State-owned steel maker PT Krakatau Steel is planning to spend up to US$1.2 billion this year for a number of ongoing projects despite pressure from the declining steel price, which resulted in an astronomical fall in its profits last year.
Finance director Sukandar said that as much as $500 million of the total capital expenditure would be directed into projects for the company and its subsidiaries. The projects include the development of a 1.2 million ton capacity blast furnace with total investment of $601.46 million; a port expansion costing Rp 889 billion ($91.6 million) in total investment; a 120 megawatt (MW) combined cycle power plant with $132 million in total investment, and a water pipe system with Rp 66 billion in total investment.
Apart from these projects, Krakatau will also see around $700 million disbursed this year to support the development of a joint venture, called PT Krakatau Posco, for a steel mill in Cilegon, Banten, with total investment for the first stage amounting to $3 billion.
“All the funding is in place. Regarding the port expansion and power plant, there are funds from local banks as well as money from our initial public offering [in 2010]. For the blast furnace, there are syndicated loans from Sinosure [China Export and Credit Insurance Corporation],” Sukandar said.
Krakatau president director Irvan Kamal Hakim said the company’s aggressive expansion plans this year followed last year’s massive capital expenditure of Rp 13 trillion ($1.3 billion).
“We are spending big right now and hope to enjoy the results when the projects are completed in 2015 and 2016. However, we are careful with our major expenditure as the global economic outlook remains unstable,” Irvan said.
The company suffered from a major decline in the price of steel last year caused by the global economic slowdown and an oversupply of steel.
Krakatau’s sales volume actually grew by 12.5 percent to 2.33 million tons in 2012 from 2.07 million tons in 2011, which pushed up its revenue by 13 percent to $2.29 billion in 2012 from $2.03 billion a year earlier.
However, the increase could not be translated into increased profits as the company was suffering from a drop in the average selling price of its main product, hot rolled coil (HRC), of around 11 percent to $773 per ton in 2012 from $869 per ton in 2011.
Despite a fall in the price of its prime raw material, steel pellets, by 7 percent to $215.5 per ton in 2012 from $232.2 per ton in 2011, the decline in the raw material price was lower than the selling price.
Sukandar noted that the company also suffered from the government’s decision last year to approve a 35 percent increase in the price of natural gas. Krakatau’s natural gas price rose by 14.6 percent to $10.2 per million British thermal units (mmbtu) last year from $8.9 a year earlier.
Krakatau reported $20.4 million in net losses in 2012, a massive decline compared to $151.2 million in net profits in 2011.
Irvan said that the company’s prospects remained uncertain this year. However, he expected the steel price to rise by 10 to 15 percent in the third quarter of the year. The company is also aiming for a 13 percent increase in sales volume, up to 2.6 million tons by year-end.
Irvan said that Krakatau would also attempt to mitigate the bleak outlook on the global steel price by pushing sales of added-value products, including steel for the automotive, oil, gas and shipping industries, rather than selling steel for other commercial use.