Demand for steel in Indonesia is expected to rise in 2016 on enhanced infrastructure development. However, the majority of steel - approximately 60 percent of total demand in Indonesia - is still being imported from abroad (primarily China). Gusti Putu Suryawirawan, Director for Base Metal Industries at Indonesia's Industry Ministry, said the government is eager to support the domestic steel manufacturing industry in order to avert further domination of foreign manufactured steel on the Indonesian market.
Indonesia's steel demand is rising, particularly now government-led infrastructure development seems to have kicked off since mid-2015. However, the domestic steel supply remains low according to Suryawirawan. Late last year, Hidayat Triseputro, Executive Director of the Indonesian Iron and Steel Industry Association (IISIA), said it helps if the government would order the mandatory use of domestically-produced steel in these infrastructure projects. In that case utilization of Indonesia's steel capacity could reach up to between 80 and 100 percent in 2016, up from 50 percent in 2015. a 50 percent utilization rate of Indonesia's steel production capacity implies that it is not only a matter of having too low steel production capacity to meet domestic steel demand but that other factors are at play that cause the limited utilization of Indonesia's steel production capacity.
The chronic oversupply of steel in China, which put severe downward pressure on the global steel price last year, made it cheaper to import steel than to purchase steel from Indonesia's steel manufacturers. Moreover, foreign-made steel is regarded higher quality. In 2015 the global steel price plunged 37 percent to USD $325 per ton, a decade low. Due to China's economic slowdown, the country's steel production failed to be absorbed by domestic demand (China is the world's largest steel market and steel manufacturer with an estimated installed annual production capacity of 874 million tons). This year, however, the steel price has climbed 8 percent to USD $305 per ton in the first month on the back of China's plan to cut back on steel production. China's plan to reduce steel output is the key reason why US-based Morgan Stanley expects the steel price to rebound further this year.
Meanwhile, Indonesia is eager to boost domestic steel production capacity. One of the projects that will enhance Indonesia's domestic steel production capacity is the integrated Krakatau Posco steel plant in Cilegon (West Java). This mega-project, involving a joint venture between Indonesian steel maker Krakatau Steel (30 percent stake) and South Korean Posco (70 percent stake), is built in two phases. The first phase, which was completed in December 2013, involved the construction of a steel plant with a production capacity of three million tons per year. The second phase, which is scheduled to be completed by 2018, will add another three million tons to its steel production capacity. After the second phase has come online, Indonesia could manage to account for at least 70 percent of its steel consumption.
Earlier this month, FE Steel Galvanizing Indonesia (fully owned by the local unit of Japan-based JFE Steel Corporation) started production at its steel plant in Bekasi (West Java). This plant has an annual production capacity of 400,000 galvanized steel sheets.