS' production capacity for HR plate is 150,000 tons. KS is the country's largest steel maker   especially in HRC and CRC sectors with a 65% share of the HRC market and 33% share in the CRC market.

PT KS is the second largest producer for wire rod having a 32% share of the market of that material in Indonesia.

PT KS has expanded its export market to Australia, Japan, Malaysia, Singapore, Britain and Vietnam. KS also imports part of its iron ore requirement from South America, and Middle East to feed its factories.

HR Plate produced by KS is used mainly for steel structure, shipbuilding industry and for steel pipes which have met the international standards in quality such as the standards of American Petroleum Institute (API) especially for oil and gas pipe, and American Society Testing Material (ASTM), British Standard (BS), British Standard Europe Norm (BSEN) and Japan Industrial Standard (JIS).

In 2011 the steel production of PT. KS rose to 2.4 million tons from 2 million tons in 2010. Its sales in 2011 reached 2.15 million tons, up from 1.91 million tons in 2010. 

KS reported Rp 17.91 trillion in income in 2011 up 19.9% from Rp 14.94 trillion in 2010. The main contributors to the sales were domestic sales that grew 17% to Rp 15.6 trillion with exports accounting for Rp 633 billion or an increase of 67%.

The company recorded a decline of 3.5% in net profit to Rp 1.025 trillion from Rp 1.062 trillion a year earlier. The decline in net profit was attributable to an increase in its cost of goods sold at a higher rate than the increase in its income. The spending on basic materials was 10% of its income in 2011. It  bought  basic materials from a number of suppliers including Samarco Mineracao SA  worth  Rp 1.93 trillion  and  Novexco (Cyprus) Ltd  valued at  Rp 2.77 trillion .

Gunung Garuda Group

PT Gunung Raja Paksi (GRP) of the Gunung Garuda Group was established in 1998 and started production in 2000. It uses second hand machines imported from Sweden. In 2007, GRP raised its production capacity for HR Plate to 450,000 tons per year from 350,000 tons earlier. Its capacity for HRC is 150,000 tons per year. Its production   of HRC is used mainly to feed the steel factories of the group which produces steel for construction projects.
Recently, three subsidiaries of the Gunung Garuda Group which is controlled by the Taniwan and Tanoto families were acquired by three investors from Singapore Metal Asia Group, Austin Investment Group and Orienstar Pte Ltd at a total price of Rp 712.78 billion.

Metal Asia Group wholly acquired the assets of PT Gunung Gahapi Sakti (GCS) in Medan including steel processing factory and non ferrous metal extrusion plant at a total price of Rp 221.75 billion.

Austin Investment Group acquired 100% stake in steel rolling company owned by PT Gunung Gahapi Bahara in Bekasi, West Java at a price of Rp 150 billion 

Meanwhile, Orientstar Pte Ltd acquired a steel processing plant of PT Gunung Rajapaksi in Bekasi, at a price of Rp 341.03 billion.

Two remaining subsidiaries of the Gunung Garuda Group - PT Bukit Terang Paksi Galvanizing, a coating company, and PT Gunung Garuda, a billet and profile steel producer will also to be sold. The group, therefore, will earn a total of around Rp 1 trillion from the asset sales.

Gunung Garuda through its subsidiary PT. Semeru Surya Steel started producing pig iron with a capacity of 120,000 tons per year. The factory is located in Tanah Laut, South Kalimantan built with an investment of Rp 100 billion.

Gunawan Group

The Gunawan Group with its two HR plate factories. PT Gunawan Dianjaya Steel and PT Jaya Pari Steel is the largest HR plate producer in term of production capacity. PT Gunawan Dian Jaya, which has an annual capacity of 450,000 tons, is located on a 15 hectare plot of land in Surabaya using U.S. technology.  The company uses basic material entirely imported. Around 80% of its production is exported to Europe.

PT Jaya Pari Steel (JPS) which is also a sister company of GDS was publicly listed in 1989. The integrated steel factory has an annual capacity of 66,000 tons.

