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State-controlled fertilizer maker Pupuk Kalimantan Timur has asked Bank Mandiri to arrange $337 million in loans to help it finance the construction of Indonesia’s largest fertilizer factory.

PKT signed a deal on Monday with Bank Mandiri, the country’s largest lender by assets, for it to be the lead arranger for the loan Other lenders in the syndicate are Bank Rakyat Indonesia, Bank Central Asia and regional development banks BPD Kaltim and BPD Jawa Barat & Banten.

The dollar-denominated 10-year loan will have a three-and-a-half year grace period, during which PKT does not have to repay any part of the principal.

PKT president director Aas Asikin Idat said on Monday that the new factory, known as Kaltim-5, would have an annual production capacity of 1.15 million tons of urea granule and 850,000 tons of ammonia. “It could also be Southeast Asia’s biggest fertilizer factory,” Aas said.

Construction on the Rp 6.15 trillion ($720 million) factory is expected to start before the end of this year, he said. The new factory would replace PKT’s 20-year-old factory known as Kaltim-1, which has poor energy efficiency. Upon its completion, scheduled for 2014, PKT’s total annual production capacity would rise to 3.4 million tons of urea and 2.1 million tons of ammonia.

He said the new factory would play an important role in cutting the difference between fertilizer supply and demand. National demand for urea is at around 9.3 million tons, but total production by local companies last year was only 6.6 million tons.

The total production capacity of local fertilizer companies was actually more than 8 million tons, but aging factories had slowed production, he said.

This year, PKT expects to meet its urea production target of 2.8 million tons, while total production by state fertilizer companies is expected to reach about 7 million tons, he said.

Pupuk Sriwidjaja is a holding company for seven fertilizer producers, including PKT, Pupuk Kujang, Petrokimia Gresik, Pupuk Iskandar Muda, Rekayasa Industri, and Mega Eltra.

From next year, the Kaltim-5 factory will receive 80 million standard cubic feet per day for 10 years from Pearl Oil, Total ERP Sebuku, Inpex South Makasar, Total E&P Indonesie and Inpex, Aas said. The selling rate would be based on the price for urea and ammonia, he said.

State Enterprises Minister Mustafa Abubakar said the availability of fertilizer was critical for the country to be able to produce its own food. The nation has been importing rice, sugar, salt and wheat among other commodities to cover a shortfall in feeding its 240-million strong population.

“The president has been prioritizing since last year the construction of Kaltim-5 so it can support the country’s food self-sufficiency program,” he said.

Zulkifli Zaini, president director of Bank Mandiri, said that in the year’s first half, Mandiri disbursed Rp 10 trillion in loans to national fertilizer companies.

“The fertilizer industry has been one of our priorities. We are committed to increasing our loans to the sector and helping the government’s food self-sufficiency program,” he said.

Agriculture Minister Suswono on Monday said the government was considering relocating its planned food estate from Papua to East Kalimantan, where there was a potential 200,000 hectares of land that could be used as an agriculture cluster.

“It may not as big as in Merauke [in Papua], but it is more feasible. It has been two years since we floated the plan, but there has been no progress at all,” he said.