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Industry Outlook

Steel Industry in Indonesia Krakatau goes for IPO

Pushing out 2.5 million tonnes of rolled coil and fl at steel a year - enough to build around 4 million cars - state-owned Krakatau Steel, which takes the name from the volcano nearby, is the biggest employer in Cilegon, West Java, Indonesia.

Long regarded a national treasure, Krakatau became a hot topic late last year when there were talks about bringing in a foreign investor to inject much-needed funding and technology.

Krakatau has been courted by several strategic investors, including industry leader ArcelorMittal SA, Australia’s BlueScope Steel Ltd, and India’s Tata Steel and Essar Steel Ltd. But the government has eventually opted to raise money for the country’s biggest steel-maker in an initial public offering, or IPO, once markets have settled down.

As Indonesia heads for elections next year, politicians are wary of upsetting voters by selling Krakatau to a foreigner who might axe jobs, slash benefi ts, and sell its steel abroad in a bid to improve competitiveness and profi ts. Indonesian Defence Minister Juwono Sudarsono calls it a ‘sensitive political issue’.

While Krakatau “has to improve its performance”, Sudarsono believes, an IPO was preferable as it would allow the government to retain ownership and control of a strategically important fi rm which supplies steel used in infrastructure, construction, and defence.

Indonesia has been struggling to shake up its state-owned enterprises, including plantations, airlines, banks, utilities and energy fi rms, which have a reputation for being bloated and ineffi - cient.

One prime example is Krakatau, which was built in the 1970s and still running partly on Soviet-era equipment. The steelmaker hasn’t upgraded or added new automation for more than a decade.

Company sources said the fi rm is looking forward to raising at least $340 million from its IPO, and a further $1.2 billion from cashfl ow and debt, according to company documents and offi cials.

Krakatau has outlined a $1.5 billion expansion so it can benefi t from rising demand for steel in Asia, particularly from China and India. Yet, there is plenty of room for improvement at Krakatau.

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