Lessons from Krakatau Steel

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  • TEMPO.CO, Jakarta - THE government should learn a lesson from the restructuring of the huge debts of Krakatau Steel. The steel producer can now breathe more easily – at least for the time being. Repayment of debts totaling US$2.2 billion, or around Rp27 trillion, from 10 states, private and foreign banks has now been delayed until 2027. The total debt burden has been reduced from US$847 million to US$466 million. As a result, for the first time in eight years, the state-owned company is in the black.

    The government must stop forcing state companies to expand their business while ignoring commercial and financial considerations. As a shareholder, the government must pay careful attention to every corporate business plan.

    Reports by the Supreme Audit Agency in 2015 and 2016 clearly stated that the largest portion of Krakatau Steel’s debts came from blast furnace plants. It had been hoped that these plants would produce 1.2 million tons of molten metal per year, but the calculations were wrong. The size of the initial investment grew from Rp674 million to Rp682 million. The construction of the plants ran 11 months behind schedule, causing losses of Krakatau US$96.7 million in potential cost savings. The company is also weighed down by debts of Rp683 billion.

    Even production is increasingly running at a loss. As a result of mistakes in estimates of gas fuel consumption, the cost of production from Krakatau’s blast furnaces is US$82 per ton higher the market price. Therefore, the decision by the company to halt production at these plants at the beginning of 2019 was the right move.

    Krakatau deserves praise for finding efficiencies by cutting production costs by almost half, from US$33 million to US$19 million. But this is not enough. There are still a number of options to escape from this debt trap, such as the sale of assets that do not complement the core business. However, even this will require extreme caution because it could lead to further reductions in increasingly small revenues. Another option would be to expand the business into the downstream sector, given the stiff competition in the upstream sector because of the flood of imported steel.

    The government also needs to listen to the protest from producers about the huge volume of imported steel. Flows of cheap steel from China, Japan, Korea, Vietnam, and Taiwan, which have increased since 2014, reached a peak last year. This flood of cheap imported steel has wiped out the 25 percent domestic market segment and resulted in Indonesian steel plants only running at 43 percent of their 24.6-million-ton capacity. As a result, not only Krakatau but the other six national steel producers have been forced to cut production. There are allegations that these steel-producing companies are subsidizing exports – a practice banned under World Trade Organization rules. This must be followed up by the Anti-Dumping Committee and the Indonesian Trading Standards Committee

    The massive restructuring of debt by Krakatau Steel could serve as an example for other state companies with similar problems. With debts totaling 35 trillion, Krakatau Steel is not the largest borrower among state-owned enterprises. Bank Tabungan Negara owes Rp249 trillion, Taspen Rp222 trillion, Waskita Karya Rp102 trillion, Pupuk Indonesia Rp76 trillion and Perusahaan Gas Negara Rp59.6 trillion. Among all these huge borrowers, Waskita Karya is the most worrying because its debt has risen by 970 percent from Rp9.7 trillion in 2014. If this is not immediately addressed, this mountain of debt could become a time bomb.

    Read the Complete Story in this Week's Edition of Tempo English Magazine