growing firms of steel: a competitiveness ...nap.psa.gov.ph/ncs/12thncs/papers/invited/ips-25...

12th National Convention on Statistics (NCS)

EDSA Shangri-La Hotel, Mandaluyong City October 1-2, 2013

GROWING FIRMS OF STEEL: A COMPETITIVENESS ROADMAP FOR THE PHILIPPINE IRON AND STEEL INDUSTRY

by

Roberto de Vera, Leandro Tan and Gilbert Garchitorena

For additional information, please contact: Author’s name : Roberto de Vera Designation : Assistant Professor Affiliation : School of Economics, University of Asia and the Pacific Address : Pearl Drive, Ortigas Center, Pasig City Tel. no. : +632-6370912 E-mail : [email protected]

GROWING FIRMS OF STEEL: A COMPETIVENESS ROADMAP OF THE PHILIPPINE IRON AND STEEL INDUSTRY

by

Roberto de Vera, Leandro Tan and Gilbert Garchitorena

i

ACKNOWLEDGEMENTS We wish to thank Mr. Roberto Cola and the PISI staff for supporting the project team at each stage of the industry roadmap project. We wish to thank all the industry representatives who shared their insights and information on the iron and steel industry which we incorporated into the industry roadmap report. We wish to thank Dr. Peter U for giving us his time and advice to move this project forward in its initial phase. We wish to thank Dr. George Manzano, Dr. Cid Terosa, and Mr. Henry Ligot for writing the trade, industry linkages, and technology sections of the report. We wish to thank our project staff, Ms. Elsie Tingzon, Ms. Glenda Hitosis and Ms. Arlene Idquival, for their assistance in organizing the industry forum and encoding the industry statistics.

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EXECUTIVE SUMMARY

Faced with weaker markets and slower growing economies in the past decade, the Philippine iron and steel industry saw firms closing and production capacities decreasing. But given a bullish investor community eager to channel funds into projects that meet the mostly untapped demand for roads, houses and offices of an expanding middle class, opportunities to build new plants and make new products beckon for the firms that have weathered this economic storm. Steel companies can seize these opportunities by continuously upgrading their workforce and processes to ISO standards to attract the investments needed to expand production capacities and product lines. Government can help steel firms in their new ventures to make world class products by reducing the smuggling of steel products and thus evening the playing field between local and foreign producers. As government continues to solve the problems reducing the industry’s competitiveness, more steel companies can adapt the successful practices of producing steel during off-peak hours to reduce power costs and building plants closer to the markets they serve to reduce freight costs.

The current state of the Philippine iron and steel industry is at a critical stage. The sector

is currently operating far below its full economic potential. As of 2010, the sector directly employs about 15,000 workers, earns P60 billion in revenue, invests P1 billion in capital expenditures and produces a gross value added of about P47 billion, which is 0.7% of the country’s GDP. These significant contributions to the national economy are based on an apparent steel consumption of 4 million metric tons – of which less than half are produced locally. It is also a level which should be 7-8 million metric tons which was the level required by Malaysia and Thailand to attain their newly industrialized country status from GDP per capita levels that have been reached by the Philippines only now.

The low steel consumption can be attributed to the numerous economic shocks faced by

the industry in the last decade. The demand for steel products has been constrained by the dearth in private and public construction following the Asian Financial Crisis in late 1990s, the Fiscal Crisis in early 2000s and the Global Financial Crisis. The mismanagement and subsequent halt in the commercial operations of Global Steel Philippines in 2007 caused sector-wide supply disruptions as the firm was the dominant producer of cold rolled steel and the country’s sole producer of hot rolled coils and plates which are the vital raw materials for the rest of the downstream industry. Consequently, sector output and employment fell by about 10 percent. In addition, competition from cheap imports is expected to become more serious as tariffs disappear within the ASEAN Economic Community, and as global steel prices fall as the surplus steel capacity in China increases in line with the impending economic slowdown in that country.

The adverse conditions of the business environment facing the steel industry have been

a major factor that has held back domestic steel production for over a decade. The current wave of consolidation has led to at least six major steel industry firms that were reportedly not operational in 2010 as some steel manufacturers have shifted to the trading of steel products instead to survive the prevailing market conditions. Local production of hot-rolled coil/sheet, cold-rolled coil/sheet, tinplates, and wire rods has been completely displaced by cheap imports particularly from China. As a result, it is only in 2011 that domestic steel production levels reached the historic high of 3 million metric tons which was last attained in 1997.

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The negative effects of the sector consolidation have reduced the present capacity of domestic steel producers to service the growing demands of an industrializing economy. The detrimental effects extend beyond the economic dislocation to workers, suppliers and downstream stakeholders. Domestic iron and steel production remains critical to construction and the manufacturing of high-end industrial goods such as parts and machineries equipment for agriculture, construction, food manufacturing, mining, and the building of appliances, vehicles and ships. Idle steel plants not only lower capacity utilization rates -- which are now virtually zero for the hot-rolled coil/sheet, cold-rolled coil/sheet, tinplates, and wire rods -- but also reduce the competitiveness of the other local steel producers along the value chain. The self-sufficiency rate of the industry has been placed at a low 46 percent, down from 55 percent in 1994. Its backward linkages with supplier sectors are now estimated to be stronger than its forward linkages with the users of finished steel products, particularly construction and manufacturing. The lack of an integrated steel production system within the country and the hallowing out of the flat steel sector has led to the fragmentation of the industry into its two main product segments – long and flat steel products – each distinct with its own set of product characteristics, market drivers, operating environments and investment opportunities such that their business interests are no longer necessarily identical in certain cases. More importantly, the resulting overreliance on the importation of steel products and the consequent unemployment of local steel plant workers are inconsistent with the long term goals of inclusive economic growth stated in the Medium Term Development Plan of the government. Notwithstanding the underdeveloped state of its supply linkages, the iron and steel industry remains a major driver in raising national output. The domestic output multiplier of the industry is higher than other sectors including construction, private health services, transportation, financial intermediation, wholesale and retail trade, other personal services, real estate, nickel mining, private education and mining / quarrying.

The clear alternative to the simple trading of steel products is to compete anew in the

manufacture of finished steel products, particularly in flat steel products which have a higher value-added than long steel products. The pre-requisite is to re-establish the supply linkages across the steel production process from iron / scrap to semi-finished goods and to finished steel products. The significant increase in the local production of billets (+65%) and bars (+49%) from 2007 to 2011 sets the stage in anticipation of a gradual recovery in the real estate sector and the implementation of public-private partnership projects to renew infrastructure spending. The proposed plan is to expand capacity not just for long products that primarily support construction -- which constitutes about 80% of steel demand – but also to develop capacity for flat products which offers higher value-added inputs to downstream sectors (e.g. auto and shipbuilding). The replacement of imported inputs with locally produced steel products will increase existing multiplier effects of new investments by as much as 50 percent. In this case, industry estimates show that a P100 million new investment in the sector will lead to corresponding increases on national economic output (+P350 million), household income (+P32 million) and permanent employment (+155 new jobs). As earlier discussed, it is within the capabilities of most steel firms to upgrade their capacities and product lines that attracts the investments needed to expand their production capacities and broaden their product lines.

The plan is consistent with the economic opportunities of developing both domestic and

export markets for Philippine steel products. The comparative advantage of Philippine steel exports has increased between 2003 and 2011 but still pale in comparison to the export performance of other ASEAN nations in the global steel market. Better governance and a young skilled labor force are expected to encourage government, investors, and families to invest in roads, manufacturing companies, schooling and health. This will enlarge the middle class based market, sustain the long term growth of the economy, and expand production in the

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construction, housing, packaging, and possibly the shipbuilding industries that raises the demand for steel products. The reality of regional production chains in manufacturing plus the robustness of the ASEAN market should encourage local industry players to explore joint ventures with foreign players as a strategic play in forming part of this regional production chain. Investment opportunities abound for projects that expand production capacities for current steel products for the local market and that introduce capacities to build new products particularly for the flat products market segment. For example, investing in new equipment with the energy-saving and environmental technology, and in larger production capacity creates economies of scale that reduces the operating costs in a sustainable manner. A large, young and skilled workforce and an expanding middle class with mostly unsatistifed demands for consumer goods are twin attractions for foreign steel producers to enter joint ventures with local companies to produce products for this expanding local market.

The competitiveness roadmap laid out by the iron and steel industry has set a long term

target of increasing steel production to 20 million metric tons by 2030. The figure is in line with the vision of the industry to be able to supply 70% of the tonnage required for sustainable economic development in 2030. This requires the implementation of several key measures aimed at:

(1) reducing the costs of importing raw materials and losses of revenue due to unfair

competition in the form of tariff distortions and smuggling; (2) improving the reliability in the supply of power and lowering electricity costs reducing

power costs; (3) lowering logistics costs; (4) encouraging investment policies conducive to raising the comparative advantage of

Philippine steel products; (5) attaining ISO accreditation in relevant areas; (6) enlarging the pool of trained workers for the industry; (7) improving the design, collection and monitoring of industry data; (8) improving the enforcement of regulations on product standards and customs

transactions; (9) developing a mentoring program within individual firms to collectively sustain

comparative advantage; (10) adapting lessons from the ASEAN experience; (11) studying the feasibility of integrating upstream all the way to mining; (12) improving production cost efficiencies; (13) helping industry players identify new products to diversify into, especially products

with high export potential. It is a given that steel companies are the main protagonists in sustaining their

competitive advantage and they will carry their own weaknesses and face their respective threats. To a large extent their success in this task depends on the moves they make to maximize their strengths to capture the opportunities in whatever operating environment they currently face. The role of government is to complement the industry in these efforts.

The recommendations that are chosen for implementation (including the ones that may

arise from the areas for further study recommended by the industry players) must be adapted to the operating environment of global competition and relatively freer trade that steel companies are facing.

Contents ACKNOWLEDGEMENTS ................................................................................................................... i EXECUTIVE SUMMARY................................................................................................................... ii PERSPECTIVE ON THE ROADMAP .................................................................................................. 1

Box 1: Business implications of the differences between Long and Flat Steel Products ......... 5 MISSION, VISION AND TARGETS .................................................................................................... 8 STATE OF THE INDUSTRY ............................................................................................................. 9

1. Structure .......................................................................................................................... 9 a. Sectoral coverage including its subsectors .................................................................. 9 b. Industry associations and players ..............................................................................11

Box 2: Diverging business interests across steel industry segments – Producers vs Users of GI Sheet raw materials ..........................................................................................................15

c. Membership in local and international groups / associations ......................................15 2. Performance / Benefits of the Industry ............................................................................16

a. Macro-economic benefits to the economy ..................................................................16 b. Share to GDP, employment, and manufacturing output ............................................17

Box 3: The Steel Industry and the Construction Sector .........................................................18 c. Trade Performance (Exports and Imports) .................................................................19 d. Investments in the sector / subsectoral ......................................................................24 e. Industry costs ............................................................................................................25

Box 4: Industry Data from Financial Statements ....................................................................25 f. Level of technology....................................................................................................28 g. Linkages with other industries ...................................................................................28 h. Supply chain, value chain, and local value added .......................................................31 i. Prices, income ............................................................................................................31

3. Supply and Demand .......................................................................................................31 a. Factors affecting supply ............................................................................................31 b. Factors affecting demand .........................................................................................37 c. Leading players (countries and companies) ..............................................................43 d. Consumption of goods per capita (local and global) .................................................44 e. Global Outlook for Philippine Steel Exports ..............................................................49

SUPPORT TO INDUSTRY DEVELOPMENT .......................................................................................51

1. Specific Industry Programs .............................................................................................51 2. General Support .............................................................................................................53

THREATS AND OPPORTUNITIES ANALYSIS ....................................................................................54 1. Threats and Concerns ....................................................................................................54

a. Brain Drain ...............................................................................................................54 b. High Power Cost ......................................................................................................54 c. Product Standards ....................................................................................................54 d. Smuggling .................................................................................................................55

Box 5: Technical Smuggling is killing us softly .......................................................................55 e. Truck Weight Limit ....................................................................................................58 f. High Distribution Cost ................................................................................................58 g. Industry Data and Statistics ......................................................................................60

2. Opportunities ..................................................................................................................60 3. Elements of Industry Competitiveness ............................................................................61

RECOMMENDATIONS ...................................................................................................................62 REFERENCES .........................................................................................................................66 ANNEXES ................................................................................................................................68

OVERVIEW OF STEEL PRODUCTION TECHNOLOGY IN THE PHILIPPINES .......................................69 PRODUCTION LINKAGES, MULTIPLIERS, AND MULTIPLIER EFFECTS OF THE IRON AND STEEL

INDUSTRY ...............................................................................................................................80 ANALYSIS OF PHILIPPINE COMPARATIVE ADVANTAGE IN IRON AND STEEL PRODUCT EXPORTS

(HS72-73) .............................................................................................................................94

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Chapter 1

PERSPECTIVE ON THE ROADMAP

1. Introduction

The iron and steel industry is a critical component of Philippine inclusive economic

growth and sustainable development. The industry plays a pivotal role in long term economic development because it provides key material inputs for the construction of roads, buildings, houses and factories as well as the manufacturing of high growth exportable products such as automobiles, ships and electronics. This well-established fact has led to the inclusion of the steel industry as among the 13 priority sectors identified under the 2011 Investment Priorities Plan (IPP) of the Board of Investments from which strategic roadmaps are essential to the development of the comprehensive national industrial policy as mandated in the Philippine Development Plan 2011-2016. This new industrial policy seeks to spell out opportunities, coordinate and promote the growth of forward and backward linkages in priority areas and high-potential growth sectors, and prepare other industries to attract investments and generate jobs.

2. Rationale

This industry roadmap represents the response of the Philippine Iron and Steel industry

Institute to the call of the national government for local industries to craft long-term industry competitiveness roadmaps that was issued during the Strategic Industry Development Forum: Partnerships for Inclusive Growth held in January 2012. The roadmap is a private-led initiative that will identify specific industry-level reforms with measurable targets for implementation of strategic interventions from all key stakeholders up to the year 2030. The Department of Trade and Industry plans to incorporate the recommendations of these roadmaps into the IPP of 2013 which aims to create sustainable economic growth across different industries and provide the environment to make the Philippines more competitive with the rest of the region.

According to the PDP 2011-2016, the Aquino administration aims to improve the

country’s standing from the bottom third up to the top third echelon of globally competitiveness nations, to increase merchandise exports to $91.5 billion from the current $38.2B, and to generate up to 6 million new jobs by 2016.

3. Prevailing conditions of the industry

The current problems facing the iron and steel industry have gradually evolved from the

last decade when Vicente (2005) noted that the primary obstacles of overcapacity, high cost of raw materials and energy, availability of raw materials, macroeconomic instability and market uncertainty are the very same ones cited in the 1970s and 1980s studies of the Metals Industry Research and Development Center (Department of Science and Technology). Since then, the steel industry has undergone extensive consolidation after the shutdown of the Global Steelworks (formerly National Steel Corporation) in _____ following the still unresolved legal dispute over real estate back taxes of NSC which caused supply disruptions sector-wide. Global Steel was the dominant producer of cold rolled steel and the country’s sole producer of hot rolled coils and plates. Treasure Steel Corporation assumed the operation of Global Steel’s billet shop and became the dominant manufacturer of billets for resale to end-users primarily the rebar manufacturers in 2012.. In addition, the real estate surplus from the Asian Financial Crisis

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and the recurring fiscal crisis limited private and public construction. Consequently, sector output and employment fell by about 10 percent1 as local production of hot-rolled coil/sheet, cold-rolled coil/sheet, tinplates, and wire rods were completely displaced by cheap imports particularly from China.

The business conditions for steel firms since 2005 have considerably changed. The

public image concerning the country’s macroeconomic instability and market uncertainty has significantly improved as evidenced by the recent upgrade in credit ratings and rise in global competitiveness rankings. While surplus capacity does exist counting the rated capacity of mothballed plants that can still be re-opened, the reality is that a significant portion of the capacities under consideration maybe considered obsolete and/or not operating (even inoperable). The cost of semi-finished steel like hot rolled coils, hot rolled plates, cold rolled coils is no longer high with the gradual phase out of MFN tariffs and the ready availability of cheap imports (although imported scrap is still subject to 3% MFN tariffs.) The country remains a net-exporter of scrap, indicating the relatively low price of domestic scrap for production inputs. In fact, the low-input price scenario has produced the opposite but negative effect of local steel plants forced to rely on steel imports.

The competitive strategy open to steel firms to survive, if not prosper, is to either

become buy-and-sell traders or re-establish the supply linkages across the steel production process from iron / scrap to semi-finished goods and to finished steel products. The significant increase in local production of billets (+65%) and bars (+49%) from 2007 to 2011 sets the stage in anticipation of a gradual recovery in the real estate sector and the implementation of public-private partnership projects to renew infrastructure spending. The proposed plan is to expand capacity not just for long products which primarily support construction -- which constitutes about 80% of steel demand – but also to develop capacity for flat products which offers higher value-added inputs to downstream sectors (e.g. auto and shipbuilding). The challenge facing the steel industry during this rebuilding and repositioning phase is compounded with increasing competition from cheap imports particularly from China, and from technical and outright smuggling especially on light sections, GI/PPGI sheets, CRC, HRC & pipes.

Apparent steel consumption in the Philippines continues to lag behind the other

comparable countries in the ASEAN region with similar income levels.2 The country ranks at the bottom of ASEAN 5 (excluding Singapore) as the 5.16 million metric tons consumed in 2011 is 62% of the next closest rival Malaysia and only 37% of the top country – Thailand (See Figure 1.1).

1 According to the latest survey of establishments conducted by the National Statistics Office (NSO).

2 Apparent Steel Consumption is the sum of production and imports less exports.

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The underdeveloped state of the Philippine economy is evident based on the per capita

apparent consumption of steel which only exceeded the 50 kg per capita milestone in 2011. From 39 kg in 2000 to nearly 54 kg in 2011, the 36% rise is well below the pace set by the other ASEAN countries led by Vietnam (+212%), Thailand (+107%) and Indonesia (+60%) (See Figure 1.2).

The high potential of future steel demand in the country is made more apparent with its

current low steel intensity which measures the amount of steel used per unit of Gross Domestic Product. It is unfortunate that steel intensity in the Philippines has followed the downward trend

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in the region since 2000. The recent consolidation of the sector led to the 39% decline in steel intensity which is worse than the average 29% decrease experienced within the region in the last 10 years (See Figure 1.3).

An initial scan from key informant interviews provides additional constraints to doing

business in the steel industry. In addition to the high cost of electricity which is reportedly the second highest in Asia behind Japan, the industry is faced with impending disruptions in the supply of electricity until new power sources are found to address the power shortage now plaguing Mindanao, which if left unsolved, could be felt nationwide.

On logistics, domestic distribution costs consisting of inland, sea freight and port charges

are more expensive than direct shipments from certain foreign ports (e.g. Japan, Taiwan & China to Cebu, Davao and Cagayan De Oro). Likewise, there are concerns on the road limit policy of the government to enforce the gross vehicle weight limit for the trucks which poses economic consequences detrimental to stakeholders (i.e. truck owners and the consumers).

On tariffs, there is still the distortion in tariff rates wherein some raw materials are

subjected to duty, whereas the finished product is not. The distortion stems out of the differences in the schedule of tariff reduction in the MFN rate and the Free Trade Agreement rates. In the case of steel billets (the raw material for steel angle bars), the MFN rate is at 3% while the ASEAN, China and Korea are zero-rated. The finished product produced from billets (including steel angle) from China, ASEAN and Korea are also zero-rated. The finished product from the rest of the world has an MFN rate of 7%.

The tariff distortion occurs when raw materials are imported from countries apart from

China, Korea and ASEAN such as Russia, Ukraine, CIS which entails an MFN rate of 3% for billets; and the imported competitive finished product like bars come from ASEAN, China and Korea with zero duty. The resulting distortion leads to a negative 3% differential.

The same is true for scrap to billets. Scrap has an MFN rate of 3%. When imported from

USA or Europe, the tariff duty is 3%. When billets, the final product of scrap originate from

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Korea, China or ASEAN, the duty rate is zero. The distortion is also a negative 3%. Such distortions further weaken the competitive position of Philippine manufacturers. There is also the absence of non tariff barriers on the importation of certain finished steel products that are locally produced in sufficient quantities.

On smuggling, the under-declaration and mis-declaration of import entries remains

prevalent. Recently, the PISI urged the Bureau of Customs to investigate 15 companies for supposed gross undervaluation of steel imports. The firms collectively imported finished steel products at an average declared value of only $317 per MT when the price of scrap metal was $400 to $420 /MT, while that of hot rolled coils and billet was above $600/MT in March 2012.

On product standards, the capability of the government (i.e. Bureau of Product

Standards in the Dept. of Trade and Industry) to monitor product standards through testing and inspection is rather limited. In addition, approved product standards for GI sheets have been stopped for enforcement by some producers thru court orders.

On monitoring and evaluating the performance of the industry, there is the absence of a

centralized agency to gather data. As such, there exists the problem of conflicting data from the concerned government agencies (e.g. Bangko Sentral ng Pilipinas, Bureau of Customs, Bureau of Import Services, National Statistics Office, National Economic and Development Authority).

Box 1: Business implications of the differences between Long and Flat Steel Products

The situational dynamics between the Philippine Iron and Steel industries is best

understood when it is viewed as consisting of two virtually distinct industry segments who share a common raw material: steel scrap and iron ore which is transformed in stage 1 of steel production into either pig iron or sponge iron. In stage 2, pig or sponge iron mixed with steel scrap is converted into molten steel which is cast into three types of semi-finished products: blooms, billets and slabs. Only billets are produced locally which utilize steel scrap as raw material using electric arc and induction furnace. Thus, the recommendations presented at the end of this report recognize that the need to address the differences in technology, markets and economics between the long and flat steel industry segments.

In stage 3, long steel products, such as reinforcing bars and sections, are produced from

billets while flat steel products, such as such as hot rolled coils/sheets/plates, cold rolled coils/sheets, galvanized sheets and tin plates, are made from imported slabs. One major difference is that the production of flat steel products entails more refined processes using higher quality ore in order to comply with for mechanical and physical properties. Consequently, stage 3 steel plants that produce flat steel products add higher value to slabs, and flat steel products have margins of 7-8%, greater than the 1-3% of long products. The lower value per weight ratio of long products means that stage 3 steel plants that produce such products have the tendency to be located closer to the market to save on transport and handling costs. In contrast, the higher value to weight ratio of flat steel products indicates that producers of such products are in a better position to export their products.

Therefore, the nature of the two major steel product segments has significant

implications on the threats and opportunities they face as well as on the strategic outlook more extensively discussed in the threats and opportunities section. The short story version is that flat steel producers of the industry can build on their expertise by attracting investments to produce

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plates for the emerging shipbuilding industry resurrected through a joint venture with the Korean shipbuilder, Hanjin. Should they succeed in forming part of regional production chain for auto parts and appliances, they can further raise investments for local slab production and production of specialized flat products for these downstream users. This is the possible growth trajectory for the flat segment given that 80-90% of local production goes the construction industry which is expected to continue to boom.

The growth trajectory for the long steel products segment remains closely linked to

construction, which accounts for 90% of its production. Raising the industrial capacity of the segment for higher billet production is key to satisfying the future requirements for finished steel products in houses and office buildings that will be constructed to meet the demands of a projected rapidly growing economy for the next three decades.

The higher technological requirements in the manufacture of flat steel products entail

different cost implications. An investment in a stage 3 plant for long products will cost about $50 million and will need a minimum production volume of half a million metric tons a year to keep it viable. A stage 3 plant for flat products will require $300 million investment with at least 1 million metric tons capacity to keep it viable. Existing steel technology in the country allows the use of scrap metal and billets in the production of finished long steel products. In contrast, flat product producers can only utilize slabs made from ore, whether sourced locally or from abroad, because more specialized products for cars and ships require higher specifications which cannot be met if the slabs are made from scrap metal.

