The competitiveness of Indonesia's steel industry remains weak. One of the main issues being the high gas price in Indonesia. High input costs make it difficult for the domestic steel industry to expand as investors prefer to import steel from abroad (mainly from China) for their infrastructure projects in Indonesia. Southeast Asia's largest economy needs about 12.5 million tons of steel per year. However, Indonesia's steel industry can only supply about 30 percent of this demand, the remainder being imported.
I Gusti Putu Suryawirawan, Director General of Metal, Machinery, Transportation Equipment & Electronic Industries at the Industry Ministry of Indonesia, says it is important for the steel industry to raise its contribution toward the overall economy and reduce reliance on steel imports. Given that the Indonesian government is eager to push for infrastructure development (evidenced by the government's continuously rising infrastructure budget) steel demand is set to rise accordingly and therefore domestic steel manufacturers need to produce enough, good-quality and affordable steel to meet demand. If not, then Indonesia will become increasingly dependent on steel imports hence putting more pressure on the trade balance.
Suryawirawan says Indonesia needs a strategy to expand the domestic production capacity of steel. One important matter is to lower the price of gas (again). Gas is a key energy source that is needed in the steel manufacturing process. Gas prices are estimated to account for 70 percent of production costs in Indonesia's steel manufacturing industry. However, gas prices in Indonesia remain high, despite the country being a big gas producer and despite the government recently having lowered gas prices for industrial use.
For steel manufacturing, producers pay an average of between USD $9 - 13 per mmbtu (million metric British thermal units). This is in sharp contrast to neighboring countries Singapore (where the gas price is around USD $3 per mmbtu), Thailand (USD $3 per mmbtu), Australia (USD $4 per mmbtu), Malaysia (USD $4 per mmbtu), or India (USD $5 per mmbtu). Therefore, stakeholders have requested the Ministry of Energy and Mineral Resources - that is in charge of gas prices - to lower domestic gas prices for industrial use to USD $4 per mmbtu as this is considered a competitive price.
However, the Energy Ministry will first study whether this further price cut is possible. In line with the central government's third economic policy package (released on 7 October 2015) the Energy Ministry issued a new regulation that lowers gas prices (for specific industries) "by a maximum of USD $2 per 1 mmbtu if gas prices are higher than USD $6 per mmbtu". This incentive is only available to the fertilizer, petrochemical, stainless steel, ceramic, glass, oleo-chemical and glove industries.
A recent study conducted by the Institute for Economic and Social Research (LPEM FEUI), which is part of the University of Indonesia (UI), claims that lowering the gas price to USD $3.8 per mmbtu would result in IDR 48.92 trillion (approx. USD $3.7 billion) in missed income in the oil & gas sector, but will boost overall tax revenue by IDR 77.85 trillion (approx. USD $5.9 billion) due to improved industry productivity.
Top Gas Consuming Industries in Indonesia:
| Gas Price
|Fertilizer||5||6.28 - 7.25||70%||791|
|Petrochemicals||24||8.93 - 16.7||70%||468|
|Pulp & Paper||8||9.15 - 11.0||20%||302|
|Steel||10||9.00 - 13.0||70%||229|
|Ceramics||33||6.40 - 9.20||23%||134|
|Glass||21||6.43 - 10.9||23%||110|
|Food & Beverage||100||7.56 - 13.0||18%||63|
|Tires & Rubber Gloves||24||7.56 - 14.0||9%||58|
|oleo-Chemicals||7||6.70 - 13.5||20%||39|
|Textile & Footwear||98||12.0 - 16.0||8%||36|
Source: Bisnis Indonesia