THE DEVELOPMENT OF INDONESIAN STEEL INDUSTRY

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51

Latif Adam^a and Siwage Dharma Negara^b

a,b Economic Research Center, Indonesian Institute of Sciences E-mails: [email protected], [email protected]

ABSTRACT

This paper examines the development and performance of the Indonesian steel industry. The steel industry in Indonesia has not maximised its productive capacity because of supply-side constraints and demand-side factors.

From the supply side, the main reason is lack of raw materials, including natural gas, because of the bottlenecks in the industries that produce such raw materials. From the demand side, the main problem stems from foreign competition for similar products, from changes in demand that make related products less attractive and harder to sell, from substitution by other steel products, and from product synthesis with non-steel raw materials. To increase the competitiveness of local steel industry, the government should intensify its efforts to further reform its policies and to provide a more attractive economic environment for this industry. Protecting the industry through tariffs- related policies can be positive or negative: the positive effect is expected to boost the development of downstream industries, whereas the negative effect is the high dependence on imports. To create an effi cient steel industry, an integrated system must be built. Upstream and downstream need to be taken care of at the same time.

Keywords: steel industry, industrial policy, steel imports, trade defi cit, tax incentives.

JEL Classifi cation: L11, L52, L61.

I. INTRODUCTION

Historically, steel industries have played a strategic role in supporting the economic growth of a country.

The experience of several industrialised countries, such as the US, Germany, England, Japan, and South Korean indicates that their rapid economic growth was facilitated by a stable and advanced steel industry (UNIDO, 1996). Tambunan (2006) in his cross- country study found a strong correlation between GDP per capita and steel consumption or production per capita.

The higher the GDP per capita of a country, the more likely it has high

steel production and consumption per capita.

Strong correlation between a country’s steel industry and its economic growth could be attributed to the steel industry’s role as a basic industry. Steel industry produces raw materials to build physical infrastructure, such as bridges, highways, seaports and airports, railways, electricity supplies, and communications. It also provides necessary inputs for other industries:

automotive, railway, shipbuilding, machinery, and electronics (Widyahartono and Tambunan, 1998).

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Through its backward and forward spillover, a steel industry facilitates other industries to grow and develop.

Therefore, the performance of a steel industry will infl uence strategically the development of other industries.

Steel industry in Indonesia has been established since 1970, at about the same time as the Pohang Iron and Steel Company (POSCO) in Korea.

However, Indonesian steel industry has not grown as fast as POSCO because of various constraints. It is struggling to achieve full production capacity because of lack of raw materials and production inputs (Changrawinata, 2010). As a consequence, there is per- sistent underproduction that requires Indonesia to increase import of more steel products every year. Indonesia has been experiencing trade defi cit in steel products for many years and this trade defi cit is forecasted to keep increasing unless there is a concrete policy and strategy to improve the industry’s competitiveness.

This paper examines the development and perfor mance of Indonesian steel industry. It is organised as follows: section 2 examines the status of Indonesian steel industry; section 3 highlights the key challenges faced by the industry; section 4 discusses several policies that have been initiated by the government to promote local steel industry; and section 5 provides policy recommendations.

II. THE STATUS OF INDONESIAN STEEL INDUSTRY

Steel production and consumption are greatly infl uenced by various factors affected by global and domestic economic development. Weakened global economic growth because of recessions in the developed countries, for instance, affects steel consumption and production in Indonesia negatively, but strong domestic economic growth, supported by a booming construction sector, affects steel consumption and production positively. In Indonesia, the main generator of demand for steel is from building construction (residential and non-residential) and infrastructure, and to some smaller extent, manufac- turing industries, such as the automotive, shipbuilding, railway, machinery, and electronic appliance industries.

The construction industry is the largest direct consumer of local steel products, particularly long products (wire rod, bars and sections). As shown in Figure 1, there have been two peak periods (in 2005 and 2008) in Indonesia for the consumption of fi nished steel products (long and fl at products). Both peaks were caused by signifi cant growth in the construction sector during each period. Figure 1 also shows that when there is a signifi cant increase in consumption, local production does not quickly adjust to meet the additional demand.

As a result, there is a gap between consumption and production, which leads to increasing imports.

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The global economic crisis of 2008–2009 had a negative effect on the steel industry in Indonesia and the consumption of fi nished steel products dropped. Reduced consumption lead to decreased production and decreased imports. However, by 2010, the demand for steel had improved. The domestic economy is predicted to con- tinue its stable growth and to reach a growth rate of 7 to 8 per cent by 2014;

as a consequence, steel consumption and production are expected to grow further in the next few years.