The previous discussion must have made it clear by this point that the iron and steel

industry actually consists of two distinct product segments--the flat and long steel products. Each has its own set of product characteristics, market drivers, operating environments and investment opportunities which would require two sets of strategies and timelines. The project team has crafted a set of recommendations which would apply to the industry as a whole and could serve as the starting point of a dialogue between the government and industry players to implement measures to improve the business-enabling environment commonly faced by present and potential investors (i.e. infrastructure, smuggling, etc.)3 After the government announces its strategies and timelines necessary to raise the global competitiveness of the industry, the industry players will come together to formulate their corresponding strategies and timelines. 4. Framework

The framework for this roadmap is based on the proposed outline set by the BOI as the

standard guideline in the crafting of the sectoral competitiveness roadmaps. In summary, the outline consists of the following elements:

I. Perspective on the Roadmap II. Vision, Goals and Targets III. State of the Industry IV. Support to Industry Development V. Opportunities-Threats Analysis VI. Recommendations To measure the success of the Roadmap in future years, the Roadmap includes:

3 For the specific recommendations see chapter 6 starting on p.71.

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a) Implementation actions within the short-tem (by 2016), medium-term (by 2022) and long-term (by 2030) for moving from current steel sector arrangements to arrangements that will help achieve the Government’s priorities

b) A framework of performance indicators to measure outcomes.

Together these components of the Roadmap will help to evaluate the progress made in

moving towards industry’s strategic vision, and whether implementation is falling behind the government’s aspirations. The framework will help to highlight areas of slow progress that need to be addressed throughout implementation of the Roadmap, and allow remedies to be implemented to maintain progress on other priorities.

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Chapter 2

MISSION, VISION AND TARGETS

1. Mission

The Philippine Iron and Steel Industry seeks to contribute to the country's sustainable

development by manufacturing world-class products for industry and society. 2. Vision

By 2030, the Philippine Iron and Steel Industry sees itself as a majority producer of

quality steel products for domestic users. We reckon that this vision is achieved when the industry is able to supply 70% of the tonnage of required apparent steel consumption for sustainable economic development in 2030.

Based on economic research, the current apparent steel consumption (ASC) in long and

flat steel products are only 57% and 35% of international levels with similar income levels respectively. To attain the 70% targets, the ASC of long and flat steel products will need to rise to 9.8 million metric tons and 10.1 million metric tons respectively by 2030.4

Table 2.1 - Apparent Steel Consumption Targets

GDP per LONG Steel Products FLAT Steel Products

Capita ($) mil MT Model % mil MT Model % 2008a 1,918 2.3 4.5 52% 1.8 4.8 37% 2009a 1,827 2.6 4.3 60% 1.5 4.7 32% 2010a 2,123 2.8 5.1 54% 1.5 5.5 28%

2011a 2,223 3.1 5.5 57% 2.0 5.9 35% 2016 2,833 4.5 7.8 58% 3.5 8.3 42% 2022 3,697 6.4 10.4 62% 5.9 10.8 54%

2030 4,808 9.8 14.0 70% 10.1 14.4 70% Legend: (a)ctual Sources: IMF projections (April 2012), UA&P estimates

4 Targets are based on the ASC-Steel Intensity model described in pp. 41-45 which also includes the arbitrary year-on-year targets

from 2012 to 2030.

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Chapter 3

STATE OF THE INDUSTRY

1. Structure

a. Sectoral coverage including its subsectors

According to Republic Act No. 7103 or “An Act to Strengthen the Iron and Steel and Promote Philippine Industrialization and for Other Purpose” dated 8 August 1991, the iron and steel industry “refers to the preparation, smelting, crushing, soaking, blooming, slabbing, melting, firing, rolling, casting, shaping, plating, galvanizing and other processes involved in transforming raw materials (i.e., iron ore, coke, limestone, fluorspar, dolomite, and silica) into semi-finished products (i.e., ingots, slabs, blooms and billets) and/or semi-finished products into finished products (products in their final physical state like hot-rolled coils and, plates and sheets”. This all-encompassing definition shows complexity of and the wide range of items produced by the iron and steel industry, both semi-finished and finished products.

The finished products manufactured by the iron and steel industry can be classified into long and flat products. Long products, which are primarily used by the domestic construction sector, consist of sections, bars, and wire rods. On the other hand, flat products include plates, hot-rolled sheets and strips, cold-rolled sheets and strips, tin plates, other metallic-coated sheets, and pipes and tubes. The main users of the flat products are the industries involved in construction, automobiles, packaging, electronic precision, household appliance and shipbuilding and repair. Other allied downstream industries include foundries, metal fabrication, tool and die, machineries and equipment for agriculture, construction, food manufacturing and mining. Flat products have generally higher value-added and more stringent product quality standards. (See Figure 3.1).

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.

LONG PRODUCTS

FLAT PRODUCTS

Scrap iron, DRI, HBI, pig-

iron

Electric Furnace Steelmaking

Billets

Imported Billets

Rolling

Construction

Bars

Shapes / Sections

Hot Rolling

Manufacturing

Machineries

Container / Packaging

Service centers

Service centers

Appliance

Construction

Fabrication

Construction

Fasteners

Wires

Nails Imported Wire Rods

Pipes

Shipbuilding HR Plates

Service centers

Construction

Pipes / Tubes HR Coils

GI / PPGI Sheets

Tinplates

Imported Slabs

Imported Hot Rolled

Local CR Coils/TMBP* Fabrication

Galvanizing

Tinning

Imported Tinplate

Cold Rolling

Imported CRC / TMBP

With the shutdown of Global Steel, all raw material inputs for galvanizing, fabrication and tinning are being imported. Facilities for local production still exist.

Other Allied Industries:

Foundries

Metal

Fabrication

Tool and Die

Construction -

retail

Machineries &

Equipment

Agriculture

Construction

Food mfg

Mining

Imported HRC

Figure 3.1 - Philippine Steel Product Linkages (2012)

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The list of the steel products locally manufactured and imported is shown in Table 3.1.

Table 3.1 - Steel Product Lines in the Philippines as of 2012

Category Local Imported Semi-Finished Products

Billets Billets Steel Slabs

Finished Products Long Products Reinforcing steel bars - all

sizes Reinforcing steel bars - mostly 6, 7, 8mm

Angle bars - 80mm and below Angle bars - all sizes Medium and Heavy sections - H

beam, I beam, channels Light Sections, Channels and Shapes

Wire rods

Steel wires Steel wires Steel purlins Steel purlins Alloy bars - including stainless

steel Flat Products Hot dipped galvanized sheets Hot dipped galvanized sheets

Zn-Al coated sheets Zn-Al coated sheets Welded black iron pipes and tubes

Welded black iron pipes and tubes

Welded galvanized pipes and tubes

Welded galvanized pipes and tubes

Pre-painted galvanized / Zn-Al coated coils/sheets

Pre-painted galvanized / Zn-Al coated coils/sheets

Pre-painted Galvanized Iron

Sheet piles

Hot rolled coils / sheets

Cold rolled coils / sheets

Stainless steel sheets Source: PISI

b. Industry associations and players

The over-all industry is traditionally represented by the Philippine Iron and Steel Institute (PISI) which currently has a membership of 47 companies including 3 related associations as members. PISI members are categorized into flat products, long products, steel fabrication / forming / finishing, and traders and suppliers. The breakdown of membership by product group and subsector and related associations as well as major non-member players is shown in Table 3.2.

Aside from these companies, there are also five steel service centers in the country.

They are companies that that process steel into products that are used by manufacturing firms. They also recycle steel and store steel products needed by many small and medium enterprises as required.5 For instance, there is POSCO-Philippine Manila Processing Center, Inc, a Korean

5 Taken from http://www.thomasnet.com/about/steel-service-centers-80132103.html

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subsidiary of Pohang Iron and Steel Co, Ltd, which is located in First Philippine Industrial Park, Sto. Tomas/Tanauan, Batangas and makes steel products for electronic components, automotive parts and home appliances.6 There is also MM Steel Service Center Corporation, a subsidiary of Marubeni-Itochu Steel Inc, which is located in the People's Technology Complex, Carmona, Cavite and produces automotive parts.7

6 Taken from http://siva-

ph.jobstreet.com/SiVA11/Company/ViewProfile.aspx?token=oABbFTSunA1Na7MXawHDn8hsLhWyhobDVHGnFldswik=&rnd=78216954&max=1&alljob=1#.UMnbzy_LYZ4 7 Taken from http://www.philippinecompanies.com/companyprofile/35122/mm-steel-service-center-corp- and

http://www.benichu.com/english/network/kanren_overseas.html

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Table 3.2 - Major Industry Players and Associations

Product Group / Stage

Subsector - Products

Major Players Related Associations

Long Product

Steel Making - Billets

1. Steel Asia /a 2. Amalgamated Metals 3. Cathay Pacific Steel 4. CKU Steel /d

5. Elegant Steel 6. Ferromet Resources

/a 7. Midland Steel 8. Melters Steel

9. SKK Steel / b 10. Stronghold Steel /a 11. Treasure Steel /a

a/ Phil Iron and Steel Institute b/ Phil Steelmakers Association c/ Phil Steel Rolling Mills Association (PSRMA) /a d/ Association of Phil Steel Mills (APSMI) e/ Steel Angles, Shapes & Section Manufacturers Association of Philippines (SASSMAPI) /a *Not operating

Rolling Mills - Bars

1. 21st Century Steel /e 2. Binan Steel /d 3. Builder Steel / c 4. Capitol Steel /a d 5. Cebu Steel / a d * 6. Continental Steel /c

7. Filipino Metals 8. Grand Asia / c 9. Legacy Steel /a e

10. LLN Products /a 11. Cathay Pacific Steel 12. Maxima Steel /a d e

13. Pag-asa Steelworks /a c

14. Metro Dragon 15. Somico Steel 16. Steel Asia /a c 17. Universal Steel

Smelting 18. Worldwide Steel

Light Section Channel

1. 21st Century Steel /e 2. Cathay Metal 3. Dragon Asia

4. Legacy Steel / a e 5. Lunar Steel / a d e

6. Maxima Steel / a e 7. Unicorn Metal

Wire Product

1. Sterling Steel /a 2. Philippine Nails and

Wire Corp. / a

3. Fidelity Steel / c Wire Rope Manufacturers Association of the Phil (WRMAP)

Flat Product

Hot / Cold Rolling

1. Global Steel /* 2. Steel Corp /* 3. Sacramento /*

Galvanizing and Coil Coating

1. AC Steel 2. Chuayuco Steel 3. Excel Coil Coating 4. Galvaphil

5. Group Steel 6. Philsteel /* 7. Puyat Steel /a 8. Sonic Steel

9. Steel Corp /* 10. Tower Steel 11. Union Galvasteel / a

Phil Galvanizers and Coaters Association

Filipino Galvanizers Institute (FGI)

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Product Group / Stage

Subsector - Products

Major Players Related Associations

Pipe and Tube

1. Supreme Steel Pipe /a 2. Super Industrial /a

3. Goodyear Steel Pipe 4. Mayer Steel

Pipes & Tubes Manufacturers Assoc.

Steel Fabrication, Forming and Finishing

1. Accutech Steel & Service Center /a 2. Colorsteel Systems /a 3. DN Steel Marketing /a

4. Fasteners Incorporated /a 5. Hurleson Steel /a 6. Jacinto Color Steel /a

7. Philmetal Products 8. Steel Centre Phil /a 9. Steelpro Phils. /a

Philippine Association of Steel Formers, Inc. (PASI)

Tin Can Manufacturers Association (TCMAPI)

Traders, suppliers and Others

20 PISI members Phil Iron and Steel Traders Association /a (22 members)

Scrap Collectors and Recyclers Association of the Phil (SCRAP)

Source: PISI

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The PISI has three basic functions in promoting the development of the local iron and steel industry. The first function of the PISI is to represent the iron and steel sector in policy discussions with the legislature and national government agencies. This will ensure that the views and concerns of the local industry will be properly heard in the relevant consultations and fora. Its second function is to provide technical training to the employees of industry players. The training programs cover areas in steel manufacturing operations, maintenance, safety and environmental management. The last function of the industry association is to conduct capacity building activities for the industry players.

The segmented nature of the steelmaking process is reflected in the existence of the

numerous associations at the sub-sector level – distinct from PISI - as seen in Table 3.20. As there is no integrated steel plant(s) in the country, no single firm can claim to represent the best interests of all industry segments. The business interests of sub-sectors that are upstream and/or-downstream from each other are not always coincidental. Promoting pro-competition policies that lead to lower prices is always welcome – but more so for the input-using downstream subsector than the upstream sector under review. Pushing for higher quality standards and hence higher prices in an upstream steel segment may not be considered in the best interest of the downstream sector which will need to pay higher costs for the inputs.

Box 2: Diverging business interests across steel industry segments – Producers vs Users of GI Sheet raw materials

A case in point is the recent issue where local galvanizers under the Filipino Galvanizers

Institute (FGI) opposed the imposition of standards for import clearances of imported raw materials for galvanizing roofing products, contrary to the stand of local producers of cold rolled coil (CRC) which produced such products. FGI states that imposing the imports of the raw materials under a mandatory Philippine National Standards (PNS) and import commodity clearance (ICC) certification would only cause unnecessary burden to the manufacturers of GI sheets. Subsequently, the government decided in April 2010 not to implement the regulation in deference to the various representations of the motorcycle assemblers and steel galvanizers (as well as the Federation of Philippine Industries) for deferment because such standards are imposed on finished – and not intermediate or raw material – goods, and that there are no facilities to conduct the test and accredited agencies to undertake the test in any case.

c. Membership in local and international groups / associations

The PISI, which is the umbrella organization of local associations in iron and steel, is

currently a member of two international organizations – the Southeast Asian Iron and Steel Institute (SEAISI) and the ASEAN Iron and Steel Industry Council (AISC). PISI is also a member of the Philippine Chamber of Commerce and Industry.

SEAISI was incorporated in 1971 under the auspices of the United Nations Economics Commission for Asia and the Far East. SEAISI is a technical institute with its main objective is to promote the iron and steel industry in the Southeast Asian region by facilitating technology transfer from around the world, particularly Australia, Japan, Republic of Korea, and Taiwan.8 Member countries of SEAISI consist of Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam as regular members, and the countries of Australia, South Korea, and Taiwan as supporting members. Japan is represented by leading steel companies, Nippon Steel and JFE.

8 Southeast Asian Iron and Steel Institute website (www.seaisi.org)

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The countries are represented by the national committees which in the case of the Philippines is PISI. The firms which comprise these national committees automatically become members of SEAISI. SEAISI is likewise an affiliated member of the World Steel Association (WSA), the largest international iron and steel association. No local iron and steel firm can currently meet the regular membership requirement of the WSA, which require an annual steel production of at least two million short tons.

On the other hand, the AISIF was established in 1977 as a regional industry club under the aegis of the ASEAN Chamber of Commerce and Industry. The primary purpose of the AISIF is to promote the well being of the iron and steel industry in the ASEAN region, focusing on trade, investment and business promotion. 9 The members of AISC are six ASEAN countries: Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam.

2. Performance / Benefits of the Industry

a. Macro-economic benefits to the economy

One measure of the significance of the iron and steel industry to the whole economy is

the multiplier effects of raising the output and investment in the sector. Based on the current economic structure surrounding the steel industry, a new investment of P100 million leads to a P270 million increase in total output, a P24 million rise in household incomes, and 117 new jobs. The figures get higher as linkages with local suppliers and buyers are further developed and locally produced inputs replace imported inputs until the effects approximate the global multipliers (See Table 3.3)

Table 3.3 - Input-output Multipliers

Multipliers Effects of P1 increase in investment

Global* Domestic Total Output 3.50x 2.70x Input sectors 1.60x 1.08x Iron & Steel Sector 1.00x 1.00x Output sectors 0.90x 0.62x Total Household Income 0.32x 0.24x Additional Employment per P100 million investment

155x 117x

* Assumes that all of the related / affected sectors are domestic (i.e. all inputs are sourced locally). Source: UA&P estimates using updated input-output table for 2008

The iron and steel industry remains a major driver in raising national output. The

domestic output multiplier of the industry is higher than construction, private health services, transportation, financial intermediation, wholesale and retail trade, other personal services, real estate, nickel mining, private education and mining / quarrying. It is overtaken by only five other sectors: manufacturing, fishing, agriculture and forestry, electricity/gas/water, and hotel / restaurants. (See Table 3.4 as seen in table 3 of Annex B.)

9 ASEAN Iron and Steel Industry Federation website (www.misif.org.my)

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Table 3.4 - Ranking of Domestic Total Output Multipliers

1. Manufacturing 3.4 2. Fishing 3.3 3. Agriculture and Forestry 3.2 4. Electricity, Gas, and Water 3.1 5. Hotels and Restaurants 2.75 6. Iron and Steel 2.7

7. Construction 2.63 8. Private Health Services 2.24 9. Transportation, Storage, and Communication 2.2 10. Financial Intermediation 1.95 11. Wholesale and Retail Trade 1.87 12. Other Community, Social, and Personal Services 1.81 13. Real Estate 1.66 14. Nickel Mining 1.26 15. Private Education Services 1.2 16. Mining and Quarrying 1.14

Note: The domestic total output multiplier is derived from the semi-closed domestic Leontief inverse matrix, which was based on a non-survey estimate of the 2008 Philippine input-output table. The table has 16 industries or sectors and 1 household sector. The household sector was excluded in the ranking. The domestic total output multiplier represents the additional domestic output in the economy generated by a change in final demand. If the assumed change in investment spending is multiplied by the domestic total output multiplier, one gets the total multiplier effect on domestic production in economy. The output multipliers were derived using the column elements of the semi-closed domestic Leontief inverse matrix

b. Share to GDP, employment, and manufacturing output

Based on the sectoral income accounts of the National Statistical Coordination Board (NSCB), the local iron and steel sector is comprised of the basic metal industries and fabricated metal products. Except for the sharp drop in the first semester of 2012, the share of gross value added (GVA) in the local iron and steel sector to GDP, GVA in industry, and GVA in manufacturing has been fairly stable (See Table 3.5). Share of the iron and steel industry hovered at 0.7% to 0.8% range during the 2003-2011 period before falling to 0.5% in the first half of 2012. The significant decline in the share to GDP is largely attributed to the 20.6% contraction in output of the iron and steel industry coupled with the 6.1% expansion in the domestic economy (See Table 3.6).

Table 3.5 - GVA in Iron and Steel Industry as a Percent of GDP

Year % of GDP % of Industry % of Manufacturing 2003 0.7 2.0 2.8 2004 0.7 2.0 2.8 2005 0.6 1.8 2.5 2006 0.7 2.3 3.1 2007 0.7 2.2 3.1 2008 0.8 2.5 3.5 2009 0.7 2.1 3.1 2010 0.7 2.1 3.1 2011 0.7 2.1 3.0

1H 2012 0.5 1.6 2.3 Source: National Statistical Coordination Board (NSCB)

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The correlation between the GVA in the iron and steel sector and GDP over the last decade is not particularly strong.10 The low correlation can be gleaned from the relative performance of the local iron and steel industry to GDP. One noticeable trend is the greater tendency for the output of the sector to experience a sharp fall, if not contraction, when economic growth declines. This trend is consistent with the nature and outlook of construction projects which drive the demand for steel products and is highly sensitive to macro-economic sentiment in the long-run. The correlation of the iron and steel sector with industry and manufacturing is likewise low, but their correlation coefficients are significantly higher than that with GDP.

Table 3.6 – GVA of Iron and Steel, GDP, Industry and Manufacturing (2003-2011)

(growth rate,%)

Year Iron and Steel GDP Industry Manufacturing 2003 - 2004 3.7 6.4 5.2 5.1 2004 – 2005 -6.8 5.0 3.8 5.6 2005 – 2006 31.7 5.3 4.5 4.6 2006 – 2007 4.4 7.1 6.8 3.3 2007 – 2008 0.1 3.7 4.9 4.3 2008 - 2009 -15.5 1.1 -1.9 -4.8 2009 - 2010 12.1 7.6 11.6 11.2 2010 - 2011 1.9 3.9 2.3 4.7

1Q 11 - 1Q 12 -20.6 6.1 4.9 5.0 Source: NSCB

The local iron and steel sector contributes less than 2% of total employment in the

manufacturing industry (See Table 3.7). The lack of upstream steel manufacturing facilities after the closure of Global Steel has led to the downscaling if not outright closure of many steel plants. Considering this development, the industry has reduced its manpower complement by 21% from 19,700 in 2003 to only to 15,648 in 2009.

Table 3.7 - Employment in the Iron and Steel Industry

Year Iron and Steel Manufacturing 2003 19,700 986,921 2005 17,979 1,025,814 2009 15,648 953,799

Source: Annual Survey of Philippine Business and Industry National Statistics Office (NSO)

Box 3: The Steel Industry and the Construction Sector

The performance of the Philippine steel industry is closely linked to the growth of the

construction sector. Steel products used in the construction of buildings, houses, and infrastructure facilities include rebars, angles, channels, beams, sheet piles, wires and wire rods, GI, Zn-Al and pre-painted sheets, and pipes and tubes.

10

A longer time series is preferred in the computation of the correlation coefficient. The NSCB is in the process of rebasing the national income accounts from 1985 to 2000. The rebased series currently available from the NSCB with a 22-subsector breakdown for manufacturing is from 2008 to first quarter of 2012. The 22-subsector breakdown includes basic metal industries and fabricated metal products.

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Simple regression estimates using national data from 1996 to 2011 show that for every P1 million increase in the Gross Value Added of Construction (at current prices) the apparent steel consumption for long steel products and overall steel products in general rise by 1.35 metric tons and 1.46 metric tons, respectively. Expressed in elasticity form, this translates to +0.3% and +0.2% increase in the consumption of long and all steel products respectively – for every one percent increase in current GVA of Construction nationwide. The regression results involving flat steel products were not statistically significant.

For every + P1 million in Current GVA of Construction Product +MT T-stat Significance Acceptable

Both 1.46 2.99 ** Yes Long 1.35 4.73 ** Yes Flat 0.23 0.67 No

For every +1% in Current GVA Of Construction Product +% in MT T-stat Significance Acceptable

Both 0.20 2.86 ** Yes Long 0.30 3.77 ** Yes Flat 0.10 0.85 No

Source: UA&P estimates using raw data from SEAISI and NSCB

c. Trade Performance (Exports and Imports)

Considering the local iron and steel industry’s limited production, the country imports about half of its requirements. Over the past two years, there has been a noticeable increase in imports iron and steel products (See Table 3.8). In 2011, importations expanded by some 24% to 3.92 million MT. The expansion in imports of iron and steel products was due in part, to the shutdown status of Global Steel, the sole manufacturer of flat products, and to higher demand by the construction sector as a result of the recovery of the real estate sector.

Table 3.8 - Imports of Iron and Steel Products (in metric tons)

Year Total Imports % change 2007 3,432,639 11.6 2008 3,018,172 -12.1 2009 2,830,103 -6.2 2010 3,170,891 12.0 2011 3,921,994 23.7

Source: Southeast Asia Iron and Steel Institute (SEAISI)

The ratio of long-to-flat product imports is about 30:70 (See Table 3.9). With a limited

capability to locally produce flat products, a large majority of the country’s consumption requirements come for imports. Over the past five years, imports of finished steel products grew by an average of 7.0% per annum. Importations of flat products outpaced long products, 7.4% per annum to 5.9% per annum. Imports of galvanized iron (GI) sheets, pipes and tubes, and plates posted the higher growth rates among flat products. GI sheets, pipes and tubes are

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primarily used by the construction sector, while steel plates are utilized by the shipbuilding and repair sector.

