Why Do Japan’s Steel Giants Want to Invest in Indonesia’s Steel Industry?

Joint Venture Nippon Steel & Sumitomo Metal Corporation (NSSMC) and Krakatau Steel

The joint venture between NSSMC and Krakatau Steel will see the birth of a new legal entity (joint venture) ‘Krakatau Nippon Steel Sumikin’ in which NSSMC holds a controlling 80 percent stake. This joint venture will construct a factory that produces automotive flat steel and which requires investments worth about USD $300 million. Apart from this amount, NSSMC will inject a further USD $113 million into the joint venture. The steel factory will be built in Cilegon (Banten, Java) and is expected to provide employment opportunities to 280 workers. The core business of this factory will involve production of annealed cold-rolled steel and hot-dip galvanized steel to supply Indonesia's automotive sector. Production capacity of the factory is designed for 480 thousand tons per year. The start of production is targeted in 2017.

Executive Director of the Indonesian Iron and Steel Industry Association (IISIA) Hidayat Triseputro said that Japanese steel producers are interested to expand to Indonesia - Southeast Asia’s largest economy - as Indonesian steel demand (by far) outpaces the country’s steel production. Triseputro said that the Indonesian market demands about 12 million tons of steel per year, whereas current domestic production capacity is only seven million tons per year. The deficit thus needs to be imported from abroad. Without enhancing the nation’s production capacity, steel imports will increase. Most of the imported steel is used in the automotive industry. As car sales have been rising considerably in recent years (see table below), so has steel demand. As such, the joint venture between NSSMC and Krakatau Steel is specifically based on both sides' expectation that Indonesia’s car industry will expand further. Considering that per capita car ownership is still relatively low in Indonesia while per capita GDP is growing, it is indeed a worthwile investment. 

Indonesian Car Sales (CBU):

Month	Sold Cars 2012	Sold Cars 2013	Sold Cars 2014
January	76,427	96,718	103,595
February	86,486	103,279	111,880
March	87,917	95,996	113,096
April	87,144	102,257	106,056
May	95,541	99,697	97,136
June	101,746	104,268	110,548
July	102,511	112,178	±91,000
August	76,445	77,964
September	102,100	115,973
October	106,754	112,039
November	103,703	111,841
December	89,456	97,694
Total	1,116,230	1,229,904	±733,311

 

	2008	2009	2010	2011	2012	2013	2014¹
Indonesian Car Sales (number of car units)	607,805	486,061	764,710	894,164	1,116,230	1,229,904	1,280,000
Indonesian Exports (number of car units)	100,982	56,669	85,769	107,932	173,368	170,907	200,000

^{¹ future forecast
Source: Gaikindo}

Mitsubishi Steel Manufacturing Stake in Jatim Steel Manufacturing

The acquisition of a 34 percent stake in Jatim Steel Manufacturing by Mitsubishi Steel Manufacturing is expected to lead to increased production capacity. Currently, Jatim Steel has a steel production capacity of 120 thousand tons per year. This will rise to an annual 170 thousand tons by 2020 (of which 100 thousand tons involves flat steel). Business relations between both companies are not new. Since 2010, Mitsubishi Steel has been providing technical support to Jatim Steel. Besides supplying the Indonesian market, Mitsubishi Steel also intends to use steel produced by Jatim Steel to supply other ASEAN countries.

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