Indonesia and South Korea have kept faith with steel maker PT Krakatau Posco, a joint venture between companies from both countries, despite a lack of profitability because of alleged dumping by manufacturers from other nations.
The company began production in 2014 after launching four years earlier, with shares owned by Indonesian state-owned steel maker PT Krakatau Steel (Per-sero) and South Korean-based multinational steel manufacturer Pohang Iron and Steel Company (POSCO).
Both countries' governments were working to make Krakatau Posco profitable, something the company has never achieved before, said Investment Coordinating Board (BKPM) head Thomas Lembong.
He said the company almost collapsed four years ago, and two years ago President Joko "Jokowi" Widodo ordered direct intervention to ensure its survival.
"Thankfully, the relationship between Krakatau Steel and Posco is now in a better shape," he said during an Indonesia-Korea business meeting in Jakarta attended by South Korean President Moon Jae-in recently.
South Korea's Posco, the world's fourth biggest steel maker, controls 70 percent of the US$3.8 billion joint venture, while Krakatau Steel holds the remaining 30 percent.
However, in December 2016, Posco was reportedly selling its stake in Krakatau Posco due to operational losses, mainly because of mass flows of Chinese-made steel entering Indonesia.
China has been experiencing an oversupply in steel production because of lower economic growth, prompting steel makers in the country to export their excess production at lower prices, including to Indonesia.
The Batam free trade zone in Riau, for instance, is where Chinese-made imitation alloy steels entered Indonesia easily as the Chinese government exempted the products from value-added tax, said Krakatau Posco president director Min Kyung-zoon.
In an effort to counter the alleged dumping practices, the Indonesian government planned to intervene by integrating the steel supply chain between local steel makers and domestic buyers, such as the automotive and construction industries, said Industry Minister Airlangga Hartarto.
In its plan, steel makers from three countries, Krakatau Steel, Krakatau Posco and Japanese-owned Krakatau Nippon Steel Sumikin will be directed to supply local industries, with the latter supplying Japanese manufacturers, he said.
For instance, Krakatau Posco and Krakatau Steel are planning to build a $450 million plant for cold-rolled coil, a steel-based raw material used by automotive manufacturers. Meanwhile, Krakatau Nippon Steel Sumikin is expected to further process the product into galvanized steel at its factory next year.
Such a scheme will place Krakatau Posco in the upstream steel industry, working on blast furnace as well as plate, hot-rolled and cold-rolled mills, while Krakatau Nippon Steel Sumikin will be placed in the downstream industry with its galvanized steel products, Airlangga said.
Tom Lembong acknowledged that it would be difficult to unify South Korean and Japanese companies with their long history of rivalry, saying that the government would help mediate between them and Krakatau Posco to face competition from China and resolve the trade deficit in steel products.
The scheme would create $6.8 billion worth of steel production, $3.4 billion worth of value-added and $170 million of potential tax revenues, according to an estimate cited by Krakatau Posco's Min.
Min said Krakatau Posco underwent a cost-saving program and an active marketing strategy to cut $4.4 million of expenses in 2017 following previous reductions of $2.3 million and $5.6 million in 2015 and 2016 respectively.
The program was expected to help the company achieve its first operating profit of $9 million in 2017, compared to operating losses of $126 million, $243 million and $62 million from 2014 to 2016, respectively, he said.