Filipino Steel and National Development
Sonny Africa, IBON Foundation
SteelAsia’s facilty in Meycauayan, Bulacan.
This article first appeared in the Ibon website: http://ibon.org/2016/07/filipino-steel-and-national-development/ on 17 July 2016. It is shared in SteelAsia’s website with permission from Ibon Foundation.
A genuinely Filipino iron and steel industry is a vital strategic element for Philippine socioeconomic development, stability and national security. It can still serve as the backbone of manufacturing and national industrialization even amid the hyped globalization of the 21st century. The government needs to overcome decades of neoliberal neglect and give the industry the attention it deserves.
Steel is invaluable for residential and commercial buildings, roads, bridges, railways, air and sea ports, vehicles, power and water, tools, industrial machinery, agricultural equipment and consumer appliances. Steel is in virtually every good and service produced by the economy directly or, if not, certainly indirectly. The country's transport system, energy supply, clean water, and food security critically depend on steel.
There are three main aspects to the development imperative for a strong domestic steel industry. This includes both production and, given steel's potential recyclability without quality loss, recycling. These aspects constitute the long-term benefits of a local steel industry which outweigh the relative cheapness of imports for now. The benefits in any case go far beyond the narrow metric of momentarily cheaper imported steel.
First, the steel industry is highly interrelated with many sectors in the economy. Steel itself is essential material, directly and indirectly, in everything the economy produces while the industry also purchases a wide range of inputs and services. There is significant potential for inter-industry linkages because steel is very widely used across the entire production and consumption chain.
And as the economy expands and aggregate demand grows, so does the demand for steel expand and the opportunities for domestic producers grow. The Philippines consumed only about 78 kilograms per capita of steel in 2013. As the economy develops its consumption will likewise increase such as to the 243 kilograms per capita of steel consumed by Thailand, 376 kilograms per capita of Malaysia, 499 kilograms of China, 672 kilograms of Taiwan, and 714 kilograms of South Korea in the same year.
Second, the steel industry is an important factor for domestic economy-wide capital accumulation. Capital and an economic surplus is created when domestic and imported iron ore is processed locally. The steel industry not only creates jobs but also creates maximum value from the iron ore and other related minerals we have. Filipino-made steel also means that any premium paid for imported manufactured steel products goes to domestic rather than foreign firms. The capital of Filipino steel firms is an economic surplus that can be circulated within the national economy rather than repatriated abroad.
Third, the steel industry can be a center of technology learning and upgrading contributing to domestic science and technology as the leading edge of industrial development. Technologies of course have to be imported especially at the start. These can be modified, improved, and made more appropriate to the country's conditions and the overall economic development plan.
The raw material for a Filipino iron and steel industry – indeed for industrial development in general – exists in the country. The Philippines for instance has iron reserves of 500 million to perhaps over a billion tons, albeit of varying grades. The country also has copper, nickel, manganese, chromium and other minerals for varying the hardness, ductility and tensile strength of steel.
The Filipino iron and steel industry had barely gone beyond its incipient stages when neoliberal globalization started to undermine the domestic economy in the 1980s. Three decades of liberalization and worsening government neglect has brought it to its current critically weak state. Indonesia, Thailand, Malaysia and Vietnam all have integrated steel mill capacity, meaning both iron-making and steel-making. The Philippines on the other hand only has steel-making and so does not have integrated steel mill capacity.
The industry's pioneers from the 1950s and 1960s include the steel-making and processing Marcelo Steel and the rolling Philippine Blooming Mills, Southern Rolling Mills, Elirol and National Steel Corporation, processing by Elsico, and final use in construction, metal works, engineering and packaging by Republic Steel Tubes, SIC, IPI and Puyat Steel. Many steel firms have either closed down or been taken over by foreign corporations. Aspiring Filipino steel manufacturers grapple with cheap imported, and often smuggled, steel.
There are reportedly around 500-650 firms manufacturing basic metals and metal products in the country but the industry is really built around just some 50 big players. The production of basic metals and metal products accounts for less than 5% of manufacturing value-added and, with around 50,000-70,000 workers, just some 2% of manufacturing workers. These already include foreign-owned firms in the country.
The country produces mostly long products (i.e. bars, wires, shapes and sections) and imports mainly flat products (i.e. plates, coils, sheets) and virtually all the crude steel for its production. Most steel demand goes to construction (over 80% of total demand) distantly followed by light and heavy fabrication, shipbuilding, and packaging.
The country's steel consumption has more than doubled from 3.5 million tons in 2004 to some 7.6 million tons in 2013. Most of this is accounted for by imports which reached 4.1 million tons in 2014, or more than double the 2.0 million tons imported in 2010. Iron and steel imports were the country's sixth biggest imported products at US$1.7 billion in 2015 (after electronics, oil, machines and engines, vehicles, and plastics). These mainly come from China and Russia but also from Korea, Japan, and Taiwan.
The Philippines is among the most open countries to metal imports in the region. The number of anti-dumping measures in the base metal sector is an indicator of how much a country protects its steel industry. The Philippines initiated no (zero) such measures in the period 2013-2014 compared to 11 by Indonesia, 11 by Thailand, seven by Malaysia, and four by Vietnam. Trade barriers being set up to protect domestic steel industries also include tariffs, safeguards, technical barriers to trade (or TBTs) and non-tariff barriers to trade (like “Buy National” campaigns).
The current policy environment for the industry is defined by the Board of Investments' (BOI) Investment Priorities Plan (IPP, under EO 226 or the Omnibus Investments Code of 1987) which gives fiscal and non-fiscal benefits and until recently by the Iron and Steel Industry Act (Republic Act 7103) whose supposed incentive period lasted from 1991 to 2006.
The Philippine government needs to make a real strategic commitment to developing a genuinely Filipino steel industry that partners with but is not subordinated to foreign interests. This also has to be part of a broader national industrialization strategy. This commitment must be expressed through protection against foreign competition (including smuggling), significant investment in appropriate and then state-of-the-art facilities, and a supportive regulatory environment.
Domestic industry can only be developed with policies that are biased for Filipino producers and restrict foreign capitalist interests. The de facto bias for foreign capital due to excessive incentives has to be removed. The benefits of having a steel industry will not materialize, or at best be very limited and shallow, if this remains under the control of foreign transnational corporations. Foreign investors will operate primarily on the basis of what is profitable for them rather than what is needed for the development of the national economy. This is the historical and recent experience of virtually every country that has built its own domestic iron and steel industry including Japan, South Korea and India, to take some Asian examples.
The government has to encourage and support industrial winners in the sector. This means providing: cheap credit, preferential loans and tax exemptions; cheap raw materials; functioning and affordable water, power and transport infrastructure; substantial technology support; and labor training.
Performance requirements have to be set to ensure that recipients of government support improve in efficiency and productivity. These requirements should cover not just production and financial matters but also the wages, benefits, working conditions and participation in the enterprises of its workers. Real industrial progress and socioeconomic development has to consistently uphold the rights of the working people.
The State has to take the lead in building vertical and horizontal linkages. This is a strategy of rational protection and support where integration into the global economy and markets will have to be phased and then only upon reaching a minimum level of domestic capacity.
An integrated Filipino iron and steel industry with a continuous production chain is viable and necessary. The iron and steel industry can develop and expand as other sectors of the economy and the nation in general develops and expands. This dynamic process means that the industry's contribution to other goods and services, to capital accumulation, and technology development will steadily accelerate and give even greater impetus to overall national development. A Filipino steel industry is an essential part of national industrialization towards a self-reliant, independent and sovereign economy where the resources of the country go to upholding the interests and welfare of the Filipino people.