Nurturing a local steel industry

I have been a skeptic about the viability of a local steel industry beyond the production of rebars and galvanized iron roofing material. When then candidate Rodrigo Duterte said he wanted to put up a steel industry, I suspected it was just RJ Jacinto who probably wanted government support to revive the Iligan mill his family once owned.

With China suffering an overcapacity in steel production, I thought it would be foolish to even think of putting up an integrated steel mill here that would process iron ore into billets. That had been our dream for the longest time but for many reasons we have failed to come up with a successful integrated steel mill operation.

Even the pompously named Iligan Integrated Steel Mill was not an integrated mill. It was nothing more than a processor of scrap and billets that were produced from iron ore in some other country.

When I visited the Iligan mill many years ago, I saw them melting the carcass of a car and other scrap. Maybe our mistake was the penchant of our oligarchs to come up with grand projects they cannot sustain. That’s what happened to Iligan.

I have to confess I am wrong to be totally skeptical about that dream of an integrated steel industry. I was rather surprised how our local industry producing products out of scrap and billets are slowly but surely laying the groundwork that builds up to that dream.

The soft spoken Benjamin Yao, who runs SteelAsia, straightened me out over lunch last week. He was introduced to me by a mutual friend. I am glad I did not back out at the last minute because I was nursing a bad cold. Ben gave me a briefing that changed my opinion about the future of a steel industry in this country.

In so many words, the secret of Mr Yao is incremental growth. He nurtured the business he inherited from his father from its humble beginnings to what it is now.

Mr. Yao learned the business by working in it starting from age 16. He learned marketing by visiting hardware stores all over Manila. His immersion in the factory gave him a good idea of production.

When he inherited the business, he grew it on the basis of previous success. He had no big ambitions that would have caused him to borrow more than the growing business would afford. But he had the vision of growth which he nurtured and did something about every opportunity he got.

Ben Yao adopted modern management techniques and combined it with street smart marketing. His idol is Peter Drucker. His managers are required to be proficient with Drucker principles. He hires the best and the most experienced engineers from among OFWs who learned best practices from foreign mills.

From the original capacity of 30,000 tons per year (the first mill was an antiquated 2nd hand rolling mill- called a hand mill), today SteelAsia produces 2.3 million tons per year (tpy). The growth in capacity came three ways: building of new mills; acquiring mothballed mills; expanding/modernizing existing capacity.

Working on the principle of building the business on the basis of incremental growth, SteelAsia became more of a contract manufacturer. His factories all over the country didn’t produce anything that had not already been ordered by a client. He minimized risk even as he made sure he kept clients happy by assuring top quality rebars.

For example, he only buys the raw materials such as imported billets after a client signs a contract. This is why he was not affected by the sharp drop in commodity prices some years ago. He encourages clients with mining operations to contract their produce for processing into billets in China or elsewhere and he will produce the required steel product from the supplied billets.

One of the highest cost component of his product is logistics. It is expensive to truck the very heavy steel rebars from the factory to the client’s construction site. Great distance from factory to work site also means risks in meeting delivery timetables.

This is why he placed his mills in strategic locations around the country rather than putting up one giant operation in one place. This gives him an advantage over competitors in terms of cost and guaranteed timely delivery.

Mr Yao’s other secret is building a community of suppliers and service providers. His network of scrap metal collectors happily provides all his requirements. We are apparently producing more scrap than the local mills can process, so we even export some quantities. Ideally, we should keep all our scrap and consider it a vital raw material for our steel industry.

SteelAsia has been a steel bar manufacturer for 50 years. Its phenomenal growth, however, happened only over the seven years from 2007 to 2014. It invested over P10 billion in adding modern steel bar manufacturing capacity.

The original mill (in Quezon City) was retired in the 1990s. The new mills are spread across the archipelago – in Meycauayan, Bulacan, Calaca Batangas, Carcar, Cebu, Phividec, Misamis Oriental and the latest mill in Davao City.

SteelAsia’s combined manufacturing capacity of 2.3 million tons per year is the largest in the ASEAN region. SteelAsia has 3,000 employees and is estimated to generate an additional 15,000 jobs for businesses supporting SteelAsia operations.

Additionally, SteelAsia will build five new mills that will manufacture products that we are currently importing 100 percent. This means they will have linkages to other local manufacturing sectors.

Once this happens, they will produce wire mesh, nuts and bolts, springs, cables, bearings, welding rods and many others products which can help our manufacturing sector become more competitive. These new products, steel plate, H/I beam, steel profiles and wire-rod, will require an investment of around P30 billion and will generate 12,000 more jobs.

Mr. Yao thinks the dream of having an integrated steel industry, one where we process our own iron ore into billets, is highly possible.

He said our population of over 100 million and our fast growing demand for steel products will justify upstream development of integrated steel making. He said that with SteelAsia alone buying 6 million tons of semi-finished steel annually, a Philippine blast furnace becomes increasingly viable.

Apart from SteelAsia, there are two other rebar companies expanding, one with a 500,000 tpy mill this 2017 and another also with a 500,000 tpy mill in 2018.  There are around 12 steel companies producing rebar  (though DTI lists over 20- these other mills don’t have rebar as their major product- they do angles, shape, flats etc.). In 10 years rebar demand is expected to be around 8 million tons.

SteelAsia is expanding to meet the Philippines’ growing steel needs for infrastructure, housing and other needs. Ongoing are two new investments totaling an additional P14 billion for new rebar mills in Central Visayas and Central Luzon. This will bring SteelAsia’s rebar manufacturing capacity to 4.3 million tons per year- one of the largest in the world.

I asked him how our notoriously high power rates affect the final cost of his product. He said it is not a problem. Power is just around two percent of cost.

“Because of our demand profile, we become a base load for generators. We get preferential rate even as low as P2 per kwh during off peak. Contrary to the myth, power has never been a factor in industry viability.”

Finally, I asked if he plans to do an IPO. Yes, he said, soon. That’s good news. Like the cement industry, steel rebar manufacturing is a sunshine industry, specially if the Duterte administration successfully implements its infra program.

My apologies to RJ Jacinto. Yes, you are right, the prospects are good for a local steel industry… just so, don’t try to get government to resurrect your family’s Iligan mill. The technology has changed so dramatically so, as Mr Yao now says, his facilities are no longer the power hungry monsters that the old mills like Iligan are.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco