A substantial holding in Indonesia's only steel mill, state-owned PT Krakatau Steel, will be offered to a strategic investor later this year following the launch of an initial public offering (IPO) - possibly as soon as the second quarter of this year. According to State Minister for State Enterprises, Sofyan Djalil, the government plans to divest 40% of the equity and is hoping to raise a total of between $160-200 million - to be ploughed back into the company.

Located on the western tip of Java, in Cilegon, the steel mill currently has the capacity to produce 2.2 million tons of steel per year, which is mostly bought locally from a wide range of industries. It makes automotive-grade hot-rolled steel used to for body panels and chassis parts for the Toyota Innova and Avanza and other locally-made vehicles.

Stakes in subsidiaries making semi-finished products, such as PT Krakatau Pipa and PT Krakatau Platinum Nusantara, will also be sold to help raise investment capital.

Fearing low public demand, the IPO will be launched as soon as market conditions stabilise, the minister recently confirmed. The funds raised would be combined with a proportionate investment by the Government to increase capacity. By 2009, steel production capacity is expected to be increased to over 4 million tons per year.

The recent strong growth in domestic vehicle production, a booming construction sector and strong demand from other domestic industries could put pressure on capacity requirements. The company exported 20% of its output last year, according the Sofyan, to countries such as China, US, Malaysia, Europe and Japan. This may be reduced to less than 10% this year to meet local demand.

Named after the famous volcano in the Sunda straits between the islands of Sumatra and Java, which exploded with devastating consequences in 1883, PT Krakatau Steel is expected to generate a turnover of $900 million this year. Increasing capacity and making greater use of local raw materials has to be achieved if it is to become a global-scale steel producer, as the government is targeting.

Currently, Krakatau Steel relies on imports of raw materials from Australia and Brazil. The steel it currently produces reportedly costs around $400 per ton, compared with $300 per ton by competitors elsewhere, such as in China.

A new iron ore processing plant is planned for Kalimantan, where the raw material is abundant, with a capacity of 4.3 million tons per year. Sulawesi is another key island where raw material is abundant. Ultimately, the Government is targeting a capacity of 20 million tons of steel per year, to be achieved by 2020.

Recently Arcelor-Mittal, the Indian steel giant, has joined the chase for a stake in the company, which mostly includes Asian-based steel companies such as Essar International Ltd (India), Bao Steel, Ispat Ltd and Nanjing Iron Steel Co Ltd. The Arcelor-Mittal offer being considered is said to involve the entire 40% stake that the government plans to release.

Tony Pugliese