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ndonesian steel maker PT Gunung Gahapi Sakti and China'€™s Nanjing Iron & Steel Co. are slated to kick off construction of a US$200 million steel mill in the second quarter of this year.

Djamaluddin Tanoto, president director of PT Gunung Garuda, the holding company of Gunung Gahapi, said on Wednesday that the mill, to be located on a 40-hectare site in Medan, North Sumatra, would be developed in two phases, with the initial phase to begin in April and costing $100 million.

'€œThe mill is scheduled to start commercial operations in August next year and will produce 500,000 tons of concrete-reinforcing steel and wire rod in its initial phase,'€ he said at the Industry Ministry.

The second phase of the project might begin after the completion of the first phase and would double the mill'€™s output by 2017, he added.

Reinforcing steel is used in construction applications, while wire rod is usually utilized in automotive production.

Demand for both types of steel has been rising in recent years, driven by construction and automobile-production booms amid robust growth in Southeast Asia'€™s largest economy.

Indonesia still secures a substantial proportion of its steel needs from overseas as local firms cannot meet the full demand or cannot produce the high-quality steel required for certain applications, such as automobile production.

The increasing output of steel, including from Gunung Garuda'€™s planned mill, will help meet local demand and reduce imports.

Indonesia'€™s steel consumption is expected to reach 20 million tons by 2020 with the assumption that annual demand will rise by 8 percent starting from 2013, according to the Indonesian Iron and Steel Association (IISIA).

This year'€™s consumption will amount to 14.7 million tons, up 8 percent on last year. With domestic production only meeting 65 percent of this demand, Indonesia will need to import 6 million tons of steel and steel products throughout the year, according to the association.

Steel demand by the automotive industry is expected to reach 1 million tons this year, more than half of which will be imported, it says.

Tanoto added that half of the mill'€™s output would be allocated to meet domestic needs, while the rest would be exported. However, that would still depend on local demand.

'€œIf the domestic market needs it, it would be better for us to sell it locally rather than export it,'€ he said, adding that sales would be prioritized in Sumatra, where Gunung Gahapi will be the only steel producer.

Gunung Gahapi aims to utilize raw materials abundantly available nearby in Aceh and Padang, West Sumatra, through its joint venture, which it 50 percent controls with Nanjing Iron & Steel, a subsidiary of China'€™s major diversified group Fosun International Limited.

To support the high energy demand for the steel mill, Gunung Gahapi will build a 2x30 megawatt power plant, in addition to the $200 million mill. The firm will seek external funds, including from a new investor, for the power plant project, according to Tanoto.

'€” JP/Linda Yulisman