In 2010, JPS produced 66,000 tons of steel plates, to meet growing demand in the country. It needs around 80,000 tons of slabs a year to feed its factory.

JPS uses imported slabs form Ukraine and from China and Brazil.

In 2010, JPS posted an increase in sales to Rp 574.2 billion, up from Rp 435.9 billion in 2009 with net profit rising to Rp 61 billion from Rp 42.7 billion. Increase in sales followed a price hike in the world market and a rise in exports. Most of 90% of its production, however, is disposed of on the domestic market especially to the construction sector.

CRC/S (Cold Rolled Coil/Sheet)

Currently Indonesia has 5 companies producing CRC/S. The five companies are PT Krakatau Steel, PT Essar Dhanajaya, PT Little Giants, PT Baja Berlian Utama, and PT Intan Nasional Steel all with a total capacity of 1.61 million tons a year. CRC mills are located in a number of areas in Banten, West Java, Central Java and North Sumatra.

Krakatau Steel largest producer of CRC

PT Krakatau Steel started producing CRC/S with an annual capacity of 850,000 tons, but the capacity was later reduced to 650,000 tons to suit its machines and production range.

From September 2002 to January 2003, PT Krakatau Steel has revamped its CRC/S mill to reach original capacity of 850,000 tons per annum. In 2007 KS expanded its production capacity further by 100,000 tons, to 950,000 tons per year at present.

PT KS is the largest producer of CRC/S in the country. PT KS has an integrated facility. The state steel maker could provide feedstock for its own CRC mill.  The main basic material for CRC/S is HRC. In fact PT KS is the only producer of HRC in the country. Other producers of CRC/S are either buying HRC from PT KS or importing basic materials from various countries.

In 2011, PT KS boosted its steel production to meet growing demand from automotive industry to which sales are expected to increase 17% in the following two years. The steel it sells to automotive sector is used for automotive components totaling 200,000 tons or 10% of its total sales.

So far CRC for automotive and electronic industries have been partly imported from Japan. CRC imports from Japan account for 30% of its total imports of CRC. The type of CRC for automotive and electronic industry has not been produced locally. Japan, therefore, asked the type of CRC to be excluded from the dumping charge in Indonesia.

PT. KS has so far supplied 90% of CRC needed by PT Bluescope Steel Indonesia which uses it to produce colored zinc alum coated steel. The remaining 10% is supplied by its parent company in Australia.

PT. KS launched initial public offering late 2010 floating 20% of its shares. The company earner Rp 2.59 trillion from the share sales. In 2012, KS will set aside   around US$ 450 million for capital expenditure to be used to build strategic projects including Blast Furnace and modernization of steel making facilities, construction of a power plant and a special port.

Essar Dhananjaya

PT Essar Dhanajaya (ED) was established in 1996 as a joint venture between PT Garama Adipratama and Essar Group from India with an initial capacity of 200,000 MT. This company increased its capacity by 200,000 tons to 400,000 tons by mid 2003. Most of HRC feedstock needed by PT ED is supplied by its parent company in India, Essar Steels Limited, which is a large steel integrated plant in that country.

The Essar group is quite active in doing business in steel industry in the country. The company also has GI sheet factory and currently it is expanding the production capacity of the factory PT Essar Indonesia, wants to build a steel pellet factory in Kalimantan, with a capacity of around 2 million tons per year, with an investment of US$ 500 million.
Other CRC Producers

Other smaller producers of CRC with an installed annual capacity of 100,000 tons include PT Little Giant from the Raja Besi Group and PT Baja Berlian Utama from the Steel industry Garuda Group. The. Production capacity of   Little Giant has declined from 150,000 tons per year to 130,000 tons per year. 

Production

Production of HRC and CRC growing
Based on data from the industry ministry Industry ministry, the country's production of HRC rose 12.4% to 2,295,000 tons in 2011 from 2,041,000 tons in 2010. The country's production of HR Plate (hot rolled plate) increased 3.68% to 848,000 tons in 2011 from 818,000 tons a year earlier.