On the production side, Indo- nesia’s steel industry has traditionally specialised in long products, such as bars, wires, and sections that are widely used in the construction sector. Figure 2 shows that the consumption of long products has increased significantly, reaching 3.5 million metric tons in 2010 compared to slightly below 3 million metric tons in 2009. This rate of consumption is higher than the rate

before global crisis struck in 2008 and indicates growth in the construction sector, which in turn implies higher demand for long steel products.

Any increase in the consumption of long products, however, can only be partly supplied by an increase in local production. To meet the domestic demand for long products, Indonesia has been increasing its imports of this type of steel, and these imports increased by 51.8 per cent over the period of 2009–2010. However, the growth in the production of local long steel products increased by only 5.3 per cent.

The production of higher value fl at products, such as steel strips and sheets, has been declining slightly in recent years and is currently below 2.5 million metric tons per year. Local production can only supply about 70 per cent of domestic demand. The 30 per cent needed for domestic consumption is supplied by imports of fl at products.

Figure 3 shows that consumption of Figure 1. Production, consumption and imports of fi nished steel products (long and fl at products) (million metric tons)

Source: CRU, Krakatau Steel (2011)

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hot rolled coil (HRC/plate) products dropped signifi cantly during the 2009 global crisis, but recovered by 2010 and is predicted to grow continuously in the coming years as demand from construction and infrastructure sectors increases. It is important to note that exports of HRC products have been declining since 2006.

The production of semi-fi nished products, such as steel billets and steel slabs, has been declining slightly in recent years. Production is currently about 3.5 million metric tons, below its peak of 4 million metric tons in 2007. Local production can only supply about 60 per cent of domestic demand and about 40 per cent of the domestic

Figure 3. Steel production and consumption for HRC/plates product (metric tons)

- 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000

2005 2006 2007 2008 2009 2010

Production Import Export Consumption

Source: Ministry of Industry (2011)

Figure 2. Production and consumption of long products (section, bar and wire rod) (metric tons)

- 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000

2005 2006 2007 2008 2009 2010

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consumption is supported by imports.

Figure 4 shows that consumption of steel billets and steel slabs dropped by about a million metric tons during the 2009 global crisis. It recovered slightly by 2010 to six million metric tons. For semi-fi nished products, Indonesia has almost no exports because it is still struggling to meet the local demand.

Steel industry in Indonesia has not maximised its productive capacity because of inadequate supplies of raw materials (including iron ore, steel scrap, and semi-fi nished products such as steel billets and steel slabs) and energy resources, primarily natural gas and electricity. Pertamina and Perusahaan Gas Negara, two state- owned companies that supply natural gas to industry, have not been able to supply enough for steel industry and, as a result, local steel industry is struggling to expand production. Natural gas is needed not only for electricity generation but also as input for steel

production. Accordingly, there is a per- sistent underproduction and Indonesia is required to increase import of more steel products every year.

III. CHALLENGES IN THE DEVELOPMENT OF STEEL INDUSTRY

Indonesia is traditionally a net importer of steel (see Figure 5) and has been experiencing an increasingly negative trade balance in terms of steel during these recent years. In 2010, the trade defi cit in steel trade accounts was more than USD5 billion. This trade defi cit had been predicted to increase further, especially after the implementation of the ASEAN–China Free Trade Area (ACFTA) in January 2010, due to which the surge in steel imports from China would be flooding ASEAN.

Chinese steel has been very competitive in the local market because of its price.

As a net steel importer, Indonesian steel industry is highly vulnerable to the Figure 4. Production and consumption for semi-fi nished steel (steel billet and steel slab) (metric tons)

- 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000

2005 2006 2007 2008 2009 2010

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regional supply and demand for steel, which are much infl uenced by China’s demand and supply of steel.

Figure 6 indicates that, compared to other ASEAN countries, Indonesia’s per capita steel consumption is still very low, below 30 kg, compared to Vietnam (125 kg per capita), Thailand (160 kg per capita), and Malaysia (300 kg per capita). However, Indonesia is expected to enter a highly steel- dependent period of growth, based on the development of industry, construction, and infrastructure. For instance, the government has made plans to accelerate the development of energy sector, and implementing these plans will increase the demand for steel. The development of oil and gas is steel- intensive because of the need for tubes and pipes for the distribution of the products. New investment in energy

sector will result in new demand for steel. In addition, with the fast growth of urban populations, the construction of apartments and housing is expected to increase over the next few years.

