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Development of steel bar industry in Indonesia.

Introduction

Steel bar supply in Indonesia still falls far short of requirement. The main hurdle keeping development of steel bar industry sluggish in the country is lack of competitiveness of steel billet industry in the upstream sector. The root cause could be traced further to lack of integration with industry producing feedstock--iron ore, sponge iron and pellets.

Indonesia has rich mineral resources including iron ore reserves which have been discovered in various areas mainly in South Kalimantan. However, the country has failed to make use of its natural wealth. The country has no technology and fund to process iron sand into steel basic materials to feed the domestic industries in the mid and downstream sectors.

The country has exported its iron sand production mainly to China and imports iron basic materials--iron ore, sponge iron, and pellet. The dependence on import for basic material makes the country's steel bar products less competitive facing imported products.

The production capacity of the country's steel billet and steel bar industries is enough to meet the domestic requirement but the factories have been too old and inefficient. Therefore, they could no longer operate at full capacity.

However, some producers of steel bars still invested to expand their capacity in 2007 and 2008. There are 15 companies having secured investment license from the Capital Investment Coordinating Board in the first 4 months of 2008. They planned a total investment of around Rp2 trillion in steel industry including steel bar manufacturing in Indonesia.

The country still imported large volume of billet to feed steel bar industry such as wire rod factories and concrete reinforcing iron (reinforcement bar) factories. Imports make up around 53% of the country's total requirement of billet in the country.

Demand for steel bars especially from the property sector and construction sector has been weak since the 150% fuel price hikes late 2005 and it was worsened with another 30% fuel price hike last May and the soaring price of steel basic materials in the world market.

The prices of steel have increased with rising demand from fast growing economies like China and India.

The price of iron ore rose from US$ 200 per ton by the end of 2007 to US$ 250 per ton early 2008. Meanwhile, the price of crude oil has surged from record to another record high exceeding the level of US$130 a barrel in mid 2008. The price of coal has also climbed to a all time record.

Description of product

Steel products could be divided into two types sheet and bars. Steel sheets are produced from slabs and steel bars from billet, bloom and ingot. Billet is produced from sponge iron and, pellet and scrap.

Downstream products of steel bars are steel wires, concrete reinforcing iron, angle iron and profile iron used mainly in the property and construction sectors.

Production Capacity

The country's billet production capacity has not yet fully utilized but capacity expansion has continued by some producers. The production capacity of billet was recorded at 4.53 million tons in 2005, up to 5.56 million tons in 2006 and up again to 6.04 million tons in 2007.

Among the companies investing in billet industry in 2007 was PT. Sanex Steel Indonesia, which built a new factory with an annual capacity of 200,000 tons per year in Cikupa, Banten. The company uses machines form China. PT. Manna Jaya built a new billet plant with a capacity of 4,000 tons per year.

PT. Krakatau Steel (KS) planned to increase its billet production capacity by 1 million tons in 2009.

KS fares better than other steel makers in the country as it has integrated facility producing some of the basic materials to feed its factories in the midstream and downstream sectors. Currently PT KS is preparing the construction of an iron ore plant in South Kalimantan in cooperation with PT. Aneka Tambang (Antam).

KS is he only billet producer using sponge iron as the feedstock in addition to scrap. Other producers use only scrap with electric induction technology. In other countries most steel casting factories use the technology of blast furnace.

The increase in production capacity amid low capacity utilization in billet industry is probably attributable to relocation of small steel casting factories form China. China has in the past several years restructured its steel industry requiring a steel casting factory to have a capacity of at least 10 million tons

The machines relocated from China use electric induction technology with iron scrap as basic material. The production capacity of the machines is relatively small not more than 10,000 tons

Pangeran Karang Murni the largest

Among major players in billet and steel bar industry are PT. Pangeran Karang Murni (PKM), PT. Krakatau Steel (KS), and PT. Ispatindo.

The production capacity of PKM is 803,000 tons/ year, KS and Ispatindo each 700,000 tons/ year.

The billet and steel bar industries are not supported with the availability of supply of basic materials, therefore, billet industry is not expected to grow as expected in the coming years.

Production Growing

The country's production of billet has fluctuated in the past several years. Production has been dominated by a few major producers PKM, Ispatindo and KS.

The production grew 18% annually in the period of 2004-2007 with production averaging 1.49 million tons per year.

In 2005, billet production that grew 44.3 % to 1.73 million tons from the previous year to follow the revival of the property sector. In Year 2006 the production fell as a result of the oil fuel price hikes late 2005. In 2007, billet production rose again to 1.92 million tons. In 2008, production is expected to stagnate with the oil fuel (BBM) price hikes in May.

