Posted on 13 Dec 2011
During the interview, Mr Fazwar also highlighted the company's sales to the country’s growing automotive and shipping industry, in addition to infrastructure projects. Below are except from the interview.
Q – Indonesia's car market is one of the largest in Asia and is growing quite rapidly. Isn’t it a big market for Krakatau Steel?
A - The local automotive industry is one of the largest consumers of steel. However, there are segments we can and cannot enter. We can enter segments of non exposure components, which are usually installed inside a car. For example, ribs on cars' hood. We can supply those products, but not the coated ones. Another example are chassis, in which we have supplies for trucks, busses and MPVs. There are also automotive segments we cannot enter and have not made any investments because the economic scale is too low. For example, coated steel with deep drawing quality and specific coating measures.
Q - How much of the volume can be counted as economical for Krakatau Steel?
A - In the upstream industry of coated steel, for example, the scale must be about 300,000 tonnes. Counting simply that a car would need about 120 kilograms of coated steel, there must be production of about 2.5 million units. In the downstream industry, such as cold rolling, it must be around 800,000 tonnes.
Q - How about the demand from PT Pindad (state weapons and ammunition producer) and PT PAL ship building company?
A - We have no problem supplying them as their demands are actually not too big. It is difficult to count the exact volume, but it is relatively small demand for Krakatau Steel.
Krakatau Steel currently has capacity to produce 3.25 million tonnes of steel per year, including hot rolled coil, cold rolled coil and wire rod. We also have a subsidiary, PT Krakatau Wajatama, which produces reinforced steel and reinforced concrete at about 300,000 tonnes per year.
We currently supply steel to Pindad to produce bullet proof and non bullet proof panzers. For the shipyard industry, we supply all steel for PT PAL to manufacture patrol ships.
I think the government needs to come back to a concept developed during Mr Pak Habibie's (former President BJ Habibie) era; that is a standardization of passenger and cargo ships, such as Caraka Jaya.
With standardized specifications, the shipyard industry will easily access the components they need. It is difficult to supply various components ordered by the shipyard industry. Standardization will also lead to a larger scale of orders and a quick localization of components.
We see that the shipping industry is a potential strategic market for Indonesia. That is why we built a JV with POSCO to support the shipping industry to, particularly, produce ocean going ships 4.5 meter in width.
Q - The government is focusing more on the development of infrastructure facilities at present. How can KS benefit from the program?
A - We expect big business from the program. We already have short and long term plans for that. For the short term plan, for example, we will further expand the production capacity of Krakatau Wajatama, our subsidiary specializing in long term steel production
However, the plan will be difficult to realize if we remain in shortage of natural gas supply. We have taken several measures to reduce natural gas consumption. We have closed down our wasteful up stream factories. It is still not enough anyway, because the down stream industries, such as hot steal and plate stream mills, cannot operate without natural gas.
Q - KS suffered a sharp decline in its operating income in the first nine months of this year. Why?
A - There are internal and external factors. Regarding internal factors, we suffered from a lengthened revitalization process of our hot strip mill facilities, leading to a loss in production volume of about 25%.
The revitalization process took longer [in May instead of January as scheduled] because we were upgrading older factories. We have to admit that all of Krakatau Steel’s factories are old, already 30 to 40 years in age.
We also suffered from external factors, first being a decline in steel prices. If I'm not mistaken, it's about USD 730 to USD 740 per tonne now.
Second, we experienced chronic problems with shortages of natural gas. It's impossible to replace natural gas to support our factories because our plants were not designed for that.
The last external problem is the surging price of iron ore since late 2010. It is because iron ore is an oligopoly market dominated by three big players: Brazilian producer Vale, Rio Tinto and BHP Billiton Australia.
It is very difficult for a steel company to gain a significant profit in this situation. This is not only a specific case befalling Krakatau Steel, but also almost all of the world's steel producers. Even Blue Scope Steel was forced to close its upstream factory, which is no longer competitive. Japanese Nippon Steel was also forced to close down one of its blast furnaces in the third quarter of the year.