If Indonesia is able to sustain its strong economic growth, there will be signifi cant increases in household income per capita in the coming years.

As per capita income increases, it is expected that per capita steel consumption in Indonesia will also grow.

Considering its huge population, the aggregate demand for steel in Indone- sia is potentially large. One concern is whether local production can expand supply as fast as the increase in the demand. If local production cannot cope with the increase in steel demand, imports will increase and hence cause a further increase in the trade defi cit.

Figure 5. Widening trade defi cit in steel trade (USD million) Source: Authors’ calculation using Comtrade database (2011)

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As explained in the preceding section, over the past two decades the Indonesian steel industry has not been developing as fast as other industries.

Tambunan (2006) and Sato (2009) argue that lack of foresight by the government to support the development of the industry was a major factor in discouraging its growth. This lack of foresight and support by the government is a disincentive for the industry in order to improve its production technologies in terms of initial investment and effi ciency.

Sato (2009) argued that there are two reasons why government policy in developing countries plays a vital role in infl uencing the development of steel industries. First, development of a modern and integrated steel industry

requires huge preliminary investment.

Accordingly, besides the government, there are only a few private players that are able to bear the burdens of such a risky industry. This suggests that the fi nancial capacity of the government will determine whether the industry can be developed successfully or not.

Second, in developing countries, innovation in steel production and in steel products has been less important than the introduction of an established system of modern steel production.

Thus, in promoting their steel industry, developing countries should invite foreign investors to help domestic players to use and adapt to modern technology.

Unfortunately, policies to encourage foreign investor participation to Figure 6. Comparison of steel consumption per capita in ASEAN (kg/capita)

Source: World Steel Association (2010)

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build domestic steel industry through transfer of technological capabilities are still lacking in Indonesia. The government has not been creative enough in attracting foreign investors to enter steel production business. Accordingly, until 2010, the industry was entirely owned by domestic players; state and private enterprises (see Table 1).¹

With the exception of Krakatau Steel, most Indonesian steel enterprises do not use an integrated system of production.² Consequently, most Indo-

1 However, recently the government shifted its policy by allowing Krakatau Steel to establish a joint venture cooperation with POSCO. This shift in the government policy should be under- stood as an effort to develop a more solid and integrated steel industry.

2 ‘Integrated system of production’ refers to a

nesian steel enterprises have diffi culty in achieving cost efficiency because of ineffi cient use of raw materials and energy. This low effi ciency in the production, in turn, results in low volume of production (Sato, 2009).

In addition, Tambunan (2006) argues that low effi ciency in Indonesian steel enterprises is because the installed capacity is not fully utilised. Supply-side constraints and demand-side problems are responsible for this. On the supply side, the main reason is lack of raw materials, including natural gas, because of bottlenecks in the industries that produce such raw materials. Other reasons

condition where steel enterprises produce pig iron by using iron ore as input for blast furnaces, then convert this to crude steel using basic oxygen furnaces or open hearth furnaces.

Table 1. The major steel companies in Indonesia by type of product, 2009 (million metric tons)

Company HRC CRC Wire rod Total

Krakatau Steel 2 0.85 0.45 3.3

Gunung Raja Paksi 0.7 0 0 0.7

Essar Indonesia 0 0.4 0 0.4

Gunung Garuda 0 0 0.06 0.06

Hanil Jaya 0 0 0.1 0.1

Ispat Indo 0 0 0.7 0.7

Gunawan Dianjaya 0.35 0 0 0.35

Jayapari Steel 0.1 0 0 0.1

Raja Besi 0.1 0.15 0 0.25

Litt le Giant Steel 0.06 0.23 0 0.29

Intan Nasional 0 0.06 0 0.06

Master 0 0 0.25 0.25

Gunung Gahapi 0 0 0.1 0.1

Growth Sumatera Industry 0 0 0.05 0.05

Total 3.31 1.69 1.71

Source: CRU, Krakatau Steel (2011)

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are import constraints (in raw materials that are imported), and a defi ciency of capital, especially working capital. On the demand side, the main problem stems from the competition of similar products of other countries, changes in demand patterns that make related products less attractive and harder to sell, substitution by other steel products, and product synthesis with non- steel raw materials (Firmansyah, 2010).