The BBM price hikes resulted in a decline of 10%-15% in the use of BBM in steel industry.

Capacity utilization low

The country's billet production still is far below the production capacity despite the annual increase. In the period of 2003-2007, capacity utilization averaged 29.3%. The low capacity utilization is caused by low competitiveness facing imported products. Only major producers are competitive in prices and quality. The capacity utilization is not expected to improve much in the coming years.

Imports of billet growing

Imports of billet are growing as domestic producers could not improve productivity despite growing demand. Growing demand results in growing supply that could be provided through imports.

In the period of 2004-2007 billet imports grew by 19.3% annually on the average. In 2005, imports totaled 1.28 million tons valued at US$580 million--up in volume by 5.5% from the previous year. In 2006, imports grew sharper by 27.9 % to 1.64 million tons valued at US$ 691.4 million.

The increase in the imports amid sluggish growth in domestic consumption was largely caused by speculation as consumers raise stock on the prospects of an increase in the prices of the material. Demand for billet in the country was weakened by a sharp increase in the prices of BBM late 2005.

In 2007, the revival of the property sector especially in large city like Jakarta and Surabaya caused a sharper increase in billet imports.

In 2008, imports are expected to stagnate with the BBM price hike in May weighing on the property sector.

Exports of billets low

The country's production of billet is used mainly to feed domestic industry. Exports are insignificant though growing.

In 2006, exports reached 4,650 tons valued at US$5.800 million, up in volume 263% from the previous year. In 2007, exports fell slightly to 4,290 tons valued at US $ 3.07 million.

Billet Consumption Growing

Billet consumption in the country has increased in the past several years to follow the economic growth of 5%-6% annually. The property sector is the largest consumer.

Billet consumption in the period of 2003-2007 averaged 2.84 million tons per year and consumption growth averaged 17.8% annually in the 2004-2007 periods. Consumption of billet grew from 1.9 million tons in 2003 to 3.64 million tons in 2007.

In 2006, consumption totaled 4.15 million tons or growing by only 6.8%. In 2007, billet consumption grew again by 13.3% to 4.52 million tons. The revival of he property sector resulted in an increase in billet consumption.

In 2008, consumption is expected to grow still but with a lower rate. Consumption in 2008 will be determined much by a number of factors-BBM prices, Bank Indonesia benchmark interest rate, which has been raised to 8.5%. The increase in the benchmark interest from 8% to 8.5% so far in 2008 will have much effect on the property sector as most buyers use credit.

Downstream steel bar industry

Wire rod

Steel bar factories use billet as he basic material to produce wire rod, concrete reinforcing iron, and angle iron. The country's production capacity for wire rod has not grown significantly over the past years. A strong growth of 14% was recorded only in 2005 to 1.39 million tons from 1.21 million tons in the previous year.

Until 2007, the production capacity for wire rod remained the same at 1.39 million tons as against requirement of only 1.1 million tons per year.

Ispatindo the largest

The country has only two major producers of wire rod--Ispatindo and KS. Ispatindo is the largest with a production capacity of 650,000 tons/ year with KS having a capacity of only 275,000 tons / year.

Other producers have only a capacity of 40,000 tons/ year on the average. The largest among them is PT. Industries Badja Garuda with a capacity of 75,000 tons

Production of wire rod stagnant

The production rate of wire rods has been almost unchanged in the past several years. The annual production averaged 919,800 tons in 2003-2007 fluctuating by less than 10%.

In 2005, production was 914,000 tons or down 7,5 % from the previous year and in 2006, the production fell again 6.1 % to 858,000 tons. In 2007, the production rose again 7.2 % to 920,000 tons. The capacity utilization of wire rod industry was 70.12%

Imports and exports fluctuating

Imports of wire rod have fluctuated in the past several years. In 2005, imports of wire rod reached 501,000 tons or up 37.17 % from the previous year. In 2006, imports fell 28.67% to 357,300 tons, and in 2007 imports rose again 16.49 % to 416,200 tons. See the following table.

Wire rod exports did not change from an average of 197,500 tons a year. In 2005, exports reached 190,500 tons down 28.2% from the previous year. In 2006, exports grew 2.1% to 194,500 tons bur down again 13.4% to 168,500 tons in 2007. See the following table.

Consumption of wire rod

Similarly consumption of wire rod did not change much. In the period of 2004-2007, consumption of wire rod grew 4.8% on the average a year with annual exports averaging 1.1 million tons.

