Steel industry development: RP’s elusive dream

There is a growing concern among major players of the local iron and steel industry that their business will plunge into a limbo when government support and protection are withdrawn come August this year, unless the government acts swiftly and decisively to save a strategic sector of the national economy.

The common sentiment is that the domestic companies would be left to fend for themselves in an environment of cutthroat competition, runaway inflation and rising costs of labor and importations of basic raw materials.

With the imminent lifting of government incentives, the players believed that their future looks dimmer than ever, and development of the steel industry is placed in serious jeopardy. Their anxieties and apprehensions will likely trigger spirited discussions at the annual convention of the Southeast Asia Iron and Steel Institute in Cebu City on May 15-17.

Wellington Tong, president of the Philippine Iron and Steel Institute, host of the regional conference, has called on the government to launch a vigorous campaign to develop the local steel industry by attracting more foreign investors.

Industry observers noted, however, that Tong was missing the point, saying the basic issue concerns the creation of a viable business environment to spur the growth of the domestic players and pave the way for eventual integration of the industry as a key prerequisite of national industrialization.

The Philippines took its first step towards the integration of the steel industry 51 years ago, yet the country is still a long way from the objective owing largely to faltering policies and lackluster implementation of pertinent laws, rules and regulations.

A noted technocrat has an even more stinging rebuke over the situation. In his study of the domestic steel industry in late 1993, Ernesto Valencia of the Philippine Center for Policy Studies remarked: "The history of our steel industry has been of failed initiatives, lost opportunities and bureaucratic inefficiency and corruption."

By and large, nothing much has been gained over the past half century. . . In this context, this year’s convention of the Southeast Asia Iron and Steel Institute hosted by the Philippine Iron and Steel Institute in Cebu on May 15-17 is held doubly significant as it will discuss the ASEAN Steel Industry Techno-Economic Perspective.

Integrate or perish

Setting aside the arguments pertaining to the financial aspects of integration, policy-makers and experts agree on the need to integrate because steel is a basic component of industrialization, hence it is considered a strategic sector of the national economy.

Owing to the fact that putting up a steel mill is a capital-intensive undertaking that also entails a long gestation period before it brings in profits, there may be two ways to speed up the integration process. One is to encourage massive infusion of capital by private business through attractive state support and incentives. The other is for government itself to take a stronger involvement in the industry, meaning copy the successful experience of other countries where the state put up its own steel factory, then privatized it at an appropriate time.

In his study, Valencia insinuated that the country missed the boat on the integration issue. "The Philippines would have had a big start over the other Asian countries if the plans (for integration) pulled through on schedule. Only Japan had an integrated steel industry that time," he pointed out. As it turned out, our Asian neighbors South Korea, Taiwan, Indonesia and Malaysia have overtaken us in the race to integration.

A country is said to have an integrated steel industry if its facilities can perform the whole gamut of production, from smelting of the basic ores down to the manufacture of the end-products that find their way to the hardware stores.

What the Philippines has is a discontinuing line of production, importing most of the primary raw materials such as the hard-rolled coils and cold-rolled coils that translate into a big drain on the country’s foreign exchange reserves.

A tale of glory and horror

The country took its first step toward integration in 1995 when, by virtue of Republic Act 1396, the government authorized the state-owned National Shipyards and Steel Corp. (NASSCO) to set up pig iron smelting plants. Envisioned as the catalyst for integration, the government earmarked P50 million for this venture and clothed it with monopoly until it attained viable operations.

NASSCO was also allowed to borrow $62.3 million from the US Eximbank for the importation of machinery and other capital equipment. In 1959, Eximbank demanded privatization of 49 percent of NASSCO assets and Jacinto Steel won the bidding, with several incentives to boot, including control over competing imports, foreign and exchange supply, 10-year holiday from taxes, levies and fees, and priority for raw material requirements.

Delay of implementation, however, seriously affected its viability. The purchasing power of the $62.2 million borrowed from Eximbank, originally estimated to cover the entire integration process, had become enough only for a cold rolling mill and a hot rolling mill by 1963. Additional capital of $70 million was needed for the blast furnace but the Board of Investments was cold to the idea.

