Krakatau Steel expects $700 million from IPO

JAKARTA (JP): The state-owned steel producer PT Krakatau Steel expects to make around $700 million from the public offering of its shares scheduled for the second half of next year.

"We expect total proceeds from the planned initial public offering of around $600 to $700 million," Krakatau Steel's president, Soetoro Mangoensoewargo, told reporters after a public presentation here on Friday.

"But I cannot disclose the exact figure expected by the government. You'd better ask the privatization team who are still working on it," Soetoro added.

He confirmed that the proceeds will be used to finance its expansion.

"We plan to build a new production line with a capacity of 2.5 million tons of hot rolled coils per annum," he said.

"We forecast that the planned IPO proceeds and our profits will account for 50 percent of the funds needed for the new project," he said. "The other 50 percent will be raised from bank loans."

He declined to disclose the total investment in the project.

Soetoro said that besides the 2.5-million-ton expansion project, Krakatau Steel has also formed a joint venture company with Pohang Iron and Steel Co. Ltd of South Korea (POSCO) to produce 2 million tons of hot rolled steel coils per annum at its industrial compound in Cilegon, West Java, in order to make itself the largest and most integrated steel producer in the country.

"But we will not use the proceeds to finance the joint venture," he said.

Asked how many shares would be sold to the public, Soetoro, said he was unqualified to decide but he hinted that it may be 35 percent of its total enlarged shares -- similar to the portions sold by Indosat and Tambang Timah.

Production

Krakatau Steel, which has six production lines, aims at becoming the largest steel manufacturer in Southeast Asia by the year 2000.

"With the two expansion projects, we'll have tripled our capacity to around 7.5 million tons per annum by 2000," Soetoro said.

"We will start construction of the joint venture facility next year. Commercial production will start by 1999."

Soetoro told a number of fund managers in the public presentation that the average utilization of Krakatau Steel's production lines was 90 percent at the end of last year.

"The capacity utilization of some production lines already reached 100 percent," he said.

The company's reduction plant, which processes iron ore to produce sponge iron as feedstock for its billet and slab steel plants, has an annual production capacity of 2.3 million tons. The billet and slab plants, which produce material for the firm's wire rod, hot strip and cold rolling mills, have a production capacity of 675,000 tons and 1.9 million tons per annum respectively.

The company's wire rod mill can produce 300,000 tons per annum, while its hot strip mill and cold rolling mill, have a production capacity of two million tons and 650,000 tons per annum respectively.

Krakatau Steel's major domestic competitors in the production of hot rolled coils include PT Gunawan Dianjaya, with annual production of 340,000 tons, and PT Jayapari Steel, with a production capacity of 100,000 tons.

In the production of cold rolled coils, Krakatau steel's domestic rivals are PT Radja Besi, which has an annual capacity of 100,000 tons, PT Little Giant, with a capacity of 120,000 tons and PT Essar Dhanajaya, with a capacity of 150,000 tons.

Domestic wire rod manufacturers include PT Ispatindo, with an annual capacity of 500,000 tons, PT Gunung Gahapi Sakti, with a capacity of 100,000 tons, and PT Growth Sumatra which has a capacity of 45,000 tons per year.

According to Krakatau Steel, Indonesia's steel consumption is growing by 10 percent per year, while production has risen by more than 12 percent per annum over the last 10 years.

The country's total crude steel production rose to 5.75 million tons in 1995 from five million tons in 1994.

Krakatau Steel, one of the 10 strategic industries overseen by the government's Management Board of Strategic Industries (BPIS), controls a majority share on the domestic market for flat steel products which consists of hot rolled and cold rolled coils.

The company's hot rolled coils have 60 percent of the domestic market, with another 12 percent supplied by its domestic competitors, while the remaining 28 percent is imported.

The market share of its cold rolled coils is around 50 percent, with other local producers sharing 4 percent and foreign steel manufacturers the remaining 46 percent.

In addition, Krakatau Steel's wire rods supply 32 percent of domestic need, other producers 44 percent, while the remaining 24 percent is imported.

At present, Krakatau Steel is engaged in a massive expansion program to increase the capacity of its crude steel production to 5.5 million tons per year by the year 2000.

The company, which at present employs 6,500 workers, booked a significant increase in sales in the last three years on the back of high domestic demand and steel price increases.

Profit growth

Soetoro frankly told the participants of the public presentation that in four years to come, Krakatau Steel's profit growth will be flat due to the financing of its expansion projects.

Krakatau Steel's net profit, according to the company's audited financial reports, jumped to Rp 216 billion (US$95 million) last year after a plunge of almost 50 percent to Rp 33 billion in 1994 from Rp 61 billion in 1993.

The company's total sales rose significantly to Rp 2.25 trillion last year from Rp 1.66 trillion in 1994 and Rp 1.42 trillion in 1993.

Responding to a participant's question about the large jump in profits last year, Soetoro said that it was due to higher prices.

Total assets rose to Rp 5.01 trillion in 1995 from Rp 4.56 trillion in 1994.

The government abolished both tariff and non-tariff barriers in the steel industry in October 1993, allowing non-steel producers to import hot rolled coils and cold rolled coils or sheet. Previously, licenses to import such steel products had been issued only to Krakatau Steel and a small number of private steel producers.

Deregulation also lowered import tariffs on hot and cold rolled coils to 10 percent and 15 percent from 20 percent (including 10 percent surcharge) and 22.5 percent (including a 7.5 percent surcharge) respectively.

The government further cut the tariffs in May 1995 to 10 percent both on hot and cold rolled coils. (hen/alo)