INTERVIEW: Give us a chance, Essar Indonesia tells Japanese carmakers

Essar Indonesia, the country's largest private producer of cold rolled coil and hot dipped galvanized coil, says it is ready to supply steel to the local car manufacturing industry, currently dominated by Japanese marques.

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A subsidiary of India’s Essar Steel, the company has been selling its products to the construction industry, tube and pipe makers, and electrical appliances manufacturers, among others – but it has yet to get into carmakers’ yards.

“We’ve tried to supply steel to the carmakers. We went to them many times, but it never developed from there,” ceo Datta Tembhekar told Steel First in a recent interview.

“We’ve been telling the automakers: give us a chance, take our material and see for yourselves – but there’s been a lot of resistance,” he pointed out.

Essar Indonesia, which is based in Bekasi, a city in West Java close to the capital Jakarta, has rolling mills with the installed capacity to produce 400,000 tpy of CRC and 150,000 tpy of HDG.

It also has a service centre that is able to handle 200,000 tpy of both full-hard and annealed CRC and HDG and sheets, among other products.

Japanese dominance
While the company’s products cannot be used in the exterior body panels of vehicles – these are usually made of high- and ultra-high-strength auto steel sheets – they are suitable for internal panels, Tembhekar said.

In fact, Essar Indonesia supplies its products to manufacturers of internal automotive components and even to the two-wheeler industry.

It just hasn’t been able to sell steel to carmakers.

“Everything they’re buying is mainly from Japan and South Korea,” Tembhekar noted.

According to a report published last year by auditing firm KPMG, Japanese brands of cars are the “undisputed leaders” in the Indonesian automotive industry, with over 90% of market share.

In terms of individual brands, Toyota had a 36.3% market share in 2012.

Daihatsu, which is controlled by Toyota, came next with 14.6%, followed by Mitsubishi (13.3%), Suzuki (11.3%), Honda (6.2%), Nissan (6%) and Isuzu (3%).

A large amount of Indonesia’s CRC and HDG imports go to these Japanese carmakers as they have become accustomed to sourcing steel from their compatriot steelmakers in Japan.

“Japanese carmakers don’t seem to want to move away from that [arrangement],” Tembhekar pointed out.

Steady imports
Figures compiled by Steel First sister company Metal Bulletin Research (MBR) in its “Southeast Asian Steel and Raw Materials Industry” five-year market outlook report show that CRC imports in Indonesia reached 1.21 million tonnes in 2012 and 1.12 million tonnes in 2013.

Of that total, Japanese materials totalled 419,000 tonnes in 2012 and 397,000 tonnes in 2013, while South Korean imports amounted to 295,000 tonnes and 305,000 tonnes, respectively.

Meanwhile, combined imports of HDG and electro-galvanized steel jumped from 372,000 tonnes in 2012 to 430,000 tonnes in 2013.

Of these, Japanese cargoes totalled 234,000 tonnes in 2012 and 246,000 tonnes in 2013. South Korean materials amounted to 70,000 tonnes and 96,000 tonnes, respectively.

In Indonesia, the biggest CRC producer is state-owned steelmaker Krakatau Steel, which has an installed capacity of 850,000 tpy and an output of 567,629 tonnes in 2013.

Up next is Essar Indonesia, followed by “some smaller players”, Tembhekar noted.

“The market size for CRC in Indonesia is around 2 million tpy now, with imports at some 1 million tpy. [These include] both annealing and full-hard materials, but more annealing,” the executive said.

The HDG market, on the other hand, is “highly fragmented”, according to MBR’s regional report, with several small producers operating at low utilisation rates. Local shipments totalled only 331,000 tonnes in 2012 and 345,000 tonnes in 2013.

Trade action

CRC imports might have suffered some initial effect after the Indonesian government imposed anti-dumping duties on shipments from Japan, China, South Korea, Taiwan and Vietnam from March 2013 onwards, a move that received strong criticism from Japanese mills.

But a review of the duties initiated in April last year resulted in a recent decision by the government to grant a tax exemption for CRC classified under HS codes 7209.16.00.10 and 7209.17.00.10 that contain a specific set of mechanical properties and chemical composition.

In other words, importers can now bring in auto steel more easily without having to worry about duties, Tembhekar said.

Steel First has written to the Indonesian Iron & Steel Industry Assn and Krakatau Steel, as well as the Indonesian Automotive Industry Assn (Gaikindo) and Japan’s Toyota to enquire about the review on the anti-dumping duties, but none of them have responded at the time of writing.

A well-placed source with knowledge of the situation, however, told Steel First that both Krakatau Steel and other major local producers are able to produce the types of CRC exempted from the anti-dumping duties.

“[But] the orders from the automotive industry to local producers are still low – they would rather import CRC with these specifications than order from local producers,” the source said.

Intense competition

Orders to domestic steel mills in Indonesia remain low even as automobile production continues to surge upwards in the country.

Vehicle output was at 837,948 units in 2011, 1.06 million in 2012, 1.20 million in 2013, and 1.29 million last year, according to figures from Gaikindo.

Having identified the growth opportunities in Indonesia, Japan’s two biggest steelmakers – Nippon Steel & Sumitomo Metal Corp (NSSMC) and JFE Steel – are both setting up plants in the Southeast Asian nation to supply auto steel to carmakers there.

JFE Steel is investing $300 million to construct Indonesia’s first continuous galvanizing line for automobiles. The 400,000-tpy facility is scheduled for commissioning in the beginning of 2016.

In August last year, NSSMC and Krakatau Steel announced plans to build a 480,000-tpy galvanizing, annealing and processing line that will be able to produce both CRC and coated products from mid-2017 onwards.

Joining the Japanese steelmakers is Chinese pipemaker Chu Kong Petroleum and Natural Gas Steel Pipe (PCK), which has plans to build a plant for the production of pickled & oiled hot rolled coil and CRC for the home appliances and automotive sectors in Indonesia.

South Korea’s Posco is also considering whether to head downstream at Krakatau Posco, its Indonesian joint venture with Krakatau Steel. A go-ahead will see the integrated steel plant, which currently produces slab and plate, expand its operations to include HRC and CRC production.

Pushing ahead
Meanwhile, Essar Indonesia will continue to focus on ensuring a stable supply of high-quality re-rolling HRC and increasing its CRC and HDG sales to more high-end sectors.

The company has just signed an agreement to buy as much as 180,000 tonnes of HRC from Krakatau Steel over a 12-month period.

“We have been buying regularly from Krakatau Steel and other suppliers, but we found that volatility in the market has been increasing, so we decided to sign that supply deal,” Tembhekar said.

“We don’t buy HRC in the spot market, and we’re totally committed to a few suppliers – we also have agreements with NSSMC, [South Korea’s] Hyundai Steel and Posco,” he added.

Despite its difficulties in selling steel to carmakers, Essar Indonesia has been managing to increase its utilisation rates and shipments over the past few years, according to Tembhekar.

In its April 2013-March 2014 financial year, the company sold 312,000 tonnes of steel products – including both CRC and galvanized steel – and operated at an average utilisation rate of 85-86%.

It expects to sell some 320,000 tonnes in the 2014-2015 financial year and 340,000 tonnes in 2015-2016, with utilisation rates reaching approximately 90% and 94%, respectively.

“We’ve been selling thinner and thinner CRC, with our sweet spot at around 0.2mm thickness now,” Tembhekar said.

Producing thinner CRC means a lower maximum output than the rolling mill’s designed 400,000-tpy capacity as the coils need more passes in the rolls. But such materials fetch higher sales prices – and therefore better margins – for the company, he noted.

Stalled expansion
But even as it operates close to full capacity, Essar Indonesia still does not have plans to go ahead with an expansion it first unveiled in the beginning of 2013.

“We did plan at that time to double our CRC capacity, and also include lines to produce other coated products including pre-painted steel, but we were not confident about the market at that time, so we decided to wait,” Tembhekar explained.

“The project is on hold and there is no estimate at this point [on when the expansion would get off the ground],” he added.

Looking ahead, Tembhekar believes carmakers might start ordering more steel from Indonesian mills as the local government has been promoting talks between both parties.

“There’s been more discussion, the government has been trying to help us,” he said.

Also, European, American and even Chinese car brands have been “seeking to chip away at the Japanese dominance” in the country, according to the KPMG report.

One recent example was the announcement by US auto major General Motors and China’s state-owned SAIC Motor to set up a joint venture in Indonesia.

For Essar Indonesia, its strategy for gaining a foothold among carmakers can be summarised by Tembhekar’s parting words to Steel First:

“We’ll keep trying.”