Prime cause of failure – non-integration

ROBERTO Cola, the president of the Philippine Steel and Iron Institute (PISI), says the primary cause of the decline of the steel industry is its failure to integrate. He also said that is again being seen today: “There’s lack of value adding among the present local players.”

China and Vietnam, for instance, Cola adds, each has a very integrated steel industry and so does Thailand.

Politics and self interest among businessmen close to the government also play a role in weakening the steel industry.

State control required

The government, Cola said, should have maintained ownership of the National Steel Corp. (NSC) because state control is the successful model of integration as seen in the experience of the countries of the region.

“The model in developed countries, even in Japan, has the old steel companies like the Nippon Steel, all government-owned. Then there’s Korea. Korea was at the same level with the Philippines during the 60s.
Its government followed the correct model. The government must initiate,” he said.

Cola said the steel industry is a basic and essential industry. If the country were still developing normally almost 80 percent of steel production would go to the construction of bridges, elevated highways, and buildings. As a country develops its manufacturing sector starts to increase consumption of flat steel products.

In their industrial development, other countries go to high value added products like automotive vehicles, appliances and special machinery and equipment. This happens when they have become fully developed and integrated. The value chain has gone so far because they developed their basics, he explained.

But in the case of the Philippines, Cola lamented, local manufacturers have to import the steel, making it impossible for them to catch up with their competitors. And of course investors will not waste their investments on something without much return.

“The government must have a will to improve the situation. Apparently our government, since the steel industry collapsed, doesn’t have much will in reviving and then advancing the industry. There’s no clear policy for the players to see that it will be profitable for them to pursue the growth of the steel industry,” Cola observed.

Businessmen, politics and corruption

What caused this bad situation?

“The problem was that policies were influenced by people with vested interest,” he said. “We have pro-importation groups. Maybe that’s the reality in our country. The group whose interest wins, you’ll see the present result and steel is just one of them and we have other industries that remain under-developed,” he added.

Another problem is high energy cost.

The price of power in the Philippines is so high that makes the locally produced steel uncompetitive with its neighbors. This also jacks up prices of finished products in the domestic market.

“The power industry is also a big problem not just the steel industry. A failure of one industry is a failure of another,” Cola said.

Besides these problems, the PISI also listed several others concerns that hamper industry growth.

These include volatility of domestic macro-economic environment, big fluctuation in the country’s annual steel demand, declining manpower pool because of migration and poor-quality graduates.

He said schools must also strengthen their engineering curricula and training programs to meet the demand for technical skills.

Failure of the National Steel Corp.

In the case of the NSC, Cola said, competing interest within the government ruined the viability of the formerly government-owned steel company.

The interests of the importers prevailed over those who believed developing the local industry was much more important than importation. So the government embraced trade liberation of steel and iron products.

“There are a lot of interests there that contradict the policy of having a government-run steel company because it was competing with the importers. That’s the bottom line. People trading in steel or importing steel are affecting the people in government when they say ‘We can’t make money out of it there’s no need for us to develop that. So let’s just import, its cheaper.’ So that’s what happened. NSC was privatized,” Cola said.

When it was privatized the company was sold to the wrong people. They were the Malaysians a small business and they couldn’t operate a big firm.

Cola suspected there was ano-maly in the deal. After the Malay-sian company went bankrupt, the NSC was transferred to another Malaysian operator that didn’t have interest in steel. It was engaged in property development. Then an Indian company eventually bought NSC.

The NSC privatization had a certain guideline but the government did not observe them guidelines. “One guideline says that the partner must have the capability to operate but the government people in charge ignored that. They sold NSC to a small company that had connections with the people of the Ramos administration. Of course it failed because it’s not their core business. So they sold it again this time to the Indians. But the Indians did the same. They have no money and now it’s the banks that have the problem. So that’s the sad story.”

Cola said, “We have a lot of bright boys in the government that want to focus on IT [information technology]. Sometimes it may be good. But they don’t know that the steel industry is one of the basic technologies when it comes to manufacturing.”

The NSC couldn’t compete because it’s not an integrated steel mill, he explained. And even if it were integrated, but doesn’t have the technology it couldn’t be at par with other producers abroad.

Tariffs in imports must not be removed

Cola said that if the government removed tariffs on imported products, the NSC would be at the losing end because it could never compete. The cost of production is very important and if a company like the NSC is not integrated and had a very small margin in the midst of strong competition, it couldn’t survive.

Other countries like China, Vietnam and Thailand have better value chains so they have a lot of elbow room to maneuver and add value to their products.

They begin from iron ore, then move from iron ore to liquid iron, liquid iron to making slabs or billets then hot rolling coil, cold rolling or rebar.

“But for us we import slabs or hot rolled coil. We have a very small room to add value, and there are only one or two manufacturers. For them it starts from iron ore, it’s easy to raise value, from iron ore, to slabs, they can negotiate good prices,” he said.

Because steel making is a very intensive industry, Cola explained, the process chain is much more efficient in modern plants abroad than the manufacturers in the Philippines. During processing, the ones abroad immediately pass semi-processed steel to the next level while the iron is hot to save energy thus lowering the production cost.

Producers in the Philippines have to reheat imported slabs or billets and this adds to the cost, he said.

“We reheat it. We spend $40 per ton. So you consume a lot of cash just for energy.” –ANGELO S. SAMONTE REPORTER, Manila Times