Increase was also recorded in the production of   CRC/Sheet to 401,000 tons in 2011 from 379,000 tons in 2010. The increase in production was boosted by growing demand on the domestic market.

On the other hand,   the country's production of steel slabs fell to 1.014 million tons in 2011 from 1.084 million tons in 2010.

The country's production of steel still falls short of the domestic requirement, which grows by 10%-12% every year on the average as the upstream sector of the industry could not yet fully utilize its installed production capacity of 8.5 million tons per year (including 1.850 million tons of slabs per year). The problem lies in the availability of iron. The country, which has a deposit of 100,000 tons iron ore, exported 20 million tons of that material in 2011 

Another problem is shortage in energy supplies including power, gas and coal to steel factories. Gas supplies to PT. KS average only 63 million standard cubic feet per day (MMscfd), as against its requirement of 85-90 MMscfd. As a result PT. KS is forced to use expensive oil to keep normal operation with a capacity utilization of 85%.
  
Imports of scrap, which is needed as feedstock, are also facing difficulties as scrap is categorized as poisonous and dangerous waste (B3 waste). There has been non regulation setting a tolerable limit for the impurities of scrap that it is often imports are detained at port.

Supply of basic materials 

The country's steel industry has faced shortage in supplies of basic materials as a result of global crisis. The shortage in supplies has resulted in a price hike of the basic material and the downstream products.

Indonesia already produces slabs but the production is not enough to meet the domestic requirement.  The only producer PT KS produced only 1.014 million tons of slabs in 2011 or 54.76% of its installed capacity. The production fell short of the domestic requirement of 1.8 million tons per year. Imports, therefore, are needed around 700,000 tons per year.

KS has received slab supplies from world's producers like Bluescope Steel Ltd in Australia. KS cooperates with Bluescope to meet its slab requirement and in the marketing of the material in the country. Bluescope supplies 120,000 tons of slabs a year to the country via PT KS. Slabs are processed by KS to turn out intermediate steel products in the form of HRC and CRC.

The HRC and CRC produced by   KS are bought back by PT. Bluescope Steel Indonesia (BSI). CRC supplied by KS accounts for 90% of BSI's requirement with the remaining 10% imported from Australia. BSI is a  producers of  metal coated with  zinc alum, as a basic material for  roofing material  and steel frames , walls  and gas ovens.

HRC and CRC production of PTKS is not enough to meet the domestic requirement. Therefore, industries using HRC or CRC such as steel pipe industry have to rely on imports for part of their requirement. Indonesia has imported HRC from 5 other countries including China, India, Russia, Taiwan and Thailand. In 2011, HRC imports totaled 1,214,000 tons mostly from China.

In a bid to reduce dependence on imports for the semi finished materials such as slabs and billet that reached 2,402,000 tons in 2010 or 43% of the country's total production, PT KS is seeking to expand its production capacity.

Investment 

Steel industry still attracts investors. Currently, there are a number of investors seeking expansion of their capacity in the upstream sector to meet large shortage in domestic supplies of basic materials.

PT. Meratus Jaya Iron & Steel which is a joint venture between PT. KS (64%) and PT. Antam Tbk (34%) produces sponge iron with a capacity of 300,000 tons per year. Its factory in Batulicin, South Kalimantan came on stream in August 2011 built with an investment of Rp 1.5 trillion. Around 65% or Rp 600 billion of the cost was covered with loan from state lender BRI.

The company will build a power plant to guarantee power supply with a capacity of 15 megawatt (MW). The power plant will use gas waste from the steel plant for fuel.

