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State-owned PT Krakatau Steel and South Korea’s Pohang Iron & Steel signed a preliminary agreement on Wednesday to build an integrated steel mill in Banten.

The joint venture is estimated to cost $6 billion and construction is scheduled to begin in August, after a final agreement is signed in April.

“This will be the starting point for these two giant steel makers,” Industry Minister MS Hidayat said at the signing ceremony between Krakatau president director Fazwar Bujang and Chung Joon Yang, chairman and chief executive of Pohang, better known as Posco.

Posco is South Korea’s largest steel maker, producing 30.5 million tons a year. Krakatau, Indonesia’s largest steel company, has an annual production capacity of 2.5 million tons.

Fazwar said Krakatau would have a 30 percent to 45 percent stake in the joint venture, with the majority share controlled by Posco.

He said the project, which will have an annual capacity of six million tons, would boost Krakatau’s production capacity to 3.5 million tons.

On Tuesday, Fazwar said the joint venture was crucial to Krakatau’s plans to become more competitive in the face of a region-wide free-trade agreement with China that comes into effect on Jan. 1. Chinese steel products already sell at much cheaper prices than those of domestic manufacturers.

The coming trade pact between the Association of Southeast Asian Nations and China will see import duties scrapped or reduced on numerous products including steel. Imported Chinese steel products currently have import duties of 5 percent to 12.5 percent, but next year the tariffs will be reduced to zero to 5 percent.

“Demand will grow next year due to the expected economic recovery, but does it mean local producers will be better off? No, things will remain difficult while Chinese exporters are keen to dump their products here,” Fazwar said.

In 2008, domestic steel producers supplied only half of Indonesia’s demand of nine million tons.

Chung didn’t speak at the signing and declined to talk to the media about the deal.