That Indonesian steel industry is facing problems of low effi ciency, and low volume of production is supported by empirical evidence. Between 2004 and 2010, steel production was always lower than its consumption. In addition, there is an indication that the consumption of several steel products increasingly continues to outpace production, that is, that the gap between production and consumption of steel tends to be increasing (see Table 2).

Table 2. Production and consumption of several steel products in Indonesia, 2004–2010 (metric tons)

2004 2005 2006 2007 2008 2009 2010

Crude steel

Producti on 3,717,049 3,728,528 3,804,505 4,159,923 4,183,800 4,064,400 4,338,500 Consumpti on 5,404,939 5,465,744 5,695,182 6,189,052 6,746,096 6,154,781 6,724,219

PC rati o 68.8 68.2 66.8 67.2 62.0 66.0 64.5

Concrete iron

PC rati o 98.9 97.6 97.2 93.6 96.5 98.1 97.5

Steel wire and rod

Producti on 988,447 914,042 857,546 919,562 839,101 1,066,100 922,300 Consumpti on 1,088,394 1,224,408 1,020,282 1,167,243 966,217 1,084,549 953,077

PC rati o 90.8 74.7 84.0 78.8 86.8 98.3 96.8

Hot rolled coils

PC rati o 79.6 75.9 105.0 86.0 75.2 87.9 81.5

Straight weld pipe

Producti on 459,593 689,723 779,181 642,832 637,050 641,200 669,500 Consumpti on 483,933 870,976 823,786 680,985 769,364 711,845 731,163

PC rati o 95.0 79.2 94.6 94.4 82.8 90.1 91.6

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Cold rolled coils

Producti on 823,220 722,250 761,974 788,643 802,900 787,500 829,900 Consumpti on 1,202,404 1,336,246 1,105,406 1,416,060 1,658,284 1,415,812 1,765,411

PC rati o 68.5 54.1 68.9 55.7 48.4 55.6 47.0

Zinc sheets steel layer

PC rati o 81.2 80.8 80.9 65.9 60.9 72.2 73.0

Tin coated steel

pc rati o 42.9 36.5 46.9 47.4 45.7 53.5 48.3

Because domestic steel production cannot supply all that is needed for domestic consumption, Indonesia imports steel to meet its domestic demand. During the period of 1995 to 2010, there was a high and sustained growth of steel imports, 7.13 per cent per year on average. As a result of this growth, the share of steel imports in the total value of Indonesian industrial imports has increased, from 4.69 per cent in 1995 to 5.58 per cent in 2010.

Several Asian countries, such as Ja- pan, China, and the Republic of Korea, emerged as important steel suppliers to Indonesia. In 2010, Indonesia imported steel from these three countries, almost 45 per cent of the total value of steel imports. Figure 7 shows that steel imports from China have become more important in recent years. China was the third largest steel exporter to Indonesia in 2009. In 2010, after the start of ACFTA, China became the

second largest replacing South Korea, which moved to third place.

Being dependent on imports from other countries to meet domestic demand is an indication that the capability of Indonesia in producing steel is relatively weak. In addition to ineffi cient production process and dependence on imported raw materials (Sato, 2009), the competitiveness of Indone- sia’s steel products to compete with imported steel products in terms of its quality, its design, and its price hampers Indonesia to improve its capability in producing steel (Tambunan, 2006).

And the steel industry is extremely vital in boosting the growth of other industries and Indonesia’s economy as a whole. Thus, dependence heavy on imported steel will force Indonesia to face instability risk because of unman- ageable external shock in the global market.

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To promote domestic steel industry, it is important that Indonesia improves the cost competitiveness of its steel products. Revealed comparative advantage (RCA) calculation indicates that in 1995 and 2010, Indonesian exports from the steel industry continued to have a comparative disadvantage

(a value of RCA less than 1) in the international markets (see Table 3).

Furthermore, the RCA’s value of the Indonesian steel industry decreased from 0.299 in 1995 to 0.266 in 2010.

This suggests that the competitiveness of Indonesia’s steel industry is declining (see Table 3).

