Steel Giant Fate Reversed

Indonesia

Economic News

22 Jul 2010
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After months of speculation over the planned sale of a strategic stake in state-run Krakatau Steel to an international bidder, the Indonesian government has opted for an IPO (initial public offering) instead.



Krakatau, with assets estimated at $1.2bn by market analysts, posted a profit of $34.07m in 2007, having made a loss in the previous year. While the return to black is a positive sign, analysts feel this was mostly driven by surging steel prices rather than internal efficiency or increased production.



The IPO is slated for the end of the year but could happen as early as September 2008, according to local reports.



The government's divestment is part of a wider programme aimed at privatising, merging or liquidating under-performing state-owned enterprises as well as raising funds to finance a growing budget deficit forecast to be 2% of Gross Domestic Product (GDP) for the year according to the Indonesia Central Bank. Among the 158 State-Owned Enterprises (SOEs), Krakatau is one of the 37 nominated for privatisation in 2008. Other candidates include aircraft maker PT Dirgantara Indonesia, railway operator INKA and plantation firm PTPN.



The change in strategy came as a surprise to many, not least foreign companies who had hoped to pick up a slice of Krakatau. Switzerland-based steel producer ArcelorMittal, Indian giants Tata and Essar, and Australia's BlueScope Steel had all expressed interest in buying a stake in Krakatau as a way to expand their footprint in Indonesia. A surging demand for steel products both domestically and globally made the company an attractive prospect for gaining an immediate inroad to the market.



The government estimates Indonesia needs another 7m tonnes of steel products to meet domestic consumption needs. Demand, expected to grow by 10% according to the Southeast Asia Iron & Steel Institute, is being driven by major construction projects with the central government having allocated nearly 20% of the overall budget expenditure to public infrastructure development this year.



Until this month, a sell-off had been seen as the preferred option for the government to unburden itself from Krakatau.



An official at the Ministry of Industry who preferred to remain anonymous told OBG that a strategic partner would have been the preferred option but because of political pressures, this did not take place. He cited the fact that Krakatau has not expanded production in over 30 years, despite the pressing needs of greater capacity to support infrastructure projects and feed other industries such as the automotives and electronics sectors, as evidence that change is needed.



Further reasons to sell Krakatau to a foreign investor included its lack of available capital to expand production, technology and management transfer gains and greater involvement in upstream, as well as downstream activities.



Some politicians argued against the proposed sale, saying it would not benefit the state and that the company could still be saved without a foreign partner.



Fazwar Bujang, president of Krakatau, told the international press, "We believe an IPO is better because it will give the public a chance to own shares in Krakatau Steel[...] an IPO would also increase transparency and market capitalisation."



For its part, Taufiequrrahman Ruki, the company chairman, commented, "We opted for an IPO because it can improve the culture of good corporate governance, while in a strategic sale, one party might have more influence. Our concern is domestic demand, while foreign firms' concern might be to the international market."



The state could release a 40% stake in the firm over time, and it is expected to launch an initial share offer of 5%, though no final decision has been made. The IPO is contingent on parliamentary approval.



While the decision to go with an IPO is a blow to the international firms who had bid for a stake in the company, they remain determined as ever to expand their presence in the country. According to Muhammad Lutfi, head of BKPM (Indonesia's Investment Coordination Board), ArcelorMittal, Tata, Essar and BlueScope have respectively expressed interest in building a $3bn steel plant from scratch, and each proposal is currently being evaluated.

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