Investment in the Steel Industry Slows Amid Downstream Ambitions Investment in Indonesia's steel industry slowed in the second quarter of 2026 due to high interest rates, rupiah volatility, and an influx of imported steel.

Investors in the steel industry appear to be holding back expansion in the second quarter of 2026, allegedly due to the impact of rising capital costs due to high interest rates, rupiah exchange rate volatility, low utilization of national factories, and the influx of imported steel that continues to put pressure on domestic producers. Indeed, iron/steel remains one of the mainstays contributing the most to downstream investment realization. A report from the Ministry of Investment and Downstream Investment Coordinating Board (BKPM) last weekend stated that realized investment in the iron/steel sector reached IDR 13.2 trillion in the second quarter of 2026.  However, upon closer examination, steel investment realization fell by around 22.4% compared to the first quarter of 2026, which amounted to IDR 17 trillion. Yusuf Rendy Manilet, an economist at the Center of Reform on Economics (Core) Indonesia, believes the decline in iron/steel investment realization cannot be viewed simply as a cyclical correction. He argues that while investment in the steel industry typically fluctuates following the disbursement of major projects, the sector's fundamentals point to deeper challenges. He explained that the current utilization rate of national steel mills is still around 52%, far below the ideal level of around 80%. At the same time, imported steel is estimated to already control more than half of the domestic market. This situation has led investors to hold back on expansion because existing production capacity is not being optimally utilized. "So, in my opinion, this weakening investment reflects structural issues more than just short-term fluctuations," he told Bisnis on Monday (July 20, 2026). READ ALSO Steel Investment Sluggish in Q2/2026, This Factor Is the Culprit Stumbling Blocks in the Asian Steel Industry and Indonesia's Opportunities for Market Share Expansion Chinese Steel Giant Sues British Government Over Nationalization of British Steel Yusuf stated that the current pressure on the steel industry stems from a combination of global and domestic factors. Globally, the global steel industry remains overshadowed by excess production capacity in China, which reaches approximately 1 billion tons per year. With a national production capacity of only around 18 million tons, even a small portion of China's steel exports is enough to put significant pressure on the Indonesian market. This situation is exacerbated by the continued decline in global steel prices, making imported products increasingly competitive. Activities at the steel mill The risk of a flood of imports also increases as major export destinations, such as the European Union, tighten their import policies. As a result, the global supply glut could potentially be diverted to countries with less restrictive market protections, including Indonesia. Meanwhile, on the domestic side, Yusuf stated that steel demand has not yet fully recovered. However, the main issue isn't simply weak demand, but rather the suboptimal protection of the domestic market, forcing local producers to compete directly with low-priced imports. On the one hand, the government continues to promote downstreaming and infrastructure development, which will increase national steel consumption. However, this increased demand has not yet fully benefited the domestic industry, as it is still largely met by imported products. "This means the market is actually available, but it hasn't yet become a market for local producers. This is where the paradox lies," Yusuf emphasized.  The government has implemented various instruments, such as anti-dumping duties, import regulations, and national standards. However, he believes their implementation is still insufficient to provide certainty to investors.  He explained that, from a business perspective, companies would certainly not increase investment when existing production facilities were still operating far below their economic capacity. Yusuf warned that weakening investment in the steel sector could potentially have a ripple effect on the national manufacturing industry. Steel is an upstream industry that supplies various strategic sectors. The construction, automotive, heavy equipment, shipping, and machinery manufacturing industries are expected to become increasingly dependent on imported raw materials if investment in the steel sector continues to weaken. Yusuf also argued that the closure of several steel mills in recent years demonstrates that the issue has impacted production capacity and employment. "In the long term, this situation could reduce the resilience of the manufacturing sector and undermine the government's downstreaming goals," he said.  Macroeconomic Influence Meanwhile, Bank Permata Chief Economist Josua Pardede stated that steel investment is currently facing pressure from high financing costs. Bank Indonesia reportedly raised the BI Rate to 5.75% in June 2026 to maintain rupiah exchange rate stability and control inflation.  At the same time, the interest rate structure of Bank Indonesia's Rupiah Securities (SRBI) is also maintained at an attractive level to encourage foreign capital inflows. According to Joshua, this policy is crucial for maintaining macroeconomic stability, but it also increases funding costs for capital-intensive industries like steel. "When interest rates are still high and the rupiah is volatile, calculating project feasibility becomes more difficult," he told Bisnis on Monday (20/7/2026). In addition to interest rates, the weakening rupiah also increases investment costs, as the steel industry still relies heavily on imports for most machinery, technology, and raw materials. Global economic uncertainty has also led investors to wait until steel prices, energy costs, and demand prospects become clearer before pursuing expansion. The investment table in downstreaming shows a decline in the steel sector. Funding cost pressures are also beginning to be reflected in the banking sector. Josua explained that the interest rate on rupiah-denominated third-party funds (DPI) increased from 2.65% in April to 2.70% in May 2026. This increase has the potential to trigger adjustments in lending rates, thereby narrowing the scope for investment financing. Despite this, Joshua assesses that the medium-term prospects for the steel industry remain quite positive. Demand is expected to continue to come from mineral downstream projects, infrastructure development, industrial estates, the energy sector, construction, housing, and transportation equipment manufacturing. This optimism is also reflected in Bank Indonesia's Prompt Manufacturing Index (PMI-BI) for the second quarter of 2026, which shows the base metals industry is still in an expansionary phase, with an index of 53.59%. In the third quarter of 2026, the index is projected to increase to 55.87%. "This means that, from a business perspective, the base metals sector has not completely lost its prospects," he explained. The problem, Josua continued, is that downstream investment has not yet fully flowed into the national steel industry. Downstream investment is currently concentrated in certain minerals such as bauxite, nickel, copper, steel, and silica sand, with downstream investment realization in the second quarter reaching around Rp152.7 trillion, or nearly 29.8% of total investment in that quarter.  Therefore, Joshua believes the government needs to ensure that downstream investment truly creates demand for the national steel industry. In addition to strengthening supply chain connectivity, the government also needs to accelerate the development of supporting infrastructure, maintain exchange rate stability, strengthen import oversight, and provide more targeted investment incentives for the steel industry. "The prospects are still there, but the government must ensure that downstreaming truly extends throughout the domestic steel industry chain, not just stopping at upstream mineral investment," he stressed.