“I expect steel demand to improve next year when the uncertainty in the market fades with the resumption of existing infrastructure developments and the launch of fresh projects,” an Indonesian trader said.
The confluence of multiple headwinds including a period of prolonged political uncertainty after April’s election and allegations of fraudulent voting and vote-counting, followed by lower demand during the Islamic holy month of Ramadan and the subsequent rainy season had contributed to malaise in the country’s steel industry.
Sources in Indonesia told Fastmarkets the finalization of the 2020 state budget in late September and the appointment of Jokowi’s cabinet ministers in October were expected to be the final hurdles before a recovery in steel demand from government infrastructure projects.
Indonesia increased its state budget for 2020 to more than 2,500 trillion rupiah ($180 billion), up 8.5% year on year, with 419.2 trillion rupiah earmarked for infrastructure development, an increase of 4.9% from 2019.
The Indonesian president, commonly known as Jokowi, has pledged continued infrastructure development with his administration announcing in May plans to spend close to 6,000 trillion rupiah in 2020-2024 for such purposes.
But market participants were concerned the country’s widening budget deficit could hamper such plans because legal regulations prohibit the deficit from exceeding 3% of the country’s gross domestic product (GDP).
Indonesia’s fiscal deficit rose to 289.1 trillion rupiah - or 1.8% of the country’s GDP - at the end of October, with the government likely to miss tax revenue objectives after collecting 70% of the targeted amount from January-October 2019, according to the country’s finance ministry.
The Indonesian government anticipates the deficit to hit up to 2.2% of the country’s GDP at the end of 2019.
Jokowi presided over the development of 4,700 trillion rupiah of infrastructure projects including new roads, airports, seaports and the country’s first mass rapid transit system to improve connectivity within the sprawling Indonesian archipelago of more than 17,000 islands during his first five-year term beginning in 2014.
The Indonesian government believes improved connectivity within the country will facilitate economic growth and distribute wealth beyond the capital city of Jakarta and the island of Java, which houses more than half of the country’s population.
During this period, Indonesia’s steel consumption hit 15.1 million tonnes in 2018, up 17.05% from 12.9 million tonnes in 2014, data from the Indonesian Iron & Steel Industry Association (IISIA) showed.
Despite being Southeast Asia’s largest economy, Indonesia’s finished steel use per capita of 56kg in 2018 lagged behind those of regional peers Malaysia, the Philippines, Singapore, Thailand and Vietnam, which were in the range of 101-504kg, according to World Steel Association data.
Capital city relocation
Jokowi’s plan to relocate Indonesia’s capital city from Jakarta to East Kalimantan in Borneo was viewed positively by market participants for the potential growth it could spur in steel demand in the long run.
“Both flat and long steel demand will be boosted by the relocation project because of the new infrastructure requirements as well as land, air and sea transport that will be necessary to support the movement of people and goods,” a second Indonesia-based trader said.
The IISIA expects growth in steel demand in the country to reach 22.7 million tonnes by 2024, an increase of more than 50% from 2018.
Indonesia’s rebar consumption stood at 3.4 million tonnes in 2018, up by 64.3% from 2014, while demand for hot-rolled coil, cold-rolled coil and plate totaled 8.38 million tonnes in 2018, rising by 5% from 2014, IISIA data showed.
“I believe it will take up to 20 years for the relocation to be completed so improvements in steel demand will be gradual,” a source at an Indonesian long steel producer said.
The government intends to start construction of the city from 2021 and begin the relocation of administrative offices by 2024.
Yet several market participants questioned the feasibility of relocation beyond Jokowi’s final term as president.
“The project will be very challenging to complete because the location of the new capital is underdeveloped and on a different island,” the first Indonesian trader said.
A source at a second Indonesian long steel producer said that it will be difficult for the Jokowi government to pull off this project within his final term and it will just be a waste of resources if the next president does not support the relocation plan
Investments made by foreign companies into Indonesia are also expected to bolster steel demand, with South Korea leading the way after a trade pact was agreed between the two countries in late November.
Known as the South Korea-Indonesia Comprehensive Economic Partnership Agreement, the deal will see Indonesia removing tariffs on various commodities including steel, automobiles and vehicle parts.
South Korean conglomerate Hyundai Group subsequently announced an $1.55 billion investment into a vehicle manufacturing plant with capacity of up to 250,000 units per year by 2030.
Indonesia is Southeast Asia’s second-largest motor vehicle manufacturer. Still, production of 831,708 units in January-August 2019 was down 5.8% from the first eight months of 2018, according to data from the Association of Southeast Asian Nations (Asean) Automotive Federation.
Southeast Asia’s biggest motor vehicle manufacturer by volume is Thailand, which produced 1,403,153 units in January-August 2019, 1.3% lower year on year.
Additional steelmaking capacity
South Korean steel major Posco also declared its interest in investing an additional $4 billion into PT Krakatau Posco, its joint venture with Indonesia’s state-owned mill PT Krakatau Steel, to increase steelmaking capacity to 10 million tonnes per year by 2025.
PT Krakatau Posco also intends to start marketing 750,000 tpy of HRC products next year while negotiations for CRC products continue.
There will also be additional capacity next year for 3.5 million tpy of steel billet, slab, rebar and wire rod from Chinese-backed PT Dexin Steel Indonesia in Central Sulawesi province, which could grow Indonesia’s volume of steel exports.
Finished steel exports from Indonesia rose 42% year on year to 1.6 million tonnes in the first half of 2019, of which 1.5 million tonnes were flat steel products, according to data from the South East Asia Iron & Steel Institute (Seaisi).
“[PT Dexin Steel Indonesia] will be more competitive as an exporter than selling into the domestic Indonesian market because freight from Sulawesi to Java costs about $25-30 per tonne, which is higher than from other sources like Malaysia and Russia,” the source at the second long steel producer in Indonesia said.
Market sources estimate freight costs to Indonesia from Malaysia and Russia’s Far East ports at $15-25 per tonne.
China’s state-owned Sinosteel Corp is also exploring a $2.7 billion investment to establish a steel plant in Tarakan, North Kalimantan.
“The project is strategically located because it can supply new infrastructure developments on the same island, to Java in the west and also other parts of the country in the east while also being competitive as an exporter due to its close proximity to other developing countries in Southeast Asia,” the second Indonesian trader said.
Fastmarkets’ daily price assessment for steel billet, import, cfr Southeast Asia was $445-446 per tonne on Monday December 16. Prices had been rising steadily since October 10, when they fell to a three-year low of $390-395 per tonne.
Fastmarkets’ weekly price assessment for steel slab imports, cfr Southeast Asia and East Asia was $395-410 per tonne on December 16. These compare with October 21's $370-385 per tonne, which is also the lowest prices have fallen in three years.
The re-election of incumbent Indonesian President Joko Widodo for a second five-year term has made market participants optimistic about an upswing in steel demand from 2020 after market conditions disappointed in 2019.