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ndustry Minister MS Hidayat on Friday kicked off construction of a US$200 million integrated blast furnace by a joint venture company in Medan, North Sumatra.

'€œI, on behalf of the Indonesian government, entrust this investment so it can develop in North Sumatra, which is hoped to be a center of development for Indonesia'€™s strategic industries due to its huge potential,'€ he said during the groundbreaking ceremony.

Construction of the steel mill is being carried out by PT Gunung Gahapi Nisco Indonesia, a joint venture between Indonesian steel maker PT Gunung Gahapi Sakti and China'€™s Nanjing Iron and Steel Co.

The first phase of construction is estimated to cost $100 million before it moves forward to the next step of development costing another $100 million.

The first phase is expected to be completed next year and the second phase by 2017.

The steel mill, to be built on 40 hectares, will employ 1,200 workers.

It will start commercial operations next year and produce 500,000 tons of concrete-reinforcing steel and wire rod a year in its initial phase.

Its capacity will be upgraded by another 500,000 tons in the second phase.

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

Demand for both types of steel has been on the rise 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 are unable to produce the high-quality steel required for certain applications, such as automobile production.

Hidayat said it was a '€œwise decision'€ by Gahapi and Nanjing to produce wire rod and concrete-reinforcing steel to supply local makers of prestressed concrete steel, steel wire ropes, cable stayed, steel cord, nuts and bolts and nails.

'€œThis cooperation is expected to help improve the quality of domestic wire rod that still cannot meet certain standards needed to produce, for example, wire rod high carbon and alloy steel,'€ he said.

Nanjing Iron and Steel Co. director Tao Po said the cooperation aimed to produce steel of international quality.

'€œWe want this cooperation to be able to meet local market demand by enhancing the quality of steel so that we can export it to other countries, especially in [the Southeast Asian region],'€ Tao Po said.

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 Industry Association (IISIA).

This year'€™s consumption will amount to 14.7 million tons, up 8 percent from 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 from the automotive industry is expected to reach 1 million tons this year, more than half of which will be imported, it says.

Gunung Gahapi aims to utilize raw materials abundantly available in Aceh and Padang, West Sumatra, through its joint venture, which it controls 50 percent of 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 would build a 2x30 megawatt power plant, in addition to the $200 million mill, Djamaluddin Tanoto, president director of PT Gunung Garuda, the holding company of Gunung Gahapi, said earlier.

The firm will seek external funds, including from a new investor, for the power plant project, according to Tanoto.