China, Russia, South Korea and Japan are the country’s leading source of imports of iron and steel products. Over the past five years, import volumes from Chinese, Russian, and Japanese companies amounted to an average of 860,552 MT, 593,675 MT and 503,387 MT per annum, respectively. The combined volumes from these three countries accounted for close to 60% of the country’s total imports of iron and steel products. Among the SEASI member countries, the leading countries of origin of Philippine imports, aside from Japan, are Taiwan (426,913 MT per year), and Republic of Korea (359,605 MT per year).

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. Table 3.9 - Philippine Imports of Semi-Finished and Finished Steel Products, 2007-2011

(in metric tons)

Particulars 2007 2008 2009 2010 2011 Semi-Finished Products 1,345,344 1,103,267 1,182,076 1,169,998 1,120,011

Billets 1,026,265 853,128 1,117,790 1,169,998 1,120,011 Slabs 319,079 250,139 64,286 0 0

Finished Products 2,061,620 1,894,417 1,640,873 2,085,803 2,738,762 Long Products 721,852 585,159 475,958 646,715 765,300

Wire Rods 431,137 377,456 338,069 336,854 344,378 Bars 58,778 42,132 36,912 65,207 115,426 Shapes and Sections 191,435 133,078 59,217 190,130 179,510 Sheet Piles 12,528 8,949 10,434 29,946 20,816 Wires 23,998 20,255 26,339 18,516 39,997 Rails 2,046 1,041 2,464 2,174 3,394 Others (Alloy and Stainless Steels) 1,930 2,248 2,523 3,888 61,780

Flat Products 1,339,768 1,309,258 1,164,915 1,439,088 1,973,461 Plates 205,385 327,249 331,058 280,728 441,528 Hot Rolled Coils / Sheets 335,863 284,478 284,879 214,908 325,326 Cold Rolled Coils / Sheets 298,494 228,336 211,257 292,648 383,018 Cold Rolled Electrical Sheets 1,676 3,593 1,619 1,626 10,019 GI Sheets / Pre-Painted / Zn-AL 103,623 100,093 74,075 227,401 300,551 Tinplates / TFS 196,849 188,796 118,080 233,449 202,720 Pipes and Tubes 166,581 119,903 99,148 122,727 180,739 Others (Alloy and Stainless Steels) 31,297 56,810 44,799 65,601 129,561

Sources: BOC, DTI, PISI, SEAISI, and industry sources.

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The export performance of the Philippine iron and steel industry has been very erratic since 2004 (See Table 3.10). From a measly 92,339 MT in 2004, export volume increased by a whopping 275% to 346,076 MT in 2006. The uptrend in exports was largely attributed to attributed to Global Steel’s sales strategy of allocating more volumes for the export market. Also, higher volumes of export sales were realized for galvanized sheets. However, the strong export performance was short-lived as volumes dropped to 74,389 MT in 2009, when Global Steel began experiencing cash flow problems. The estimated export volume of iron and steel products in 2010 was 105,103 MT --- 70% lower than the industry’s all-time high.

Table 3.10 - Exports of Iron and Steel Products11 (in metric tons)

Year Total Exports % change

2004 92,339 2005 162,324 75.8 2006 346,076 113.2 2007 219,949 -36.4 2008 150,516 -31.6 2009 74,389 -50.6 2010 105,103 41.3

Source: SEAISI

The country’s export volumes are lower compared with other SEASI member countries

(See Table 3.11). For instance, Philippine iron and steel exports in 2010 accounted for a paltry 0.1% of total exports of SEASI member countries. Japan remains as the leading exporter with volumes accounting for close to half of the institute’s total. Furthermore, the Philippines has a limited product line compared with its neighboring countries. As previously mentioned, the absence of an upstream sector constrains the ability of local firms to manufacture the full line of iron and steel items, particularly flat products.

Table 3.11 - Exports of SEASI Member Countries, 2010 (in metric tons)

Country Total Exports % share Australia 2,608,577 2.9 Indonesia 1,415,851 1.6 Japan 42,935,779 48.0 Republic of Korea 24,558,059 27.4 Malaysia 2,791,671 3.1 Philippines 105,103 0.1 Singapore 2,133,154 2.4 Taiwan 9,843,040 11.0 Thailand 1,849,230 2.1 Vietnam 1,282,723 1.4 TOTAL 89,523,187 100.0

Source: SEAISI

The country’s leading export of iron and steel products are carbon steels (both hot-rolled

and cold-rolled) and coated sheets and strips. Over the 2004-2010 period, carbon steels and carbon sheets and strips posted annual averages of 111,206 MT and 42,463 MT, respectively.

11

Details of 2011 exports of iron and steel products are not available.

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The primary destinations of the locally produced iron and steel products are Vietnam, India, and Indonesia. These three countries combined account for close to 50% of total export volumes over the past seven years.

There are also indirect exporters of steel products in the country. These include firms

engaged in the production of computers, office equipment, and automatic teller machines for the export market. The combined steel consumption of these firms can reach as high as 15,000 metric tons per month.

Historically, the Philippines has been a net importer of iron and steel products (See

Table 3.12). Net imports amounted to 3.04 million MT in 2010, an increase of 10.4% over the previous year. With the exception of Japan and Taiwan, all SEASI member countries are net importers of iron and steel products.

Table 3.12 - Trade Performance, Philippines: 2004-2010 (in metric tons)

Year Exports Imports Trade Balance 2004 92,339 2,866,458 -2,774,119 2005 162,324 2,721,205 -2,558,881 2006 346,076 3,076,805 -2,730,729 2007 219,949 3,432,639 -3,212,690 2008 150,516 3,018,172 -2,867,656 2009 74,389 2,830,103 -2,755,714 2010 105,103 3,147,891 -3,042,788

Source: SEAISI

The Philippines iron and steel industry likewise actively trades in scrap iron. Scrap

comes from recycled products, leftovers from consumption such as vehicles and building supplies, and surplus materials. The local steel industry is comprised primarily of steel making and rolling mills. Steel making, which is scrap-based, utilizes the electrical arc furnace process. Hence, the local industry is a huge consumer of ferrous scrap.

In 2010, consumption of scrap iron amounted to 1.24 million MT, with local firms supplying a large majority of demand. Imports of scrap iron summed up to 24,321 metric tons in 2010. Unlike finished steel products, the Philippines is a net exporter of scrap iron (See Table 3.13).

Table 3.13 - Exports and Imports of Scrap Iron (in metric tons)

Year Exports Imports Trade Balance 2004 861,828 20,977 840,851 2005 947,491 12,104 935,387 2006 1,274,379 22,762 1,251,617 2007 771,739 98,703 673,036 2008 767,759 63,028 704,731 2009 397,463 34,684 362,779 2010 550,997 24,321 526,676

Source: SEAISI

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d. Investments in the sector / subsectoral There is limited information on investments in the Philippine iron and steel industry. The investment data used in this report were based on the Annual Survey of Philippine Business and Industry prepared by the National Statistics Office (NSO). Gross addition to fixed assets is used as the proxy variable for investments.

The results of the NSO show that investments in the manufacture of basic iron and steel have declined sharply to Php297 million in 2009 from Php1,565 million in 2003 (See Table 3.14). Investments were significantly lower in spite of the 34% growth in revenues over the same period.

With the looming establishment of the ASEAN Free Trade Area (AFTA), a number of local firms are unable to compete with low cost producers in other countries. Hence, some of these firms have opted to close shop or to shift to more competitive product lines. The breakdown of investments by subsector in 2009 is provided in Table 3.14.

Table 3.14: Investments in the Philippine Iron and Steel Industry (in million pesos)

Particulars 2003 2005 2009 Manufacture of Basic Iron and Steel Total Revenue12 52,338 75,667 70,190 Total Cost13 47,521 71,278 59,926 Value of Output14 53,505 77,787 69,021 Gross Addition to Fixed Assets15 1,565 1,372 297 Total Manufacturing Total Revenue 2,244,079 2,949,134 3,357,437 Total Cost 1,835,479 2,434,069 2,457,885 Value of Output 2,263,936 2,912,185 3,293,680 Gross Addition to Fixed Assets 102,493 94,984 95,407

Source: Annual Survey of Philippine Business and Industry, NSO

Table 3.15: Gross Additions to Fixed Assets by Subsector, 2009 (in million pesos)

Subsector Investments Operation of blast furnaces and steel making furnaces 63 Operation of rolling mills 147 Pipes and tubes manufacturing, iron or steel 5 Manufacture of pipe fittings of iron or steel 0 Manufacture of galvanized iron sheets, tinplates and other coated 71

12

Revenue includes cash received and receivables for goods and products and by-products sold and services rendered. Valuation is at producer prices (ex-establishment) net of discounts, and allowances including duties and taxes but excluding subsidies. 13

Cost refers to all expenses incurred during the year whether paid or payables. Valuation is at purchasers price including taxes and other charges, net of rebates, returns and allowances. Goods and services received by establishment from other establishments of the same enterprise are valued as though purchased. 14

Value of output represents the sum of the value of products and by-products sold, receipt from industrial services done for others, receipt from goods sold in the same condition as purchased less cost of goods sold, fixed assets produced on own account, and change in inventories of finished products and work in progress. 15

Gross addition to fixed assets is equal to capital expenditures less sale of fixed assets including land.

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Subsector Investments metal products made in steel works of rolling mills Steel works, not elsewhere classified 10 TOTAL 297


e. Industry costs

Based on the NSO’s 2009 Annual Survey of Business and Industry, total revenues of the

iron and steel industry summed up to Php70,190 million, lower than the Php75,667 million posted in 2005 (See Table 3.16). Total operating cost was Php59,926 million in 2009 – significantly lower than the Php71,278 million registered in 2005. Hence, estimated net operating income improved to Php10,264 million in 2009 from Php4,289 million in 2005.

The NSO survey provides only two components of operating costs – intermediate cost and compensation cost. Intermediate cost consists of cost of materials, fuel and electricity consumed, industrial service, and goods for resale. Based on the surveys conducted in 2005 and 2009, intermediate and compensation costs accounted for 88% and 4% of total operating cost, respectively. According to industry sources, the largest components of intermediate cost are raw materials and electricity and fuel consumed. Thus, financial performance of the iron and steel industry is highly sensitive to price movements in raw materials, electricity, and fuel.

Box 4: Industry Data from Financial Statements

Industry data from NSO surveys is open to questions particularly as the size and number

of players in the steel industry greatly varies from the data gathered from PISI which is sourced from industry insiders. (Table 3.2). In addition, general conclusions from industry-level data of NSO are subject to sub-sector interpretations. Differences in the costs and pricing within the steel product segments characterize the financial dynamics of the entire industry which cannot be taken singularly. As a case in point, steel prices especially that of billets nose-dived in the latter part of 2008 due to the European financial crisis. The rate of decline in the final product’s price is much steeper than the decrease in raw material prices which is scrap. Hence net operating income of billet producers significantly dropped in 2009 contrary to the conclusion arrived at using NSO data. On the other hand, rebar manufacturers may have posted gains in 2009 as a result of the significant decline in billet prices which are the raw materials of steel bars.

As an alternative to survey data from NSO, financial statements for 2010 of identified

steel firms were obtained by PISI. Combined net income after tax of the Philippine iron and steel industry amounted to Php277.7 million in 2010 on the back of total revenues and total costs of Php60,362.1 million and Php60,084.3 million, respectively The local industry posted a net profit margin of only 0.46%. Financial performance of the industry was pulled down by the Php840-million loss in the operations of steel making for billets, primarily because of the steep drop in prices of billets. Among the six subsectors, the rolling mills for bars segment, which was comprised of 21 companies, registered the largest combined revenues with Php44,599 million. At a distant second was the galvanizing and coil coating subsector with P8,194 million. It was also the most profitable subsector as it realized a net profit margin of 3.5% in 2010.

The industry data shows that the cost of goods and sales is about 78-93% of net sales

while operational expenses including selling and administrative costs comprise about 3-11%

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depending on the steel product segment. Minus the two top billet-producers whose net sales comprises 78% of the segment, the margins after cost of sales and operations in billet production are a healthy 6.8 percent and 3.3 percent respectively.

Financial Performance of Philippine Iron and Steel Industry, 2010 (in million pesos, unless stated otherwise)

Subsector Number of Companies

Total Revenues

Total Cost Net

Income After Tax

Capital Expenditures

Net Profit

Margin (%)

Steel Making - Billets

9 4,024.63 4,863.42 (838.80) 431.24 (20.84)


21 44,598.89 43,797.23 801.66 490.73 1.80

Section 6 2,411.28 2,395.21 16.07 3.68 0.67 Wire Product 3 417.89 411.61 6.28 3.19 1.50 Galvanizing and Coil Coating

10 8,194.47 7,906.65 287.82 118.42 3.51

Pipe and Tube

2 714.90 710.21 4.69 8.38 0.66

TOTAL 51 60,362.05 60,084.33 277.72 1,055.65 0.46

Subsector Net

Sales Gross Profit

Operating Income

Ratio to Net Sales (%)

Gross Profit

Operating Income

Net Income Before

Tax Steel Making - Billets

4,023 (609) (795) (15.1) (19.8) (20.5)


44,379 2,988 1,722 6.7 3.9 2.7

Section

2,403 127 65 5.3 2.7 1.0

Wire Product

414 20 11 4.9 2.8 2.3 Galvanizing and Coil Coating

8,137 1,036 492 12.7 6.0 4.6

Pipe and Tube

714 157 80 22.0 11.2 1.0

TOTAL

60,070 3,720 1,574 6.2 2.6 1.3 Source: Various audited financial statements

Note: In order to avoid double counting, multi-product firms are included in only one subsector.

Despite its poor financial performance in 2010, the steel making for billets subsector still managed to incur some Php430 million in capital expenditures. Only the rolling mills for bars segment registered higher capital expenditures in 2010 at Php490 million. These two subsectors accounted for more than 85% of the total capital expenditures of the local iron and steel industry.

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Table 3.16: Revenue and Cost of the Philippine Iron and Steel Industry, 2009 (in thousand pesos)

Industry Number of

Establishments Total Revenue Total Cost

Total Compensation

Intermediate Cost

Operation of steel making furnaces 94 27,460,409 22,274,368 935,247 18,640,159 Operation of rolling mills 94 23,764,767 22,397,681 897,529 20,878,295 Pipes and tubes manufacturing, iron or steel 28 3,528,060 3,087,235 322,789 2,682,133 Manufacture of pipe fittings of iron or steel 5 984,675 884,722 22,093 803,089

Manufacture of galvanized steel sheets, tinplates and other coated metal products made in steel works or rolling mills 40 11,554,810 9,200,308 530,943 8,214,449 Steel works, not elsewhere classified 35 2,897,246 2,082,003 170,109 2,076,776

TOTAL 70,189,967 59,926,317 2,878,710 53,294,901 Source: NSO

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f. Level of technology

According to industry sources, the level of production technology of Philippine steel

producers vary from state-of-the-art to over two decades old. Most new investments in process technologies are driven by short-term profit-seeking brought about by a lack of long-term vision and consistent government policies.

Steel production firms can be classified into two, depending on which production stages

the firm undertakes. Firms are called integrated steelworks if their production set-up start from iron ore or scrap to produce steel products like bars, wire rods, hot rolled coils/sheets/plates, etc. Firms with production set-up that starts with semi finished steel like billet or slab or produce only semi-finished steel are non-integrated steelworks like independent rolling mills and billet making plants. Scrap-based integrated mills using Electric Arc Furnace are normally called Mini-mills to distinguish it from ore-based integrated mills using the Blast furnace route.

The last mini-mills in the country were established in the 1996-1998, and no new mills

for the Stage 2 production have been opened since then. Most of the “new” steel mills (actually, using second hand equipment from China) are rolling mills for the long products sections and rebars.

In 2011, Treasure Steelworks installed its first (of two planned) mini-blast furnace with a

pig-iron capacity of 350,000 MT/year, part of a planned production to 700,000 MT/year. This is part of a plan to build the only integrated steel mill in the Philippines ever since Global Steel Philippines, the former National Steel Corporation, stopped operating in 2010.

Compared to other steel producers (mini-mills and rolling mills) of similar capacities

(between 100,000 and 300,000 MT/year capacity) in Southeast Asia, Philippine producers are able to price their products competitively. Local steel producers are able to make do with off-the-shelf technology from China that are easy to install and that assure considerable savings in energy expenses. Another technology where some mini-mills are willing to invest is in scrap preheating, which raises the temperature of the scrap metal using the heat of exhaust gases from the melting process. Other technology investments in the steel industry have considerably reduced wastage from 4% more than ten years ago to an acceptable 1% of total output. Although some mini-mills want to install furnaces to increase capacity up to 500,000 MT/year to achieve optimal efficiency not one has proceeded for the reasons already mentioned, i.e., it would not be competitive for them because of smuggling and other forms of government corruption.

See Annex A for more details on the overview of steel production technology in the

Philippines.

g. Linkages with other industries16

The iron and steel industry is widely considered one of the catalysts of industrialization

and a major backbone of all industries in the economy. In fact, industrialization in many countries is strategically linked with the growth and development of the iron and steel industry.

16

Based on the report entitled “Production Linkages, Multipliers, and Multiplier Effects of the Iron and Steel Industry”. The report was prepared by Dr. Cid Terosa for the Philippine iron and steel industry road map. The full report is included in the annex.

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Sustained long-run economic growth will require, among others, growth in public spending for infrastructure and private construction spending. Greater public spending on infrastructure and private construction spending will undoubtedly boost demand for iron and steel products. In the Philippines, the surge of public-private partnerships in infrastructure development, expansion of the real estate industry, growth of the housing industry, and the emergence of the shipbuilding industry will intensify demand for iron and steel products.

To meet demand for its products, the iron and steel industry relies on other industries for production inputs and on households for labor inputs. The web of production interrelationships between the iron and steel industry and the rest of the economy intensifies production linkages and produces multiplier effects that help expand output, household income, and employment.

Input-output analysis was used to quantify the multiplier effects of the Philippine iron and steel industry and to measure the strength and diffusion of the industry’s production. The results of the analyses are discussed in Annex B and summarized below.

The production structure of the steel industry consists primarily of intermediate inputs

which account for about 66 percent (See Table 3.17). The major intermediate inputs of the iron and steel industry are as follows:

1. Blast furnace, steel making furnace, steel works, and rolling mills 2. Electricity 3. Wholesale and Retail Trade 4. Manufacture of Non-Metallic Mineral Products (not elsewhere classified) 5. Petroleum Refineries About 25.2 percent of the production structure of the iron and steel industry can be

traced to financial capital, 6.3 percent to labor inputs, two percent to physical capital inputs, and about 0.5 percent to other primary inputs. In sum, about 34 percent of the production structure of the iron and steel industry can be attributed to primary inputs. (see Table 3.17)

Table 3.17 - Production Structure, 2008

Inputs % share of inputs Intermediate Inputs (including steel and mineral products, power, trade, oil, etc.)

66.0

Primary Inputs Finance 25.2 Labor 6.3 Physical Capital 2.0 Others 0.5

Total 100.0% The production structure of the iron and steel industry is skewed towards intermediate inputs since at least two-thirds of the total inputs of the industry can be traced to intermediate inputs. This implies that changes in the iron and steel industry brought about by government policy or external factors will affect producers of intermediate inputs more than suppliers of labor and capital inputs. Also, this implies that the iron and steel industry can generate more backward linkages since its demand for intermediate inputs is greater than its demand for primary inputs.

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The structure of the steel industry output is heavily geared towards other industry sectors and not final demand (See Table 3.18). Approximately 88 percent of the output of the iron and steel industry is allocated to intermediate demand. This means that most of the output of the iron and steel industry is used as production input by other industries in the economy. For example, 17.9 percent of the output of the iron and steel industry that is allocated to intermediate demand goes to the manufacture of fabricated metal products while 17.3 percent is distributed to the manufacture, assembly, and repair of office, computing, and accounting machines.

Table 3.18 - Distribution of Output, 2008

Output Destination % share Intermediate Demand 88.0

Manufacture of fabricated metal products except machinery and equipment

17.9

Manufacture, assembly, and repair of office, computing, and accounting machines

17.3

Manufacture of engines and turbines, except for transport equipment and special industrial machinery and equipment

16.6

Construction 12.5 Manufacture of motor vehicle parts and accessories 6.7 Manufacture of other fabricated wire and cable products except insulated wire

6.6

Cutlery, hand tools, and general hardware 4.4 Blast furnace and steel making furnace, steel mills and rolling mills 3.8 Manufacture of metal containers 3.3

Final Demand 12.0

Total 100.0% A striking feature of the distribution structure of the iron and steel industry is its heavy

dependence on imports. Based on the input-output table, the iron and steel industry is a net importer since its imports far outweigh its exports. Imports of the iron and steel industry are about nine times greater than its exports. Also, imports of the iron and steel industry are around 97 percent of the total output allocated to intermediate demand or distributed to industries. As computed from national input-output tables of NSCB, the rate of self-sufficiency of the iron and steel industry has fallen from 55 percent in 1994 to only 46 percent for the entire steel industry in 2000. The present figure cannot be higher as the local production structure has not significantly improved since 2000.

Economic research shows that the domestic backward linkage of the iron and steel

industry remain strong. This denotes the significance of the sector in utilizing the output of other sectors including electricity; households; wholesale and retail trade; petroleum refineries including LPG; crude oil and natural gas; manufacture of other non-metallic mineral products; telecommunication services; banking; real estate activities; and manufacture of asphalt, lubricants, and miscellaneous products of petroleum and coal.

In contrast, the domestic forward linkages of the sector with downstream sectors are

relatively weak. This denotes the relatively low level of integration between the sector and other

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sectors. Specifically this finding also reveals the underdeveloped state of the manufacturing industry in utilizing domestically produced steel products.

h. Supply chain, value chain, and local value added

Based on NSO survey data, total value added in the iron and steel industry summed up to Php13,072 million in 2009. This figure is lower than the Php13,466 million posted in 2005 (See Table 3.19). The lower value added for the industry may be attributed to the significant drop in international prices of intermediate steel in 2009. For the period, the sector engaged in the operation of blast furnaces and steel-making furnaces which contributed more than half of value added in the local iron and steel industry. This only proves that the operation of more upstream steel products contributes more in terms of value-added to the entire Philippine steel industry. This economic fact underscores the reality that the local manufacture of intermediate steel products must never be sidelined to realize the higher value-added in the entire spectrum of the iron and steel industry.

Table 3.19: Value Added17 by Subsector, 2009 (in million pesos)

Subsector Value Added Operation of blast furnaces and steel making furnaces 7,118 Operation of rolling mills 2,287 Pipes and tubes manufacturing, iron or steel 645 Manufacture of pipe fittings of iron or steel 151 Manufacture of galvanized iron sheets, tinplates and other coated metal products made in steel works of rolling mills 2,173 Steel works, not elsewhere classified 698 TOTAL 13,072


i. Prices, income

Based on interviews with industry leaders, raw materials account for about 55% to 90% of total production costs of steel products. Local prices follow global prices – which in turn are based on global supply-demand imbalances, and costs of other inputs. Majority of the raw materials and semi-finished products used by the local steel industry are imported from Korea, Vietnam, Russia and China. Power costs, which include fuel consumed and electricity use, account for some 35% of total production cost. Transportation costs likewise make up about 5% of product cost. Profit margin in the manufacture of long products ranges from 1% to 3%. Due to higher value added, the margin for flat products is greater than long products at 7% to 8%. 3. Supply and Demand

a. Factors affecting supply

There have been no significant changes in the numbers of establishments and rated capacity over the past three years (See Table 3.20). This development indicates that there likewise have been no substantial investments in the industry. Firms find it cheaper to import steel products than to manufacture them locally. The only changes have been to the billets and

17

Value added is gross output less intermediate input. Gross value for the manufacturing sector is the value of output plus industrial services done for others. Intermediate input is intermediate cost plus non-industrial services done by others and all other cost.

