The Jakarta Post
State-owned steelmaker Krakatau Steel is set to issue a Rp 3 trillion (US$212.4 million) mandatory convertible bond (MCB) as a vehicle for a state capital injection to weather the economic crisis.
The company’s shareholders approved the measure on Tuesday. Under the scheme, the asset will convert into common stock in the company on the contractual conversion date.
The bonds, which will be held by the government, will have a 7-year tenure and will then turn into new shares. The government currently owns 80 percent of the steelmaker, Krakatau Steel finance director Tardi said on Tuesday.
“The company, right now, has negative net working capital and its liabilities exceed assets by 80 percent,” said Tardi during a virtual briefing.
The company’s cash on hand stood at $104.4 million as of June this year, a 19.8 percent decline from the $130.2 million in December 2019. Its total liabilities stood at $808.7 million as of June 2020, down sharply from $2.5 billion at the end of 2019.
Krakatau Steel is one of several state-owned enterprises (SOEs) slated to receive capital from the government out of the Rp 695.2 trillion national economic recovery (PEN) fund.
National flag carrier Garuda Indonesia has also received the green light to receive Rp 8.5 trillion in a MCB, as the airline has suffered losses because of the pandemic’s pressure on travel demand.
Krakatau said the injection was necessary to stimulate recovery in other steel-intensive industries, such as machinery and construction, which together accounted for 11 percent of Indonesia’s gross domestic product (GDP) in the third quarter, Statistics Indonesia (BPS) data shows.
The company saw its revenue dip by 21.2 percent to $552.8 million in the first half of the year, down from $702 million in the same period last year. However, it still booked a $4.51 million net profit in the period, turning around a $135 million net loss from last year.
The funds from the bonds will be used to stretch payment periods, or cash conversion cycles, from 90 days to a maximum of 180 days, Tardi added.
This is expected to encourage customers to buy more steel without hurting their or Krakatau Steel’s finances, both of which are being strained by the economic downturn.
But even with the injection, Krakatau Steel is several million dollars short of granting such a relaxation for all its customers. Tardi said the relaxation needed a total of $391 million in 2021 and said, “The rest of the funds will come from other financing sources.”
Globally, the steel industry, like almost every other industry, has felt its performance squeezed by the COVID-19 pandemic, which the World Steel Association expects to cause worldwide steel demand to contract by 2.4 percent year-on-year to 1.72 billion tons in 2020.
The association expects global steel demand to rebound 4.1 percent to 1.79 billion tons next year, led by China’s economic recovery, as the world’s second-largest economy builds new infrastructure and property. China is one of the few countries expected to book positive growth this year.
“The global steel industry passed the lowest demand point for this year in April and has been recovering since mid-May,” said World Steel Association economics committee chairman Al Remeithi in a statement on Oct. 15.
“However, the recovery is uneven across countries depending on their success in containing the virus, the structure of national industry and, finally, economic support measures.”
Compared to the global estimate, Krakatau Steel expects its steel sales to contract by a sharper 11 percent year-on-year to 1.61 million tons in 2020. The projection is also 22.5 percent lower than planned sales in 2020, company data shows.
Over 80 percent of the company’s steel is sold in Indonesia, a country that is not only still riding its first COVID-19 wave but that has also entered an economic recession after its economy shrank for two consecutive quarters.
“We expect that, by 2021, there will be a recovery in sales volume to pre-COVID-19 levels,” Krakatau Steel president director Silmy Karim said.
He noted that the company was cutting costs to maintain its financial health. The steelmaker is a recipient of a government energy incentive whereby it can buy natural gas at $6 per million British thermal units (mmbtu), lower than the market average of $8 per mmbtu.
The company's stocks, traded under the symbol KRAS on the Indonesia Stock Exchange (IDX), surged by 1.39 percent to Rp 438 apiece on Thursday at 11:31 a.m. as the benchmark Jakarta Composite Index (JCI) rose by 0.7 percent. Its stock value has increased by 44.08 percent from the beginning of the year.