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.

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Indonesia imports between 6.5 - 7.5 million tons of steel each year to meet domestic demand. Given that Indonesia's steel exports are insignificant it therefore implies that steel is one of the components that puts heavy pressure on the country's trade balance. The steel deficit of Indonesia is estimated to reach USD $7 billion this year. Indonesia requires some 12.5 million tons of steel per year for its construction projects. However, the domestic steel industry can only supply about 6 million tons of steel.

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After a three-year slowdown, the steel industry of Indonesia is showing some positive developments supported by government-led infrastructure projects in Indonesia and the rising global steel price. The price for (benchmark) hot rolled coil has surged 47 percent since the start of 2016 to USD $485 per ton (May 2016 delivery). In late 2015 the price of hot rolled coil was as low as USD $265 per ton. Moreover, the mandatory usage of locally-manufactured steel for the infrastructure projects will have a positive impact on Indonesia's steel industry.

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Indonesia's steel and iron producers urge the government to limit imports of steel into Indonesia as these imports are a burden on the domestic steel industry. Data from the Indonesian Iron and Steel Industry Association (IISIA) show that steel imports from China - the world's largest steel producer - into Indonesia jumped 94 percent year-on-year (y/y) to 3 million tons in 2015. This surge is particularly caused by foreign contractors working on infrastructure projects in Indonesia.

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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.

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The overall capacity utilization of Indonesia's steel industry could grow to 80 percent from 50 percent currently. However, it will require government support. Hidayat Triseputro, Executive Director of the Indonesian Iron and Steel Industry Association (IISIA), is optimistic this target can be achieved as the government's push for infrastructure development is showing positive signs (in the second half of 2015 there have been more groundbreaking ceremonies for large government-led infrastructure projects across the country).

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The government of Indonesia plans to introduce a 15 percent anti-dumping duty on steel to prevent massive steel imports thus supporting Indonesia’s domestic steel industry. Indonesia is not the first country to introduce anti-dumping import duties on steel products. China imposed anti-dumping duties on certain stainless steel tubes from Japan and the European Union (thereby increasing the global steel oversupply), while Malaysia imposed anti-dumping duties on hot rolled coils imported from China and Indonesia.

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Irvan Kamal Hakim, Director at Krakatau Steel (Indonesia’s largest steel manufacturer), said that the domestic steel industry is still affected by prolonged concerns about excess steel supply in China, the world's largest steel producer. Amid slowing economic growth in the world’s second-largest economy, domestic steel demand in China has declined resulting in a global oversupply of 525 million tons. Each 1 percent decline in GDP growth in China results in an additional oversupply of 24 million tons of steel.

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Two giant Japan-based steel producers, Mitsubishi Steel Manufacturing and Nippon Steel & Sumitomo Metal Corporation (NSSMC), will invest a total of USD $450 million in Indonesia for an acquisition as well as for the establishment of a special steel factory. Mitsubishi Steel is to purchase a 34 percent stake (worth USD $37 million) in Indonesian special long steel producer Jatim Steel Manufacturing, while NSSMC and Indonesia's largest steelmaker Krakatau Steel agreed to form a joint venture to produce automotive flat steel in Indonesia.

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Tata Steel Limited, the Indian multinational steel producer, recently announced its ambition to penetrate the Asia-Pacific region, including Indonesia. Although it remains unclear whether the company intends to establish a factory in Indonesia, an official of the company said that Tata Steel wants to enter Indonesia with downstream products in 2014 or 2015 as it sees potential in Southeast Asia's largest economy and aims to improve profitability by increasing efficiency in the operatives in the Asia-Pacific.

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Steel pipe and tube manufacturer Steel Pipe Industry of Indonesia (Spindo), which has the largest steel pipe production capacity among manufacturers in Indonesia, is expected to show solid corporate earnings in the period ahead as the company bought raw materials for its production process when the hot-rolled coil (HRC) price was near its lowest at USD $265 per ton. Investa Saran Mandiri expects that Spindo's earnings will improve markedly starting from the second quarter of 2016 as the HRC price has risen to USD $485 per ton in May 2016.

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The price of steel has surged 20 percent to USD $365 per ton in April 2016 from USD $305 per ton at the start of the year. The primary reason for the higher steel price is China's plan to curtail the country's installed steel production capacity by a further 150 million tons over the next five years. In recent years the steel price has dropped significantly due to the global oversupply, mainly originating from the chronic steel oversupply in China where domestic demand declined amid the nation's economic slowdown.

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With Indonesia's construction and infrastructure sectors expected to grow in 2016, backed by government support, Indonesia-based steel pipe manufacturer Steel Pipe Industry of Indonesia should manage to see higher net profit this year. The company, with its factories in Sidoarjo and Surabaya (East Java), has the largest steel pipe production capacity of all steel pipe producers in Indonesia. With its six factories - and 34 production lines - the company's production capacity currently stands at 588,600 metric tons per year.

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The Indonesian government approved the request of Indonesia's automotive sector to be exempted from the anti-dumping duties that have been imposed on imports of steel from specific countries. Through Finance Ministry Regulation No. 65/2013 on Anti-Import Duties, the government set import duties - ranging between 7 and 55.6 percent - for steel imports from China, Japan, South Korea, Taiwan and Vietnam in an effort to protect the domestic steel manufacturing industry amid a global steel oversupply (particularly caused by a supply glut in China).

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Domestic steel sales in Indonesia are expected to rise 6 percent y/y to 15.1 million tons in 2014. Meanwhile, the global average steel price has been USD $536 per ton this year, implying that the market value of Indonesian steel sales is to reach USD $8 billion this year. In recent years, the country’s steel sales have been rising on development of infrastructure, defense industry, and manufacturing. The sales are expected to continue rising in the years ahead due to commitment of the government to boost infrastructure development.

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