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bars subsectors. One firm entered the billets subsector augmenting capacity with 120 MT, while two new firms went into the production of steel bars with an additional combined capacity of 500 MT.

Table 3.20 - Philippine Iron and Steel Industry, 2010

Sector Product Type Number of Firms Total Capacity (MT) 2008 2010 2008 2010

Rolling / Finished products

Hot-rolled coil / sheet 1 1* 1,700 1,700 Cold-rolled coil / sheet 3 3* 1,210 1,210 Galvanized sheet 10 10 1,408 1,408 Tinplate / Tin free 1 1* 210 210 Color coating 4 4 172 172

Semi-finished products

Billet 9 10 1,260 1,380

Rolling / Finished products

Bar 15 17 4,300 4,800 Section 7 7 420 420 Wire rod 4 4* 700 700

*non-operational since 2011 Source: SEAISI

The manufacturing of steel items in the Philippines generally start with the processing of

semi-finished products such as billets and slabs (See Figure 3.2). However, there are a number of billet-making plants in the country that uses electric arc furnace to melt scrap iron and convert them to billets. As of end-2010, combined billet production capacity of ten firms stood at 1.26 million metric tons per annum. About half of apparent consumption of billets comes from imports. Billets are further processed to produce long products such as bars, shapes and sections, wire rods, wires and other wire products, and fasteners.

The lack of an iron-making sector constrains the range of products that the local industry can manufacture. Moreover, reliance on scrap-based billet steel-making limits the industry’s capability to produce high-grade steel products. These two factors are particularly relevant in the case of flat steel production in the country. Slabs which are the semi-finished items used to manufacture flat products, are mainly imported. There is currently no local slab production in the country, while the firm that can produce HRCs are no longer in operations. The local industry likewise imports cold rolled coils (CRCs), tinmill black plates (TMBPs), and tinplates. Tinplates are further processed to produce food cans and containers, while CRCs are manufactured to GI, Zn-Al, and pre-painted sheets. CRC’s are also fabricated as purlins, light sections, drums, steel furniture, etc.

The rated capacity across different products of the Philippine iron and steel industry is lower compared with its Southeast Asian neighbors (See Table 3.21). The Philippines also has a shorter range of steel products manufactured relative to its neighboring countries. Production capacity of the local industry for most products is at least 40% lower compared the ASEAN average. It is only for galvanized sheets and bars where the Philippine iron and steel industry has comparable capacities. Hence, achieving self-sufficiency in the local iron and steel industry will require substantial investments in the medium-term.

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Figure 3.2: Philippine Iron and Steel Industry Flowchart

Source: Updated from Competitiveness in the Philippine Steel Industry by Marissa C. Garcia and Sandy Vicente (2005)

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Table 3.21 - Production Capacities of the Iron and Steel Industry in the ASEAN Region, 2010 (in thousand metric tons)

Products Indonesia Malaysia Philippines Singapore Thailand Vietnam Direct Reduced Iron (DRI) 2,000 3,630 0 0 0 0 Slab 1,800 2,500 0 0 3,000 0 Hot rolled coil / sheet 3,540 3,350 1,700 0 8,400 300 Cold rolled coil / sheet 1,610 2,140 1,210 0 2,700 2,165 Galvanized sheet 1,516 700 1,408 0 676 1,032 Tinplate / Tin-free 130 250 210 0 666 0 Color Coating 0 0 172 0 465 0 Welded Pipe 1,706 0 300,000 0 0 NA Seamless Pipe 380 0 0 0 0 0 Billet 5,095 5,250 1,380 750,000 3,438 7,570 Bloom 0 750 0 0 630 0 Bar 3,696 7,180 4,800 0 7,700 7,250 Section 1,331 1,200 420 0 2,229 2,250 Wire rod 1,850 0 700 0 2,483 7,250 Wire mesh 476 500 0 0 0 0 Galvanized wire 0 250 100,000 0 0 0 Hard Drawn Wire 0 120 150,000 0 0 0 Bolts and Nuts 0 150 0 0 0 0 Source: SEAISI

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There are two projects in the pipeline that will augment capacity of the local iron and steel industry in the medium-term. The details of these of these two projects are shown in Table 3.22.

Table 3.22: Steel Projects

Company Location Description Status Steel Asia Bulacan,

Luzon 1,200 MT Twin Mini-Mill 600K MT ReBar Line 600K MT Section Line With Finished Product Rebar 10mm – 36mm Wide Flange Beams W4 – W16 Flat Bars (ship building application) Flat Bars (automotive application) Flat Bars (industrial grating) Angles Channels

Project starts 4th Quarter 2012 Commissioning 2015

PagAsa Steel Pinagbuhatan, Pasig City,

NCR

400K MT Rolling Mill for ReBar

Source: SEAISI

Finished steel production in the Philippines has increased to 3.10 million MT in 2011 or an average growth rate of 3.5% over the past five years (See Table 3.23). Over the same time period, production of long products expanded by an average rate of 11.8% per annum, while the manufacture of flat products declined by 15.4% per annum.

Production of semi-finished steel increased to 1.20 million metric tons in 2011 or by an average growth rate of 16.5% per annum during the 2007-211 period. Local crude steel products, which mainly consist of billets, are processed by using an electric arc furnace. Billets are semi-finished products, which are further processed through rolling and drawing to produce bars, rods and wires. Production of finished goods registered a much lower growth of 4.1% per year.

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Table 3.23: Philippine Production of Semi-Finished and Finished Steel Products, 2007-2011 (in metric tons)

Particulars 2007 2008 2009 2010 2011 Semi-Finished Products 718,000 710,669 824,009 1,050,000 1,200,000 Billets 718,000 710,669 824,009 1,050,000 1,200,000 Slabs 0 0 0 0 0 Finished Products 2,641,606 2,596,274 2,532,637 2,757,016 3,102,140 Long Products 1,669,984 1,738,845 1,979,690 2,347,108 2,620,000 Wire Rods 0 0 0 0 0 Bars1/ 1,411,931 1,520,414 1,611,659 1,931,438 2,100,000 Shapes and Sections1/ 77,622 77,857 179,065 201,074 320,000 Sheet Piles 0 0 0 0 0 Wires 180,431 140,574 188,966 214,596 200,000 Rails 0 0 0 0 0 Others (Alloy and Stainless Steels) 0 0 0 0 0 Flat Products 971,622 857,429 552,947 409,908 482,140 Plates 0 5,714 0 0 0 Hot Rolled Coils / Sheets 292,006 215,192 102,062 0 0 Cold Rolled Coils / Sheets 269,596 184,254 100,187 5,552 0 Cold Rolled Electrical Sheets 0 0 0 0 0 GI Sheets / Pre-Painted / Zn-AL2/ 357,736 313,807 293,180 354,000 392,140 Tinplates / TFS 0 0 0 0 0 Pipes and Tubes 52,284 138,462 57,518 50,356 90,000 Others (Alloy and Stainless Steels) 0 0 0 0 0 Sources: BOC, DTI, PISI, SEAISI, and industry sources 1/ Includes bar products converted from wire rods

2/ 2010 figure revised using new industry data

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During the 2007-2011 period, the share of the long products to total finished steel production was more than 70%, with the remainder accounted for by flat products. Bars accounted for more than 60% of total local finished steel production. Steel bars, which can be categorized as plain or deformed, are commonly used for construction projects. Steel bars, which are categorized as long products, generally serve as tensioning devices in reinforced concrete and reinforced masonry structures holding the concrete in compression. GI sheets, pipes and tubes are the leading flat products manufactured by the local industry. Capacity utilization rate across the iron and steel sector was computed using production and rated capacity data culled from the SEAISI. The results of the computation are presented in Table 3.24.

Table 3.24: Capacity Utilization Rate, 2011

Product Capacity

Thousand MT

Production Thousand

MT

Utilization Rate (%)

Hot-rolled coil / sheet 1,700 0 0.0 Cold-rolled coil / sheet 1,210 0 0.0 Galvanized sheet1/ 1,408 267 19.0 Tinplate / Tin free 210 0 0.0 Color coating 172 125 72.7 Billet 1,380 1,200 87.0 Bar 4,800 2,100 43.8 Section 420 320 76.2 Wire rod 700 0 0.0

Source of Basic Data: SEAISI 1/

Includes GI sheets and Zn-Al

There is a wide variation in the capacity utilization rates across the different steel products. Utilization rates are highest for billets at 87%, while lowest for galvanized sheets at 19%. However, the utilization rates are generally understated since total capacity includes firms which are not longer operational but whose plants have not been decommissioned. Currently, only six finished steel products are produced locally – sections, bars, galvanized sheets, color coated sheets, wires and pipes and tubes. Imports generally account for more than 45% of the country’s demand for finished steel products. In general, low capacity utilization rates mean lesser units of goods are produced and higher fixed costs per unit.

b. Factors affecting demand

Apparent consumption is used as a proxy variable for local demand for iron and steel products. Apparent consumption is computed as production plus imports less exports. Apparent consumption of semi-finished products stood at 2.32 million metric tons in 2011 or an average growth rate of 6.7% per annum over the past five years (See Table 3.24). The robust demand for semi-finished steel products was traced to the 10.5% annual expansion in apparent consumption of billets. Demand for slabs contracted by an average rate of 50% per annum during the same time period.

During the 2007-2011 period, apparent steel consumption of finished products expanded by average rate of 9.9% per annum. Demand for long products outpaced those of flat products, 11.0% versus 8.4%. Bars, which are primarily used by the construction sector, accounted for close to 38% of demand for finished steel products (See Table 3.25 on next page). The other

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products with significant shares were GI sheets (10%), hot rolled coils/sheets (8.1%), wire rods (7.8%), and cold rolled coils/sheets (7.6%). Among the major finished steel products, plates registered the fastest growth rate at 17.6% per annum. This was followed by bars and GI sheets which posted similar growth rates of 14.4% per annum.

About 80% of demand for finished steel products in the country is cornered by the construction industry (See Table 3.26). Steel products used in the construction of buildings, houses, and infrastructure facilities include rebars, angles, channels, beams, sheet piles, wires and wire rods, GI, Zn-Al and pre-painted sheets, and pipes and tubes. Light and heavy fabrication firms, including shipbuilding and repair, account for about 15% of demand. Finished steel products demanded by the fabrication sector include ship plates, plates, hot rolled coils, cold rolled coils, EGI and other coated sheets, specialty bars, rods, and stainless and alloy steels. The share of total steel demand of the packaging sector is about 4%. Packaging firms are the main users of tinplates and tin-free steel for food cans and other containers.

Table 3.26: Comparative Steel Demand (in percent)

Particulars 2010 2011 Construction 80% 81% Light and Heavy Fabrication 15% 14% Packaging 4% 4% Others 1% 1%

Source: SEAISI

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. Table 3.25: Apparent Steel Consumption, 2007-2011

(in metric tons)

Particulars 2007 2008 2009 2010 2011

Billets Production 718,000 710,669 824,009 1,050,000 1,200,000 Imports 1,026,265 853,128 1,117,790 1,169,998 1,111,252 Exports 0 9,300 0 0 0 Apparent Steel Consumption 1,744,265 1,554,497 1,941,799 2,219,998 2,311,252

Slabs Production 0 0 0 0 0 Imports 319,079 250,139 64,286 0 8,759 Exports 0 0 0 0 0 Apparent Steel Consumption 319,079 250,139 64,286 0 8,759

Long Products Production1/2/ 1,489,553 1,598,271 1,790,724 2,132,512 2,420,000 Imports 719,922 582,911 473,435 642,827 703,520 Exports 8,259 2,126 319 829 0 Apparent Steel Consumption 2,201,216 2,179,056 2,263,840 2,774,510 3,123,520

Flat Products1/ Production 292,006 215,192 102,062 0 0 Imports 1,341,698 1,311,506 1,167,438 1,442,976 2,035,241 Exports 211,690 136,815 73,449 104,007 0 Apparent Steel Consumption 1,422,014 1,389,883 1,196,051 1,338,969 2,035,241

Sources: BOC, DTI, PISI, SEAISI, and industry sources 1/

Covers hot-rolled products only in order to avoid double counting 2/

Excludes bar products converted from wire rods

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During the 2007-2011 period, more than 50% of demand for steel products is sourced from imports (See Table 3.27). There has been no change in the share of imports to demand over the past 15 years. For instance, imports accounted for 43.6% of demand in 1996, which was before the Asian financial crisis. Most local iron and steel companies are unable to compete with low-cost producers from countries like China, Russia, Japan, and Korea. Thus, consumers opted to import their steel requirements rather than purchase them from local manufacturers.

Table 3.27: Apparent Consumption, Philippines: 2007-2011

(percent share)

Particulars 2007 2007 2008 2009 2011 Production 49.2 50.8 54.7 51.8 46.9 Imports 56.9 53.1 47.4 50.7 53.1 Exports -6.1 -3.9 -2.1 -2.5 0.0 Apparent Consumption 100.0 100.0 100.0 100.0 100.0

Source: SEAISI

Philippine apparent consumption levels are much lower than those of its Southeast Asian neighbors (See Table 3.28 on next page). Local steel consumption of 4.25 million MT in 2010 was 70% to 75% lower than Thailand and Vietnam. The country’s ratio of long-to-flat product consumption was 65:35 in 2010 compared to 39:61, 26:74 and 44:56 for Malaysia, Thailand and Vietnam, respectively. The ratio for Indonesia, which has a comparable per capita GDP with the Philippines, was 40:60 in 2010. Based on international experiences, the ratio of flat-to-long product consumption of most developed economies averages around 70:30. Generally, as the domestic economic continues to grow, steel consumption shifts from construction of basic infrastructure and housing to manufacturing industries with higher value added such as automotive, electronic precision equipment, household appliance, packaging, and ship building and repair. Based on recent SEASI data, the ratios for Australia and Korea in 2010 were 25:75 and 33:67, respectively.

Imports accounted for about 45% of apparent consumption of finished steel products in

2011 (See Table 3.29 on page 46). However, there is a marked difference in the import dependency of long and flat products. Imports comprised about 80% of flat products, while the comparable figure for long products is significantly lower at 23%. There are only four finished steel items wherein local production accounts for more than 50% of apparent consumption. These are bars, shapes and sections, wires, and GI, pre-painted and Zn-Al sheets. The first three items are categorized as long products. In the case of semi-finished products, the import dependency of billets is about 48%, while almost all of slabs are imported.

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Table 3.28: Apparent Consumption of Finished Steel Products in the ASEAN Region, 2010

(in thousand metric tons)

Products Indonesia Malaysia Philippines Singapore Thailand Vietnam Rails and Accessories 40.3 22.2 2.2 14.9 0.0 0.0 Steel Sheet Piles 9.0 21.0 29.9 54.5 2,825.4 0.0 Sections 718.4 521.2 390.9 257.7 0.0 194.1 Bars 1,765.4 2,080.5 1,996.5 1,444.9 0.0 4,580.7 Wire Rods 1,034.2 1,477.2 336.9 0.0 1,466.4 1,448.3 Plates 672.3 418.7 280.7 283.9 530.5 362.6 Hot-Rolled Sheets and Strips 1,295.4 1,942.3 197.0 280.9 6,065.3 3,546.3 Tyres and Wheels 0.0 0.3 0.0 0.0 0.0 0.0 Cold-Rolled Sheets and Strips 1,221.8 1,567.3 282.6 150.8 2,421.6 1,926.7 Cold-Rolled Electrical Sheets 53.0 128.4 1.6 58.9 110.6 0.0 Galvanized Sheets 532.2 1,071.8 257.7 -21.8 1,751.4 0.0 Tinplates 223.2 156.2 137.1 56.2 351.4 0.0 Other Metallic-Coated Sheets 390.9 281.1 183.5 48.0 917.7 1,355.3 Pipes and Tubes 951.0 890.5 156.4 50.0 0.0 746.1 TOTAL 8,907.1 10,578.9 4,253.0 2,678.9 16,440.4 14,160.0

Source: SEAISI

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Table 3.29: Apparent Steel Consumption, 2010 and 2011 (in percent share)

Particulars 2010 2011a/ P M X AC P M X AC

Semi-Finished Products 47.3 52.7 0.0 100.0 51.7 48.3 0.0 100.0 Billets 47.3 52.7 0.0 100.0 51.9 48.1 0.0 100.0 Slabs --- --- --- --- 0.0 100.0 0.0 100.0

Finished Products 58.2 44.0 2.2 100.0 53.1 46.9 0.0 100.0 Long Products 78.4 21.6 0.0 100.0 77.4 22.6 0.0 100.0

Wire Rods 0.0 100.0 0.0 100.0 0.0 100.0 0.0 100.0 Bars 96.7 3.3 0.0 100.0 94.8 5.2 0.0 100.0 Shapes and Sections 51.4 48.6 0.1 100.0 64.1 35.9 0.0 100.0 Sheet Piles 0.0 100.0 0.0 100.0 0.0 100.0 0.0 100.0 Wires 92.2 8.0 0.2 100.0 83.3 16.7 0.0 100.0 Rails 0.0 100.0 0.0 100.0 0.0 100.0 0.0 100.0 Others (Alloy and Stainless Steels) 0.0 100.0 0.0 100.0 0.0 100.0 0.0 100.0

Flat Products 23.5 82.5 6.0 100.0 19.6 80.4 0.0 100.0 Plates 0.0 100.0 0.0 100.0 0.0 100.0 0.0 100.0 Hot Rolled Coils / Sheets 0.0 111.3 11.3 100.0 0.0 100.0 0.0 100.0 Cold Rolled Coils / Sheets 2.0 107.0 9.0 100.0 0.0 100.0 0.0 100.0 Cold Rolled Electrical Sheets 0.0 100.0 0.0 100.0 0.0 100.0 0.0 100.0 GI Sheets / Pre-Painted / Zn-AL 65.5 42.1 7.6 100.0 56.6 43.4 0.0 100.0 Tinplates / TFS 0.0 100.0 0.0 100.0 0.0 100.0 0.0 100.0 Pipes and Tubes 32.2 78.5 10.7 100.0 33.2 66.8 0.0 100.0 Others (Alloy and Stainless Steels) 0.0 100.0 0.0 100.0 0.0 100.0 0.0 100.0

Sources: BOC, DTI, PISI, SEAISI, and industry sources a/ Details of export figures not yet available for 2011

P = Production, M = Imports, X = Exports, AC = Apparent Consumptions

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c. Leading players (countries and companies)

The People’s Republic of China is the world’s leading steel producer with total crude steel production of 683.3 million tons in 2011 (See Table 3.30). China’s production accounted for close to 46% of total world crude steel production. A distant second was Japan with a production volume of 107.6 million tons or 7.2% of total. China is likewise the world’s leading exporter of both semi-finished and finished steel products with an estimated 56.3 million tons in 2008.

Table 3.30: Leading Producers of Crude Steel by Country

(in million tons)

Country 2007 2008 2009 2010 2011 China 494.9 500.3 573.6 626.7 683.3 Japan 120.2 118.7 87.5 109.6 107.6 USA 98.1 91.4 58.2 80.6 86.2 India 53.5 57.8 62.8 68.3 72.2 Russia 72.4 68.5 60.0 66.9 68.7 South Korea 51.5 53.6 48.6 58.5 68.5 Germany 48.6 45.8 32.7 43.8 44.3 Ukraine 42.8 37.3 29.9 33.6 35.3 Brazil 33.8 33.7 26.5 32.8 35.2 Turkey 25.8 26.8 25.3 29.0 34.1 WORLD 1,351.3 1,326.5 1,219.7 1,413.6 1,490.1

Source: World Steel Association

China is a net exporter of steel products to the ASEAN region. Net exports to the region amounted to 5.35 million MT in 2010 – with imports of 0.59 million MT and exports of 5.94 million MT. Most of the imports of the ASEAN region from China are semi-finished steel products used for its rolling mills. On the other hand, the list of the largest steel-producing companies in the world is shown in Table 3.31. ArcelorMittal S.A. is the largest steel producing company in the world with 97.2 million tons in crude steel production in 2011. The Luxembourg-based company is also the market leader in steel for use in automotives, construction, household appliances, and packaging. A distant second is the Hebei Iron and Steel Group, a state-owned enterprise, with crude steel production of 44.4 million tons. Hebei Group is the company that resulted from the merger between Tangsteel and Hansteel in the Hebei province of China. Six out of the ten largest steel producing companies in the world are Chinese firms. Moreover, there is only one European firm and no American firms in the world’s top steel producing companies.

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Table 3.31: Top Steel Producing Companies

Company

2011 Crude Steel Production

(million tons)1/

Country

ArcelorMittal 97.22/ Luxembourg Hebei Group 44.4 China BaoSteel Group 43.3 China POSCO 39.1 South Korea Wuhan Group 37.7 China Nippon Steel 33.4 Japan Shagang Group 31.9 China Shougang Group 30.0 China JFE 29.9 Japan Ansteel Group 29.83/ China Source: World Steel Association 1/ Includes stainless steel when applicable

2/ Includes allied subsidiaries with less than 30% share

3/ Includes Panzhihua but not Benxi

d. Consumption of goods per capita (local and global)

The Philippines has one of the lowest apparent steel use per capita in the ASEAN region at 44.2 kilograms of crude steel equivalent (See Table 3.32). Only Myanmar has a lower apparent steel use per capita than the Philippines. The differences in steel consumption per capita are usually attributed to the higher level of economic development of its neighboring countries. However, the country’s per capital steel consumption is also lower than the countries with the same or even lower level of GDP per capita. For instance, Vietnam, which has per capita gross national product (GNP) of US$1,160 in 2010, has apparent steel use per capita of 149.7 kilograms. Compare this with the Philippines which has a per capita GNP of US$2,060 (77% higher than Vietnam) but with an apparent steel use per capita of only 44.2 kilograms (70% lower than Vietnam). Furthermore, Thailand’s per capita GNP of US$4,150 is about twice that of the Philippines but its steel consumption per capita is 5.6 times higher. Indonesia has relatively the same per capita GNP and steel use per capita ratio as the Philippines. Indonesia’s per capita GNP was US$2,500 in 2010, while it’s apparent steel use per capita was 44.8.

Table 3.32: Apparent Steel Use Per Capita (in kilograms crude steel equivalent)

Country 2006 2007 2008 2009 2010 Bangladesh 6.2 6.0 5.4 11.1 12.3 China 299.4 333.0 342.6 426.5 445.2 Hong Kong, China 568.1 564.9 348.7 416.3 274.4 India 44.3 49.4 50.0 53.1 56.3 Indonesia 32.3 37.0 45.1 37.1 44.8 Japan 653.3 674.1 652.9 446.2 538.6 North Korea 16.3 12.2 11.3 11.7 9.3 South Korea 1,084.9 1,189.7 1,266.5 975.1 1,122.1 Malaysia 323.1 360.2 397.5 330.5 367.2 Myanmar 12.2 12.1 11.3 18.3 20.8

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Country 2006 2007 2008 2009 2010 Pakistan 18.0 18.0 13.6 15.2 14.8 Philippines 39.8 44.5 43.9 41.7 44.2 Singapore 667.9 834.6 928.2 760.0 644.5 Sri Lanka 24.8 24.4 20.0 19.9 21.4 Taiwan 1,044.2 949.3 887.6 588.9 926.0 Thailand 237.4 217.4 249.7 186.1 245.4 Vietnam 71.3 124.9 113.9 141.0 149.7 ASIA 185.1 201.6 205.8 221.5 237.8

Source: World Steel Association

The low steel use per capita of the Philippines may be partly due to the country’s economic structure. The service sector, which is not as steel intensive as the industrial sector, accounts for about 56% of the country’s GDP. The largest consumers of steel are the construction, household appliance, packaging, and shipbuilding and repairs subsectors. These four subsectors are part of the industrial subsector. Service is also the country’s fastest sector with a 5.1% growth posted in 2011. The industrial sector managed a growth of only 2.3%.