By 1970, the Jacintos’ nightmare began. All hell broke loose as government financing institutions became uncooperative, the peso value declined as costs of importations and loan interests went up, while state protection schemes were withdrawn. The following year, IISMI was blacklisted by the Central Bank, effectively closing the bank’s lending windows on the company. Even the Japanese Ministry of International Trade and Industry (MITI) froze its credit on IISMI. A series of negotiations with the government achieved nothing for IISMI.

When President Marcos declared martial law in 1972, things turned for the worst for the Jacintos. The government confiscated all their assets. The Jacintos fled to the US. They left behind a padlocked steel factory and foreclosure proceedings initiated by the DBP. The foreclosure was eventually completed, and the firm was renamed anew to National Steel Corporation (NSC).

After the EDSA Revolution in 1986, the Jacintos tried to regain the NSC which has been placed under the control of the Department of Trade and Industry, but never succeeded. Meanwhile, the government sold the mothballed NSC to a Malaysian company that failed to put it back into full commercial operation, reacquired it, then sold it again to Global Steel.

Living on borrowed time

To stir investor interest and ensure the growth of the iron and steel industry President Corazon Aquino enacted on Aug. 8, 1991, Republic Act 7103, also known as the Iron and Steel Industry Act. The law has a keen eye on integration "that makes full and efficient use of the country’s human and natural resources taking into consideration its critical impact on employment, indigenous resources utilization, foreign exchange and balance of payments position."

R.A. 7103 was thus seen as the catalyst for integration which, in turn, is viewed as a springboard to national industrialization. To attain the law’s vision, the government was mandated to provide the necessary stimuli in the form of incentives.

To avail itself of the package of incentives, a corporation must be duly certified as eligible by the Board of Investments based on five criteria: nationality, manufacturing activity, technical and economic capability, separate accounts and environment protection. The grantee can enjoy the incentives for a definite period of 15 years.

To boost further the development of the industry, President Fidel V. Ramos created the Presidential Iron and Steel Committee (PISC) that challenged private business to take the lead in the integration program. Only three companies responded — the Jacinto Group, the NSC and the Philsteel Group.

Of the three, only the Philsteel project, addressing the concerns of the midstream and downstream sectors of the industry, pushed through. The two others simply fizzled out mainly due to the huge amount of investments required to put up the projects.

Cognizant of the fact that setting up a steel production facility is a capital-intensive venture, the government came up with a package of attractive incentives including the Rational Tariff Incentives and Protection Scheme concerning imported raw materials.

Unfortunately, the incentives offered under R.A. 7103 are good only for 15 years, by which the grantees were supposed to be operating profitably, and the vision of the law attained. But the hard reality is there’s no light yet at the end of the tunnel toward industrialization.

The incentives are set to expire this August, seriously endangering the viability of the local steel industry. This has triggered a debate on whether or not the President can resurrect or prolong the grant of the incentives without the legislative imprimatur if only to ensure the growth of the local industry.

Industry stakeholders assert that she could do it by virtue of R.A. 7103 which recognizes the continuing rights of a certified enterprise, as well as in the spirit of the flexible tariff clause of the Tariff and Customs Code.

Industry observers also pointed out that the government has often flip-flopped on the implementation of the tariff incentives program to the detriment of the industry’s viability, and President Gloria Macapagal-Arroyo has the golden opportunity to rectify past mistakes, institute sweeping reforms, create an environment conducive to business growth and put the integration program back on track.

Valencia voiced out the same sentiment 13 years ago. "The development of the steel industry cannot happen without state intervention. It needs a supportive policy environment to develop and integrate."

"The supportive policy environment must be stable over a suitable time horizon in order to reduce the uncertainty that discourages investors," he stressed.

(Editor’s Note: Rolando A. Jaurigue, a noted expert on the steel industry in the Philippines as well as the rest of Asia, was a five-term president of the Philippine Iron and Steel Institute and a two-term chairman of Southeast Asia Iron and Steel Institute, the umbrella organization of iron and steel institutes in the region.)