Investment in Indonesia: Great Opportunities for Steel Producers
The Indonesian Iron & Steel Industry Association (IISIA) says Indonesia is in big need of investment in the steel industry in order to expand the nation's steel production capacity. In the years ahead, steel demand is expected to rise strongly in Indonesia on the back of construction and infrastructure projects. Without investment, Indonesia will become increasingly dependent on steel imports.
Basso Datu Makahanap, Senior Official at IISIA, says Indonesia requires plenty of investment in the steel industry. Rising domestic steel production capacity would mean Indonesia can limit the amount of steel imports, while it would also generate more employment and more tax revenue for the Indonesian government.
In full-year 2016 Indonesia consumed 12.7 million tons of steel. However, domestic manufacturers could only produce 6.8 million tons, implying nearly half of Indonesia's steel demand needs to come from abroad, particularly China where a chronic steel oversupply led to attractive prices.
Considering Indonesia is focused on infrastructure development, domestic steel demand in Southeast Asia's largest economy is estimated to rise to 21.4 million tons by 2025 This means there exists a very interesting steel market in Indonesia that can be tapped by domestic players. Without new investment in Indonesia's steel industry, foreign exporters will be the ones that benefit from billions of US dollars worth of steel demand. Meanwhile, the steel trade deficit also puts pressure on Indonesia's trade balance and rupiah exchange rate.
The construction sector of Indonesia is the biggest steel consumer. This sector accounts for 78 percent of total steel consumption in Indonesia, followed by transportation (8 percent), oil & gas (7 percent), and machining (4 percent).
Makahanap also urges the Indonesian government to enhance the quality of the investment climate for steel investment, especially the ease of obtaining permits should be made easier as well as an improvement in infrastructure development in order to reduce logistics costs, he added.
I Gusti Putu Suryawirawan, Director General of Metal, Machinery, Transportation Equipment and Electronic Industries at Indonesia's Industry Ministry, says steel demand in Indonesia is expected to rise by an average 8.3 percent (y/y) up to 2021. He added Indonesia is currently the world's fourth-biggest importer of steel.
Forecast Indonesian Steel Demand:
| 2016 | 2017 | 2018 | 2019 |
2020 | 2021 | 2022 | 2023 | 2024 | 2025 | |
| Steel Demand (in million tons) |
12.7 | 13.6 | 14.6 | 15.6 | 16.7 | 17.8 | 19.0 | 20.4 | 21.8 | 23.3 |
Source: Bisnis Indonesia
The government aims to see domestic steel production capacity rise to 12 million tons by 2019, followed by 17 million tons by 2024, and to 25 million tons by 2035. However, this target - set in the National Industry Development Masterplan (in Indonesian: Rencana Induk Pembangunan Nasional, or RIPIN) - will require private investor involvement.
Kim Jhi-yong, President Director of Posco Indonesia Inti, earlier said that his side is committed to to play its part in developing Indonesia's steel industry. Indonesian steel manufacturer Krakatau Posco, a joint venture between Indonesian state-owned steel maker Krakatau Steel and South Korean steel giant Posco, are currently in talks to develop a new plant worth USD $450 million in Cilegon (Banten). Posco Indonesia Inti (PII), Posco's holding company in Indonesia, stated that the plant would mostly cater to significant rising demand from Indonesia's domestic automotive industry.
Indonesia's biggest steel maker Krakatau Steel, which is listed on the Indonesia Stock Exchange, has seen its shares slide 30.52 percent so far this year to IDR 535 a piece. Krakatau Steel has posted net losses every year since 2012. This is caused by the firm's heavy investments in new facilities as well as the overall decline in steel prices in recent years (mainly caused by the chronic oversupply in China). More recently, steel prices have been improving as China cut its national steel production, while the world's second-largest economy is looking in better shape now. An improvement in the Chinese economy should boost construction in the world's biggest steel consumer and producer.
Stock Quote Krakatau Steel - KRAS: