Indonesian steel town prepares for privatization

Reuters, Thu Oct 2, 2008 8:48am 

CILEGON, Indonesia (Reuters) - Like its volcanic namesake nearby, state-owned Krakatau Steel looms large over this part of Indonesia. 

Its aged, weather-beaten plants in Cilegon, West Java, push out 2.5 million tons of rolled coil and flat steel a year -- enough to build around 4 million cars -- making Krakatau a target for some of the world's leading steel-makers. 

But rather than bring in a foreign investor to inject much-needed funding and technology, the government has opted to raise money for the country's biggest steel-maker in an initial public offering, or IPO, once markets have settled down. 

Krakatau is the biggest employer in this part of West Java and has long been regarded as something of a national treasure. A previous bid to raise funds by selling it to a foreign buyer had to be scrapped because of strong political and public opposition. 

As Indonesia heads for elections next year, politicians are wary of upsetting voters by selling Krakatau to a foreigner who might axe jobs, slash benefits, and sell its steel abroad in a bid to improve competitiveness and profits. 

"It's a sensitive political issue," said Defense Minister Juwono Sudarsono in a recent interview with Reuters. 

While Krakatau "has to improve its performance," he said, an IPO was preferable as it would allow the government to retain ownership and control of a strategically important firm which supplies steel used in infrastructure, construction, and Defense. 

"With the improvement in economic performance, we do not have to resort to strategic sales," Sudarsono added. 

BLOATED, INEFFICIENT 

The decision says much about Indonesia's efforts to shake up its state-owned enterprises, including plantations, airlines, banks, utilities and energy firms, which have a reputation for being bloated and inefficient. 

"With an IPO, there will be more job security and if I have money, I would love to buy the company's shares, as steel will always be in demand," said Subekti, chief foreman at one of Krakatau's mills. 

Over the past year, Krakatau has been courted by several strategic investors, including industry leader ArcelorMittal SA, Australia's BlueScope Steel Ltd., and India's Tata Steel and Essar Steel Ltd. 

But Subekti, who at 46 has spent more than half his life working for Krakatau Steel, said he saw no advantage in having a foreign strategic investor. 

"There's no real improvement at state-owned companies that are taken over by foreign investors. Besides, since Mittal is owned by an individual, they won't care about the community living near the plant or the people in Cilegon," he said, as enormous red-hot slabs of steel thundered past his control room. 

"Take Freeport. They make gains, but the people around their mine are very poor," he said, referring to Freeport McMoRan Copper & Gold Inc, which runs the huge Grasberg copper mine in Indonesia's Papua province. 

ASPIRING CAPITALISTS 

No wonder, then, that unions and management alike have welcomed the government's decision to go for an IPO. 

Posters in praise of the planned privatization adorn Cilegon's offices and streets, where even the names -- Billet Road, Pellet Road -- are a nod to Krakatau's local importance. 

Built in the 1970s and still running partly on Soviet-era equipment, Krakatau has outlined a $1.5 billion expansion so it can benefit from rising demand for steel in Asia, particularly from China and India. 

The aspiring capitalists of Cilegon have already seen some changes at Krakatau Steel as it is readied for sale. Long-term contracts were scrapped, enabling Krakatau to sell its products at a higher, spot-market price. 

Last year, it returned to the black, making a profit of 314 billion rupiah ($33.5 million), against a loss of 135 billion rupiah in 2006, and the chief executive said he expects profit to climb to 1.2-1.3 trillion rupiah this year. 

The secretive, state-owned company is not obliged to provide detailed financial statements to the public because it isn't listed, and in the run-up to its IPO is only just starting to come to terms with dealing with the media. 

Still, there is plenty of room for improvement at the firm, named after the volcano that loomed on the opposite side of the Sunda Strait until it blew up in spectacular fashion in 1883. 

Krakatau's location, picked by former President Sukarno in honor of an Indonesian independence hero, is nowhere near its raw materials. Gas has to be piped in to fuel the furnaces, while iron pellets are shipped in from Brazil and Sweden. 

In Cilegon, it has nearly 8,000 staff, many of whom enjoy housing, transport, medical, schooling, and food subsidies that in Indonesian terms appear generous -- though meager by, say, Scandinavian standards. Its assets, worth over 12 trillion rupiah, include machinery and substantial land property holdings. 

The firm hopes to raise at least $340 million from its IPO, and a further $1.2 billion from cashflow and debt, according to company documents and officials. 

The funds would pay for a new blast furnace, expansion of its steel plants, and an iron ore smelter in South Kalimantan, enabling Krakatau to secure domestic supplies of iron ore so that it can be fully integrated. 

Krakatau hasn't upgraded or added new automation for more than a decade, said Fazwah Bujang, chief executive, a chemical engineer by training who spent most of his working life at the company until he took over at the helm last year. 

"Now is the time to do that. We are going to modernize." 

(Additional reporting by Ed Davies, Telly Nathalia, and Harry Suhartono; Editing by Megan Goldin) ($1=9380 Rupiah)