A similar trend can be gleaned in the Philippines’ steel intensity (See Table 3.33). The country’s steel intensity of 0.020 kilograms per US dollar is much lower than the region’s average of 0.038 kilograms per US dollar. The country’s steel intensity has stagnated at 0.020 kilograms per US dollar as nominal GDP grew at a faster rate than apparent steel consumption, 14.1% versus 5.4%. The economic expansion has not resulted in increased demand for steel products.

Table 3.33: Steel Intensity

(in kilograms per US dollars)

Country 2006 2007 2008 2009 2010 Indonesia 0.017 0.017 0.017 0.014 0.013 Malaysia 0.043 0.041 0.038 0.034 0.035 Philippines 0.026 0.024 0.020 0.020 0.020 Singapore 0.018 0.017 0.019 0.015 0.012 Thailand 0.063 0.051 0.049 0.041 0.044 Vietnam 0.101 0.131 0.090 0.112 0.102 Average 0.045 0.047 0.039 0.040 0.038

Source: SEAISI

However, the silver lining in the Philippines low apparent steel use per capita and low steel intensity is the local iron and steel industry has a strong upside with an improvement in the long-term prospects of the economy. According to an August 2009 report of the Institute of Developing Economies18, the relationship between the level of economic development and steel consumption follows an inverse U-shape. Steel intensity generally increases with an expansion in per capita GDP. Steel intensity peaks at a per capita GDP of US$15,000 to US$20,000, and then decreases as per capita further increases. With a maturing economy, steel substitutes such as plastics come into play, thereby reducing steel usage per commodity. Based on the latter assumption, the present steel intensity in the Philippines of both long and flat steel products are far below the levels required for sustained economic development as

18

Hajime Sato. ”The Iron and Steel Industry in Asia: Development and Restructuring.” IDE Discussion Paper No. 210. August 2009.

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experienced by other more developed countries. The steel intensity for long steel products was above, if not equal to, the international trend from 2002 to 2004 but has since fallen far behind the international norm based on similar per capita GDP levels (see Figure 3.3). Likewise, the steel intensity for flat steel products was close to 90% of the international trend in 2003, but has since dropped and the gap continues to widen (see Figure 3.4).

If the standard trajectory between apparent steel consumption and rising incomes (GDP per capita) across countries is followed, the current levels of apparent steel consumption for long steel products are only 57% of the standard required at current income levels (see Figure 3.5). The figure for flat steel products is even lower at 35% (see Figure 3.6). The estimates are fairly conservative being at the low end of steel consumption patterns experienced in Thailand and Malaysia.

The projected steel consumption can be used as the starting basis for a framework on measuring industry performance in terms of meeting development requirements. In this regard one possible measure is the ratio between the actual ASC and the required ASC which currently stands at 57% and 35% for long and flat steel products respectively in 2011. The interim long term targets are 70% by 2030 for both major product segments. The corresponding ASC levels are shown in Table 3.34.

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Table 3.34 Apparent Steel Consumption – Targets

GDP per Capita ($)

LONG Steel Products FLAT Steel Products

mil MT Model Target mil MT Model Target

2008a 1,918 2.32 4.46 52% 1.78 4.80 37% 2009a 1,827 2.59 4.32 60% 1.50 4.66 32% 2010a 2,123 2.77 5.14 54% 1.55 5.52 28%

2011a 2,223 3.12 5.50 57% 2.04 5.89 35% 2012 2,329 3.35 5.88 57% 2.20 6.28 35% 2013 2,438 3.58 6.28 57% 2.41 6.71 36%

2014 2,561 3.84 6.74 57% 2.73 7.18 38% 2015 2,692 4.13 7.24 57% 3.08 7.69 40%

2016 2,833 4.51 7.78 58% 3.47 8.25 42%

2017 2,984 4.86 8.37 58% 3.90 8.86 44%

2018 3,141 5.07 8.59 59% 4.17 9.06 46%

2019 3,280 5.33 9.03 59% 4.56 9.51 48%

2020 3,419 5.69 9.48 60% 4.98 9.95 50% 2021 3,558 6.06 9.93 61% 5.41 10.40 52%

2022 3,697 6.43 10.38 62% 5.86 10.85 54%

2023 3,836 6.82 10.82 63% 6.32 11.29 56%

2024 3,974 7.22 11.27 64% 6.81 11.73 58%

2025 4,113 7.62 11.73 65% 7.31 12.18 60%

2026 4,252 8.04 12.18 66% 7.82 12.62 62%

2027 4,391 8.46 12.63 67% 8.36 13.06 64% 2028 4,530 8.90 13.08 68% 8.91 13.50 66%

2029 4,669 9.34 13.53 69% 9.48 13.94 68%

2030 4,808 9.79 13.99 70% 10.06 14.37 70% Legend: (a)ctual otherwise forecast or target Sources: IMF projections (April 2012), UA&P estimates

e. Global Outlook for Philippine Steel Exports

Aside from determining Philippine’s standard and bilateral comparative advantage in the

steel and iron export, it is also equally important to highlight the country’s structural performance in order to identify where the Philippines stands in the global steel market. Among the selected Asian countries, China, Indonesia, Japan, Malaysia, Philippines and Thailand are considered as emerging markets by the International Monetary Fund (IMF). The Economist meanwhile adds Korea and Singapore in the emerging market economies list. Both institutions nonetheless agree that Japan has a mature market economy.

The term emerging markets was coined by the World Bank economist Antoine W. van

Agtmael in 1981 in reference to countries experiencing “rapid economic growth and industrialization.” Such classification of countries is based on the composition of countries export earnings and other income from abroad. Emerging and developing economies are often transitional economies, shifting from closed economies to open market economies. It usually

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involves structural or policy reforms such as currency or capital market changes and high level of foreign.19 On the other hand, a mature economy is a stable economy characterized by a stable population that lessens the pressure to create more jobs for a larger workforce. It has low growth, yet still enough to financially support retirees, and generally low inflation.

A positive outlook lies ahead for the Philippines and the rest of the emerging Asian

countries (except for Japan probably) as the trend for the global steel production is shifting from mature economies to emerging market economies. Europe and the United States show a weakness in both GDP and industrial production as GDP is forecast to grow less than 2.0% in both 2011 and 2012, as opposed to an expected 9.0% and 7.5% growth in 2012 for China and India, respectively.20 This reason should not lead to complacency. Asian economies are still facing challenges with regards to the steel and iron exports. For one, although the steel industry has been recovering since the global financial crisis, the recent Eurozone sovereign debt crisis has created a lot of uncertainty in the market. With the uncertain economic environment, many countries have implemented a number of austerity measures while others have suspended investment in infrastructure and other industries altogether. Consequently, steel demand has not rebounded as strongly as expected. Growth in steelmaking capacity still exceeds steel demand in 2011 by an estimated of 493 million tonnes capacity.21 The very nature of steelmaking and large amounts of capital investment also supports the existence of excess capacity. The sector cannot easily and quickly adjust to changing conditions. Thus, by the time the global economic crisis hit in 2009 to 2009, steel mills were still operating at high capacity even though demand fell off drastically. Another challenge which the market confronts is the increased volatility in the cost of raw materials of steel. The shortage of these supplies has allowed suppliers of iron ore and metallurgical coal to rebuild the pricing mechanisms through shifting from annual to shorter-term price contracts. This has led to greater problems. Steelmakers should now deal not only with the volatility in raw material prices but also in maintaining margins with fluctuating demand. With these, the current trend among steel companies has been to reduce costs by entering into joint ventures, where the costs are being shared between the parties. In turn economies of scale and technological advances are created, which usually reduces the cost base.22

See Annex C for more details on the comparative advantage of Philippine steel products.

19

Stanley Lt Labs. “Economy Watch” <accessed http://www.economywatch.com/world_economy/emerging-markets/ July 18, 2012> 20

World Economic Outlook: Slowing Growth, Rising Risks, IMF, as cited by Ernst & Young, “Global steel – 2011 trends 2012 outlook”<accessed http://www.ey.com/Publication/vwLUAssets/Global_steel_2011_trends_2012_outlook/$FILE/Global_Steel_Jan_2012.pdf July 18, 2012> 21

“Chronic oversupply hits cyclical headwinds— China Steel sector,” JPMorgan, as cited by Ibid. 22

Sangwook Cho as cited by Ibid

http://www.economywatch.com/world_economy/emerging-markets/

http://www.ey.com/Publication/vwLUAssets/Global_steel_2011_trends_2012_outlook/$FILE/Global_Steel_Jan_2012.pdf

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Chapter 4

SUPPORT TO INDUSTRY DEVELOPMENT

1. Specific Industry Programs

Government support to the local iron and industry has taken various shapes and forms over the past 30 years. In 1979, President Ferdinand Marcos announced a plan for the development of 11 major industrial projects. The projects included in the plan were steel, petro-chemical, pulp and paper, copper smelter, aluminum, phosphate fertilizer, diesel engines, gas and oil, coconut industry, and nuclear power plant. The main objective of the plan was to shift the focus of the country’s industrial sector from consumer goods to basic heavy industry. The plan was never realized due to the oil price shock and the debt crisis in the early 1980s that resulted in massive capital flight and eventually a deep economic recession. In 1981, the government became directly involved in the iron and steel business when the National Development Corporation assumed full ownership of the National Steel Corporation (NSC). With the implementation of a five-year expansion, the NSC evolved into a major player in the iron and steel sector. In early 1990s, the NSC became the leading producer of billets, a major producer of flat-rolled products, and the country’s only tinplate producer. Under the government’s privatization program, Malaysia’s Wing Tiek Group acquired controlling interest in NSC in November 1994. Two years later, Wing Tiek sold its entire equity stake (69%) to another Malaysian company, Hottick Investment Ltd. Last October 2000, the Securities and Exchange Commission ordered the liquidation of the NSC citing that Hottick Investment was unable to service its debts amounting to US$350 million. After several years under liquidation, NSC was eventually sold by private creditor banks and the government to Global Ispat Holdings Ltd. . The company was later on renamed Global Steel Philippines Inc.. Even with a new management team on board, the company continues to experience financial losses due to insufficient operating capital, and competition from cheaper, unfairly traded import products. By 2010, Global Steel, the country’s largest steelworks, decided to shut down its operations in the Philippines after its power connection was cut by the National Power Corporation over long overdue unpaid electric bills. Under the administration of President Corazon Aquino, RA No. 7103 or “An Act to Strengthen the Iron and Steel Industry and Promote Philippine Industrialization and for Other Purposes” dated 8 August 1991 was enacted into law. It provided a comprehensive framework for the development of an integrated iron and steel industry. This recognized the importance of development of the iron and steel industry as the springboard and basis for launching Philippine industrialization. The objectives of the law are as follows:

a) Provide a framework for a rational integrated iron and steel program consistent with the requirements of the government environment protection;

b) Establish a policy direction concerning the rationalization of government corporations in the iron and steel industry;

c) Provide measures to strengthen its demand and supply structures primarily through the establishment of an integrated iron and steel plant which is technologically and

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economically efficient, internationally competitive and contributing to industrialization and accelerated development of the country;

d) Provide stiffer penalties for smuggling of iron and steel products; and e) Provide for a set of quality and industry standards for iron and steel products.

The law also provided a set fiscal and non-fiscal for enterprises duly certified by the Board of Investments (BOI). These incentives included:

a) Entitlement to generate its own electricity, either directly or through co-generation, build-operate-and-transfer and other contracts;

b) Financing of projects through official development assistance; c) Tax and duty exemptions on imported equipment; d) Tax credit on domestic capital equipment; e) Authority to contract loans, credits and indebtedness in any convertible foreign currency

or capital goods from foreign financial institutions or fund sources; and f) Rationalization of the country’s tariff incentive and protection scheme to enhance the

viability of the local iron and steel industry.

There was also a specific provision in the law that provided stiffer penalties for smuggling upon the operation of the smelting plants. The maximum penalty stipulated in the law was a fine of not less than Php300,000 and imprisonment of not less than 12 years for unlawful importation of iron and steel products with an appraised land value of at least Ph150,000. The law also outlined measures to strengthen the linkages of the iron and steel industry with other economic enterprises. It provided for Investment Coordinating Committee of the National Economic and Development Authority to formulate a plan for the development and establishment of upstream and downstream industries identified with the iron and steel industry. These industries included, among others, basic household tools, precision tools, engines, and shipbuilding. The fiscal incentives provided under this law are no longer applicable since their effectivity lapsed in 2006 after a 15-year applicability period. In order to ensure the effective implementation of RA No. 7103, a Presidential Iron and Steel Committee was created by virtue of Executive Order (EO) No. 73 dated 25 March 1993. The functions of the committee were the following:

a) To advise and recommend polices to the President of the Philippines on the overall direction of the iron and steel industry in the Philippines;

b) To coordinate and enhance collaboration among agencies of the government involved in the implementation of RA No. 7103;

c) To monitor the progress of implementation of RA No. 7103 and to recommend measures for the consideration of concerned agencies of the government as may be necessary to assure the proper and expeditious implementation of the law; and

d) To coordinate closely with and enlist the support of the private sector, particularly in the iron and steel industry, and to do all such other acts as may be required to accomplish the functions of the committee.

The committee was comprised of five cabinet secretaries and four representatives from the private sector to be appointed by the President, two of whom shall be the President of PISI and the Chairman of the National Steel Corporation.

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2. General Support

With the lapse of the availability of the incentives provided under RA No. 7103, no laws have been recently enacted which related specifically to the iron and steel industry. The last law issued by the government related to the iron and steel industry was EO No. 375 dated 22 October 2004. This law modified the rate of import duty on certain iron and steel products under the Tariff and Customs Code of 1978. It provides that these iron and steel products will be levied the Most-Favored-Nation rates of duty.

The development of local iron and steel industry is specifically mentioned in the Philippine Development Plan 2011-16 as a priority sector which “need to be rationalized to address not only the local requirements but should also compete in the export market.” The sector is identified as a Preferred Activity in the Investment Priorities Plan (IPP) of the Board of Investments in 2012. According to industry sources, the iron and steel industry can still be classified as a strategic project under the list of preferred activities of the BOI. Strategic projects are those that exhibit social economic returns that will significantly contribute to the country’s economic development. Under the Omnibus Investments Code of 1987, eligible strategic projects shall be entitled to the following fiscal and non-fiscal incentives

Income tax holiday of between four to six years from commercial operations;

Tax credit on domestic capital equipment;

Exemption from contractor’s tax;

Simplification of customs procedures;

Unrestricted use of consigned equipment;

Employment of foreign nationals;

Tax credit for taxes and duties on raw materials;

Access to bonded manufacturing / trading warehouse system;

Exemption for taxes and duties on imported spare parts; and

Exemption from wharfage dues and any export tax, duty, impost and fee.

With the exception of the access to official development assistance, the incentives provided under RA No. 7103 for the iron and steel industry as similar to those under the Omnibus Investments Code for strategic projects.

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Chapter 5

THREATS AND OPPORTUNITIES ANALYSIS

1. Threats and Concerns

a. Brain Drain

Over the past several years, the local industry is experiencing some semblance of brain drain. As the local industry continues to face stiff competition from low-cost producers abroad, a number of its technicians and engineers are being enticed with more attractive offers in Singapore, Taiwan, and the Middle East.

b. High Power Cost The iron and steel industry is highly energy-intensive industry due to the huge requirements of the electric arc furnaces. According to industry estimates, the share of fuel and electricity cost to total operating cost is within the range of 5-30% depending on the technology and age of steel plant and the type of steel product produced. The country’s lack of available sustainable power in Mindanao and high cost of electricity have been cited as impediment to the development of the local iron and steel industry and one of the major factors why it cannot compete in the international markets. Presently, the Philippines has one of the highest electricity prices in the Asian region (See Table 5.1)

Table 5.1: Electricity Cost in Southeast Asian Region, 2011

Country Electricity Cost (US$ per kWh) Philippines 0.10 China 0.08 Malaysia 0.07 Indonesia 0.07 Thailand 0.06 Vietnam 0.07

Source: Philippine Development Plan National Economic and Development Authority (NEDA)

Aside from high costs, reliability of supply and quality of electricity can also be problems confronting local firms particularly those located in Mindanao and the Manila Electric Company franchise area. Severe and persistent voltage fluctuations can damage machinery and equipment, thereby driving up maintenance costs. Firms have to the shoulder extra costs to ensure a reliable supply of quality electricity.23 Firms have implemented the successful strategy of producing during offpeak hours to avail of the lower power rates that reduces their power costs.

c. Product Standards

23

Vicente, Sandy and Marissa C. Garcia (2005)

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Monitoring of product standards of steel items sold in the domestic market is another industry concern. The Bureau of Product Standards (BPS), an attached agency of the Department of Trade and Industry (DTI), is the government agency responsible for monitoring product standards in the country. The BPS is mandated to develop, implement, and coordinate standardization activities in the Philippines.24 There are several cases where market leaders complain of cost cutting from competing firms who deliberately lower product quality below those set by the BPS. Several years ago, there were complaints from local galvanizers over the implementation of Philippine National Standards (PNS) for GI sheets. These firms were clamoring for the relaxation of import standards and local regulations to give consumers more flexibility and preference to choose for their needs and requirements. On the other hand, a group of galvanizers are proposing the adoption of the International Organization for Standardization (ISO) standards in order to protect consumers from substandard products. PNS 67 is Philippine standard for GI sheet roofing. It specifies a minimum base metal thickness of 0.35 millimeters and a zinc coating of 215 grams per square. Just recently, the enforcement of the PNS for GI sheets has been put on hold by a court order requested by some galvanizers.

d. Smuggling

Smuggling is another market malpractice that continues to plague the local iron and steel industry. Smuggling of steel products can occur through: (1) technical smuggling; (2) diversion through customs-bonded warehouses; and (3) outright smuggling. Technical smuggling is prevalent through undervaluation of prices, misdeclaration of nature of goods, misclassification of tariff heading, and undervaluation of volume or weight (see Box 3). On the other hand, in outright smuggling, imported goods are not registered at all with customs and other institutions. In majority of cases, outright smuggling is a criminal offense.25 Rampant smuggling has severe repercussion on the local iron and steel industry. It has resulted in the closure of several steel plants in the country. Meanwhile, capacity utilization of the surviving firms continues to drop with unabated smuggling. Moreover, smuggling creates an unlevel playing field among competing firms since the effective price of the smuggled raw materials and/or intermediate goods are much lower than the prevailing market price. The bulk of the smuggled steel products come from China.

Box 5: Technical Smuggling is killing us softly

MALAYA; Published on Tuesday, 18 September 2012 Written by DUCKY PAREDES ‘This gives the Customs Collector of the Port too much discretion and is almost an open invitation to corruption.’

THERE is a Joyland Industries Corporation in Mandaue, Cebu. This is a misnomer. The company does nothing industrial. It does not have a proper steel plant to speak of. Yet, it sells nothing but steel products. Joyland is engaged mainly in the importation of finished steel products, mainly smaller sized steel wire rods distributed through hardware stores and used for small construction projects.

24

Bureau of Product Standards website (www.bps.dti.gov.ph) 25

Steelwatch. A publication of the Philippine Iron and Steel Institute. September 2008 issue.

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What is remarkable about Joyland is that it is able to import finished products like wire rods at prices below prevailing industry rates for -- not even finished products – scrap metal – at least as far as it declares the value of its shipments for Bureau of Customs purposes.

For instance, on May 9, 2012 Joyland brought in a shipment of 7,904.17 metric tons of finished steel wire rods. The declared value of the imports was US$279 per metric ton. The prevailing value of steel wire rods sold by Russia during the April-May 2012 period ranged from $640 to $700. In short, Joyland was declaring the value of its imported products at less than half the prevailing market prices.

The Metal Bulletin Weekly put the prices of scrap metal at their highest in January 2011 at $480-495 per metric ton and lowest in November of that year at $395-405 per metric ton.

Joyland was declaring its imported finished products substantially lower than scrap prices. How could this possibly happen? And, how could Customs accept this valuation, if there is no prior collusion?

***

Last April, a shipment of similar steel wire rods entered the Port of Manila. The shipment valued the same exact product at $575 per metric ton. Because the product was priced below standard international pricing guides, the shipment was placed under investigation by the CIIS. The same exacting scrutiny is so glaringly absent at the Port of Cebu --- regarding the undervalued imports of Joyland in particular.

This is not an isolated case. Joyland has been consistently undervaluing its importation for years. According to post-entry audit, from December 2006 to November 2009 alone, the total discrepancy in Joyland’s payment of duties and taxes amounted to P 125,959,793.57. This represents lost government revenues.

From November 2009 to the present, Joyland imported additional undervalued products amounting to tens of thousands of metric tons, apparently enjoying lax treatment from the BOC District Collector for Cebu, Atty. Ronnie C. Silvestre.

The Philippine Iron and Steel Institute, the Galvanized Iron Wire Manufacturing Association and other industry groups have written a stream of letters to the Customs Commissioner and the Secretary of Finance complaining about the technical smuggling being done by Joyland --- with the apparent collusion of the Cebu Customs Collector.

The standard excuse given by Customs officials is that the Bureau follows the Transaction Value Method for determining taxes and duties due imported products.

What this means is that the importer simply presents documents indicating the value of the shipment, provided these are notarized by accredited lawyers from the source. Their declaration is simply accepted, if the Customs Collector concerned chooses to do so, without using any other reference to crosscheck the declared value.

This is, clearly, a serious flaw in the system, especially in a government that claims to be exclusively travelling on the Daang Matuwid!

This gives the Customs Collector of the Port too much discretion and is almost an open invitation to corruption. The Collector may simply accept the declared value offered by an unscrupulous importer with no further documentation. It opens a large gateway for undervalued imports to enter our market, devastating local industries. It keeps the doors wide open for properly connected practitioners to engage in technical smuggling.

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For steel products in particular, there exists a Metal Bulletin Weekly indicating prevailing prices for metal products traded globally. All the Customs Bureau needs to do, if the BOC really wants to curb technical smuggling, is to cross-reference the importer’s valuation with prices indicated in the bulletin. In this digital world, where correct information may be sourced in seconds, one has to wonder why our Bureau of Customs has not updated its systems to prevent misdeclaration by importers.

***

It is not enough for the Customs Commissioner and his Cebu District Collector to smugly tell off legitimate Filipino industries by saying they follow the Transaction Value Method. This method, as so glaringly demonstrated by the records of Joyland’s in-your-face undervaluation, is so easily corrupted. Then, again, maybe there are those in the Customs Bureau bent on maintaining the margins of discretion that open the windows for bribery.

It was so much easier to curb technical smuggling when the Philippine government retained the services of the Societe Generale de Surveillance (SGS). The global firm monitored product prices internationally and kept our own Customs fully informed of actual pricing levels. In addition, the SGS tracked imports from the foreign manufacturers, assuring the integrity of pricing information.

Intense lobbying from smugglers caused the cancellation of the Philippine government contract with SGS. This opened so much space for technical smuggling.

***

But, with advances in information technology, our Customs Bureau doesn’t even need an SGS anymore. The BOC, in any Philippine port, can easily source industry information globally, if the BOC chooses to do so. Why doesn’t the BOC do this? If we really want reforms in the BoC – one of our most corrupt agencies – this should first come in the form of improvements in its information systems.

