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Domestic steel prices are likely to rise 15 percent to 20 percent in the first half of the year, triggered by an increase in international prices for iron ore, a senior official at state-owned steel company PT Krakatau Steel said on Thursday.

Irvan Hakim, Krakatau’s marketing director, said iron ore prices on the international spot market had risen 30 percent to 40 percent since December, and would eventually lift domestic steel prices.

“Nearly all the steel products such as iron sheeting, nails, reinforcement wire for concrete and pipes, will gradually increase, because the steel industry relies on iron ore,” Irvan said.

In 2008, domestic steel producers supplied only about half of the country’s steel demand of nine million tons. Steel is a vital raw material for the construction industry.

“We have heard that iron prices will increase and it will affect construction companies like Wijaya Karya,” said Slamet Maryono, director of operations at state-construction firm PT Wijaya Karya (Wika).

He said Wika would likely pass on the increase in steel prices to developers in future contracts.

The recovering global economy has boosted demand for scrap metal, especially in the United States and Japan, driving the price of steel products higher. Rising oil prices also mean higher transportation costs.

“The price in rupiah already includes the cost for warehousing and distribution to consumers. When international iron ore prices rise, we will definitely be affected,” Irvan said.

The new free-trade agreement between China and the Association of Southeast Asian Nations scrapped import duties on steel from China as of Jan. 1, opening the door for cheap Chinese-made steel products to flood the country.

However, according to Irvan, the inflow of Chinese imports will not lower prices in Indonesia because Chinese steelmakers will also be forced to pay more for iron ore.

The Chinese government’s massive stimulus package, which is causing a surge in infrastructure projects, has been blamed for the jump in iron ore prices.

Iron ore imports by China surged 22 percent in December to the second-highest level on record, strengthening the ability of miners BHP Billiton, Rio Tinto and Vale to ask for higher prices, according to Bloomberg.

Contract prices may rise as much as 50 percent this year, investment bank Nomura said this week.

Suppliers of iron ore hold annual talks with steelmakers to fix benchmark contract prices for the 12 months from April 1, the start of the Japanese financial year.