Concrete reinforcing iron (Reinforcement bar)

Concrete reinforcing iron is used much in the construction sector. The country's production capacity for concrete reinforcing iron has remained unchanged in the past several years averaging at 4.3 million tons per year. In 2005 the production capacity fell 6.1% but rose again 7% in 2006.

The country's production of concrete reinforcing iron has tended to decline in the past several years with annual production averaging 1.81 million tons in the 2003-2007 periods.

Production of concrete reinforcing iron peaked in the five years period at 2.01 million tons in 2005, up 19.7 % from the previous year.

In 2006, the production fell 9.6 % to 1.82 million tons. It fell further to 1.74 million tons in 2007. The decline was attributable to fuel price hikes late 2005 and price instability. In 2007, the price of concrete reinforcing iron surged from Rp 4,300 per kg to Rp 8,000 per kg.

In 2008, the production is expected to remain unchanged on a number of factors price instability and fuel price hikes in May, 2008.

The capacity utilization of the country's concrete reinforcing iron industry is relatively low averaging 41.8%. The production, however, is enough to meet domestic requirement. The producers could not expand market abroad on weak competitiveness in price; therefore, the industry could not be expected to increase its capacity utilization.

Imports and exports I

The country's import of concrete reinforcing iron has tended to increase though remaining small. In 2005, imports shot up in volume 1,769% to 13,300 tons from the previous year.

In the following two years imports fluctuated as shown in the following table.

Exports in 2003-2077 averaged 430 tons per year. The export volume is not expected to grow significantly in the coming years.

Consumption

Domestic consumption of concrete reinforcing iron has largely been supplied domestically. Consumption grew slightly in the past five years by 2.6 % annually in 2004-2007. Annual consumption averaged 1.83 million tons a year.

Prices

The steel bar industry in Indonesia has been faced with price instability in he past two years. The prices of concrete reinforcing iron in 2007 rose 86 % from Rp. 4,300 /kg to Rp 8,000/ kg.

Early 2008, the prices of concrete wires and nails surged 180% to Rp14, 000 per kg from Rp 5,000 in 2007. The price hike followed the increase in the price of basic material wire rod to Rp 9,000 per kg.

The price hikes were caused by a number of factors including an increase in the price of iron ore to US$150 per ton early 2008, energy price rise and coal price increase. The price hikes was driven by strong demand from growing economies in Asia-China and India.

Investment in steel bar industry

In 2007, investment was recorded in upstream sector of steel industry such as in billet industry.

PT. Inti Surya Sentosa, a domestic investment (PN) company built a steel factory in Manyar, Gresik, East Java producing with a capacity of 20,000 tons of concrete reinforcing iron and 4,000 tons of angle iron a year.

Meanwhile, PT. Manna Jaya Makmur built its factory in Bangsal, Mojokerto, East Java with an annual production capacity of 30,000 tons of concrete reinforcing iron, 10,000 tons of deformed steel bars, 10,000 tons of angle iron and 4,000 tons of billets.

PT. Sanex Steel Indonesia built a steel factory with an annual capacity of 200,000 tons of billet in Cikupa, Banten. The factory use machines from China.

In 2008, interest in investment is also high as indicated by plans by PT. Lautan Steel Indonesia, and a number of other investors from China--PT. Hua Fung Metal, PT. Century Metalindo, PT. SMS Steel, and PT. Power Steel Indonesia.

PT. Lautan Steel Indonesia will build concrete reinforcing iron plant with an annual capacity of 200,000 ton per year also producing billet with a capacity of 240,000 ton in Serang, Banten.

The four Chinese investors plan to produce downstream steel products such as concrete reinforcing iron, ingot and steel rolling.

Another Chinese company PT. Liang Ying Nuansa Indonesia plans to build a concrete reinforcing iron plant with a capacity of 11,750 tons per year in Mojokerto, East Java, with an investment of Rp.141 billion.

Conclusion

* The installed capacity of Indonesia's steel bar industry is large but capacity utilization is low averaging 35.6% for billet and 41.8% for concrete reinforcing iron in 2003-2007.

* Low capacity utilization of billet industry was attributable to lack of integration with basic material producers while the price of pellet and sponge iron are expensive making the industry less competitive.

* Capacity utilization of wire rod industry is quite high at 70.1 % with capacity not far exceeding requirement.

* Capacity utilization of concrete reinforcing iron industry is low though imports are also small.

* Exports of concrete reinforcing iron could be expanded as he prices are not competitive.

