Deficit in Indonesia's Steel Industry Puts Pressure on Trade Balance
Indonesia imports between 6.5 - 7.5 million tons of steel each year to meet domestic demand. Given that Indonesia's steel exports are insignificant it therefore implies that steel is one of the components that puts heavy pressure on the country's trade balance. The steel deficit of Indonesia is estimated to reach USD $7 billion this year. Indonesia requires some 12.5 million tons of steel per year for its construction projects. However, the domestic steel industry can only supply about 6 million tons of steel.
I Gusti Putu Suryawirawan, Director General of Metal, Machinery, Transportation Equipment and Electronic Industries at Indonesia's Industry Ministry, says if Indonesia remains dependent on imports of steel then Indonesia's steel industry cannot raise its contribution toward overall GDP growth. In fact, given Indonesia's robust economic growth, domestic steel demand will only rise and therefore imports of steel need to rise accordingly. He uttered these words at the groundbreaking ceremony for the construction of state-controlled Krakatau Steel's new hot strip mill in Banten. This factory, worth USD $460 million, will have an annual production capacity of 1.5 million tons.
Krakatau Steel finances the construction of this hot strip mill by using funds from its initial public offering (IPO) in 2010 as well as new bank loans. After completion Krakatau Steel's total production capacity of steel strips will rise from 2.4 million tons to 3.9 million tons (per year).
Suryawirawan further stated that Indonesia cannot simply block steel imports from China, the world's largest steel producer, through protectionist measures (and anti-dumping measures). Instead, the country will need to focus on expanding its domestic steel production capacity. Currently, Indonesia's per capita steel consumption is still relatively low at 40 kilogram per year. However, by 2020 this figure is targeted to have risen to 70 kilogram on the back of government-led infrastructure development. This means that Indonesia really needs to upgrade its steel industry in order to avoid rising reliance on imports of steel.
So far in 2016, global steel prices have rebounded on expectations that China will curb domestic steel production capacity. According to data from ME Steel, the global steel price touched its highest level in July 2008 at USD $1,130 per ton. However, it touched its lowest level in December 2015 at USD $265 per ton caused by the chronic steel oversupply in China.