PT. Krakatau Posco which was established in 2010 is a joint venture between PT. KS (30%) and Pohang Steel and Iron Company (Posco) of South Korea (70%) will produce slab, HRC and HR Plate with a total capacity of 6 million tons per year. The new factory is being built in Cilegon, Banten over a 338 hectare plot of land. Its construction is made in two phases. The first phase is contraction of production facility with production capacity of 1.5 million tons of slab, and 1.5 million tons of steel plates per year. The first phase is to be completed in 2014 with an investment of US$ 3 million. The second phase will follow with a capacity of 3 million tons and with the same cost of US$ 3 million. Around 30% of the production from the second phase will be exported to Vietnam to feed a Posco's factory producing downstream products in that country. Completion of the project of PT. Krakatau Posco will raise the country's production capacity for slab from 9.8 million tons per year at present to 11.3 million tons per year

PT KS is implement seven factory expansion and infrastructure projects which will need a total investment of Rp 11 trillion. The factory expansion will increase its steel production capacity from 2.4 million tons per year at present to 5 million tons per year in 2014.

PT. KS plans to build a steel factory with a blast furnace having a capacity of 1.5 million tons per year to cost around US$ 528 million. The factory is to come on line in 2014.  PT. KS has secured a loan from two Chinese banks, Bank of China Limited (ICBC) and China Bohai Bank (CBB). The construction of the blast furnace will be awarded to a Chinese contractor. The factory will use coal for fuel.  Scrap will make up a small part of its basic materials.

PT. KS hopes top increase the production capacity of its hot strip mill to 3.5 million tons from 2.4 million tons at present. PT. KS also plans revitalization of a number of its production facilities to expand the production capacity of its iron making factory to 1.74 million tons per year from 1.5 million tons. The project is to be completed in 2012.

Gunung Garuda Group cooperates with Wuhan Iron and Steel Corp from China to build two steel factories producing specialty steel with a capacity of 1 million tons per year. The first factory is located in Medan, North Sumatra. In the second phase it will build another specialty steel factory with a capacity of 3 million tons per year in Kotabaru, South Kalimantan. Construction of the two factories will cost around US$ 3 billion. The project in Medan will be implemented in two phases. The first phase is to build a facility with a production capacity of   500,000 tons per year to be operational in 2013 to be followed with the second phase with a production capacity of   500,000 tons to be completed in 2014. The factory will use iron ore as the basic material. Its production of specialty steel will be sold to automotive and construction industries.

ArcelorMittal teaming up with PT Banten Global Development, a company owned by the Banten regional administration, will build a steel plant with a capacity of 2.5 million tons per year. The factory is to be built in Banten with an investment of US$ 5 billion. Originally construction was to start in 2011 to be completed in 2013.  However, implementation has been delayed over uncertainty in basic material supplies that are expected from various areas.  The quality of iron ore in Kalimantan is still in the category of iron lump ore, which will need processing facility. Implementation of its port project is postponed as the water in the Banten Bay where the port is to be built is too shallow.

PT Gunawan Dianjaya Steel Tbk (PT. GDS) plans to set aside US$ 12 million to expand its production capacity from 400,000 tons to 540,000 tons per year. Implementation of the plan will be made by phases.   Domestic steel requirement is estimated at 2 million tons a year as against the supplying capacity of the country's industry of 1.2 million tons per year.

PT Indo Japan Steel Center plans to build a specialty flat steel factory with a capacity of 10,000 tons a year. The specialty steel will be supplied to producers of automotive components. The factory will be built over a 4.8 hectare plot of land  in the Industrial Estate of Mitrakarang, Karawang, West Java  with an investment of  Rp100 billion . It is to be operational in 2013.

The company is a joint venture between Nippon Steel,   PT Adyawinsa Dinamika, and PT Dwijaya Sentosa Abadi each with a 30% stake and PT Krakatau Steel holding the remaining 10%.  PT PK has no interest of taking the majority stake in the joint venture as it wants to focus on its projects in the upstream sector.  PT KS also supplies steel in the form of flat steel for the automotive industry. The product of specialty flat steel as feedstock for automotive components is high in demand in the country. A car will need around 700 kilogram of steel. ...

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