* Steel bar industry could increase its capacity utilization and improve efficiency if it is integrated with upstream steel industries producing the basic materials--pellet and sponge iron

* The prices of steel bars began to surge in 2007 to follow the basic material price hikes and energy cost.

* The country could take advantage of the price hikes but lack of integration between the industries in the upstream and downstream sector make the industry less competitive.

* In the coming years investment is expected to increase in the steel industry especially in the upstream sector.
Table--1
Production capacity of billet 2003 - 2007

 Year Production capacity Growth (%)
 (ton /year)

2003 4,735,000
2004 4,535,000 -4,2
2005 4,535,000 0,0
2006 5,564,200 22,7
2007 * 6,042,200 8,6

Note: *) estimate

Source: Data Consult

Table--2
Billet producers and capacity (tons)

 Producers Capacity Location

PT. Pangeran Karang Murni 803,000 DKI Jakarta
PT. Krakatau Steel 700,000 Banten
PT. Ispatindo 700,000 East Java
PT. Jakarta Cakra Tunggal 420,000 DKI Jakarta
PT. Jakarta Steel Megah Utama 300,000 DKI Jakarta
PT. Gunung Garuda 300,000 West Java
PT. Budi Dharma Jakarta 250,000 DKI Jakarta
PT. Master Steel Manufacturing 220,000 DKI Jakarta
 Co. Ltd
PT. Inter World Steel Mills 210,000 Banten
PT. Sanex Steel Indonesia 200,000
PT. Gunung Gahapi Sakti 200,000 North Sumatra
PT. East Java Taman Steel 200,000 East Java
 Manufacturing
PT. Hanil Jaya Metal Works 180,000 East Java
PT. Inter General Yaja Steel 160,000 Central Java
PT. Toyogiri Iron & Steel 120,000 West Java
PT. Growth Sumatera 78,700 North Sumatra
PT. Pulogadung Steel Manufacturing 60,000 DKI Jakarta
 Co. Ltd
PT. Barawaja 40,000 South Sulawesi
Total 5,141,700

Source: Industry Ministry, Data Consult/ICN

Table--3
Production of billet 2003 - 2007

Year Billet (ton) Growth (%)

2003 1,042,000 --
2004 1,199,000 15.07
2005 1,730,000 44.29
2006 * 1,580,000 -8.68
2007 * 1,921,000 21.59

Note *) Estimate by Data Consult

Source: Data Consult

Table--4
Billet capacity utilization, 2003 - 2007

 Year Cap. util. (%)

2003 22.0
2004 26.4
2005 38.1
2006 28.4
2007 31.8
Average 29.3

Source: Data Consult

Table--5
Volume of billet imports, 2003 - 2007

 Year Volume of imports Growth Value
 (ton) (%) (US$ million)

2003 876,252 203.8
2004 1,217,472 38.9 521.6
2005 1,284,076 5.5 579.7
2006 1,641,705 27.9 691.4
2007 1,726,645 5.2 934.9
Average 1,349,230 19.3

Source: Industry ministry

Table--6
Volume of billet exports, 2003 - 2007

 Year Volume of exports Growth Value
 (tons) (%) (US $ 000)

2003 5,960 -- 2.62
2004 652 -89.1 3.11
2005 1,283 96.9 1.73
2006 4,657 262.9 5.88
2007 4,296 -7.7 3.07
Average 65.7

Source: BPS, Industry ministry

Table--7
Consumption of billet 2003 - 2007

 Year Production Exports Imports Consumption Growth
 (tons) (tons) (tons) (ton) (%)

2003 1,042,000 5.960 876.252 1,912,292 --
2004 1,199,000 652 1.217.472 2,415,821 26.3
2005 1,730,000 1.283 1.284.076 3,012,793 24.7
2006 1,579,909 4.657 1.641.705 3,216,957 6.8
2007 1,921,025 4.296 1.726.645 3,643,374 13.3
Average 2,840,247 17.8

Source: Industry ministry

Table--8
Wire rod production capacity, 2003 - 2007

 Wire rod Growth
 Year (tons /year ) (%)

2003 1,215,000 --
2004 1,215,000 0
2005 1,390,000 14
2006 1,390,000 0
2007 * 1,390,000 0

Note *) estimate

Source: Data Consult

Table--9
Producers of wire rod and capacity

 Producers Production Location
 capacity
 (tons/ y)