Source: Authors’ calculation using Comtrade database (2011)

Figure 7. Indonesia’s steel imports major origin countries, 2009–2010

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Table 3. Revealed comparative advantage of steel industry in Indonesia, China, Japan, and Republic of Korea, 1995–2010

Years Indonesia China Japan Republic of

Korea

1995 0.299 1.225 1.245 1.437

1996 0.252 0.856 1.258 1.475

1997 0.234 0.888 1.293 1.549

1998 0.508 0.593 1.350 2.130

1999 0.425 0.536 1.392 1.868

2000 0.316 0.728 1.366 1.746

2001 0.262 0.458 1.507 1.846

2002 0.279 0.367 1.637 1.616

2003 0.307 0.362 1.550 1.708

2004 0.349 0.706 1.368 1.522

2005 0.302 0.720 1.488 1.636

2006 0.455 0.943 1.459 1.562

2007 0.316 1.056 1.361 1.427

2008 0.373 1.130 1.517 1.529

2009 0.328 0.502 2.188 1.903

2010 0.266 0.699 1.926 -

Source: Authors’ calculation using Comtrade database (2011) Japan and the Republic of Korea

have a higher competitiveness in terms of steel products in the international market. Transformation of the steel industry from state-led development to liberalisation and privatisation through competition among private firms encouraged the industry in these two countries to improve their competitiveness (Sato, 2009).

Surprisingly, the competitiveness of China’s steel industry is not as impressive as those of Japan and the Republic of Korea. There are several possible explanations for this low competitiveness. It might be because the technical analysis of Revealed Com- parative Advantage (RCA) only mea-

sured the competitiveness of the steel industry relative to other industries besides that of steel. Therefore, we have to interpret the low competitiveness of China’s steel industry as being a comparison with several other of China’s industries. This low competitiveness may be a refl ection that China gives priority to marketing its steel product in the domestic market as a response to increased domestic demand (Holloway, Roberts, and Rush, 2010).

It is important to note that not all Indonesian steel products are at a comparative disadvantage in the international market. Among the four types of steel products, Indonesia has a comparative advantage for HS 7202

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(ferro alloys and ferro manganese). It is interesting to note that between 1995 and 2010, the competitiveness of these products increased slightly (see Table 4).

any niche market opportunity. This means the role of market promotion and market intelligence will become more important for the industry if it is to survive within an increasing competition. Increases in steel exports to European countries in 2010 should help motivate the industry to penetrate European and other non-traditional markets.

IV. CURRENT POLICY TO PRO- MOTE LOCAL INDUSTRY The government of Indonesia has several policies to develop local steel industry and encourage new investment in it.

To encourage the development of national steel industry, the government provides incentives for new investment.

First, the government has promulgated some policies on facilities for import duty relief, such as the Decrees of the Minister of Finance: No.135 of 2000, Table 4. Revealed comparative advantage

of several of Indonesia’s steel products

HS 1995 2002 2010

7202 4.323 2.040 4.888

7201 0.029 0.318 0.000

7203 0.262 0.185 0.035

7204 0.440 0.538 0.312

Source: Authors’ calculation using Comtrade database (2011)

Traditionally, Korea, Singapore, and Malaysia are the main destinations for steel exported from Indonesia (see Figure 8). In 2010, the Netherlands became the number one export destination replacing Korea, which moved to second place.

The recent change in the export market suggests that Indonesia needs to diversify its products to fi ll

Figure 8. Indonesia’s steel export to major destination countries, 2009–2010

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No. 28 of 2001, No. 456 of 2002, and No. 47 of 2005. These regulations were intended to increase opportunities for national steel producers to increase the value of their exports. Second, the government issued regulation in 2007 that provides tax incentives for investment in the fi eld of steel business. Third, there are incentives set by the government to attract investors: tax holidays and tax reduction, which include the reduction of net income tax by about 30 per cent of total income over a six-year period. The government also gives an acceleration of depreciation of fi xed assets, acquired in the context of capital investment.

In 2008, the government promulgated Presidential Regulation No. 28 of 2008 on the National Industrial Cluster stating that industrial development is directed at strengthening the key industrial cluster groups, including the

iron and steel industry. Furthermore, in 2009, the Ministry of Industry launched Decree No.103 of 2009 on the Road Map of Steel Industrial Cluster Development, which includes the development of basic iron and steel industries, steel mills, and industrial iron and steel pipe and pipefi ttings.

In April 2009, to help safeguard domestic steel industry, the government tightened the regulations on the import of 202 iron and steel products.

The Regulation of the Minister of Trade No. 21 of 2009, starting from July 2009, requires steel importers to process certifi cation and, prior to im- porting, to fi le a report to an appointed surveyor on their steel commodity needs. The regulation is intended to protect the domestic steel industry.