Information management is what the Deputy Commissioner for Intelligence should be relying on. Clearly, the retired general in charge of intelligence is inclined to do old-fashioned cloak-and-dagger spying. That is so out-of-date. That is so un-modern. Gen. Danilo Lim will impress us better if he walks around with a laptop and not a gun. The information needed to stop smuggling is so easy to access from international industry bulletins.

The case of Joyland demonstrates how backward we are or, maybe, how backward the corrupt officials prefer we remain so that they can continue plying their illicit trade. How else can finished goods be slipped in day after day at prices way below scrap metal?

At some point, both the Department of Finance and the Bureau of Customs ought to explain to our public how technical smuggling continues to proliferate on such a destructive scale. That explanation, given all we now know about the activities of Joyland, should guide us on whether to believe in the fairy tale of the existence of a “tuwid na daan.”

Technical smuggling does not only deny government billions in lost revenues. Smuggling, given the tight global economic environment, can also wipe out Filipino industries. Technical smuggling (just as simple smuggling) will wipe out jobs and economic opportunities for our people.

As a country with as many people as ours and a constantly increasing population, we need industry, not just trade and commerce. Certainly, a steel industry is an essential. With a BOC,

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the way that it is, there is no way that this country can be competitive and get anywhere! http://www.malaya.com.ph/index.php/160-news-flash/13283-technical-smuggling-is-killing-us-softly

e. Truck Weight Limit

Last May 2011, the Department of Public Works and Highways (DPWH) announced the strict enforcement of the restrictions on both the allowable axle load of 13,500 kilograms (kgs) and gross vehicle weight, which ranges from 16,880 kgs to 41,000 kgs depending on the number and configuration of axles. The enforcement of these restrictions is provided in RA No. 8794 or “An Act Imposing a Motor Vehicle User’s Charge of Owners of All Types of Vehicles and for Other Purposes” dated 27 June2000. The main objective of the law is to save the country’s road network for the adverse effects of overload. A number of industry association such as the PISI, the Confederation of Truckers Association of the Philippines (CTAP) and the Pulp and Paper Manufacturers Association have expressed their concerns with new directive. Considering that about 80% of the trucks and trailers operating in the country have only three to four axles, the DPWH directive will effectively cut average payload by about half. This will result in an increase in freight costs and higher cargo handling and storage chargers. Furthermore, it will worsen traffic conditions since it will take more take more trips to transport the same amount of payload.26 Fortunately, the DPWH has put on the hold indefinitely the implementation of the anti-overloading provisions. The CTAP has proposed that 13,500 kg per axle be the sole basis for determining truck weight limit. Both the Philippine Ports Authority and the DTI have expressed their opposition to the since the truck load limit imposed is lower that what is internationally recognized. Based on international standards, 20-foot and 40-foot containers are built and designed for a maximum gross weight of 24,000 kgs and 30,480 kgs, respectively for cost efficiency in shipping, storage and handling.27

f. High Distribution Cost

Based on the Doing Business report prepared annually by the World Bank and the International Finance Corporation, the associated costs of trading across borders are higher in the Philippines compared with most of its Southeast Asian neighbors (See Table 5.2). Due to the bulky character of semi-finished and finished steel products, the transportation of these goods poses a challenge to the industry. The availability of required equipment and facilities for handling bulk cargo is critical in minimizing losses during transportation. The cost to export in the Philippines of US$630 per container is more expensive compared with Malaysia (US$450), Thailand (US$625), and Vietnam (US$580). The same can be said for the cost to import, which is estimated to be US$730 per container. The estimated cost is likewise higher than Indonesia (US$660), Malaysia (US$435), and Vietnam (US$670). The items considered in the computation of the cost required to export and import were all documentation, inland transport and handling, customs clearance and handling, and port terminal handling. The computations were based on official costs only and do not include bribes.

26

“RA No. 8794 – Anti-loading law,” The Manila Bulletin, March 22, 2011. 27

Ibid.

http://www.malaya.com.ph/index.php/160-news-flash/13283-technical-smuggling-is-killing-us-softly

http://www.malaya.com.ph/index.php/160-news-flash/13283-technical-smuggling-is-killing-us-softly

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Table 5.2: Cost of Trading Across Borders, 2012

Indicator

Ph

ilip

pin

es

Ind

on

esia

Lao

PD

R

Ma

lay

sia

Th

ail

an

d

Tim

or

Les

te

Vie

tna

m

Be

st

Pe

rfo

rmer

glo

bally

Trading across border (rank)

54 39 168 29 17 89 68 Singapore (1)

Documents to export (number)

7 4 9 6 5 6 6 France (2)

Time to export (days)

15 17 44 17 14 25 22 Hong Kong (5)

Cost to export (US$ per container)

630 644 1880 450 625 1010 580 Malaysia (450)

Documents to import (number)

8 7 10 7 5 7 8 France (2)

Time to import (days)

14 27 46 14 13 26 21 Singapore (4)

Cost to import (US$ per container)

730 660 2035 435 750 1015 670 Malaysia (435)

Source: Doing Business in the Philippines, 2012 World Bank and International Finance Corporation

Logistics costs which accounts for about 5% of total costs are particularly high for domestic distribution that includes inland sea freight and port charges. In some cases, direct shipments costs from certain foreign ports (i.e., Japan, Taiwan, and China to Cebu, Davao and Cagayan de Oro) are lower compared with transporting goods from Manila to Davao (See Table 5.3). The higher freight rates are largely blamed on inefficiencies in marine transport such as inadequate port and vessel capacities, and ineffective port management and administration.28 The lack of competition in the shipping industry has likewise contributed to higher transport costs. With limited competition, firms have no incentive to minimize costs since these can be simply passed on to the consumer of service through higher charges. It is important to note that firms (as in the case of Steel-Asia in Davao) have successfully reduced their distribution costs by building plants closer to the markets they serve.

28

Llanto, Gilbert M., Enrico L. Basilio, and Leilanie Basilio. Competition Policy and Regulation in Ports and Shipping. PIDS-World Bank Competition Policy Project. February 5, 2004.

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Table 5.3: Comparative Freight Rates (2005)

Particulars Manila to Davao

HK to Manila

Bangkok to Manila

Klang to Manila

Freight Cost* (US$ per 20-foot container)

623

248

595

672

Distance (nautical miles) 519 619 1,189 1,343 Sailing Time (days) 1.5 1.5 8.0 8.0 Freight Cost per Nautical Mile

1.20

0.40

0.50

0.50

* rounded figures made specific (= distance x freight cost per nautical mile) Source: Llanto et al, ”Competition and Regulation in Ports and Shipping”, 2005.

g. Industry Data and Statistics There is the absence of a centralized agency to gather data on the domestic iron and steel industry. As such, there exists the problem of conflicting data from the concerned government agencies (e.g. Bangko Sentral ng Pilipinas (BSP), BOC, Bureau of Import Services, NSO, and NEDA). The availability of timely and reliable industry data and information is important for planning purposes and for monitoring and evaluating performance of the sector.

2. Opportunities

Three trends are making it likely that the Philippines is poised to enter a phase of long term rapid economic growth which will deepen and broaden markets for houses, roads and other products that will require steel products. First, the labor force will be growing faster (increasing by over 1 million per year) than the youth and elderly. Second, the government and private sector are investing more in the health and schooling of people. Third, the country is currently one of the darlings of local and foreign investors which could be further reinforced by a possible raise of our sovereign credit rating to investment grade based on real gains in fighting corruption and managing government finances.

We reckon that is likely that the government, companies and civil society could work

together to prepare this labor force by investing in their health and schooling and to attract the investments that will generate the well-paid jobs to match this prepared labor force which could cause the Philippine economy to grow from 7-10% a year till 2040: the 2011 GDP per person in 2011 prices ($2,345) could at least double in 2026 ($4,700); quadruple in 2040 ($9,400). The resulting growth of the middle class should raise the demand for roads, houses and office buildings—which should expand the demand for reinforcing bars, galvanized sheets and other locally produced steel products.

Four other trends—higher wages of Chinese workers, labor shortage in Japan and

Korea, the flooding of export manufacturing zones in Thailand, and the slowdown in the Chinese economy—are making these major industry players look at the Philippines as a possible site for market and production expansion. If we are able to attract investments into appliances, ships and auto parts and to form part of a regional production chain to manufacture these products to form a critical mass of downstream users of flat steel products, we could attract more foreign industry players to form joint ventures with local players—which have emerged leaner and stronger after surviving the adverse economic conditions of the past decade—to produce flat steel products.

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3. Elements of Industry Competitiveness The extent to which the Philippine Iron and Steel industry is able to seize the benefits of

long term phase of rapid economic growth beckoning amid these opportunities hinges on its competitiveness relative to its industry players in region: Vietnam, China, Indonesia and Korea. Industry competitiveness consists in the ability of its firms to sustain its present and to further raise its competitive advantage: a combination of external circumstances and firm-specific capacities that keeps the costs of its product costs lower than its competitors and enables it to make future products providing a higher value and thus commanding a higher price to consumers—such as flat and specialty steel products. A steel company succeeds in sustaining their competitive advantage when it continuously upgrades its capacities—organization of work flow, technology, workers’ skills -- which enable it to find ways to cut costs and produce higher value added goods. In the end, local steel firms leverage their competitive advantage in two ways: they manufacture present products at low costs as they expand into untapped local markets and they shift their production portfolio to high-value products as the markets for their present products get saturated. It is a given that steel companies are the main protagonists in sustaining their competitive advantage and they will carry their own weaknesses and face their threats. To a large extent their success in this task depends on the moves they make to maximize their strengths to capture the opportunities in whatever operating environment they currently face. The role of government is to complement the industry in these efforts.

The government can support local companies sustain their competitive advantage. First,

the government can implement programs that can lower the costs of steel production which include electricity, logistics, raw materials and labor. For example, the government can construct and manage an efficient transport network of roads, airports, and harbors which reduces logistics costs (which includes the handling, storage and transportation of raw materials and finished products.). Second, it could focus on implementing infrastructure projects that increases the market for steel products and all policies that make the economy vibrant. For example, it could ramp up the bidding and implementation of its public-private partnership projects for it will have a direct effect on increasing the demand for steel products such as reinforcing bars and galvanized sheets which keeps the present firms viable and convinces to invest in additional production capacity. Improved infrastructure also makes it easier for tourists to visit resorts and for educated workers to commute to higher paying jobs in central business districts from affordable houses in areas at the periphery both of which grows the economy rapidly for the long terms and thus provides a steady, predictable growth in markets for steel products which in turn attracts more investments and growth in the industry.

Third, it could support an environment that encourages local and foreign investment into

the industry. For example, the government could maintain fair competition between local and foreign producers should the Bureau of Customs reduce the smuggling of steel products through an under-declaration of value and misclassification of steel products. Moreover, local governments and national agencies could lower the costs of doing business by reducing the time to process applications and paying business permits and taxes. Keeping a predictable set of sound investment policies and improving the management of our educational system that expands the pool of productive workers sufficiently flexible to produce higher value products to match their higher wages makes the country an attractive site for investors. This makes it easier for local firms to invest and attract foreign investments to expand their manufacturing of present and new steel products.

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Chapter 6

RECOMMENDATIONS

To enable the Philippine iron and steel industry to fulfill its mission and achieve its vision

in 2030, we have crafted a set of recommendations addressing 13 areas which would apply to the industry as a whole. Based on the comments we received during the industry forum and several meetings, we initially formulated recommendations to address nine areas of concern related to industrial competitive advantage. We crafted these recommendations to fulfill the industry players' perennial request for government to implement current programs and enforce rules (See areas 1 to 4) and to suggest initiatives these industry players could undertake to complement the government's efforts to raise industry competitiveness (See areas 5 to 9). After circulating these recommendations to the industry players, we received additional comments which we considered to craft recommendations related to four areas in which government and industry players could seize opportunities in the business environment (See areas 10 to 13).

These recommendations should have the combined effect of supporting the overall

strategy of helping industry players sustain their competitive advantage by keeping the costs of present products lower than their competitors and enabling them to produce higher value products in the future. All government, sectoral and agency efforts at improved implementation of programs should be directed in supporting this overall strategy.

It is a given that steel companies are the main protagonists in sustaining their

competitive advantage and they will carry their own weaknesses and face their threats. To a large extent their success in this task depends on the moves they make to maximize their strengths to capture the opportunities in whatever operating environment they currently face. The role of government is to complement the industry in these efforts. The recommendations that are chosen for implementation must be adapted to the operating environment of global competition and relatively freer trade that steel companies are facing.

1) To reduce the costs of importing raw materials and losses of revenue due to unfair

competition, the DFA and DTI can work to remove the negative impact of a tariff distortion caused by a 0% tariff on finished steel products and a 3% tariff on raw materials for steel production (such as steel scrap and billets) by hastening to reduce the 3% tariff on raw materials to 0%. As mentioned above, the BOC can implement a one-page description of customs fees and procedures to reduce unfair competition coming from steel imports due to the under-declaration of value and misclassification of steel products. To reduce losses in revenue due to the entrance of substandard steel products, the DTI can mount a product standards campaign by providing its provincial counterparts with more manpower and funds to inspect the quality of steel products.

2) To improve the reliability in the supply of power and lower electricity costs, the Department of Energy (DOE) could hasten the full development of the Wholesale Electric Spot Market and could work with related agencies to ease investment and operation of more power plants. The DOE could review the maintenance schedules of the country’s power plants to assure a steady, supply of power needed by the industry players. Industry players could adapt an effective practice of producing during off-peak hours to take advantage of lower power rates which leads to reduced electricity costs.

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3) To reduce logistics costs, handling procedures at the harbors could be streamlined by

implementing a service contract wherein the port management contractors and Bureau of Customs will present a one-page description of services to be delivered at a set fee and deadline similar to the model of the Naga City Citizens Charter: this is a guidebook which describes a step-by-step procedure in availing of a service, includes who, when and how the service is delivered and the city official they can turn to if they find that the city service was not delivered or was delivered poorly. This will reduce loss of customs and steel company revenues due to the misdeclaration of value and misclassification of steel imports. The DPWH and DOTC can implement a truck ban and road axle policy that balances the goal of reducing more traffic congestion, with minimizing the wear-and-tear of trucks on the road network, while keeping transport costs of steel companies low.

4) To encourage investment in the Philippine Iron and Steel Industry, the different government agencies—such as the DPWH, BIR, BOC, DTI, DOE, in particular—can work together to keep a credible and consistent set of investment policies that makes the Philippines an attractive site for foreign investments. The government can implement its programs that grow the economy rapidly which in turn grows the office building and housing markets which in turn have a derived demand for steel products. A rapidly growing economy also means household incomes reach levels that demand high value products—such as cars, appliances—which in turn use flat and specialty steel products and thus will make investments in these steel products viable.

5) To make the sector more attractive for local and foreign investors, steel companies can aim to attain ISO accreditation in relevant areas. They can work with other industry associations to form a cluster of SME suppliers close to the site of their steel plants. This will multiply the job generation impact of their plants to the communities as well as assuring a steady supply of inputs for their production. In the medium term, the robust companies in the industry could team up to be part of a regional production chain which could answer the need of expanding the base of downstream steel users that could expand the markets of present steel products and create markets for high value steel products particularly in specialty and flat products.

6) To enlarge the pool of workers for the industry, the industry associations can work with TESDA and vocational schools to improve the delivery of vocational programs and to raise the student enrollment of its programs. They can expand their on the job training programs with vocational schools. Industry associations can work with universities to support programs that encourage competencies needed for all workers such as critical thinking, communication and people skills. They can start their endowment programs to provide scholarships that will attract the upper-third of a graduating high school class to study for a college degree in education, which is what the more successful educational systems in Singapore and Finland have done.

7) To answer the need for a set of consistent and timely delivered industry data, the industry players can work with university economic and engineering departments to maintain an industry data bank which would include regular analysis of business economic prospects of the local and regional industry. The industry center could host dialogues between government, industry and civil society to come up with and implement activities that will support the competitive advantage of the industry players.

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8) To complement the implementation efforts of the BOC and DTI provincial standards monitoring teams, the industry players can work with these agencies to fund and man independent standards and customs transactions monitoring teams in the steel products consistent with the legal and policy requirements of the said agencies.

9) To help companies upgrade their capacities continuously, so necessary to sustain their competitive advantage, the industry players need to implement in-house programs that foster a culture of “lifelong learning” and “thinking strategically”. They may institute a mentoring program where each worker is coached by another worker in the company, where they agree to set goals and action plans and review them that contribute to attaining the vision set by company. After feedback by the DTI on this roadmap report, the steel companies could set their own strategies and timelines and together they can come up strategies and guidelines for the industry which will be constantly reviewed by an iron and steel industry center which could be a division under BOI.

10) To incorporate additional strategies that worked into this roadmap, the government can learn from the ASEAN experience. The Philippines used to be equal to, or above, its ASEAN neighbors Thailand, Indonesia and Vietnam in terms of industrial performance, particularly in the iron and steel sector. In the past ten (10) – twenty (20) years, they improved by leaps and bounds, leaving us behind in many ways. Perhaps the government should look deeper into the things these other countries did right – these can be valuable lessons and useful inputs to our ongoing road-mapping exercise.

11) To address the supply gaps in iron and steel production, government can initiate a study to see the feasibility of integrating upstream all the way to mining. The biggest challenge in meeting the supply gaps in iron and steel production is to satisfy the input feed requirements of the midstream flat and long steel products manufacturing. Doing this requires a reliable long-term supply of domestic iron ore and coal in order to stay globally competitive. The emergence of new technologies may now allow us full integration, in partnership with the mining sector, to maximize domestic value-added in the overall supply chain. Reciprocally, this linkage could give the mining sector an extra justification for a reviving their interrupted activities in exploration, development and operations.

12) To improve their production cost efficiencies, industry players should take a serious look at

effective strategies that local companies are using to reduce their operating costs. To tap the full benefits of the economies of scale in steel production, they need to take a serious look at purchasing equipment using current technology that have production capacities at least three times larger than most existing steel mills which were built using second hand equipment based on older technology imported from countries who were upgrading their plant equipment. One way of doing this is start a local plant using the capital, experience and know-how of foreign steel companies who are on the lookout for expansion opportunities in robustly growing markets such as the Philippines. Given that the size of regional markets are big enough to support plants using current technology, industry players can adapt the strategy of Steel-Asia to build a steel plant closer to the markets (as in the case of their Davao plant set to operate in fourth quarter of 2013) to save on distribution costs. They can consider shifting their production schedules to off-peak hours to avail of the lower power rates that lead to reduced electricity costs.

13) To help industry players identify new products to diversify into, they can team up with universities to host initiatives that connects them to local end users of steel products via

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“communities of practice”: a network of product users, manufacturers, steel centers, industrial designers, exporters of products with steel components who are selected based on their willingness to share their expertise to whoever may need at mutually beneficial arrangements. One of the suggested outcomes of these communities of practice would to conduct regular investor sessions which would consist of identifying products of downstream users (which could include niche design-intensive products) in canning, nuts and bolts manufacturing, tools and other forged steel products, automotive manufacturing, shipping, and appliance sectors to which local industry suppliers could supply the needed steel products as inputs at competitive prices. The Philippine Exporters Foundation and DTI can work with these communities of practice to conduct “new export discovery workshops” which would gather small groups of investors, steel service centers and exporters develop new export products. Demand for steel products in the country continues to be dominated by the construction sector, accounting for about 80% of total demand. In the case of Thailand, the construction sector accounts for only 54% of total demand. Other major consuming sectors in Thailand include automotive, machinery and industrial, appliance, and packaging. These communities of practice could also award “innovation prizes” for manufacturing solutions that reduce energy costs and carbon emissions in steel plants.

Without withholding the necessary efforts to implementing the above recommendations, we reckon that the government should refocus its efforts in implementing the recommendations addressing area 1 because it addresses the strategic significance that industry players have placed on setting up a level playing field against uneven and unfair trade practices (i.e. smuggling, uneven tariffs and substandard steel products). In the same vein, we would advise industry players to work at implementing the recommendations in area 5 because it supplies the missing link of investments needed to complete the chain of raising production capacities and broadening product lines which they find to be at the crux of their strategies to raise their competitive advantage.

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REFERENCES Arizabal, Antonio. (2003). Roadmap for the Technological Upgrading of the Philippine Iron and

Steel Industry to Achieve Global Competitiveness. Paper prepared for the Metals Industry Research and Development Center, Department of Science and Technology in cooperation with the Department for Trade and Industry and the Philippine Iron and Steel Institute.

ASEAN Iron & Steel Industry Federation. 2011 Directory Bureau of Product Standards website (www.bps.dti.gov.ph) Garcia, Marissa and Sandy Vicente. (2005). “Competitiveness in the Philippine Steel Industry.”

Paper presented during the technical workshop on industry studies for the Meeting the Challenges of Globalization: Production Networks, Industrial Adjustment, Institutions and Policies, and Regional Cooperation Project, September 26-27, 2005, Manila, Philippines.

International Finance Corporation (2012). Doing Business in the Philippines 2012. Labs, Stanley Lt. “Economy Watch” <accessed

http://www.economywatch.com/world_economy/emerging-markets/ July 18, 2012> Llanto, Gilbert M., Enrico L. Basilio, and Leilanie Basilio (2005). Competition Policy and

Regulation in Ports and Shipping. PIDS-World Bank Competition Policy Project. February 5, 2005

National Economic and Development Authority (2011). Philippine Development Plan 2011-2016 National Statistics Office. Annual Survey of Business and Industry (2003, 2005 and 2009) OECD (2011). Developments in Steelmaking Capacity of Non-OECD Economies Philippine Iron & Steel Institute. 2006-2007 Directory Philippine Iron & Steel Institute. Philippine Country Reports 2008 to 2011. Philippine Iron & Steel Institute. Steelwatch industry newsletters Sato, Hajime (2009). ”The Iron and Steel Industry in Asia: Development and Restructuring.” IDE

Discussion Paper No. 210. August 2009 South East Asia Iron & Steel Institute. Statistical Yearbooks. Various years Southeast Asian Iron & Steel Institute website (www.seaisi.org) Vicente, Sandy (2005). “Basic metal and Metal Products - Industry Competitiveness and

Readiness for Further Trade Liberalization: Facing the Finalization of the DOHA Development Agenda” Paper presented during the technical workshop on industry studies for the Meeting the Challenges of Globalization: Production Networks, Industrial

http://www.bps.dti.gov.ph/

http://www.seaisi.org/

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Adjustment, Institutions and Policies, and Regional Cooperation Project, September 26-27, 2005, Angelo King International Conference Center, Manila, Philippines.

World Economic Outlook: Slowing Growth, Rising Risks, IMF, as cited by Ernst & Young,

“Global steel – 2011 trends 2012 outlook”<accessed http://www.ey.com/Publication/vwLUAssets/Global_steel_2011_trends_2012_outlook/$FILE/Global_Steel_Jan_2012.pdf July 18, 2012>

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ANNEXES A. OVERVIEW OF STEEL PRODUCTION TECHNOLOGY IN THE PHILIPPINES B. PRODUCTION LINKAGES, MULTIPLIERS, AND MULTIPLIER EFFECTS OF THE IRON AND STEEL

INDUSTRY C. ANALYSIS OF PHILIPPINE COMPARATIVE ADVANTAGE IN IRON AND STEEL EXPORTS

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ANNEX A

OVERVIEW OF STEEL PRODUCTION TECHNOLOGY IN THE PHILIPPINES

Introduction

The basic production process for iron and steel products has three stages and facilitates

the competitive analysis of the state of technology of the industry. This also determines the types of firms involved in iron and steel production present in a country, the level of investment required, the volume and value of economic output, and the future prospects for upgrading technology or capitalizing on advances in steel production technology.

