BUSINESS OPPORTUNITIES STEEL INDUSTRY IN INDONESIA

BUSINESS OPPORTUNITIES
STEEL INDUSTRY IN INDONESIA

Swiss Business Hub Indonesia
Wolfgang Schanzenbach
Mobile number: +62 811 8709 013
Email: Wolfgang.Schanzenbach@eda.admin.ch

Feranica Susanto
Mobile number: +62 812 953 7355
Email: Feranica.Susanto@eda.admin.ch

Market Overview

Steel Industry in Indonesia

Steel plays an important role in the development of the manufacturing sector in Indonesia. Most of the
manufacturing sector was built to cater to the rising demand of ASEAN 650 million instead of domestic
market only. As recent as in the full-year 2016 Indonesia consumed 12.7 million tons of steel.
However, domestic manufacturers could only produce 6.8 million tons, implying nearly half of
Indonesia's steel demand needs to come from abroad, particularly China where a chronic steel
oversupply led to attractive prices.

The Indonesian Iron & Steel Industry Association (IISIA) said Indonesia is in big need of investment in
the steel industry in order to expand the nation's steel production capacity. In the years ahead, steel
demand is expected to rise strongly in Indonesia on the back of construction and infrastructure
projects. Without investment, Indonesia will become increasingly dependent on steel imports.

                         Forecast of Indonesian Steel Demand (in Million tons)

        2016      2017       2018   2019    2020      2021      2022   2023    2024    2025

                                            Demand in Million tons

The government aims to see domestic steel production capacity rise to 12 million tons by 2019,
followed by 17 million tons by 2024, and to 25 million tons by 2035. However, this target - set in the
National Industry Development Master plan (in Indonesian: Rencana Induk Pembangunan Nasional,
or RIPIN) - will require private investor involvement.

According to National Industrial Development Master Plan, the government set to build a new cluster
at Cilegon, Banten, West of Java, and Nickel and Stainless steel at Morowali, Center of Sulawesi,
East of Indonesia. According to National Industrial Development Master Plan (RIPIN) it is projected
that Indonesia could produce 17 tons each year in 2024. From this project, Indonesia is expected to
reduce the import for up to 80% in the upcoming years.

From an economic point of view, steel is the most important base metal with a global market value of
USD 225 billion per year. Indonesia's total consumption of crude steel in 2016 was 14 million tons,
while the total domestic production only reached 8 million tons. Therefore, to meet domestic demand,
Indonesia has to import 6 million tons of steel products.

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Indonesia's government prioritizes infrastructure projects, which will allocate a state budget for the
infrastructure of USD 35 Billion in 2018. This program will boost steel consumptions respectively.
Most of steel consumptions comes from construction sector, which accounted for 78% of total steel
usage, followed by automotive sector at 8%. Ministry of Industry encourages the development of high
value-added steel products to support construction sector. The addition of crude steel capacity 10
million tones until 2025 with BF or EAF technology is needed to fulfill the intermediate mills'
consumption.

Business Opportunities for Swiss Companies

Automotive Manufacturing Sector

Much has been made of Indonesia’s automotive market as the biggest in the ASEAN, driven by a
much-heralded emergent middle class. As a function of its promising demographics and the continued
availability of relatively inexpensive labor and land, the country has been surrounded by tipped to
transform into a globally competitive automotive manufacturing hub equipped to meet rising demand
from local consumers as well as those in similarly-developing regional markets.

The rise in sales is being met with an increase in production among manufacturers, indicating
prospects. In late of August 2018, Mitsubishi announced it was scaling up production of its
Indonesian-made Xpander model by 20% this year to meet rising demand in the local and ASEAN
markets.

Rival Japanese brand Toyota is also looking to boost production of its Rush sport utility vehicle, announced
in mid-July that it intended to export the car to 53 markets internationally. Currently, the Rush, which is
exclusively manufactured in Indonesia only shipped to the Philippines. Meanwhile, Toyota’s export plans
form part of a $1.9bn local capacity-building program due to be completed next year.

The strength of the automotive industry has also encouraged new players to enter the market. In July
last year, Chinese manufacturer Wuling opened a $700m, 120,000-unit-capacity factory in Cikarang,
West Java, while fellow Chinese firm DFSK Motors invested $150m in the construction of a local
plant.

Growth is also leading to an increase in output from parts and materials providers. Meanwhile major
automotive parts maker follow like Toyota, Nissan, Mercedes Benz, BMW, Hyundai, Scania, Volvo,
SAGMW, Honda, and Daihatsu which continue to enhance their production capacities, to launch
strategic vehicles designed for emerging countries, and to build engine plants.

Global parts suppliers have followed the OEMs and have been starting new operations and expanding
their production capacities. These suppliers' moves are to satisfy automakers' demand for local
production, promoting weight reduction and energy saving, and to reduce production costs of vehicles.

To strengthen operations in Indonesia, some suppliers are also restructuring their manufacturing and
sales bases, establishing sales subsidiaries, and positioning Indonesia as export hubs due its largest
market in the South East Asia Free Trade Area as well as the recently signed Free Trade Agreement
with Australia which make Indonesia strategically located in the fulcrum in the regional export hub.

One steel material supplier, Krakatau Nippon Steel Sumikin, a joint venture between Japan’s Nippon Steel
& Sumitomo Metal Corp and local firm Krakatau Steel, announced it would be expanding production
of automotive flat steel products following the opening of its new $300m plant in Cilegon, in north-
western Java, in early August 2020.

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The company’s annual output stands at around 120,000 tons of anti-corrosion and high-strength steel
for automotive industry use, but it expects to increase this to 480,000 tons once the new plant is fully
operational.

