Headline / October 2019

Closing the Gap

By Albert W. Nonto

Despite lower consumption this year, mainly due to the simultaneous presidential and legislative elections, the company plans to increase its production capacity over the next five to 10 years to maintain its position as the nation’s most integrated steel maker.

There are many reasons for the group’s optimism that this plan will become reality. Data from the South East Iron and Steel Institute shows that Indonesia’s steel consumption remains among the lowest in the Association of Southeast Asian Nations (Asean) region, at an average of about 57 kilograms per capita per year, while this figure is about 300 kilograms for Malaysia and 400 kilograms for Singapore. In comparison, South Korea consumes about 1,000 kilograms of steel per capita per year.

But with several state infrastructure projects underway, Alouisius Maseimilian, president director of Gunung Raja Paksi, expects this to increase to between 80 kilograms and 90 kilograms per capita over the next three years.

Hilmi Karim, president director of state-owned PT Krakatau Steel, Indonesia’s largest steel maker, confirmed the data. He said it showed that Indonesia’s steel industry had yet to develop, due to structural problems, and that the country’s infrastructure was also very poor compared with its Asean neighbors. He expressed confidence that the situation would change over the next five to 10 years, as strong demand in the construction, property, and oil and gas industries shows a positive trend. He said a housing backlog of more than 10 million units further presents a major opportunity for the industry.

The Indonesian Iron and Steel Industry Association believes the massive infrastructure projects currently underway will boost consumption of the metal. Hilmi said Indonesia’s steel consumption increased 11 percent year-on-year to about 15 million metric tons in 2018 and that this was expected to rise to 21 million tons by 2024 (see table).

However, there remains a large gap between demand and national production. In 2017, Indonesia only produced 7 million tons, which increased to about 10 million tons last year. The gap between supply and demand is filled with imported products, which makes Indonesia one of the world’s biggest net steel importers, along with the United States, Vietnam and Thailand.

Alouisius sees plenty of room for growth, evidenced by increasing demand for steel, in line with Indonesia’s gross domestic product growth. And the government’s massive infrastructure development push may just help to turn Gunung Raja Paksi’s optimism into reality.

Over the next few years, Indonesia aims to construct 5,500 kilometers of railways, 3,600 km of roads – 1,000 km of it toll roads – 49 dams, 24 seaports, and powerplants with a combined capacity of 35,000 megawatts. The country’s infrastructure budget for 2014 amounted to Rp 154.7 trillion ($11 billion) and increased 165 percent to Rp 410.7 trillion by 2018.

Local steel producers still have huge opportunities for expansion, especially to close the gap between supply and demand, as nearly 50 percent of the national steel supply is imported.

Development Plan

The company has bold plans to become a significant player in the industry through greater use of its blast furnace to boost production to about 3.2 million tons over the next three years from 2.8 million tons currently. “This will increase Gunung Raja Paksi’s overall production capacity,” Alouisius said. In the meantime, the company plans to buy an iron ore mine in Sumatra to strengthen its supply chain, as it currently still relies on imported raw material.

He said Gunung Raja Paksi can realize these plans, as it is the only company with a complete product line, from slabs and billets to sheet steel and steel bars and their derivatives.

The company’s long history in the industry has seen it serving various sectors, such as construction, oil and gas, shipping and machinery, boiler, pipe, gas tube, light steel and tower manufacturing. However, 70 percent of its products are used in construction, followed by the oil and gas sector.

The company also offers other products, such as plate cut to size, plate-forming services in accordance with customer demand, product welding services, and prefabrication. Additional services include normalizing furnace facilities to produce steel plate.

“Backed by a strong organizational structure, experienced professionals and a solid management team, the company believes it will become a leading integrated steel producer, from upstream to downstream,” Alouisius said. He also noted the company’s significant reputation in exports.

To raise its operational standard, the company is in a serious discussion with a world-class steel producer to increase efficiencies and open itself to strategic investment. However, Alouisius declined to name the company, due to ethical considerations.

Gunung Raja Paksi sold 10 percent of its shares to the public in early September, raising about Rp 1.1 trillion, which will mainly go toward settling debt related to the acquisition of PT Gunung Garuda, which helped the group become an integrated steel producer.

Gunung Raja Paksi now produces hot-rolled plate, coil H-beam, IWF and angled steel, as well as a downstream lineup of about 30 products.

Alouisius said the company would also increase its slag production in collaboration with established cement producers, which will absorb the product. Another subsidiary, Gunung Steel Construction, specializes in engineering, procurement and construction services, which help it create more business opportunities and boost revenue.

But investors still take a wait-and-see position on Gunung Raja Paksi’s shares. Some institutional investors who spoke to GlobeAsia during the recent public exposé of the company’s public offering had not yet decided whether to add the stock to their portfolios. To them, the company’s financial performance had not been strong enough to warrant such a decision, as its net profit had shown a declining trend over the past two years. Gunung Raja Paksi booked net profit of $28 million in 2017, which dropped to $19 million in 2018. “Many factors led to the decline in the company’s net profit last year, but lower steel and iron prices were among the biggest contributors,” Alouisius says.

He concedes that the industry faces challenges. Krakatau Steel’s Rp 30 trillion loss last year impacted investor confidence in the industry. Despite good growth prospects, structural problems are also expected to negatively impact companies’ performance.

Chandra Purnama, head of financial advisory at PT Kresna Sekuritas, sees rising Chinese steel output as the biggest challenge to increasing domestic production in Indonesia. “We are of the view that the two main reasons behind the problem are the ongoing trade war between the United States and China, and weak regulations and supervision by the Indonesian government, which result in illegal iron and steel imports flooding the country,” he said.

The United States has slapped an additional tariff of 25 percent on imported Chinese steel, which prompted suppliers to start looking at potential new markets. Chandra said Indonesia’s lower production capacity, current robust demand and geographical proximity to China make it a potential market for them.

“In terms of regulations, feeble government supervision has led Chinese steel producers to resort to new tricks, one of which is to manipulate the harmonized system shifting from carbon steel to alloy steel containing about 0.0008 percent boron. This is normally used in automotive production. The result is that Chinese suppliers enjoy zero percent import duties, compared with the normal 10 percent to 20 percent,” Chandra said.