Currently, the price of hot rolled coil (HRC) reached USD $600 per ton, whereas over the past two years the global HRC price had peaked around USD $500 per ton. Purwono Widodo said the steel price is now at "scary levels" and could disrupt progress of infrastructure development projects.

Purwono explained that for the construction of a project - whether financed by the state budget, the regional state budget, or private companies - the budget is always prepared in the previous year while taking into account (assumptions of) the steel price. Now, with the rising trend of the steel price, it can delay the tender process for construction projects because there is uncertainty about the steel price.

Normally, during the preparation of the tender a reference steel price is used within a 20 percent margin (namely the reference price plus and minus 10 percent). However, if the actual steel price rises more than 10 percent above the reference rate used in the preparation of the tender, then the tender needs to be delayed and requires recalculation.

Widodo, who also serves as Marketing Director of Krakatau Steel (Indonesia's largest steel manufacturer), said the increase in global steel prices cannot be separated from China's policies as the world's biggest steel producer's decision to cut its steel production capacity has been a key factor.

The cut in China's steel production capacity is due to government policies aimed at curtailing output at those production facilities that are not environmentally friendly. Moreover, this move comes at a time when domestic steel demand is on the rise in the world's second-largest economy. The Chinese government promised to cut 150 million tons from its total production capacity.

With the Chinese policy in mind, Widodo predicts that Indonesia could see a 50 percent decline in steel imports during the second half of 2017, despite the assumption that Indonesia's domestic upstream steel producers can only produce about 8 million tons this year, while total domestic steel demand is estimated to reach 13 million tons in 2017.

Widodo added that Indonesia's downstream steel manufacturers currently show rising appetite for upstream products. They mainly order at Krakatau Steel and Gunung Garuda. At Krakatau Steel, order books are full up to October 2017.

Meanwhile, Krakatau Steel benefits from the gradually increasing steel prices. Krakatau Steel President Director Mas Wigrantoro Roes Setiyadi said the company's performance improved in H1-2017 reflected by a net loss of USD $56.7 million (improving from a net loss of USD $87.6 million in the same half one year earlier). This improvement is expected to continue in the remainder of 2017.

Krakatau Steel's HRC price stood at USD $520 per ton in January 2017 but reached USD $629 per ton by the end of June 2017. Despite the decrease of steel sales volume to 841.101 tons due to overhaul and the Idul Fitri holiday, the company still managed to record operating profit of USD $4.5 million in H1-2017.

In terms of market share, Krakatau Steel controls 44 percent of the domestic hot rolled coil steel products market and 28 percent of the domestic cold rolled coil steel products market. Meanwhile, hot rolled coil products dominate total sales of the company (by 46.61 percent), followed by cold rolled coil steel (31.28 percent). However, so far this year shares of Krakatau Steel have slid 27.92 percent to IDR 555 a piece.

Stock Quote Krakatau Steel - KRAS: