Steel nerves amidst pressure

It has been two and a half years since the National Steel Corp. (NSC) had shut down its plants in Iligan City, leaving a trail of tears, deprivation and lost dreams in its wake.

How else would you describe a catastrophe that left 2,000 people out of jobs, had put about 80,000 children out of school, deprived the city of P160 million in taxes yearly, and denied the government of close to P1 billion in duties on the raw material the company imports annually?

NSC used to be the largest Philippine producer of hot-rolled coils and semi-finished materials for roofing as well as pipes and tubes.

When it closed shop, the scrap iron business lost P1.4-billion worth of business, and its neighbor in Iligan, the Refractories Corp. of the Philippines, lost 30 percent of its market. Mabuhay Vinyl Corp. was also severely hit, and the National Power Corp. lost P720 million in electricity sales yearly.

Has anybody learned anything from the National Steel debacle? What sayeth the government, the creditors, and the investors? More so the Malaysian investors?

Not knowing who screwed who, the Malaysians and the government seems willing to repeat the experience all over again.

Lately, the survival of the company was transformed into ticklish political issue, thus, according to my "e-bugs" (euphemism for "sources"), it was in the agenda of the overnight visit of President Arroyo to Malaysia two weeks ago.

My "e-bugs" further reported that while it is true that the President was trying to entice more Malaysia firms to invest, part of the classified agenda – aside from the ownership of the Spratlys – was what to do with NSC, specifically its future.

A source said that Malaysian Prime Minister Mahathir threw a tantrum months ago when Philippine banks were planning to foreclose the steel plant and find a new buyer for the company. Banks had wanted to own 100 percent of the company to be divided corresponding to their exposures.

Dusting old newspaper stories and other reports, my "e-bugs" reminded me that of the P16-billion obligations of NSC, more than P5 billion was owed to Philippine National Bank (PNB) because of a sweetheart transaction that was maneuvered by no less than its former president and former finance secretary who was reported to be the broker for the Wing Tiek Group.

Wing Tiek was the arrogant company that promised to put equity in NSC when it bought almost the entire steel firm from the government in 1995. But instead of bringing in something, Wing Tiek ended up badgering local banks for financing.

Two years later, another Malaysian firm, Hottick Investments Ltd., absorbed the stake of Wing Tiek and then turned around to sell it to the Renong Group. Then the Asian crisis struck and Renong’s supposedly lofty plans for the local steel firm were abandoned.

By early 1999, the debts of National Steel had piled up to more than P12 billion, and without capital infusion from the Malaysians, NSC was forced to borrow some more. The steel firm shut down its facilities in late 1999.

To date, the ownership of the steel firm lies with the state-owned asset management firm of the Malaysian government called Danaharta.

Here we are now, one administration later, with the government still biddable to the whims of the Malaysians who got the steel plant into trouble in the first place.

Not that the government was entirely faultless. National Steel was a vital industry that was breaking even, at least before the Malaysians came into the picture. In the late 80s, it was still a profitable company.

The government not only turned over a jewel to a Malaysian firm that bilked local banks of billions, it also eased tariff and quota restrictions on steel imports that made NSC less viable.

Now the creditors who believe they should control the company, and in this case, rightly so, are being forced to compromise because of the diplomatic pressures being applied by the Malaysians.

Mahathir understandably would not want any Malaysian investment in the Philippines go to waste; any overseas financial scandal would definitely be fodder to those trying to damage the Malaysian leader’s image.

Thus, instead of gaining 100 percent, the banks are being forced to bend backwards to accept a 75-percent to 25-percent ownership sharing. Clearly the banks are not happy. But if it would pave the way for finding a buyer for NSC, there are apparently willing to accept the deal. After all, bankers take comfort in the thought that the 25-percent stake is to be shared by the Malaysian and Philippine governments.

The next problem, assuming the ownership issue is resolved, is to find the buyer for the plants when the steel industry itself is at odds on the issue of tariff restrictions, or lack of it. The government is caught in the middle of this tug-of-war.

Upstream industry companies like National Steel and Cathay Pacific Steel Co. (of Estrada adviser Johnny Ng) are asking the government to impose higher tariffs and quota restrictions on steel, particularly those coming from Russia and Ukraine.

On the other hand, the downstream industry led by Filipino-Chinese businessmen like John Copengco, Marcelo Co, and Johnny Ong want the government to make the entry of cheap steel easier.

When the government had raised tariffs on imposed steel in early 1999, downstream players deemed it unfit; upstream players, on the other hand, grumble that the move is insufficient considering that the United States and Canada have raised their tariffs versus imported steel to between 70 and 218 percent.

The question now is, does the government know where its priorities lie?

As it prepares an incentive package including more tariff protection to rehabilitate National Steel and attract buyers to the company, will the government also weigh the 782 companies compromising the downstream steel industry employing over 60,000 people?

I agree that the rehabilitation of the country’s largest upstream steel player is important, but the government must pursue this objective not just with Malaysia in mind but also the workers, their families, the foregone government revenues, and its impact to other domestic industries.

Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. If you wish to view the previous columns, you may also visit my website at http://bizlinks.linkedge.biz.