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wo giant state-owned steel companies, Indonesia’s Krakatau Steel (KS) and South Korea’s POSCO, are pooling their resources to expand an existing 6 million-ton integrated steel industry cluster in Cilegon, Banten, to handle a total of 10 million tons in order to strengthen Indonesia’s position as Southeast Asia’s largest steel manufacturing base.

“The project is based on a study by the POSCO Research Institute that predicts Indonesian steel demand will increase to 24 million tons by 2025 from about 13 million tons at present, of which around 50 percent is still imported,” POSCO’s senior vice president for overseas projects Lim Seung-kyu told Indonesian journalists in Seoul on Friday.

POSCO invited journalists from five Indonesian media outlets, including Vincent Lingga of The Jakarta Post, for a five-day visit last week to attend the POSCO biennial global Early Vendor Involvement (EVI) forum and visit its integrated steel plants in Pohang and Gwangyang and the POSCO University of Science and Technology.

As an emerging country that needs to develop more infrastructure and manufacturing industries, Indonesia’s demand for steel has been growing faster than that of developed countries, Lim said.

The construction and infrastructure sector uses 8.4 million tons of steel per year, the automotive sector 2.4 million tons, machinery 804,000 tons and shipbuilding 500,000 tons, according to the POSCO Research Institute study. Without additional capacity, Indonesia will suffer a steel deficit of almost 18 million tons by 2025, the study showed.

Lim estimated an additional capacity of 3 to 4 million tons would be needed to complete the 10 million-ton integrated steel industry cluster because the Cilegon industrial estate already has upstream and midstream steel plants with 6 million-ton capacities, shared half and half by KS plants and a KS-POSCO joint venture (KP).

“But the expansion of the KP integrated industry [cluster] will make it more competitive with high economies of scale and an optimal mix of upstream, midstream and downstream steel products,” Lim said.

The new joint venture between KS and Japan’s Nippon Steel and Sumitomo Metal Corp. to build an automotive steel plant, also in Cilegon, seemed not to discourage POSCO about expanding its investment in Indonesia’s steel industry.

Only about one year after the ground breaking for the construction of the steel industry cluster, KS set up another joint venture with Nippon and Sumitomo Metal Corp. in December 2012 to develop a US$300 million plant with an annual capacity of 450,000 tons of cold-rolled, galvanized steel sheets for automotive outer panels.

The plant, currently under construction, is scheduled to come on stream in the middle of next year.

“We are here for the long term. In contrast to Japanese steel companies, which started with downstream products that generate high profit margins but require a much smaller investment, POSCO focuses on developing a competitive steel industry by starting with upstream processing to produce basic materials for mid- and downstream products,” Lim asserted.

That is why, he said, the first KS-POSCO steel joint venture, which invested $3.5 billion to construct the original 6 million-ton cluster in Cilegon, started with the building of a blast furnace with a 3 million-ton capacity, the first of its kind in Southeast Asia.

POSCO, which according to the Brussels-based World Steel Association is the world’s fourth largest steel producer, had a total capacity of almost 40 million tons and total sales of $35.3 billion last year.

The broader POSCO Group, which also operates in trading, engineering and construction, energy and information and communications technology, globally booked consolidated revenues of $58.2 billion and had $80.4 billion in total assets last year.

The POSCO group operations and investments through its seven subsidiaries in Indonesia also cover power generation, oil palm plantations and engineering and construction.

TM Zakir Machmud, the head of the Economic and Industrial Research Group of the University of Indonesia, observed at the Indonesian steel industry session of the EVI forum that most manufacturing industries in Indonesia started with downstream factories.

“That is why our manufacturing sector depends largely on imports for their basic and intermediate materials,” Zakir noted in his research paper.

The chairman of the Investment Coordinating Board (BKPM), Thomas Lembong, who also addressed the Indonesian session, said he hoped the expansion of the Krakatau-POSCO joint venture, already the single largest foreign investment project in Indonesia, could be realized given the strategic role of steel in a modern economy.

Krakatau Steel’s marketing director Dadang Danusri confirmed that the feasibility study for the expansion of the KP integrated industry cluster would be completed next February.

“Only after the completion of the feasibility study, would we decide on the technical details for the expansion,” Dadang said.

Indonesian Ambassador to South Korea John Prasetio noted at the conference that POSCO had been assessed by World Steel Dynamics, a steel information service network, as the world’s most competitive steel company over the past four consecutive years, followed by the Nucor of the US and Japan’s Nippon-Sumitomo in the second and third ranks.

“I learned from my interaction within the diplomatic community in Seoul over the past four years that many countries had approached POSCO to help them build their own steel industries, which are vital to a modern economy,” John said.