Global Business Guide Indonesia

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Business Updates | Steeling for Growth: Opportunities in Indonesia’s Value Added Steel Industry

Demand for steel in Indonesia has in recent years expanded at a rate largely unparalleled on the global stage. Between 20o2 and 2012 the country saw demand for both crude and finished steel jump by over 9% - the fourth highest among countries consuming at least 5 million tonnes of steel per year (OECD) and enough to place first within the ASEAN. Unsurprisingly, the steel manufacturing industry has been the subject of intense interest with total investment in the industry rising from 38.3 trillion IDR in 2012 to 58.5 trillion IDR last year (Jakarta Globe).

Given the local industry’s present inability to meet domestic demand for steel products, openings for new manufacturing facilities are plentiful. A thriving automotive industry as well as a consumer base of rising purchasing power in particular builds for lucrative opportunities in the manufacture of value added goods such as automotive flat steel and stainless steel.

Raw materials readily available?

Supporting the development of downstream steel product manufacturers is the greater availability of locally sourced raw materials brought about by Indonesia’s recent policies on metal ore exports (See The Question of Indonesia’s Unprocessed Ore Export Ban). A blanket ban on the export of nickel ore, for example, is set to encourage the construction of local smelting facilities to produce nickel pig iron – a key component in the manufacture of stainless steel.

China’s Tsingshan Holding Group in September 2014 announced its plans to commence the production of nickel pig iron at its new Sulawesi-based processing facilities in January 2015. Constructed through a joint venture partnership with local firm Bintang Delapan Mineral, this smelter is to operate at a capacity of 300,000 tonnes per year (with scope to increase by a further 600,000 tonnes post completion of a second construction phase) and was established in part to meet demand from stainless steel manufacturers in China running low on the raw material as a result of Indonesia’s nickel ore export ban. Other projects set to increase the availability of locally sourced raw materials for value added products such as stainless steel include smelters run by PT Cahaya Modern Metal Industri, Vale and PT Indoferro (See Interview with Mr Fadjar Suhendra of Growth Steel Group, parent company of PT Indoferro), in addition to 30 nickel smelters already past the feasibility study stage (Reuters).

Similarly, the manufacture of other value added steel products including galvanized steel used in the production of cars will benefit from the construction of ASEAN’s first large scale blast furnace in Cilegon, Banten. Operated by South Korea’s POSCO in partnership with state owned enterprise Krakatau Steel, this facility is targeting the annual production of 1.8 million tonnes of slabs and 1.2 million tonnes of heavy plate – thereby substantially boosting the availability of crude steel required as an input for downstream processes.

The significance of these new facilities is not to be overlooked: Indonesia’s metal manufacturing industry has long been criticized for a disconnect between upstream capabilities and growing downstream demand. The cost of imports necessitated by a lack of processed, semi-finished metals only serves to add to the high raw material prices often cited as an impediment to value added steelmakers’ profitability.

Key areas of opportunity

In manufacturing finished steel products, companies can look to the following target industries as being especially noteworthy given the presence of a strong local market.

Automotive Steel - An attractive local and regional consumer base has given rise to the establishment of manufacturing facilities in Indonesia for international automotive brands including Toyota, Nissan, Honda, Chevrolet and Suzuki. Seeking to become Southeast Asia’s hub for automotive manufacturing (See Indonesia’s Automotive Industry), Indonesia is targeting the production of 1.61 million cars next year, up from the 1.3 million unit projection for 2014 (GAIKINDO). This creates new opportunities for manufacturers of steel products catered to the automotive industry including hot dip galvanized steel and annealed cold-roll steel.

Offering better profit margins than commodity steels for products such as flat steels, the manufacture of automotive parts has served as a natural transition for the steel industry in other developing countries. India, as an example, has over the last four years seen a marked shift among steel manufacturers towards focusing on value added steels for a booming automotive industry. Led by Tata Steel, JSW Steel and Essar Steel, autograde steel has been described as the next wave of improving margins for steel companies as well as a means to diversify into products “less volatile and less exposed to market vagaries” (Business Standard, 11/11/2013).

