The PT Krakatau Steel Tbk (KRAS) shareholders’ meeting scheduled for September 5, 2024, has attracted considerable attention. KRAS needs a recovery in financial performance and a leap in innovation, including through the development of green steel, or low-carbon steel. Previously, this state-owned steel issuer recorded a loss of Rp476.57 billion in the first quarter of 2024, a 59.50% year-on-year (yoy) increase in losses. KRAS’s deteriorating financial performance has had a significant impact on the trend in its share price. On August 23, 2024, KRAS shares closed at Rp107 per share, down 52.6% year on year.

As a step toward restoring its financial performance, KRAS plans to undertake financial restructuring by issuing Mandatory Convertible Bonds (OWK), subject to shareholder approval at the upcoming Annual General Meeting of Shareholders (AGMS). It should be noted that KRAS previously issued Mandatory Convertible Bonds in 2022 as part of the National Economic Recovery (PEN) program following Covid-19. The OWK issuance provided Rp3 trillion in government funding through the issuance of Series A bonds worth Rp2.2 trillion and Series B bonds worth Rp800 billion, via a private placement mechanism, with maturity on December 30, 2027. However, KRAS’s share price at the time was Rp348 per share, higher than the current price of Rp100 per share.

Issuing OWK when the share price is low actually risks placing additional pressure on existing shareholders, because more shares will have to be issued upon conversion to meet the same bond value. In other words, existing shareholders could face greater dilution of their share ownership.

Therefore, KRAS management should provide investors with assurance by setting out a plan to improve the company’s financial condition and allocating the proceeds from the Convertible Bonds to more than simply covering the company’s losses. The Convertible Bonds could be used to fund projects capable of attracting new investors, such as transforming the business toward low-carbon steel products (green steel).

The Green Steel Trend

As global awareness of the impacts of the climate crisis caused by carbon emissions grows, demand for environmentally friendly products has risen significantly in global markets, particularly demand for green steel. According to Fairfield Market Research, a business division of London-based Fairfield Consultancy Services Limited, the global green steel market is expected to continue growing, reaching USD47.2 billion by the end of 2030, with a CAGR of 122.9% over the 2023–2030 assessment period. This projection is borne out by investment trends in various countries as they take steps to decarbonize the manufacturing sector, particularly the steel industry. One example is the United States Department of Energy (DOE), which provided the steel industry with US$1.5 billion in grants last March to promote low-carbon steel production technologies.

In 2021, Swedish steel company SSAB announced its plan to become the world’s first carbon-emissions-free steel producer by 2045. SSAB uses green hydrogen-based technology in its steel production to replace coal, known as hydrogen breakthrough ironmaking technology (HYBRIT).

The HYBRIT project was well received by global market participants, and SSAB’s share price surged by as much as 50% in the third quarter of 2021 compared with the same period in 2020. This trend continued as SSAB committed to accelerating its green transition in early 2022. Through its investment in green technology, SSAB has also strengthened its position as a pioneering green steel producer on the global stage and attracted major automotive companies such as Volvo and Mercedes-Benz, which are committed to sustainable supply chains.

Convertible Bonds as a First Step in Financing Green Steel

With regard to the use of mandatory convertible bonds, KRAS management could take a cue from ArcelorMittal. In 2022, ArcelorMittal issued green convertible bonds worth €1 billion, maturing in 2029. The green bonds were issued to fund green steel projects, in line with ArcelorMittal’s commitment to support the Net Zero Emission agenda by 2050. ArcelorMittal’s move proved highly successful: on January 14, 2024, the French government announced that it would provide €850 million in investment support. The funds will be used to purchase two Electric Arc Furnaces (EAFs) and build a Direct Reduction Plant. This technology is intended to replace Blast Furnaces and Basic Oxygen Furnaces, which are still coal-based and are the main cause of high carbon emissions in the steel industry.

Therefore, Krakatau Steel, Indonesia’s largest steel company, must become a pioneer of the green transition in the country’s steel industry. The prospects for green steel in international markets cannot be ignored. Krakatau Steel has a significant opportunity to participate in the green steel market. Green steel could be a turning point for Krakatau Steel in improving its corporate performance. Publishing a KRAS decarbonization roadmap with detailed targets and regular evaluations would be a game changer.

Given the many new investment opportunities, such as green financing, that Krakatau Steel can leverage to ensure its business remains sustainable in the future, the Mandatory Convertible Bonds to be issued at the upcoming GMS must be used as initial capital for green steel development. In addition, the international financial industry is increasingly aware of the need to decarbonize industry. This will provide a fresh boost and make KRAS more attractive to existing shareholders and prospective investors after the GMS.

Bakhrul Fikri

CELIOS Economic Researcher