(Oct 4): Indonesian steelmaker PT Krakatau Steel’s attempt to restructure US$1.5 billion (RM6.35 billion) of loans is turning the spotlight on operational and industry woes that complicate the process.

The government is trying to finalise a restructuring deal between Indonesia’s largest steelmaker and its lenders in October, Bloomberg reported late last week. Its falling revenue, stiff competition from cheap Chinese imports, and the death of its president director on Wednesday could factor into the parties’ negotiations on what to do with the loans.

The state-owned company’s net loss in the first half of 2024 widened to US$60 million, from US$37.4 million in the year-ago period, according to the company’s financial results. Revenue slumped to US$444.7 million, from US$984.6 million, with the result partly attributed to a 2023 fire at a Banten province plant that hampered hot-rolled coil production.

Many of the challenges facing Krakatau Steel are also clouding investors’ confidence in its unit PT Krakatau Posco, which raised US$700 million through offshore bonds earlier this year. 

On Sept 23 — just four months after the notes were sold — S&P Global Ratings downgraded the outlook on the unit, a joint venture with South Korea’s Posco Holdings, to negative, on “pricing pressure” and likely “volatile” performance. 

Krakatau Posco’s notes due in 2027 and 2029 both fell more than 0.3% on the week ending Sept 27 after the downgrade, according to prices compiled by Bloomberg. 

“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. 

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 then 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, resulting in savings of about US$685 million. 

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 three trillion rupiah (US$194.4 million).  

Still, the company fell back into posting losses in 2023, after a three-year run of profitability. It has now posted annual losses in nine out of the last 12 years, according to Bloomberg-compiled data. 

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 line-up to include hot and cold sheet steel and wire rod steel. By 2022, its production capacity hit four million tonnes 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.

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 may also 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 it 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. 

Uploaded by Liza Shireen Koshy