First of three parts
With higher growth rates and investments shifting to emerging economies like the Philippines, the manufacturing industry is being prepped by the government—specifically the Department of Trade and Industry (DTI)—for a revival, aiming to improve its contribution to work force and
national output.
This move, initiated through the Industry Roadmap Project of the DTI, is part of the agency’s broader manufacturing-resurgence program. Crafting of the industry road maps is led by the private sector. They are presented to the government to identify gaps and challenges in the growth of a particular manufacturing subindustry.
Among these subindustries that have long been burdened with inefficiencies is the iron and steel industry. Based on the industry’s road map, of the Philippines’s estimated domestic demand of 6 million metric tons (MMT) in 2012, 57 percent, or 3.4 MMT, were imported.
And with the steady economic growth further driving up steel consumption, the Philippine iron and steel industry needs to gain some measure of self-sufficiency if it hopes to compete in a wider and freer Asean.
One of the primary reasons for the high import dependence in the sector today is the decision of the Indian investor to shut down Global Steel, formerly the National Steel Corp. The iron and steel industry’s production capacity in the flat products subsector severely declined after the shutdown due to the lack of an upstream sector for flat products.
Global Steel was the dominant producer of cold-rolled steel and was the country’s sole producer of hot-rolled coils and plates, which are semiprocessed products in the supply chain of flat products.
Owing to the displacement caused by cheaper imports and dearth in production capacity, employment in the sector of flat products declined, according to the Philippine Iron Steel Institute (Pisi).
The lack of upstream steel- manufacturing facilities after the closure of Global Steel, Pisi said, has led to the downscaling, if not outright closure, of many steel plants. This reduced the employment in the iron and steel industry from an estimated 19,700 in 2003 to only 15,648 in 2009, and further to less than 2 percent of the manufacturing industry’s employment total today.
According to Pisi’s road map, over the past five years, import volumes from Chinese, Russian and Japanese companies amounted to an average of 860,552 MT, 593,675 MT and 503,387 MT per annum, respectively.
The combined volumes from these three countries accounted for close to 60 percent of the country’s total imports of iron and steel products.
Today, the Philippines imports 80 percent of the country’s crude steel requirements, referring to the flat and long products’ main input materials, which are slabs and billets, said Roberto Cola, president of Pisi, in an interview.
The Philippines has been a net importer of iron and steel, but so are other Southeast Asia Iron & Steel Institute (Seasi) member-countries, which include Australia, Indonesia, South Korea, Malaysia, Singapore, Thailand and Vietnam. Japan and Taiwan, also Seasi members, are the exceptions.
The Asean 6 countries, composed of Indonesia, Malaysia, the Philippines, Thailand, Singapore and Vietnam, registered a steel consumption of 67 MMT in 2014.
The majority of the 2014 demand was filled by a net importation of around 40 MMT.
But the insufficiency is more glaring in the Philippines. Although other Asean member-states are importing large quantities of steel from China, they have better iron and steel-making (ISM) capacity.
The local industry actually puts the Philippines’s ISM capacity at zero, while other comparable Asean economies, even if they are also importing iron and steel products, have been moving toward integration of their ISM to include the production of slabs and billets.
The Philippines’s lack of ISM capacity limits the products that the country can offer for export to just long products. It also placed the country at a disadvantage when the economic integration within Asean occurs and trading activity is bolstered.
Adding to the crippling effect of the shutdown of Global Steel is the gradual phaseout of MFN (most favored nation) tariffs imposed on semifinished steel products, as well as the excess capacity worldwide.
While there are still investments in long products, importations have completely displaced flat-product capacity. Billets, or the long products’ semifinished main input, are also imported.
Cola affirmed that investments in the industry are now only concentrated in the production of long products. These products have lower investment requirement per ton than flat steel.
Despite these challenges, however, the local iron and steel industry is bent on bridging the gaps in steel production, especially with apparent steel consumption (ASC) seen to balloon to 20 million MT (MMT) by 2030.
“ASC tracks gross domestic product [GDP] growth by 3 percent to 4 percent. If the average GDP growth of the Philippines is 6 percent, steel consumption would be at 8 percent,” Cola said.
Given the Philippines’s steady economic growth in the past several years, and the foreseen ramping up of public and private infrastructure spending to come, Pisi said the 20 MMT estimate by 2030 is possible.
National Economic and Development Authority (Neda) Deputy Director General Rolando G. Tungpalan also said the Philippines can anticipate a rise in the demand for locally produced steel products, as “the country’s real-estate sector continues to grow, the shipbuilding industry is starting to emerge, and the implementation of government infrastructure projects is continuing to roll out.”
“The ongoing reconstruction and rehabilitation of disaster-affected areas and retrofitting works for disaster-resilient infrastructure are also expected to increase the demand for iron and steel in the coming years,” Tungpalan said.
As the Philippine economy continues its high-growth path and the Asean integration takes place by the end of 2015, he said the government expects a surge in developments within and outside Metro Manila, in addition to the many key infrastructure projects that are already on stream and in the pipeline.
The increase is happening. In 2012 the industry saw an unprecedented spike in ASC to reach 6 MMT, a 50-percent increase in two years’ time,
PISI said.
From the 6 MMT in 2012, consumption further expanded by 12 percent year-on-year to 6.7 MMT in 2013. Since then, consumption has grown by double digits yearly.
If the industry remains in its uncompetitive state, however, there is little chance it will beable to achieve its ambition of increasing the share of domestic production in the demand—now at 43 percent—to 70 percent in 2030. To be continued