Role of steel in industrialization

One of the most positive trends in the ongoing growth process of the Philippine economy is the faster rate at which industry is growing compared with services. More than ten years ago, when China was still the preferred site for manufacturing investments, the Philippines was losing hope that it would ever industrialize. There were talks about the Philippines leapfrogging from agriculture to services, bypassing the industrial stage. Although manufacturing is only one of the sectors classified as “industry” (the others are mining, construction and public utility) there was no question that a country with as large a population as the Philippines would never be really considered industrialized if manufacturing does not constitute a fair share of the Gross Domestic Product (GDP) and employing a significant percentage of the labor force. Through the years, manufacturing in the Philippines would average a little over 20 percent of GDP (compared to 30 percent or more of most of our neighbors) and 9 percent of the labor force (compared to more than 15 percent of our peers). In any modern economy with a large domestic market, economic progress is associated with an increasing share of the manufacturing sector in the economy.

Things have changed over the last ten or more years. China has experienced very rapid increases in wages and, despite a huge population, is already suffering labor shortages because of rapid ageing. Manufacturing investments, especially by the Japanese, South Koreans, and Taiwanese, are now moving away from China and relocating in Southeast Asia, especially in Vietnam, Indonesia and the Philippines. These are the export-oriented industries that we lost to China in the last century. Now, there are signs that they are coming back to the Philippines. But more importantly, manufacturing activities targeting the domestic market are the ones leading the surge in production and employment. For examples, the largest and fastest growing manufacturing enterprises are food and beverage, health products, wood products and chemicals that are primarily sold to domestic consumers. An industry that is coming of age because of a rapidly increasing domestic demand for its products is steel, what with the Build, Build, Build program of the present government and the booming housing and office building sectors, thanks to the more than one million workers in the BPO-IT industry and the relatives of the more than ten million OFWs.

Iron and steel were of the essence of the first industrial revolution that occurred in England in the last decades of the nineteenth century. The irony is that the world is now in the fourth stage of the industrial revolution (the digital age) and the Philippines has not yet developed a strong domestic steel industry. There were attempts in the past, such as that of the National Steel Corporation in Iligan. To my mind, the main obstacle at that time was the very limited domestic market because of the large portion of the Philippine population who lived below the poverty line and who did not have an effective demand for steel products. Today, we still have a large segment of our population living before the poverty line of $2 per person per day, about a quarter of the population. Because of our young and growing population, however, the remaining three quarters or more than 75 million consumers would be big enough to constitute a viable market for a local steel industry to flourish. That is why we should celebrate the announcement by the Steel Asia Manufacturing Corporation, the country’s largest steel manufacturer, to invest $1 billion, approximately R51 billion, for its backward integration which will consist in putting up its own electric furnace and three minimills for the production of specialized steel products after it shelved its former plan to acquire the mothballed National Steel Corporation complex in Iligan, Mindanao. The upstream steel integration plant will be using metal scrap as base for its electrical furnace with which it plans to produce not just rebars but sections such as plates, slabs, billets, blooms and plates — all indispensable materials for the ambitious infrastructure program of the Duterte Government that plans to bring infrastructure spending all the way up to 7 percent of GDP by 2022 (from its present 5 percent). Add to the public infrastructure program the bullish plans of the private sector to heavily invest in housing, office buildings, hotels and resort facilities, hospitals and other edifices and you have a local market for steel products that would warrant other enterprises following the example of Steel Asia Manufacturing Corporation.

In a conversation I had with Chairman Benjamin Yao and President Adrian Cristobal Jr. of Steel Asia, I learned that this enterprise is no novice in steel manufacturing. It has been in the industry for 51 years and has a present market share of 45%. It has an existing manufacturing capacity of 2.3 million tons per year of rebar and 500,000 tons per year of billets. Ongoing expansion includes upstream steelmaking of 3 minimills totaling 1.8 million tons per year (billets and blooms) and 4 midstream rolling mills totaling 3 million tons per year (rebar, sections, wirerods and merchant bars). Unlike previous attempts to build a steel industry which required a lot of subsidies from the Government, Steel Asia has been efficiently and productively managed so that reasonable profits have been made without the need for government subsidies. In fact, it has received a good number of international certifications, such as ISO 9001 certified Quality Management Systems, ISO 14001 certified Environmental Management systems, ISO 17025 certified Testing Laboratory Accreditation, ISO 18001 certified Occupational Health and Safety Management. It also has received certifications from the UK CARES British Standard Product Conformity and from the Bureau of Philippine Standards.

Steel Asia is contributing to the generation of much needed employment. Its existing mills employ 3,000 workers directly and generate employment for other enterprises, many of them small and medium-scale enterprises, for 15,000 more workers. Once its ongoing and planned expansion projects are complete, the company will employ 7,000 direct workers and 32,000 workers through its suppliers. It is also contributing to inclusive growth by locating its operations in regions outside the National Capital Region, such as in Meycauayan, Bulacan; Calaca, Batangas; Carcar, Cebu, Davao City and Villanueva, Misamis Oriental. Steel Asia is an example of an enterprise that can finally build a solid foundation for the manufacturing sector to make a significant contribution to GDP and to employment. We may still achieve the vision of manufacturing contributing at least 30% to GDP and 15% to employment by 2022. We can then claim that we are a truly industrialized economy.

For comments, my email address is bernardo.villegas@uap.asia