Meanwhile, PT JFE Steel Galvanizing Indonesia is ready to supply steel for the car industry in
Indonesia. The steel mill has completed the construction of its USD 300 Million plants in Bekasi (West
Java) which was opened on 15 September 2016. Currently, Indonesia still imports steel from Japan.
Specifications of steel for cars are complicated since customers are very strict on specification,
therefore we cannot yet supply from local steel mills.

When the material with similar specifications already exists in Indonesia, JFE will take the material
from local companies because it is believed to make the logistic costs efficient. They plan to supply
Daihatsu, Toyota, Suzuki, Mitsubishi, and Nissan. Still viewing Japanese cars, President Director of
PT Toyota Motor Manufacturer Indonesia, Masahiro Nonami, said that the car industry still needs to
import some materials, such as resins, synthetic rubber, and steel.

Heavy Equipment Sector

Demand for heavy equipment remains strong as global demand for commodities drives it. It is in line
with the strong growth of the industrial sectors that use heavy equipment, i.e. the mining,
agribusiness, and forestry sector. According to the Indonesian Association of Heavy Equipment
Companies, imported products account for 45% of the heavy equipment market, and local products
hold the majority share of 55%.

A number of the world’s top heavy equipment manufacturers have built factories in Indonesia, such as
those from Japan, South Korea, and China, including Sumitomo, Doosan, and Sany. Some Japanese
investors also plan to relocate their manufacturing operations to Indonesia.

Rising demand for heavy equipment in Indonesia has attracted heavy equipment producers such as
Sany Heavy Industry Co. from China Ltd. to invest IDR 2.8 trillion (USD 200 million) to increase its
production capacity. The Sany Group plans to make Indonesia it's center for heavy equipment
products in order to meet the market demand in the ASEAN regions, Japan and Australia.

Based on the data by Ciptadana Securities After seeing a 6% growth in 2017 units, Indonesia’s heavy
equipment sales volume is back to double-digit growth in 2018, growing by 65%. The strong growth
continued this year as of August 2018 heavy equipment market saw a 32% growth. This is in line with
the rapid growth of the industrial sectors that use heavy equipment particularly the mining,
agribusiness, construction, and forestry sector. Sales to the mining sector saw the highest growth in
terms of unit volume and share. Mining machinery sales volume was at 5,020 units in 2018 or growing
by 37% as strong increase in coal prices and recovery in nickel prices have boosted demand for
mining machinery. Mining machinery market share is also improved significantly from 50% in 2017 to
53% in 2018.

The second-largest volume was sold to the construction sector with 21% share and grew by 26% on
still robust infra development in Indonesia. Agro sector booked the highest volume growth of 41%
despite average CPO price down by 15%, but two largest Crude Palm Oil companies under our
coverage still registered 11% volume growth. Heavy equipment sales to forestry sector were also solid
in 2018, growing by 10%, which we believe was driven by higher solid pulp price. We also found
heavy equipment scarcity in Indonesia where current backlog order in two big distributors namely
United Tractor for Komatsu brand and Hexindo Adi Perkasa for Hitachi brand has reached October
2019.

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Pertaining to market share, we see Komatsu market share relatively stable at around 35.8% in 2018
which we believe was supported by higher mining machinery sales which have been its dominant
product. Caterpillar held the second position with market share of 16.2%, which was supported by
strong sales of rigid dump trucks and travel dozer to mining sector.

Hitachi saw a decline in market share from 17.6% in 2017 to 15.8% in 2018 which we believe due to a very
strong backlog order that forces its customers to wait until October 2020 for delivery of big machinery
especially giant mining excavator and rigid dump truck. Kobelco enjoys strong demand from the
construction sector especially for small-to-medium excavators used in construction field. Kobelco is
more aggressive in terms of pricing and payment terms. Kobelco was now ranking 4th in Indonesia’s
heavy equipment sales with 14.2% share in 2018. We also witness Korean-made excavator and
wheel loader makers’ benefit from strong demand and scarcity of heavy equipment supply in
Indonesia. Doosan and Hyundai ranked no five and six with respective market share of 3.8% and
3.2%. The remaining volume was shared by other brands such as Volvo, JCB, Terex, Liugong,
Liebherr and others.

Meanwhile based on the report by Off-Highway Research (OHR), Although the demand is expected to
be somewhat volatile over the next few years, OHR’s new report, The Construction Equipment
Industry in Indonesia, forecasts that demand will remain between around 12,500 and 17,500 units up
to 2022.OHR notes that the volume of equipment sales makes Indonesia by far the largest equipment
market of the Association of Southeast Asian Nations (ASEAN) bloc.

Investment in the mining sector has been a key driver of the recent growth in equipment sales, states
OHR, a leading construction equipment market research consultancy. Construction has also played a
part and is expected to continue to do so. However, the uncertainty of the 2019 presidential election
caused a hiatus in spending.

In a summary of the key findings of its new report, OHR continues: “As well as being a large market,
Indonesia is also an important manufacturing base, particularly for crawler excavators. In addition,
compaction equipment, crawler dozers, dump trucks and motor graders are manufactured in
Indonesia, making it an important country for component suppliers. The high population of equipment
– Off-Highway puts this at more than 115,000 construction machines plus a further 20,000 agricultural
tractors – also makes it a significant country for companies active in the equipment aftermarket”.

In the end, Indonesia is a promising market in which many are trying their adventure. The ones who
became successful took due care on the culture more than on the business. If foreign companies
understand and appreciate the country, they will learn to love it, besides of the good opportunities.
However, that information cannot be an assurance that the companies endeavor becomes a success
all along the line, and for sure it does not replace individual consulting and advice. But if foreign
companies follow these points, there will be in a good way for their business success in Indonesia.

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