Steel production has three basic stages. Stage 1 is iron production. Stage 2 is steel

production. Stage 3 is rolling and surface treatment. Stage 1: Iron Ore to Pig Iron

Stage 1 is production of iron, which is the raw material for steel production. This stage

turns iron ore into pig iron with the use of blast furnaces of the Basic Oxygen (BOF) or Open Hearth (OHF) type, using high-grade coking coal as a reducing agent.

The main sources of iron ore in the world are China, Australia, Brazil, India and Russia,

which accounted for more than half of total world production in 2010.29 Another technology turns raw iron ore into sponge iron through a DRI (directly reduced

iron) furnace, which uses natural gas or low-grade coal as a reducing agent. Pig and sponge iron have about the same iron content, but have different properties and therefore their own merits.

Pig iron is usually in solid (lumpy) form and has a typical humpy shape (hence, its

designation as “pig”). Pig iron is used in foundries for cast and wrought iron castings or for Stage 2 (steel production).

Sponge iron or DRI has a solid metallic form but a spongy microstructure. The product

can be shaped into briquettes for ease of transport and is mostly used for steel production, and because of its high rate of oxidation,has to be processed as quickly as possible to avoid rusting and other hazards due to its pyrophoricity or combustibility upon exposure to air30. Stage 2: Pig or Sponge Iron to Steel

Stage 2 is steel production, where pig or sponge iron, or scrap metal, are the raw

materials that are converted through combustion or burning into steel, an iron-based alloy containing carbon, silicon, manganese, and other trace elements. This is done through the removal by burning or oxidation at high temperatures of impurities. Several options include the use of any of several available technologies such as an LD Converter (LDC), Electric Arc Furnace (EAF), Electric Induction Furnace (EIF), Energy Optimising Furnace (EOF), Converter Arc Furnace (CONARC), or a Cyclone Converter Furnace (CCF). The different furnace

29

"U.S. Geological Survey". Retrieved 2011-12-20. 30

Valipour, MS, "Mathematical Modeling of a Non-Catalytic Gas-Solid Reaction: Hematite Pellet Reduction with Syngas", Scientia Iranica, 16(2c), 108-124, 2009. (http://www.scientiairanica.com/Issues/00113/2009/v16/n2.aspx)

http://minerals.usgs.gov/minerals/pubs/commodity/iron_ore/









http://www.scientiairanica.com/Issues/00113/2009/v16/n2.aspx















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technologies are distinguished by the fuel used by which the pig iron is melted and/or how oxygen is mixed with the molten iron.

LDC, using Austrian technology, blows oxygen through a water-cooled tube. EAF uses a

high-voltage electric arc passing through graphite electrodes or chemicals to melt the pig iron or scrap, while oxygen is introduced through a consumable pipe lance.

EIF uses electromagnetic induction to melt the iron; while this is more energy efficient

and clean, its processing capacity is very limited compared to EAF technology.31 EOF combines three independent, interconnected reactors, a furnace to produce steel, a preheater to heat the scrap and a recuperator to recover waste heat and to reuse by heating oxygen, which is injected at high speed to promote decarburization and at low speed to promote post combustion.32

CONARC and CCF are the latest technologies in steel making. CONARC, developed by

Mannesmann Demag in the 1970s, combines electrode arc melting with top-blowing of oxygen for hot metal treatment.33 CCF, developed in 2004, is part of the Hlsarna steelmaking process, which bypasses the pig iron phase by processing iron ore directly into steel, with the injection of oxygen into a cyclone of crushed iron ore and hot gas. CCF is a cleaner technology that meets EU environmental and energy efficiency standards.34

Molten steel is then cast into primary products that solidify upon cooling into intermediate

or semi-finished products, each weighing anywhere from 15-20 tons. These Stage 2 products, called ingots, generally come in three shapes and sizes and are known in the industry as blooms, billets or slabs.

Blooms are square or rectangular in shape, measuring approximately 150mm x 200mm,

or roughly 6” x 8”. Billets are similar to blooms but have a square cross-section and a smaller cross-

sectional size, e.g., 120mm square or less. Slabs are rectangular, wide, semi-finished steel products that are 150mm to 250mm

wide with a thickness that is 3 to 4 times the width. Thin Slabs are cast continuously in a thin slab casting machine to a width of 35-50mm.

These Stage 2 finished products are the raw materials for the next stage.

Stage 3: Rolling Steel to Finished Products

Stage 3 is rolling and surface treatment, and this is where the steel products of Stage 2

are rolled and, in some cases, surface-treated into finished products ready for sale to consumers. In this final stage:

31

EIF: 40,000-50,000 MT/year. EAF: 300,000 MT/year. ^ Phillip F. Ostwald, Jairo Muñoz, Manufacturing Processes and Systems (9th Edition), John Wiley & Sons, 1997 ISBN 978-0-471-04741-4 page 48. 32

R. H Tupkary and V R Tupkary: Steel time International, 2006, Vd 30 No.8 P28/31; 33

D. Malmberg et.al. Microwave technology in steel and metal industry, an overview, ISIJ Intern. Vol

47(2007) P.433 34

Van den Brink, Erwin (3 September 2010), "Nieuwe ijzertijd" (in Dutch), De Ingenieur 122 (13): 50–51,

http://en.wikipedia.org/wiki/Induction_furnace#cite_ref-1

http://en.wikipedia.org/wiki/Special:BookSources/9780471047414

http://en.wikipedia.org/wiki/Special:BookSources/9780471047414

http://www.deingenieur.nl/





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● Blooms are hot-rolled into heavy sections, sheet pilings, grinding balls for mining use, and large diameter steel bars. Blooms are sometimes rolled into billets in a billet mill.;

● Billets are rolled into long finished steel products such as construction steel rebars, rods and light sections; and,

● Slabs are hot rolled into flat products like plates, sheets, and strips for use in the shipbuilding, automotive, appliances or construction industries. Included in stage 3 are pipe mills which turn slabs into steel pipes of various diameters.

This also includes surface coating plants which turn thin slabs into tin cans for packaging use or into galvanized iron roofing sheets.

Figure 1 contains a schematic diagram of the steelmaking process.35

Steel Scrap

Steel is one of the most recycled materials in the world, because recycling is cheaper

than mining and processing iron ore, aside from many other technical and scientific reasons, such as the lower melting point of steel compared to iron (therefore, lower energy consumption), lesser requirements for chemical substances (to turn steel into cast form), and lower waste disposal costs. In the U.S., for example, recycling of steel scrap accounts for more than half of total steel production and saves the steel industry up to 75 percent of its energy requirements yearly.36

The most significant advantage of steel that makes recycling economical is that steel

does not lose its inherent material properties during the process of melting down steel so it could be turned into something else, e.g. steel bars recycled into slabs and plates, or automobile steel components recycled into large diameter bars for steel bridge supports.

Since recycling steel has been going on for centuries, the steel industry has developed

advanced scrap utilization technologies that are very efficient and environment friendly due to lower carbon emissions. Japan, which imports all of its iron ore and, at the same time, has one of the largest volume of scrap steel because of its post-War industrialization, has become one of the most advanced in scrap recycling technologies. Its Nippon Steel Hirohata Works pioneered the development of modern scrap recycling technologies as early as 1993.

One of the revolutionary technologies used in scrap melting utilizes what is called the hot

heel scrap melting process. It is economical because it uses an existing blast oxygen furnace (BOF) and therefore reduces equipment cost and retains the freedom of raw material and fuel use, the process assures high productivity and high product quality, and it minimizes the total production cost through the effective utilization of waste energy, such as recovering the off-gas via the steel plant’s existing system; hence, minimal system remodelling expenditures would be needed.

35

Sato, Hajime. 2009. The Iron and Steel Industry in Asia: Development and Restructuring. IDE Discussion Paper 210.2009.08. Institute of Developing Economies. Tokyo: JETRO. p. 7. 36

Chandekar, D.A. Steelworld Research Team February 2010, Melting of steel scrap: A worldwide phenomenon. pp.44-48. From http://www.steelworld.com/newsletter/feb10/feature0210.pdf

http://www.steelworld.com/newsletter/feb10/feature0210.pdf















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Steel Products Just a quick note on steel products which are the result of Stage 3 steel production.

Steel products are classified into Long or Flat products. Long products

Long products are finished steel products that are produced by hot rolling or forging of

blooms or billets into usable shapes and sizes. These products are supplied in predetermined lengths, except wire rods that are supplied in wound coils form. The different types of long products are bars and rods in various cross-sections such as round, flat, square, or multi-sided (hexagon or octagon) depending on special end-user requirements such as those used in furniture-making.

Long products could also be finished using cold-worked twister and deformed (CTD) or

thermo-mechanically treated (TMT) into bars and rods. These are in the form of hot-rolled round bars or rods with indentations or ribs normally supplied in straight length or in folded bundles and are used directly in civil construction. This includes wire rods that are hot-rolled plain bars or rods (no indentations) that are in coil form, normally used to produce steel wires and steel bright bars.

Included among long products are angles, shapes and sections, channels, girders,

joists, I beams, and H beams used in civil or mechanical construction; rail sections obtained from hot rolling of blooms or billets that are used in rail or tramways; wires that are produced by cold drawing of wire rod through a die, and these are usually supplied in coils; bright bars that are cold drawn, ground or peeled plain bars produced from hot-rolled plain bars or wire rods. Flat Products

Flat products are finished steel that come in thin and flat form and are produced from

slabs or thin slabs in rolling mills with the use of flat rolls. These are supplied in hot-rolled, cold-rolled or in coated condition depending on end-user requirements. Among the variety of flat products are:

● plates: thick flat finished product of width +500mm and Thickness > 5mm

supplied in cut or straight length, normally produced or supplied in as hot rolled condition with or without specific heat treatments;

● sheet : thin flat finished steel products, width +500mm and thickness < 5mm supplied in cut or straight length, produced or supplied in hot rolled/cold rolled/coated condition and known as Hot Rolled (HR) Sheets or Cold Rolled (CR) Sheets or Coated Sheets;

● strips : hot/cold/coated flat rolled products, supplied in regularly wound coils of super-imposed layers, and are known as HR or CR or Coated Strips. Depending on the width, strips could be sub-classified as wide (> 600mm) or narrow (<600mm);

● coated products: cold-rolled products coated with metals or organic chemicals, such as galvanized plain or corrugated sheets for roofing, paneling or automobile materials, or tinplate used for the manufacture of containers, and color-coated products used for furniture, automobiles, and other uses. This overview of the steel production process simplifies the determination of the typology

of steel production firms, the current status and short-, medium- and long-term prospects of steel production technology in the Philippines and in Asia.

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Typology of Steel Production Firms Steel production firms can be classified into three depending on which production stages

the firm undertakes. Firms that have all three stages are called integrated steelworks. Firms with two of the three stages are semi-integrated steelworks. Firms with only Stage 3 of the steel production process are called rolling mills. We now look at examples of each firm type and their levels of technology.

Integrated Steelworks converts iron ore to crude steel which is rolled into finished

products. The first generation of integrated steelworks, which were founded in the late 19th century, was located close to iron ore mines or coal mines. The second generation, built in the 1960s, were located near deep water ports, had more modern equipment, and were more productive, achieving economies of scale from improved production processes.37

In the Philippines, the only firm that attempted to be of this type is that which used to be

the National Steel Corporation (NSC) in Iligan City, which was bought in 2004 by an Indian steel company and renamed Global Steel Philippines, Inc. Currently, it only operates as a Stage 2 firm, whereby a Filipino industrialist had purchased a mini-BOF from China, with a 150,000 metric tonnes (MT) annual capacity, which is operated as a separate entity by the name Treasure Steelworks, Inc.38

Among the top 25 integrated steelworks in the world in terms of crude steel production,

14 are in Asia, with China having six, Japan with three, South Korea and India with two each, and Iran with one.39 There are also integrated steelworks in New Zealand and Australia, and project studies are being made to establish integrated steelworks in Indonesia, Vietnam, and Thailand. Since iron ore is expensive to transport, most integrated steelworks are close to the sources of the ore and coking coal. South Korea and Japan seem to be the exception, since these have to totally import their iron ore.

Semi-integrated Steelworks have Stages 2 (steel-making) and 3 (rolling processes)

under one roof. The so-called MiniMills fall under this firm typology, which involves making crude steel out of steel scrap or DRI in EAFs, before rolling them into finished products. In some cases, steel production and rolling are in separate facilities, which allows for greater operational flexibility.

In the Philippines, the nine largest semi-integrated steelworks with a total steelmaking

capacity of 1.3 million MT annually account for some 800,000 MT of finished steel production. In 2012, the Philippines consumed 4 million MT of steel products, which shows that most of the steel used in the country is imported. This level of steel consumption was almost the same in 1996, just before the Asian financial crisis.

Rolling Mills comprise the third type of steelworks engaged in pure Stage 3 production,

transforming billets and slabs into finished products through hot-rolling and/or cold-rolling, providing surface treatment processes such as galvanizing, color-coating or tin-coating, or working these into steel tubes and pipes. Most of the steel companies in the Philippines are of this type. There are billet manufacturers which provide the raw material inputs to steel bar

37

Sato pp 7-9. This is a major resource for this section. 38

Interview with Steel Executive A on 11 July 2012. 39

http://www.steelads.com/info/largeststeel/TOP25_Worlds_Largest_Steel_Companies_2010_2011.html

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makers which eventually goes to construction. With the shutdown of Global Steel Philippines Inc., the major flat steel rolling mill, the raw material inputs for galvanized roofing materials and metal containers for food packaging are 100% imported. None of the steel producers in the country could produce the more sophisticated, multiple-alloyed, high performance steel products required by high value-added industries such as tool and die making, automotive and semiconductor electronics that their steel raw materials need to be imported. Steel Production Technology: A Tough Road to Nirvana

Much of the basic technology used in steel production is more than centuries-old, but

they require huge capital investments. For example, a bar mill that breaks even at 100,000 MT per year requires at least $20 million of investments, while a hot strip mill with a minimum efficient scale of 2 million MT would cost $400 million in investments. A 300,000 MT per year EAF firm requires $100 million, while an integrated steelworks with a minimum efficient scale of 3 million MT per year costs $4 billion initial investment.

Below is the summary of the minimum efficient scale and initial investments required for

some firm types40:

Firm Type Economic Scale (MT/year) Initial Investment (US$)

Ore-based Integrated steelworks 3 million $4 billion

Hot strip mill 2 million $400 million

EAF (scrap) with thin-slab CC 1 million $300 million

EAF with bar mill 300,000 $100 million

Bar mill 100,000 $20 million

Additionally, investments in technology are determined according to market size, supply

and demand dynamics, economies of scale, and the legal frameworks for industrialization and in the trading of raw materials and finished products. According to industry sources, the level of production technology of Philippine steel producers is over two decades old, and that new investments in process technologies are driven by short-term profit-seeking brought about by a lack of long-term vision and consistent government policies.

The last two mini-mills were established in the 1996-1998, and no new mills for Stage 2

production have been opened since then. Most of the “new” steel mills (actually, using second hand equipment from China) are for Stage 3 steel production.41

On top of the bureaucratic obstacles and inconsistencies, the industry finds a growing

problem with corruption in the Customs and Internal Revenue Bureaus that allow rampant smuggling, both technical and direct, and tax evasion. Another result of the dominant mentality is a fragmented iron and steel industry sector where information is not shared, and where the different players find it difficult to work together for the good of the whole industry.

40

Sato pp 9-10 41

Interview with Steel Executive B on 16 July 2012.

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Stages of Technology: Costs and Benefits Japan and South Korea are two of the largest steel-producing nations in Asia, and also

the most advanced. Having to import most of their iron ore for their industrialization in the 20th century, the state of steel process technology is the most experienced and developed, because of the need for economy, efficiency and profitability.

The two biggest cost items for a steel producing firm are raw materials (60-65%) and

power or fuel (25-30%), so most technologies focus on these two cost items, either by cutting the cost of turning pig iron to semi-finished steel products for semi-integrated firms, and by making the melting process more energy efficient for both semi-integrated and rolling firms.

Other areas for cutting down on costs with the use of technology is in the area of

reducing transportation costs by locating the steel mill close to ports or load-bearing road networks, both for deliveries of raw materials and finished products, cutting down on labor costs through improved production efficiency, reducing product rejects due to process inconsistencies and compliance with environmental regulations, but while these have more serious impact, e.g., product failures when these do not meet government standards, or environmental pollution, which lead to potentially high liabilities, the costs in technology investments or penalties imposed are almost negligible, estimated by industry sources as being not more than 5% of total cost. Putting Money Where It Matters

Raw material prices fluctuate according to global demand. This applies to the prices of

Stage 1 steel production outputs, such as pig or sponge iron, the prices of inputs to Stage 2 production such as steel scrap, and the inputs to Stage 3 production such as blooms, billets and slabs. Over the last ten years, the wild upsurge in the demand for steel products all over Asia, driven by rapid economic growth in China, India and some parts of Southeast Asia (like Vietnam and Indonesia), have driven the prices of raw materials in all its forms (pig/sponge iron, scrap, and semi-finished steel products). Therefore, there is nothing much that technology can do to bring down the cost of raw materials.

One problem, though, that the high cost of raw materials creates among local steel

producers is the low capacity utilization of many steel mills. This is brought about not only by the high cost of raw materials, but also the high potential profits a businessman could earn from smuggling of imported steel products (for Stages 2 and 3), which makes it uneconomical for local producers to supply more than what they could sell. Although yearly, more than 50% of steel used in the country is imported, the fact that a big portion of it is smuggled or misdeclared crowds out the potential market demand that local producers could supply and squeezes the local suppliers’ profit margins. Rather than invest in technology to expand production, producers instead cope with the lower margins by operating at a lower but economically sustainable capacity.

What steel companies are able to do, however, is to make the production processing of

raw materials more efficient, so that product standards are met and wastage is minimized. Most steel companies in the Philippines have invested in computer-controlled production systems using European technology (e.g., Siemens) with an estimated 4-year payback period. Industry

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sources admit that they readily invest in technologies that assure or improve product quality and maximize output, for the simple reason that they can easily calculate the financial returns.

Different steel companies use different technologies, but the mini-mill representatives

admit that their 15-year old technology is still economical and give guaranteed financial returns. Most of these technologies were bought from Chinese suppliers and easily retrofitted to the existing, older Stages 2 and 3 steel mills in the Philippines.

Another technology-based strategy used by steel companies to cut on raw material

waste while meeting the market demand is to adjust their product dimensions to their end-user requirements. For example, since steel bars are normally sold in 6-meter lengths, some steel companies have purchased cooling beds up to 12 meters in length to meet varying length orders, ranging from 7.5 to 9 meters. This helps to lock in local demand to local supply, so that construction companies need not look for foreign suppliers to meet special requirements. Depending on the capacity, cooling beds cost from $150,000 to $160,000 and these costs can be recovered in two to three years.

Compared to other steel producers (mini-mills and rolling mills) of similar capacities

(between 100,000 and 300,000 MT/year capacity) in Southeast Asia, Philippine producers are able to price their products competitively. Note, however, that the primary competition of domestic steel producers are the smugglers who, with their lower or zero tariffs and taxes are able to price their products to be competitive with imported products, while squeezing the margins of legitimate steel producers.

Power or energy make up the second biggest cost item in steel production, accounting

for as much as 35% of total cost. Electrical power is used to melt the raw materials in the EAF, and steel producers look for ways to cut down on power usage, especially since power rates in the Philippines are among the highest in Southeast Asia.

Local steel producers are able to make do with off-the-shelf technology from China that

are easy to install and that assure considerable savings in energy expenses. Among the common ones are the installation of capacitors, which stabilize the power usage caused by the voltage fluctuations in EAFs or EIFs, resulting in 3-phase imbalances in the power grid, negative sequence current, high order harmonics, severe voltage distortion, and low power factor. These effects result in higher power usage readings. A good capacitor system with harmonic filters costs between $15,000-25,000 and have a payback period of less than a year in any steel plant at any given output, even below 300,000 MT/year.

Installing a recuperator, a heat recovery system that reuses the heat from exhaust gases

to raise the temperature of the air in the furnace, resulting in lower energy costs. A recuperator system costs an average of $250,000 and is economical for production capacities of 300,000 MT/year, which is the average capacity of mini-mills in the country. This investment has a reasonable payback period of 2-4 years.

Another technology where some mini-mills are willing to invest is in scrap preheating,

which raises the temperature of the scrap metal with the use of specially-designed EOF that use the heat of exhaust gases from the smelting process. A Siemens model costs P20 to 30 million, but this would give decent financial returns if the furnace capacity is greater than 500,000 MT/year. Although some mini-mills want to install furnaces that could meet this capacity, not one is willing to do so for the reasons already mentioned, i.e., it would not be competitive for them because of smuggling and other forms of government corruption.

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The optimal EAF output for a steel plant is in the range of 300,000 to 500,000 MT/year. The three biggest mini-mills, Steel Asia, Capasco and Treasure Steelworks, have an average capacity of 300,000 MT/year. There are two mini-mills in Pampanga, each with an EAF capable of processing 150,000 MT/year, and 3-4 smaller ones, each with a capacity of less than 100,000 MT/year. Of the approximately 1.3 million MT/year of crude steel, an estimated 1 million MT/year is sold as iron and steel products. Given that the estimated steel consumption in the Philippines in 2010 was 4 million MT/year, it can be estimated that at least 3 million MT/year were imported.

In 2011, Treasure Steelworks installed its first (of two planned) mini-blast furnace with a

molten steel capacity of 150,000 MT/year, part of a plan to ramp up Stage 1 production to 700,000 MT/year.42 This is part of a plan to build the only integrated steel mill in the Philippines ever since Global Steel Philippines, the former National Steel Corporation, stopped operating in 2010.

Other technology investments in the steel industry have considerably reduced wastage

from 4% more than ten years ago to an acceptable 1% of total output (at P33,000 per MT and annual output of 300,000 MT/year, the cost savings go as high as P300 million yearly). Every savings equivalent to 1% of total output would be worth P100 million yearly at current prices for a 300,000 MT annual capacity. This explains why local companies do not need incentives to invest in technology that would improve productivity and energy efficiency.

Environmental considerations, however, such as cleaning of furnace emissions, or

recycling of waste products such as slag or mill scale, have their economic benefits as well, not only in terms of acceptability by the community and less political pressure from NGOs and politicians. Slag can be sold as an asphalt additive, while mill scale can be fed back into the EAF and mixed with the raw materials or scrap for melting. Computerized systems to make the furnace air mixture more optimal for sustaining high temperatures also give the added benefit of minimizing CO2

emissions and cleaning up the smoke. This is why domestic steel companies are willing to invest, even without incentives, to comply with environmental safety standards. Medium- and Long-Term Outlook

According to the OECD 2010 Steelmaking Report43, Asia would grow its steelmaking

installed capacity by 147.5 million MT/year to 2012, with China accounting for 61% of total capacity and India accounting for 28%. From 2003 to 2012, the Philippines grew its capacity by 500,000 MT, growing from 1.7 million MT in 2002 to 2.2 million MT in 2012 (projected). In contrast, our neighbors will grow from a larger base to at least, in the case of Vietnam and Indonesia, four times our capacity. Projected installed capacities by 2012 are as follows (in million metric tons per year):

Steelmaking Capacity Crude Steel Production 2002 2012 2003 2009

China 197 815 222 567 India 40 114 32 60 Malaysia 8 11 4 6 Indonesia 7.8 9.2 2 3.5

42 Developments in Steelmaking Capacity of Non-OECD Economies 2010 , OECD Publishing, Apr 28, 2011, p. 38.

43 OECD (28 April 2011). Developments in Steelmaking Capacity of Non-OECD Economies 2010, p. 49.

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Philippines 1.7 2.2 0.6 0.7 Vietnam 1.7 9.3 0.5 2 Thailand 7.4 9.3 3.6 6 Source: OECD 2011, pp. 48-49

The above table indicates that countries which grew in capacity and actual production

between 2002 and 2012 invested in newer technology. According to the OECD report, these Asian countries installed blast furnaces, EAFs, EOFs, EIFs, and more up-to-date for a wide variety of production processes such as continuous casting, galvanizing, etc. China alone starting operating at least seven new integrated steel mills between 2002 and 2009, and was in the process of constructing six more greenfield integrated steel mills all over the country.

