T

he government has received a formal complaint from South Korean steel giant Pohang Iron and Steel Company (Posco) over its business partner PT Krakatau Steel’s (KRAS) recent deal to establish another steel joint venture with Japanese companies, a minister has said.

Industry Minister MS Hidayat confirmed in Jakarta on Thursday the South Korean company had protested the establishment of the new joint venture because it allegedly violated their business partnership agreement signed in 2009.

The minister said that his office would carefully assess the allegation to determine whether state-owned KRAS had really violated its joint venture agreement with Posco.

The world’s third-largest steel company, Posco, and KRAS signed an agreement to establish a joint venture in late 2009 to build and operate a steel mill in Cilegon, Banten. The joint venture plans to spend up to US$6 billion to build the plant.

 However, last December, KRAS set up another joint venture with Nippon Steel and Sumitomo Metal Corporation (NSSMC), aiming to build a $378 million steel factory that will produce high grade steel for the country’s fast-expanding automotive industry.

“KRAS might have breached business ethics. It needs a further study to find out if the company has really violated their joint venture agreement. I promise I will try to mediate the conflict,” Hidayat said.

Krakatau Posco, the joint venture of KRAS and Posco, is currently completing the construction of its plant slated to begin commercial operations in January next year. The plant is part of the two stages of development planned by Krakatau Posco to produce 6 million tons of steel products a year. In the first phase, the plant is designed to produce steel plate, steel slabs and hot rolled coil. The types of steel to be produced under the project’s second phase will be discussed later after the plant has started operating.

Meanwhile, under its new joint venture with the NSSMC, which holds a majority stake of 51 percent, KRAS aims to make cold rolled coil (CRC) and galvanized CRC, higher grade products, which can generate greater profit margins.

A source from Posco speaking on condition of anonymity said that the Korean government had also sent a letter to the Indonesian government to raise concerns over the issue.

“Krakatau Posco was established based on the request of the Indonesian government to produce here,” he said. With this condition, KRAS should give priority to the Krakatau Posco joint venture, he added.

Indonesia has seen a growing demand for steel, including for infrastructure development and automotives, but limited domestic production has led to increased imports. The government is trying hard to attract foreign direct investment in the base metal industry to reduce the dependence on imports.

KRAS’ corporate secretary, Andi Firdaus, said that, so far, the firm had not received any written complaint from Posco regarding the issue. The new business partnership that KRAS sealed with Nippon Steel was carried out in a “careful manner”, paying attention to all clauses in the joint venture agreement with Posco. “We always maintain good cooperation with Posco for the bigger interest and mutually beneficial prospects in the long term,” said Andi in a text message sent to the The Jakarta Post.

According to Andi, KRAS had formally sent a notification letter to all stakeholders, including POSCO, on the joint venture agreement with the NSSMC before the deal was sealed.