The regulation applies protection to 202 listed domestically produced steel products, including hot rolled coil and Source: Authors’ calculation using Comtrade database (2011)

Figure 8 (cont.). Indonesia’s steel export to major destination countries, 2009–2010

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hot rolled plate. Under this regulation, all steel importers must acquire certifi cation to import any of the 202 iron and steel products and must fi le reports of shipments to state-appointed surveyors. The reports themselves must include information, such as tonnages and where the imported steel is to be used. However, the regulation will not be enforced against products from countries with which Indonesia has signed bilateral trade agreements, including Australia, New Zealand, Japan, India, China, Russia, and the Netherlands.

In August 2010, the Indonesian government (represented by PT Krakatau Steel) and the South Korean government (represented by Pohang Iron and Steel Company [POSCO]) began the construction of the first phase of a plate mill with a capacity of 3 million metric tons in Cilegon (in Banten Province). This is part of an integrated, steel-industry development plan for steel mills, and the production of hot rolled steel (hot rolled coils), slabs (plates of raw materials and HRC) and steel plate with a total capacity of 6 million metric tons and worth around USD6 billion.

In January 2011, the government promulgated import regulations on iron and steel, through the Regulation of the Minister of Trade No. 54 of 2010. This policy sets the guideline that iron and steel may only be imported by

companies that have production license (Importir Produsen or IP) recognition.

The policy is to encourage the growth of the national steel industry. This regulation covers 166 post tariffs on iron and steel imports.

The Ministry of Industry has proposed, a cooperation program with Japan. It includes the use of a new technology, direct iron ore smelting (DIOS), to improve the efficiency of the country’s steel industry. The cooperation is under the Indonesia–Japan Economic Partnership Agreement (IJ–EPA).

The new technology allows processing that utilises smaller inputs of iron ore, which is suitable for Indonesia’s available natural resources. However, this technology is still in the knowledge-transfer stage and therefore any calculation of the investment needed would be tentative indeed.

Furthermore, because of concern about the negative effect of the implementation of the ASEAN–China Free Trade Area (ACFTA), the government is to delay the implementation sched- ule, specifi cally for steel products, until 2018. Likewise, the Ministry of Indus- try imposes a number of mandatory national industry standards in an effort to restrict the import of products from China, such as cold-rolled coil.

The government’s current policies, fi scal and non-fi scal, for the steel industry can be seen in Table 5.

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Table 5. Government policy: fi scal and non-fi scal

Government policy Descripti on

Tax holiday Regulati on by Minister of Finance on tax holidays for foreign investment, including investment in an integrated steel industry.

Import duty

In February 2008, the government issued anti -dumping import duti es by imposing a 5 per cent duty on imports of HRC from China, Taiwan, Thailand, Russia and India.

Minister of Finance’s regulati on 151 of 2009 imposing import duty safe- guards on domesti c nail products.

Minister of Trade’s regulati on 54 of 2010 setti ng guidelines for iron or steel imports.

• It covers 166 post tariffs on iron or steel imports.

• Iron or steel products can only be imported by the producer.

• Valid until December 2021.

Nati onal standards (SNI or Standar Nasional Indonesia)

• The mandatory SNI for steel sheets, plates and HRC referring to Ministry of Industry regulati on 38 of 2009.

• The Ministry of Industry regulati on 23 of 2011 for mandatory SNI for CRC.

Locati on

Providing economic locati ons, such as those close to seaports and close to the producers of raw material (that is, South and East Kalimantan) or close to markets (that is, West Java) to att ract private investors, parti cularly in the steel industry.

Consumer protecti on

Protecti ng the consumer from non-standard iron or steel products by pre- venti ng illegal imports (by customs surveillance).

V. CONCLUSION AND POLICY RECOMMENDATIONS To increase the competitiveness of the local steel industry, the government should intensify its efforts to further reform its policies in order to provide a more attractive economic environment for this industry.

Protecting the industry through import tariffs can be positive or negative for the industry itself. The positive effect is that the policy is expected to boost the development of downstream industries. Meanwhile, the negative effect is that the policy may cause the high dependence on imports. It can be seen that Indonesia has billet and slab producers (downstream); however,

we do not have steel pellets producers (upstream), and thus the encourage- ment by the government to support the creation of upstream industry is strongly needed. Finally, to create an effi cient steel industry, an integrated system must be built: upstream and downstream need to be taken care of at the same time.

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