Short-term gain, long-term loss

Vietnam’s largest steelmaker may put on hold plans for a third blast furnace, saying the US-China trade war is stoking fears of another steel glut and could push more inexpensive Chinese-made steel products into Vietnam which is Southeast Asia’s biggest steel consumer.

According to a report by Nikkei Asian Review, Formosa Ha Tinh Steel (FHS), as part of its goal of becoming Southeast Asia’s largest integrated steelmaker, had planned to start building another blast furnace in or after 2020 to boost capacity.

But FHS chairman Chen Yuan Cheng told Nikkei that they will carefully examine the plan as uncertainties are growing over the outlook of the US-China trade war. FHS, which had been steadily expanding production, is now assuming a cautious business stance due to the trade war uncertainties, he said.

While the flood of imported steel is seen to benefit Vietnamese consumers, analysts see the local steel and related industries suffering as capacity expansion becomes unviable under an uncompetitive environment.

The report observed that as Vietnam’s economy has grown, so too has its demand for construction materials, making it the region’s largest consumer of steel.

And just like FHS, Philippine cement manufacturers have started to rethink their investments moving forward due to the influx of imported cement.

A report from worldstopexports.com shows that the Philippines is third in terms of countries that bought the highest dollar value worth of cement last year. On top of the list is the United States which imported $1.4 billion worth of cement, followed by China ($652.1 million), and then the Philippines with $540.6 million. Completing the top 15 are France, Netherlands, Bangladesh, Ghana, Hongkong, Israel, Sri Lanka, Germany, Australia, Singapore, Ivory Coast, and Italy.

The same report pointed out that among the 15 countries, the fastest-growing markets for cement since 2014 are China (up 2,385 percent), Philippines (up 409 percent), US (up 86.9 percent) and Netherlands (up 81.1 percent).

Of the $540.6 million worth of cement imported by the Philippines in 2018, Vietnam was the biggest supplier accounting for $303.9 million (with imports from Vietnam up 539.1 percent from 2014), followed by China at $47.3 million (up 542.2 percent), South Korea at $44.4 million (up 48 percent), Thailand at $43.2 million (up 795.1 percent), and Taiwan at $36.7 million (up 864.8 percent). Completing the top 15 suppliers from which the Philippines imported cement in 2018 are Japan, Indonesia, Malaysia, UAE, Pakistan, France, Netherlands, Egypt, United Kingdom, and Iran. These 15 countries shipped 99.9 percent of Philippine cement imports last year.

Overall, the value of Philippine cement imports increased by an average of 409 percent from all supplying countries since 2014 when cement purchases were only at $106.2 million.

The surge of cement imports and the injury that it has caused the local cement industry has resulted in the Department of Trade and Industry imposing a provisional safeguard duty of P8.40 per bag of cement beginning February this year. According to Trade Secretary Ramon Lopez, imported cement surged to more than three million metric tons in 2017 from just 3,558 tons in 2013, while the share of imports by non-manufacturers or pure traders increased to 15 percent from only 0.02 percent during the same four-year period.

Equally important is the fact that the local cement industry experienced a sharp decline in income of 49 percent in 2017, Lopez said.

The Tariff Commission is expected anytime soon to make the additional duty on cement permanent, if not increase even further the amount of import duties on cement.

While over-importation may appear to benefit local users in the short-term, this serves as a disincentive against investing and expanding on the part of local cement manufacturers.

Without a viable Philippine cement industry, we will be forced to depend on imports. As pointed out by Lopez, relying solely on imports and being at the mercy of global supply and demand situation is risky and irresponsible.

Misguided priorities

As early as 2017, the Department of Finance recommended the merger of the Philippine Export-Import Credit Agency (Philexim) with other state-run guarantee firms to promote fiscal discipline.

The result was the issuance in 2018 of Executive Order 58 by President Duterte which merged Philexim with the Home Guaranty Corp. (HGC), with the former as the surviving entity.

According to the EO, the national government will have a more comprehensive oversight of its guarantees to effectively identify, monitor, and control risks, implement measures to manage these risks, and provide appropriate capital against those risks.

The said EO also transfers the guarantee functions, programs and funds of the Small Business Corp. (SBC) as well as the administration of the agricultural guarantee fund pool and the industrial guarantee and loan fund to Philexim and renames the latter as the Philippine Guarantee Corp. (PGC).

Philexim, attached to the Department of Finance, guarantees foreign loans for development purposes.

Meanwhile, the HGC is mandated under RA 8763 to extend guarantees on housing loans and other credit facilities to encourage funders and financial institutions to provide financing for home acquisition and mass housing development.

According to the EO, the merger of HGC and Philexim is in the best interest of the state since this would result in economies of scale, removal of operational redundancies, among others.

To give Philexim a fresh start, the EO increases its authorized capital stock from P10 billion to P50 billion. Meanwhile, to clean up its balance sheet, Philexim will establish a subsidiary to manage its non-performing assets and outstanding loans.

While Philexim has been a problem for the DOF given its huge debts and guarantees, the HGC has been a source of pride for the government. As earlier mentioned, in 2018, HGC posted a net income of P2.19 billion versus P516.9 million in 2017. Its total assets stood at P36 billion as against liabilities of P26 billion. So why dissolve HGC and allow Philexim to survive?

Housing, especially mass housing, has never been a priority for the Duterte administration, sad to say. Dissolving the HGC is another proof of this. There is no assurance that this new entity called PGC will even prioritize the grant of housing loan guarantees. Worse, what if this PGC will refuse to honor guarantees already granted?

HGC’s system of credit guarantees has become an integral part of the government’s shelter program and has facilitated the entry of more private funds into housing programs and urban development. With the country still suffering from a huge housing backlog, expect matters to turn for the worse.

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