Inalum's perpetual problems

PT Indonesia Asahan Aluminium (Inalum), which is reportedly mired once again in severe financial problems and urgently requires fresh capital injection, is much more than simply an Indonesian-Japanese aluminum-smelting joint venture company. It is a monument to the friendship and cooperation between the two countries. So important is this industrial entity that the ebb and tide of bilateral relationships in the 1970s were strongly influenced by the progress of the negotiations for the implementation of the US$2 billion venture.

No wonder, Inalum and its hydropower project became the favorite site for President Soeharto's visits in the 1970s and early 1980s. That fact, by and large, shows the political dimension of the huge venture located in North Sumatra.

Economically, however, the project seems to be a parody of the old story of a theoretically viable business venture that turns into a money-losing proposition. The venture was designed to harness the huge hydropower of the Asahan river that flows from Southeast Asia's largest volcanic reservoir, Lake Toba. And economically, aluminum smelting is the best user of this kind of cheap power because a smelter is one of the highest energy- intensive manufacturing plants. When the construction of the project was started in 1976, many aluminum smelters were losing money and were about to close down due to high energy costs. Hence, the Inalum smelter, supported by cheap hydropower, was supposed to be highly competitive on the international market.

However, Inalum has been beset with financial problems since its start-up in 1982. When the smelter began production at its full designed capacity of 225,000 tons in 1984, the international aluminum price had collapsed to $1,000 from as high as $2,000/ton in 1980. Its debt burdens, which are denominated entirely in the Japanese yen, increased sharply when the yen appreciated by more than 50 percent in 1985 against the dollar, in which the international aluminum price is quoted. Therefore, Inalum lost money steadily between 1982 and 1986.

In response, the Japanese shareholders, consisting of 12 companies and the government, injected 12 billion yen ($79 million at the rate prevailing at that time) in additional equity capital and reduced the interest rate on Inalum's 220 billion yen debts from seven to 6.45 percent.

The company made a sharp turnaround in 1987 with a profit of $50 million which doubled to $100 million in 1987. But this bullish era was soured by the decline in the smelter's production due to the decrease in the power supply from its power stations which was caused by the dropping of the water level in the lake.

Inalum's operations were disturbed again in 1988, when A.R. Soehoed, chairman of the Asahan Development Authority, temporarily canceled the company's aluminum exports to Japanese buyers due to a drawn-out row with the Japanese shareholders over Indonesia's demand for a larger share of the smelter's output commensurate with the increase in its share ownership to 41 percent.

The bottom line of the 12 years of Inalum's operations is cumulative losses of $230 million. A very sad condition indeed.

It is very difficult to verify last week's wire service stories about Inalum's severe financial problems because the company's head office in Jakarta is refusing to make any comment. In fact, Inalum seems to us a very closed company in so far as mass media access to its reports of accountability is concerned, although it is 30 percent owned by the Japanese government and 41 percent by the Indonesian government.

However, talks with Japanese officials in Jakarta, who are in charge of overseeing Inalum, gave us the impression that Inalum's problems are not due simply to the depressed aluminum market. There have been questions about Inalum's relations with the Asahan Development Authority and about the company's plan to build a new hydropower station with a capacity of 180 megawatts to support its plan to expand capacity by 75,000 tons. It is, we think, high time for both Indonesian and Japanese shareholders to negotiate a comprehensive program for an overall solution to Inalum's troubles.