(Bloomberg) -- Indonesian steelmaker PT Krakatau Steel’s attempt to restructure $1.5 billion of loans is turning the spotlight on industry woes.
The government is trying to finalize a restructuring deal between Indonesia’s largest steelmaker and its lenders in October, Bloomberg reported late last week.
The state-owned company is facing a host of challenges including stiff competition from cheap Chinese imports. Its net loss in the first half of 2024 widened to $60 million from $37.4 million in the year-ago period. Revenue slumped to $444.7 million from $984.6 million, with the result partly attributed to a 2023 fire at a Banten province plant that hampered production of hot-rolled coils—metal sheets that can be used in cars or ships. Moreoever, its president director passed away on Wednesday.
Some of the challenges facing Krakatau Steel were factors when S&P Global Ratings last month lowered the outlook of its unit PT Krakatau Posco to negative. The joint venture with South Korea’s Posco Holdings raised $700 million through offshore bonds earlier this year.
“We see a persistent impact from the aggressive Chinese steel imports in Asia amid the concern of overcapacity and weak domestic steel demand in China,” according to a note from Nomura on the S&P downgrade.
What’s happening:
Krakatau Steel disclosed in November that it’s in restructuring talks over the loans, and discussions with banks have since continued. At the time, the company said that the plant fire necessitated the restructuring.
It’s not the first time the steelmaker has sought to restructure the debt. In early 2020, Krakatau Steel struck a deal with 10 lenders.
The government has since offered support to boost Krakatau Steel’s competitiveness, including President Joko Widodo’s call for a cut in imports and direct aid of 3 trillion rupiah ($194.4 million).
Still, the company fell back into posting losses in 2023 after a three-year run of profitability. It’s now posted annual losses in nine out of the last 12 years, according to Bloomberg-compiled data.
What is Krakatau Steel:
Krakatau Steel was officially founded in 1970. But its predecessor entity goes back to 1960, when the Indonesian government signed an agreement with Russia’s Tyazhpromeksport for the construction of Cilegon Steel Mills, according to Krakatau Steel’s website.
The company eventually broadened its product lineup to include hot and cold sheet steel and wire rod steel. By 2022, its production capacity hit 4 million tons a year.
At its peak, Krakatau Steel once hosted industrialists from China eager to learn how their nation could accelerate its own output. Fast forward several decades and the Indonesian firm was suddenly having to grapple with cheaper imports from a rapidly growing China and elsewhere.
What’s next:
That Krakatau Steel’s three-year streak of profitability came after the loan restructuring in 2020 is notable, and this current round of negotiation could similarly prove to be a boon.
But broader external challenges remain, including pricing pressure from imported Chinese steel products and the impact of Indonesian tariff policy on imports, S&P noted in its Krakatau Posco downgrade.
Krakatau Steel also may need more than just the loan restructuring deal to become healthy, said Teddy Hariyanto, senior credit analyst at PT Mandiri Sekuritas.
“The company needs to sort out the problems that is has in its plants, ramp up the sales to generate cash flow and cut down on inventories and improve any collectibles it has,” he said.
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