Major crisis looms in steel sector

First of a series

The Philippine steel industry is facing “a crisis in the making.”

The numbers may not look as alarming today as the local steel sector remains in a relatively comfortable position: A demand only of 6 million tons as of 2012 and a supply of about 6.6 million tons, of which 57 percent (3.4 million metric tons) have been imported while the remaining 43 percent (3.2 million MT) came from local production.

But the expected spike in local steel consumption to 20 million metric tons by 2030 may tilt that balance, possibly derailing the crucial capital projects and investments by that time, as the country’s “very high degree” of import dependence on semi-processed and finished steel products may prove to be highly unsustainable to address that demand.

“It’s a crisis in the making. Just like in the case of power supply, the shortage we’re seeing now was because five years ago, the people didn’t act. We don’t see yet that steel shortage because demand is still at 6 million tons,” noted Rolando S. Narciso, who headed the National Steel Corp. (NSC) before the state run corporation was privatized.

“Steel projects will take at least five years to plan and construct, and now, looking at 2020, the steel crisis will happen if we don’t do what we’re supposed to do now. We’re preoccupied in catching up with the country’s requirements on infrastructure, power, utilities, and now the government is dealing with port congestion and the traffic. But eventually, to correct all those, especially infrastructure, we will need a lot of steel and cement, among others,” Narciso told the Inquirer.

A report from the Board of Investments, an attached agency of the Department of Trade and Industry, showed that the Philippine iron and steel industry is indeed poised for continued growth given the rising demand for such products to support the expected roll out of infrastructure, rehabilitation and housing projects.

Infra projects

In a presentation given before the Organization for Economic Cooperation and Development (OECD) in France this year, the BOI said demand is now being driven largely by the “implementation of big ticket government infrastructure projects; reconstruction efforts for the typhoon and earthquake affected areas; and the housing backlog and redevelopment of urban centers across the country.”

As of end 2013, the country’s “apparent steel consumption” grew by 9.2 percent to 6.58 million metric tons in 2013, from the 6.03 million MT recorded the previous year. This increase was similarly attributed to the continued growth in real estate developments and higher infrastructure spending by the government.

Of the total demand for steel, 81 percent went to the construction industry; 9 percent for light and heavy fabrication; 5 percent for shipbuilding; 4 percent for packaging; and 1 percent for other requirements.

The bulk of the country’s steel production consisted largely of the so-called long products (which included billets, ingots, bars and wires that can be used for construction, manufacturing and fabrication), which meant that local existing capacity is only for the downstream sector. Flat products (such as tinplates, hot and cold rolled coils, galvanized and pre-painted galvanized steel which are used for construction, appliances and packaging) comprised the bigger share among the country’s steel imports.

However, the growth of the steel and iron producing industry is being hampered largely by the high cost of electricity, technical smuggling, outdated facilities and tariff distortions concerning imported steel products. If left unchecked, the Philippines may find itself, more than a decade from now, depending highly on imports, thus making it susceptible to volatile market conditions, which may send the country reeling from a possible steel crisis.

Glory days

But for a small group of former NSC officials that included Narciso as well as industry experts, the glory days of the steel industry can still be had—and perhaps, be in a much better position than before. By these glory days, they refer to the time when the Iligan plant of the NSC, which was once considered as Asia’s largest steel mill facility, was still at its peak, accounting for a healthy 65 percent share of the local steel production.

With investments of about P27 billion, the NSC was producing in the mid-80s about 75 percent of the local supply for cold-rolled products, 39 percent for the hot rolled products, 69 percent for tinplates, and 26 percent for the billets.

But the privatization program in 1995 led to disastrous results, as the move by the Westmont Group of Malaysia to acquire a majority ownership of the NSC eventually led to a shut down of the steel facility in 1999 due to mismanagement. NSC executives appointed by Westmont were allegedly highly paid, enjoyed costly perks, and maintained wasteful habits that included frequent foreign trips to and from the parent company in Kuala Lumpur.

(To be continued)