With its own automotive industry poised to take advantage of a growing middle class, Indonesia also offers steel manufacturers with a market ready for value added products. International firms recognizing this opportunity have already begun planning their entry into the country, including Nippon Steel & Sumitomo Metal Corporation (NSSMC), which plans to construct an automotive flat steel factory with Krakatau Steel. The plant will be located in Cilegon in close proximity to Krakatau Steel’s crude steel production facilities. For local firms, such cooperation with international partners such as NSSMC is often necessitated by the need for technology closely held by foreign entities.

Stainless Steel - Rising incomes in Indonesia is expected to shift consumer preferences for household goods towards high quality, durable offerings – thereby opening the door to manufacturers of stainless steel appliances, cutlery and cooking utensils. Recognizing this opportunity to tap into a quickly emerging middle class, international stainless steel brands such as Acerinox of Spain have increasingly reached out to local players to further their presence in the country.

Other opportunities exist in the form of serving the hospitality industry through the provision of stainless steel ovens, shelving, cabinets, counters and trolleys. Current local players in this field such as Jaya Stainless Steel have also focused upon the manufacture of highly specialized products to be installed in hospitals including scrub stations equipped with UV sanitizers. The implementation of a universal healthcare program should bring about a positive knock-on effect for manufacturers of stainless steel equipment of this variety (See Indonesia’s Healthcare Sector).

From a broader standpoint, demand for steel products worldwide is very much dependent upon trends in China. Per an Ernst & Young report on the 2014 global outlook for steel, a strong domestic economy and growing middle class in China will “shift the product range as more sophisticated consumer products such as automobiles and home appliances are sought after. This will benefit steelmakers with high-end, value added products”.

As Chinese stainless steel manufactures have taken to setting up nickel processing operations in Indonesia to address their dwindling stock of nickel pig iron; local steel manufacturers should seek to take advantage of the availability of raw materials on their doorstep in serving an expanding market for stainless steel on both a local and regional scale.

Other opportunities

In addition to producing finished steel products for the automotive industry and household customers, opportunities exist in providing value added steel for the construction sector (See Indonesia’s Building & Construction Materials Sector). Though demand from this industry in carrying out infrastructure projects and property development is for the most part limited to commodity long steel, there is a growing market for long steel with advanced properties such as anti-graffiti and anti-corrosive coatings in developed countries (Ernst & Young). While not needed in the immediate future given Indonesia’s present focus on basic infrastructure, these added features have substantial potential for application in more advanced, upscale developments in the future.

Challenges ahead

Taking advantage of the aforementioned opportunities is by no means a straightforward exercise in what is a capital-intensive business venture. Steel manufacturers in Indonesia will have to contend with a recent hike in electricity tariffs described as having the potential to force large smelters to cease operations (See Indonesia’s Subsidies on Electricity Powered Down). Infrastructural inefficiencies also continue to dampen investor expectations; an issue that has thus far been circumnavigated by establishing production bases in the direct vicinity of processing facilities. This solution in and of itself takes away from Indonesia’s strength in having multiple regions with immense potential for setting up manufacturing industries (See Indonesia’s Economic Potential: A Look Beyond Java).

Finally, when evaluating the potential of Indonesia’s finished steel manufacturing industry, it is important to recognize that much stills depends upon the actualization of processing facility projects. Consistency in encouraging downstream development appears to be on the new administration’s agenda, though to what extent remains to be seen (See New Government May Reinvigorate Indonesia’s Investment Appeal).

Global Business Guide Indonesia - 8th September 2014

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Indonesia Manufacturing Snapshot

Contribution to GDP: 18% (2015)
Sector Growth: 5.5% (yoy, 2015)
Number Employed in the Sector: 16 million (2016)
Highest Minimum Wage by Province: 3,350,000 IDR/month (DKI Jakarta)
Lowest Minimum Wage by Province: 1,631,245 IDR/month (West Nusa Tenggara)
Main Areas: Automotive, Electronics, Textile & Garment, Footwear, Food & Beverages, Metal Products, Chemicals.
Main Export Markets: USA, Japan, China, Turkey, South Korea, Germany, Singapore, Thailand, Philippines, Saudi Arabia, Malaysia.