Indonesian steel imports could increase on power subsidy cut

JAKARTA - Indonesia's plan to axe electricity subsidies for industrial users this year could increase the country's steel imports, an industry body said, warning that bigger iron smelters could close their operations before paying a 64 per cent hike in rates.

The staged increases to industrial power tariffs due to commence in May and continue until the end of the year are among government reforms to alleviate some of the roughly 280 trillion rupiah (S$30 billion) Southeast Asia's largest economy expects to spend on energy subsidies in 2014.

However, the Indonesian Iron and Steel Industry Association (IISIA) warned on Thursday that a 6-month - rather than its preferred three-year - transition to the higher power tariffs, would force larger smelters out of business, prompting an increase in imports of smelted iron.

The increase in imports would be another blow to Indonesia's metals industry after around US$500 million (S$625 million) a month in ore and concentrate exports stopped in January when President Susilo Bambang Yudhoyono imposed rules intended to force companies to build smelters and process raw materials domestically.

The new regulation on the tariff increases issued earlier this month would "divide the industry", IISIA co-Chairman Ismail Mandry told reporters. He said that category 4 users - above 30,000 kilovolt-amperes - who face the biggest increases in power rates, are responsible for Indonesia's upstream iron and steel production.

"In the end we will import more (steel) because it will be more efficient," Mandry said, without clarifying how much production would be affected or how far imports could increase.

Electricity costs account for 15 to 20 per cent of iron and steel production costs, Mandry said.

An increase in steel imports could also impact Indonesia's yawning current account deficit that helped push down the rupiah by more than 20 per cent against the dollar last year.