PT. Ispatindo 650,000 East Java
PT. Krakatau Steel 275,000 Banten
PT. Industries Badja Garuda 75,000 North Sumatra
PT. Gunung Gahapi Sakti 72,000 North Sumatra
PT. Hanil Jaya Metal Works 60,000 East Java
PT. Growth Sumatera 30,000 North Sumatra
PT. Jakarta Kyoei Steel Works 20,000 DKI Jakarta
PT. Mega Pratama Ferindo 4,000 Banten
PT. Citra Jaya Marga Prima
Total 1,186,000

Source: Data Consult

Table--10
Production and capacity utilization of wire rod
industry, 2003 - 2007

 Year Wire rod Growth Cap. util.
 (ton) (%) (%)

2003 919.000 75,6
2004 988.000 7,5 81,3
2005 914.000 -7,5 65,8
2006 858.000 -6,1 61,7
2007 * 920.000 7,2 66,2
Average 919.800 70,12

Note *) estimate

Source: Industry ministry, Data Consult/ICN

Table--11
Imports of wire rod 2003 - 2007

 Year Imports of wire rods Growth
 (tons) (%)

2003 248,862
2004 365,151 46.73
2005 500,884 37.17
2006 357,284 -28.67
2007 416,207 16.49
Average 377.678 17.9

Source: BPS, Industry ministry

Table--12
Exports of wire rod 2003 - 2007

 Year Exports Growth
 (ton) (%)

2003 168,786 --
2004 265,203 57.12
2005 190,518 -28.16
2006 194,547 2.11
2007 168,526 -13.38
Average 197,516 4.42

Source: BPS Industry ministry

Table--13
Consumption of wire rod, 2003 - 2007

 Year consumption Growth
 (tons) (%)

2003 999,076 --
2004 1,087,948 8.90
2005 1,224,366 12.54
2006 1,020,737 -16.63
2007 1,167,681 14.40
Average 2004 - 2007 1,099,961 4.8

Source: Industry ministry

Table--14
Production capacity of reinforcement bar

Year Production capacity Growth
 (tons) (%)

2003 4,347,000
2004 4,347,000 0.0
2005 4,082,000 -6.1
2006 4,364,000 6.9
2007 4,364,000 0.0

Source: Industry ministry

Table--15
Production of concrete reinforcing iron, 2003-2007

 Production Growth Cap. util.
 Year (ton) (%) (%)

2003 1,718,000 39.5
2004 1,682,000 -2.1 38.7
2005 2,014,000 19.7 49.3
2006 1,821,000 -9.6 41.7
2007 1,842,626 1.2 40.0
Average 1,815,250 41.8

Source: Data Consult

Table--16
Imports of concrete reinforcing iron

 Reinforcement Growth
 Year bar (ton) (%)

2003 729
2004 713 -2.1
2005 13,336 1,769.4
2006 33,315 149.8
2007 18,194 -45.4

Source: Data Consult

Table--17
Exports of concrete reinforcing iron

 Exports Growth
 Year (tons) (%)

2003 715 --
2004 215 -69.93
2005 438 103.72
2006 290 -33.79
2007 490 68.97
Average 430

Source: Data Consult

Table--18
Consumption of concrete reinforcing iron, 2003-2007

 Volume Growth
 Year consumption (ton) (%)

2003 1,718,014 --
2004 1,682,499 -2.07
2005 2,026,898 20.47
2006 1,854,025 -8.53
2007 1,860,330 0.34
Average 1,828,353 2.6

Source: Data Consult

Table--19
Investment in steel bar industrv in Indonesia 2007-2008

 Company Capacity Products Location
 (ton/year)

PT. Inti Surya 20.000 Concrete East Java
Sentosa reinforcing
 iron

 4.000 Angle iron

PT. Manna Jaya 30.000 Concrete East Java
Makmur reinforcing
 iron

 10.000 Deform steel
 bars

 10.000 Angle iron

 4.000 Billet

PT. Sanex Steel 200.000 Billet Banten
Indonesia

PT. Lautan Steel 240.000 Billet Banten
Indonesia
 200.000 Concrete
 reinforcing
 iron

PT. Hua Fung -- Concrete Banten
Metal reinforcing
 iron, ingot,
 steel rolling

PT. Century -- Concrete Banten
Metalindo reinforcing
 iron, ingot,
 steel rolling

PT. SMS Steel -- Concrete Banten
 reinforcing
 iron, ingot,
 steel rolling

PT. Power Steel -- Concrete Banten
Indonesia reinforcing
 iron, ingot,
 steel rolling

PT. Liang Ying 11.750 Concrete East Java
Nuansa Indonesia reinforcing
 iron

Source: Data Consult
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Title Annotation:Industry Profile
Publication:Indonesian Commercial Newsletter
Date:Jun 1, 2008
Words:3947
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