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tate-owned steel firm PT Krakatau Steel estimated that prices of finished steel products would rise by 5 percent in the second semester this year due to the growing cost of raw materials and surging domestic demand.

Company marketing director Irvan Kamal Hakim said on Thursday in Jakarta that during the first semester of this year, raw material prices rose by about 20 percent, and the trend would last through the next semester, with prices up by as much as 26 percent.

“With the raw material price increase, producers will be forced to raise their prices, but they will surely calculate thoroughly,” he said during a press briefing at his office.

Krakatau Steel data shows that in the first semester ending June 30, prices of all materials (iron ore, scrap and semi-finished steel) rose. The price of iron ore increased 21 percent to US$182 per ton in the first half of this year, up from $150 in the same period last year. Semi-finished products such as slab rose by 20 percent to $708 per ton in the first semester of this year, up from $589 per ton a year earlier.

The price of hot rolled coil (materials for building structures and automotive components) stood at Rp 8,500 ($1) per kilogram in June and was expected to reach Rp 9,200 by the year’s end, while iron sheet was Rp 29,500 and should top Rp 35,000 by the end of this year.

Irvan said another key contributor to the expected second-semester surge in finished steel product prices was rising domestic demand. Domestic steel use could rise by 5 percent in the second half of this year, he said, up from 3.58 million tons in the first semester, a 12 percent increase from the 3.22 million tons in the first semester of 2010.

“This increase was predicted by the acceleration of projects, mostly infrastructure, funded by government spending. The budget absorption will be higher in the second semester of this year,” he said.

The Central Statistics Agency (BPS) said recently that the construction sector grew by 7.4 percent in the second quarter of this year and contributed 10.1 percent to the 6.4 percent growth of Southeast Asia’s largest economy.

According to Irvan, other demand increases will come from vehicle and heavy equipment producers.

“Motorcycles, for example, will be the main demand generator. While the mining sector grows, the need for heavy equipment will also drive demand for steel,” he said.

Krakatau Steel president director Fazwar Bujang said the shipping industry would also contribute to rising steel demand.

“Significant coal exports and domestic demand have pushed up ship-building orders and in turn driven demand for steel,” he said.

Krakatau Steel is currently Indonesia’s largest steel producer, with a 45 percent share in the domestic steel market, which put out 8 million tons last year and predicted 8.3 million this year.