Integrated

FIRST PERSON - Alex Magno (The Philippine Star) - December 3, 2020 - 12:00am

During the Marcos period, the country invested in seven showcase industrialization projects. Nearly all of those projects became white elephants, wasting borrowed money and bringing all of us to that crushing debt crisis of the early eighties.

To be sure, the country needed these projects to spur our industrialization. But the seventies was not the time to build them.

For the large upstream projects to be viable, we needed to have developed downstream industries that will consume their output. Without the downstream industries, the showcase projects were doomed. This was the basic flaw in those investments. They were dictated by political vanity rather than correct market conditions.

One of those showcase projects was the integrated steel mill at Iligan. At that time, the mill was state of the art. Today, that mill is a rusting complex of outdated steelmaking technologies.

The Iligan facility had a melt shop that converted scrap metal into steel billets. That ran into problems immediately. We simply did not have enough quality scrap to feed the melt shop and keep it viable.

Producing steel billets is a power intensive process. At that time, we had among the most expensive power rates in Asia. A large portion of the total costs of the steel billets went to paying for power. That made the product uncompetitive.

We tried reviving the Iligan integrated steel plant a couple of times in the past decades by taking in foreign strategic partners. All the attempts failed. In the meantime, new and more efficient steel technologies have been developed. They used less power, polluted less and produced higher quality products ideal for the high tensile strength modern buildings need to have.

The Iligan plant has become the equivalent of the dinosaur.

In the meantime, too, our downstream steel industries using more modern technologies developed using imported billets to roll into steel bars and other finished products. Today, we have enough downstream industrial capacity to support an integrated steel mill. But we no longer have an integrated steel mill capable of processing scrap or iron ore into respectable steel billets.

We also have enough domestic demand for steel products to support a truly Filipino integrated steel industry. With all the private construction and infrastructure projects being undertaken, we are seeing double-digit growth in market demand for steel products. A large part of the raw materials in the form of billets are imported.

There should be enough value in the chain to encourage a local investor to take a fresh look at the profitability of building an integrated steel mill.

Ramon Ang of San Miguel did look into the possibility of building a fully integrated steel mill in Mindoro several years back. He had the vision of an expanded steel facility that not only produced construction material but even automotive parts for a truly Filipino car industry. But Ang’s attention has since been focused on building critical infrastructure, including the largest airport in the region.

Meanwhile, lax regulation allowed obsolete steel plants now banned in China to be reconstructed in the country. These plants, sold for a song because they are already banned in their country of origin, use dirty and inefficient technologies that pollute the air, abet global warming and poison our communities.

These plants use 1950s-vintage induction furnaces mainly responsible for massive pollution in China. About 17 of these plants are now in operation in the country, taking advantage of a serious loophole in our regulatory structure. All the operators of these plants under-declared the true capacity of their plants to avoid the need for environmental clearance certificates.

All they needed were permits from the local governments that were either easy to convince through inducements or did not have the technical capability to even determine the actual production capacity of a steel plant – let alone assess their technologies.

Some of these plants actually produce steel billets from melting scrap metal. Because they use outdated technologies, the steel billets are substandard. Naturally, the finished products are also substandard. The final victim is the Filipino consumer who is exposed to all the hazards of using inferior construction materials.

Even as these plants use obsolete technologies and have higher energy costs per unit of output, they still operate profitably because the old banned plants were purchased for very little. There is always money to be made by unscrupulous business practices.

The substandard billets produced by these banned plants are not negligible. The data show that while the domestic demand for steel products increased the past few years, the amount of steel billets we import declined significantly. That means more and more of our downstream steel mills are using the cheaper but inferior billets produced by way of induction furnaces (IF).

Imagine if we took out all our emission regulations and allowed old gas-guzzlers cast off by neighboring economies to fill our streets. The pollution levels would be murderous. That is exactly what is happening by allowing imports of IF plants with nary any regulatory intervention. They will make the Clean Air Act a joke.

As more and more of the plants already banned in China are allowed to relocate here, the incentive for any private investor to build a modern integrated steel industry in the country evaporates. Steel manufacturing is a capital-intensive industry. It will be a challenge to compete with substandard producers who pay basically nothing for the obsolete plants they import.

Our legitimate steel manufacturers have brought this matter up with the DENR. But no action has been taken to date.

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