Irvan Kamal Hakim, President Director & CEO, Krakatau Steel (Persero): Interview

Interview: Irvan Kamal Hakim

What sort of difficulties do domestic steel manufacturers currently face in Indonesia?

IRVAN KAMAL HAKIM: Industry players are optimistic that by 2015 global steel markets will rebound. We believe that the economic recovery in Europe will propel higher demand for Indonesian steel.

Also, we must not forget the Chinese market. Many economists feel that China can quickly raise its GDP growth from the current 7.5%, which will impact world steel markets. For instance, China currently produces 50% of the world’s steel, which translates roughly to 750m tonnes per annum. In Indonesia there is a saying that when China coughs, we catch the cold. This is the case for many other countries as well, far beyond the Asia-Pacific region.

Of late, to counter weak demand, many industry players have moved to diversify their operations. This is essential to spread risk, just as any investor should do. This will ensure that we avoid volatility in the market place, and cover our backs through other streams of income. As an example, many companies are entering joint ventures to put to use steel waste from production. These sort of diversification plans will help buffer steel companies from the cyclical commodities downturns.

There are many bright emerging prospects in Indonesia, and these will only grow. Indonesia in many aspects could be grouped with Brazil, Russia, India and China, although we are not quite on that level as yet. The government cannot do this alone, and this must be private sector-driven growth.

What will be the main drivers of the Indonesian steel market moving forward?

HAKIM: In the case of emerging countries, normally the main drivers are construction and infrastructure projects. In developed markets, automobiles and home appliances are the main drivers. Indonesia is placing an emphasis on automobiles, as we see a service-based economy begin to take root. The growth of the local automotive industry, along with the introduction of low-cost green cars, will have a positive impact on local market demand. Also, the implementation of the 2009 Mining Law in 2014 will add value to new downstream industries, which many foreign investors are interested in exploring.

To what extent are labour costs having an impact on the steel industry at the moment?

HAKIM: Wages are continuing to rise, which is proving to be an issue with the private sector and a thorny matter with the government. This will prove to be a challenge over the long term for the industry. Many firms are looking to reduce their permanent labour force by 25%. That said, capacity is also increasing and so will efficiency. In 2017 our employees will be able to double their productivity due to new facility investments coming on-line and streamlined processes. We must make our industry lean in order to compete on a regional and global level.

Are there any other major challenges for companies attempting to expand domestically?

HAKIM: The two issues in steel production are raw materials and energy. Electricity and natural gas are costly and the steel industry is energy-intensive. A lack of energy infrastructure is preventing some manufacturers from operating at full capacity.

However, we believe that by 2015 the industry globally will begin to recover, and once more operate at around capacity. In addition, we are hoping that anti-dumping laws are enforced so that competition in the market is fair. It should be clear that dumping refers to the legality of steel. These anti-dumping measures are in place for five countries and enforced under the WTO standard of law.

If the regulations are enforced legally and fairly I believe investments will continue to enter Indonesia. As a result, this will reduce our current account deficit and also strengthen our investment climate.