Among the technology improvements that the Philippines’ steel companies could

consider for their future investments to attain financial sustainability of their businesses in the medium- to long-term, based on past technological innovations and investments that have proven to improve competitiveness in steel production, are the following44:

1. Introduction of control systems for production processes and the automation of their

operations; 2. Improving air mixture to improve combustion properties in the furnace; 3. Use of alternative energy sources for furnaces and ovens; 4. Use of economical, though lower quality, raw materials such as scrap and waste steel; 5. Labor saving (operation optimization of machines and equipment, continuous unloaders,

automation of oven operation and reduction of the work period of furnace relining, etc.); 6. Extension of equipment service life (furnaces and ovens) through periodic maintenance

periods; 7. Environmental conservation (dust treatment using a rotary-hearth reduction furnace

(RHF), circulation of exhaust gas, etc.); 8. Innovative processes (e.g., production technologies of substitutional iron sources, the

Smelting-reduction Process (DIOS), next-generation ovens (SCOPE 21), etc.); and, 9. Visualization of phenomena within the furnace (development of the visual evaluation and

numerical analysis system of a furnace (Venus), improvement in the prediction accuracy of a furnace total model, etc.).

Some steel companies are already investing in some of these technologies, encouraged

by the financial viability of those investments. There is no need for investment incentives. The best the government could do is to try to level the playing field by taking away the unfair economic advantage of smugglers by cleaning up the Bureaus of Customs and Internal Revenue. Checkpoint: 2003 Roadmap and Reality

The key technological recommendations of the 2003 industry roadmap were related to

the rehabilitation of NSC as an integrated steel mill and the construction of a mini-integrated steel plant based on DRI or Corex ironmaking technology.45 The key objective, then as now,

44

Interview with Steel Executive C on 18 July 2012; Naito, Maasaki. Development of Ironmaking Technology, Nippon Steel Technical Report, no. 94, July 2006, p. 3-4. 45

Arizabal, A.V. (ed.), 2003. Roadmap for the Technological Upgrading of the Philippine Iron and Steel Industry for Global Competitiveness. DOST-PCIERD-MIRDC-DTI, Manila.

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was for the country to supply Stage 2 products from raw material inputs in the form of iron ore, pig iron, DRI or scrap.

To-date, NSC (as Global Steel) has ceased operations again (since 2010) after its

attempted rehabilitation in 2004. One important technological upgrading recommendation was the purchase of more

efficient furnaces. Since 2003, there have been no new significant investments, unlike in other SEA countries that have installed state-of-the-art energy-efficient furnace alternatives such as EOF, EIF, etc. The closest the country has fulfilled the 2003 plan is Treasure Steelworks’ purchase of a mini-Blast Furnace that was installed beside NSC in Iligan. Other than that, most investments involved the production efficiency measures mentioned above.

Another recommendation in the 2003 industry roadmap was for companies to invest in

scrap handling and preparation equipment to size scrap charges and minimize repeated charging. As of 2012, industry insiders who were interviewed claim that such an investment would be too expensive for local steel producers at this point.46

A key recommendation also was to reduce the cost of tinplate for canning use by down-

gaging and expanding the production of double-reduced blackplate products, but this also depended on the continuous operation of NSC, so nothing was done on this.

In summary, much of the technological recommendations of the 2003 roadmap had to

do with the rehabilitation and upgrading of NSC as an upstream raw material producer of slabs, billets and blooms. The manner by which NSC was managed until it ceased operations in 2010 precluded any possibility that the key technological recommendations of the 2003 roadmap could be implemented by the steel industry players.

In the meantime, even though political instability, government policy inconsistencies and

other business challenges are present in the other countries around the Philippines, the level of private sector investments in those countries allowed the start-up of steelworks that utilize more modern technologies compared to ours.

We just have to act catch-up again once we get our acts together.

46

Interview with Steel Executive D on 20 July 2012.

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ANNEX B:

PRODUCTION LINKAGES, MULTIPLIERS, AND MULTIPLIER EFFECTS OF THE IRON AND STEEL

INDUSTRY 1. Introduction

The iron and steel industry is widely considered one of the catalysts of industrialization

and a major backbone of all industries in the economy. In fact, industrialization in many countries is strategically linked with the growth and development of the iron and steel industry.

Sustained long-run economic growth will require, among others, growth in public

spending for infrastructure and private construction spending. Greater public spending on infrastructure and private construction spending will undoubtedly boost demand for iron and steel products. In the Philippines, the surge of public-private partnerships in infrastructure development, expansion of the real estate industry, growth of the housing industry, and the emergence of the shipbuilding industry will intensify demand for iron and steel products.

To meet demand for its products, the iron and steel industry relies on other industries for

production inputs and on households for labor inputs. The web of production interrelationships between the iron and steel industry and the rest of the economy intensifies production linkages and produces multiplier effects that help expand output, household income, and employment.

The objectives of this study are as follows:

1. To describe and analyze the production and output distribution structures of the iron and steel industry

2. To quantify the total output multiplier and multiplier effects of the iron and steel industry on the economy including the output multiplier effects induced by both production and consumption activities

3. To quantify the total household income multiplier and multiplier effect of the iron and steel industry on the economy

4. To derive the total employment multiplier effect of the iron and steel industry on the economy from the industry’s total household income multiplier effect

5. To measure the strength and dispersion of the production linkages of the iron and steel industry The iron and steel industry is defined in this study in terms of the activities of iron and

steel foundries, which generally involve the manufacture and casting of iron and steel. More specifically, these activities include the following: casting of semi-finished iron products; casting of gray iron castings; casting of spheroidal graphite iron castings; casting of malleable cast-iron products; manufacture of tubes, pipes, hollow profiles; manufacture of tube or pipe fittings of cast iron; casting of semi-finished steel products; casting of steel castings; manufacture of seamless tubes and pipes by centrifugal casting; and manufacture of tubes or pipe fittings of cast steel.47

47

This is based on the Philippine Standard Industry Classification. The Department of Trade and Industry and Board of Investments define the iron and steel industry in terms of three sub-sectors: primary, intermediate, and downstream. The primary sub-sector includes iron making or extraction of iron from iron ore, steel making or refinement of iron or scrap into steel, and bullet, ingot, and slab casting. The intermediate sub-sector includes processing of semi-finished iron and steel into finished products as well as rolling, forming, drawing, and finishing. The downstream sub-sector includes users of iron and steel products such as construction,

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In the next section, the methodology used in the analysis is briefly described. The third section analyzes the production and distribution structures of the iron and steel industry. The fourth and fifth sections quantify and explain the total output and total household income multipliers and multiplier effects of the iron and steel industry. The total employment multiplier effect of the iron and steel industry is quantified and discussed in the sixth section. Finally, the last section analyzes and discusses the strength and dispersion of the production linkages of the iron and steel industry. 2. Methodology

The study uses input-output analysis to quantify the multiplier effects of the iron and

steel industry and to measure the strength and diffusion of the industry’s production linkages. The 2000 Philippine input-output table was projected to 2008 using data from the 2008 Annual Survey of Philippine Business and Industry. The RAS technique was used to arrive at the non-survey estimate of the 2008 Philippine input-output table.48

The semi-closed input-output model is used to derive the total output, total household

income, and total employment multipliers of the iron and steel industry.49 This model includes households in the analysis of the production interrelationships of the iron and steel industry and its multiplier effects.50 The same model is used to measure the strength and dispersion of the production linkages of the iron and steel industries. The model is expressed as follows:

X = ( I – Ā )-1 Y

where X is output, Y is final demand, I is the identity matrix, Ā is the augmented technical coefficient matrix, and ( I – Ā )-1 is the semi-closed global Leontief inverse matrix that captures direct, indirect, and induced multiplier effects.51

Since the iron and steel industry is import-dependent, the semi-closed domestic Leontief

inverse matrix was derived using the augmented technical coefficient matrix Ā and rates of self-sufficiency derived from the input-output table.52 In this study, both global and domestic Leontief

automotive and machinery, and engineering and metalworking sectors. In this study, only the primary and intermediate sub-sectors of the iron and steel industry are directly taken into account. 48

A software program produced by the DIA Agency, Incorporated processed the data and projected the 2000 Philippine input-output table to 2008 using the RAS technique. The non-survey estimate of the 2008 input-output table has 16 industries and one household sector. 49

The total employment multiplier is derived using the total household income multiplier and average annual compensation data. 50

The open input-output model does not include households in the analysis of production interrelationships and their multiplier effects on the economy. Simple multipliers are derived from the open input-output model while total multipliers are derived from the semi-closed input-output model. 51

Final demand refers to consumption spending, investment spending, government spending, export demand, and import demand. The augmented technical coefficient matrix includes an additional row for household input coefficients and an additional column for household spending coefficients. The household spending coefficients are based on the compensation of employees data found in the input-output table. The household spending coefficients are based on personal consumption expenditures data found in the input-output table. The inverse matrix is a global inverse matrix because it incorporates both domestically-produced and imported inputs. 52

The rates of self-sufficiency were computed using the official 2000 Philippine input-output table since the non-survey estimate of the 2008 Philippine input-output table does not include the data required for computing the rate of self-sufficiency. The global Leontief inverse matrix takes accounts for both domestically-produced and imported inputs while the domestic Leontief inverse matrix accounts for domestically-produced inputs only.

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inverse matrixes are analyzed to contrast the “potential” and “actual” multipliers of the iron and steel industry.53

The total output multiplier is the sum of the column elements of the semi-closed Leontief

inverse matrix. It embodies the direct, indirect, and induced effects of a change in final demand on the output of all industries in the economy. The total household income multiplier is the last element in each column of the semi-closed Leontief inverse matrix. It contains the direct, indirect, and induced effects of a change in final demand on household income.

The total household income multiplier effect is divided by the annual average

compensation to get the employment multiplier effect of the iron and steel industry. Hence, the employment multiplier effect is not directly derived from the semi-closed Leontief inverse matrix.

Backward and forward linkage indexes are derived from the semi-closed Leontief inverse matrix in order to measure the strength of the production linkages of the iron and steel industry. The backward linkage index (power of influence) is the ratio of the total output multiplier and the average output multiplier.54 The forward linkage index (sensitivity of dispersion) is the ratio of the sum of the row elements of the semi-closed Leontief inverse matrix and the average output multiplier. An index that is greater than 1 indicates strong linkages while an index less than 1 indicates weak linkages.

The dispersion of the backward and forward linkages of the iron and steel industry is

measured using the coefficient of variation. The coefficient of variation is the square root of the ratio of the standard deviation of the column (row) elements of the semi-closed Leontief inverse matrix corresponding to the industry and the mean of the same column (row) elements. If the coefficient of variation of an industry is greater than the average coefficient of variation, production linkages are deemed less evenly dispersed. If the coefficient of variation of an industry is less than the average coefficient of variation, production linkages are deemed more evenly dispersed.

3. Production and Output Distribution Structures of the Iron and Steel Industry A. Production Structure of the Iron and Steel Industry

The production structure of the iron and steel industry refers to the composition of the

production inputs of the industry. In general, production inputs can be divided into intermediate inputs or producer goods and primary inputs. Intermediate inputs or producer goods are goods used to produce other goods. For example, iron and steel are intermediate inputs of the construction industry because the construction industry uses iron and steel to build houses and buildings. Primary inputs can be divided into two, namely labor inputs and capital (physical and financial) inputs.

Intermediate inputs account for about 66 percent of the production structure of the iron and steel industry.55 The major intermediate inputs of the iron and steel industry are as follows: 56

53

In this study, potential multipliers assume that all production inputs, even those that are imported, are domestically produced while actual multipliers account for domestically-produced inputs only. 54

The average output multiplier is the sum of the total output multipliers of all industries divided by the number of industries. 55

This is based on both the official 2000 Philippine input-output table and the non-survey estimate of the 2008 Philippine input-output table. 56

The list comprises about 79 percent of the total value of the intermediate inputs of the iron and steel industry as shown in the input-output table.

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1. Blast furnace, steel making furnace, steel works, and rolling mills 2. Electricity 3. Wholesale and Retail Trade 4. Manufacture of Non-Metallic Mineral Products (not elsewhere classified)57 5. Petroleum Refineries58 About 25.2 percent of the production structure of the iron and steel industry can be

traced to financial capital, 6.3 percent to labor inputs, two percent to physical capital inputs, and about 0.5 percent to other primary inputs. In sum, about 34 percent of the production structure of the iron and steel industry can be attributed to primary inputs.

The production structure of the iron and steel industry is skewed towards intermediate

inputs since at least two-thirds of the total inputs of the industry can be traced to intermediate inputs. This implies that changes in the iron and steel industry brought about by government policy or external factors will affect producers of intermediate inputs more than suppliers of labor and capital inputs. Also, this implies that the iron and steel industry can generate more backward linkages since its demand for intermediate inputs is greater than its demand for primary inputs.

B. Output Distribution Structure

The output distribution structure of the iron and steel industry refers to the industry and

final demand destinations of the industry’s output. The industry destinations of output refer to industries that use the output of the iron and steel industry as production input. The final demand destinations of output pertain to the use of the output of the iron and steel industry by households, firms, government, and even exporters.59

Approximately 88 percent of the output of the iron and steel industry is allocated to

intermediate demand.60 This means that most of the output of the iron and steel industry is used as production input by other industries in the economy. For example, 17.9 percent of the output of the iron and steel industry that is allocated to intermediate demand goes to the manufacture of fabricated metal products while 17.3 percent is distributed to the manufacture, assembly, and repair of office, computing, and accounting machines. The major industry destinations of the iron and steel industry in descending order are as follows:61

1. Manufacture of fabricated metal products except machinery and equipment (17.9%) 2. Manufacture, assembly, and repair of office, computing, and accounting machines

(17.3%)

57

This includes intermediate and final products from mined or quarried non-metallic minerals such as sand, gravel, stone, or clay. 58

In the input-output table, this includes LPG 59

In the input-output framework, the final demand destinations of an industry include personal consumption expenditures (final demand of households), government consumption expenditures (final demand of government), gross fixed capital formation (investment spending), changes in stocks (investment spending), exports, and imports. 60

This was derived from the input-output table as the share of total intermediate demand to total domestic output plus exports. Total domestic output is the sum of total intermediate demand, personal consumption expenditures (final demand of households), government consumption expenditures (final demand of government), gross fixed capital formation (investment spending), and changes in stocks (investment spending). 61

The numbers for each industry/sector is the share of the industry/sector in total intermediate demand for the products of the iron and steel industry.

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3. Manufacture of engines and turbines, except for transport equipment and special industrial machinery and equipment (16.6%)

4. Construction (12.5%) 5. Manufacture of motor vehicle parts and accessories (6.7%) 6. Manufacture of other fabricated wire and cable products except insulated wire (6.6%0 7. Cutlery, hand tools, and general hardware (4.4%) 8. Blast furnace and steel making furnace, steel mills and rolling mills (3.8%) 9. Manufacture of metal containers (3.3%)

A striking feature of the distribution structure of the iron and steel industry is its heavy

dependence on imports. Based on the input-output table, the iron and steel industry is a net importer since its imports far outweigh its exports. Imports of the iron and steel industry are about nine times greater than its exports. Also, imports of the iron and steel industry are around 97 percent of the total output allocated to intermediate demand or distributed to industries. As computed from data contained in the national input-output table, the rate of self-sufficiency of the iron and steel industry is 46 percent in 2000, down from 55 percent in 1994.62

4. Total Output Multiplier of the Iron and Steel Industry A. Total Output Multiplier and Multiplier Effect

1. Global Total Output Multiplier and Multiplier Effect

The global total output multiplier represents the potential output multiplier if all the production inputs of an industry are domestically produced. As seen in Table 1, the global total output multiplier of the iron and steel industry is 3.5. This means that a one-peso increase in

investment spending for the iron and steel industry generates 3.5 pesos of additional output in the economy.63 Hence, a 100 million peso investment in the iron and steel industry results in 350 million pesos of additional output in the economy. Aside from the iron and steel industry itself, the other industries or sectors that are expected to benefit most from the output multiplier effect of the iron and steel industry are as follows:64

1. Blast furnace and steel making furnace, steel works and rolling mills 2. Households 3. Electricity 4. Wholesale and retail trade 5. Petroleum refineries including LPG 6. Crude oil and natural gas 7. Banking 8. Manufacture of other non-metallic mineral products, not elsewhere classified 9. Manufacture of plastic furniture, plastic footwear, and other fabricated plastic

products

62

In the input-output framework, the rate of self-sufficiency is derived using the import coefficient. The import coefficient is the ratio of total Imports to the sum to total intermediate demand, personal consumption expenditures(final demand of households), government consumption expenditures (final demand of government), gross fixed capital formation (investment spending), and changes in stocks (investment spending). 63

Note that this could be a change in any of the final demand components such as consumption spending, government spending, export demand, and import demand. In this study, a change in investment spending was chosen as the impact variable. Regardless of the impact variable used, the total output multiplier effect will remain the same because the same global total output multiplier is used. 64

These industries/sectors are arranged in descending order based on individual output multipliers.

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10. Ownership of dwellings

Table 1. Global Total Output Multiplier and Output Multiplier Effect of the Iron and Steel Industry

A. Global Total Output Multiplier 3.50 B. Assumed Increase in Investment Spending (in pesos) 100,000,000 C. Total Multiplier Effect on the Economy ( A x B ) (in pesos) 350,000,000 D. Industries/Sectors that will benefit most (in pesos)

1. Blast furnace and steel making furnace 28,331,000 2. Households 28,113,000 3. Electricity 23,338,000 4. Wholesale and Retail Trade 18,511,000 5. Petroleum refineries including LPG 11,972,000 6. Crude Oil and Natural Gas 8,289,000 7. Banking 4,789,000 8. Manufacture of other non-metallic products, nec 4,458,000 9. Manufacture of plastic furniture, plastic footwear, etc 3,640,000 10. Ownership of Dwellings 2,251,000

Note: The global total output multiplier is derived from the semi-closed global Leontief inverse matrix, which was based on a non-survey estimate of the 2008 Philippine input-output table. It represents the additional output in the economy generated by a change in final demand. If the assumed change in investment spending is multiplied by the global total output multiplier, one gets the global total output multiplier effect on the economy. The output multiplier effects on individual industries or sectors were derived using the column elements of the semi-closed global Leontief inverse matrix corresponding to the iron and steel industry. The impact variable (change in investment spending) was arbitrarily chosen. The impact variable could be a change in consumption spending, government spending, export demand, and import demand. The abbreviation “nec” stands for “not elsewhere classified”

2. Domestic Total Output Multiplier and Multiplier Effect The domestic total output multiplier takes into account only the domestically-produced

production inputs of the iron and steel industry. The domestic total output multiplier of the iron and steel industry is 2.7, which means that a one-peso increase in investment spending for the

iron and steel industry generates 2.7 pesos of additional domestically-produced output in the economy (see Table 2). A 100 million peso investment in the iron and steel industry results in 270 million pesos of additional domestically-produced output in the economy. The industries or sectors that are expected to benefit most from the output multiplier effect of the iron and steel industry are as follows:65

1. Blast furnace and steel making furnace, steel works and rolling mills 2. Electricity 3. Households 4. Wholesale and retail trade 5. Petroleum refineries including LPG 6. Manufacture of other non-metallic mineral products, not elsewhere classified

65

These industries/sectors are arranged in descending order based on individual output multipliers.

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7. Telecommunications services 8. Banking 9. Real Estate Activities 10. Manufacture of asphalt, lubricants, and miscellaneous products of petroleum and

coal

Table 2. Domestic Total Output Multiplier and Output Multiplier Effect of the Iron and Steel Industry

A. Domestic Total Output Multiplier 2.70 B. Assumed Increase in Investment Spending (in pesos) 100,000,000 C. Total Multiplier Effect on the Economy ( A x B ) (in pesos) 270,000,000 D. Industries/Sectors that will benefit most (in pesos)

1. Blast furnace and steel making furnace 24,563,000 2. Electricity 20,909,000 3. Households 20,754,000 4. Wholesale and Retail Trade 11,615,000 5. Petroleum refineries including LPG 7,595,000 6. Manufacture of other non-metallic products, nec 4,020,000 7. Telecommunications services 3,674,000 8. Banking 2,606,000 9. Real estate activities 2,096,000 10. Manufacture of asphalt, lubricants, and miscellaneous products of

petroleum and coal 1,782,000 ______________________________________________________________________________ Note: The domestic total output multiplier is derived from the semi-closed domestic Leontief inverse matrix, which was based on a non-survey estimate of the 2008 Philippine input-output table. It represents the additional domestic output in the economy generated by a change in final demand. If the assumed change in investment spending is multiplied by the domestic total output multiplier, one gets the total multiplier effect on domestic production in economy. The output multiplier effects on individual industries or sectors were derived using the column elements of the semi-closed domestic Leontief inverse matrix corresponding to the iron and steel industry. The impact variable (change in investment spending) was arbitrarily chosen. The impact variable could be a change in consumption spending, government spending, export demand, and import demand.

3. Comparison of Total Output Multipliers

a) Domestic The total output multipliers of all industries in the economy can be ranked based on their

magnitude or size. The ranking of domestic total output multipliers are ranked to compare the absolute magnitude of domestic output multipliers. The domestic total output multiplier of the iron and steel industry is the sixth highest out of16 industries in the non-survey estimate of the 2008 input-output table (see Table 3).

Table 3. Ranking of Domestic Total Output Multipliers

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17. Manufacturing 3.4 18. Fishing 3.3 19. Agriculture and Forestry 3.2 20. Electricity, Gas, and Water 3.1 21. Hotels and Restaurants 2.75 22. Iron and Steel 2.7 23. Construction 2.63 24. Private Health Services 2.24 25. Transportation, Storage, and Communication 2.2 26. Financial Intermediation 1.95 27. Wholesale and Retail Trade 1.87 28. Other Community, Social, and Personal Services 1.81 29. Real Estate 1.66 30. Nickel Mining 1.26 31. Private Education Services 1.2 32. Mining and Quarrying 1.14

______________________________________________________________________________ Note: The domestic total output multiplier is derived from the semi-closed domestic Leontief inverse matrix, which was based on a non-survey estimate of the 2008 Philippine input-output table. The table has 16 industries or sectors and 1 household sector. The household sector was excluded in the ranking. The domestic total output multiplier represents the additional domestic output in the economy generated by a change in final demand. If the assumed change in investment spending is multiplied by the domestic total output multiplier, one gets the total multiplier effect on domestic production in economy. The output multipliers were derived using the column elements of the semi-closed domestic Leontief inverse matrix.

b) International To facilitate international comparison of output multipliers, the simple output multiplier of

the iron and steel industry was derived.66 Based on the non-survey estimate of the 2008

Philippine input-output table, the simple output multiplier of the iron and steel industry is 2.08. This is higher compared to Algeria (1.76) but lower compared to the USA (2.7), Germany (2.7),

and India (2.4)67

B. Initial, Production-induced, and Consumption-induced Output Multipliers and

Multiplier Effects The total output multiplier of the iron and industry can be decomposed into three

separate multipliers, namely initial output multiplier, production-induced output multiplier, consumption-induced output multiplier effect. The initial output multiplier corresponds to the

66

The simple output multiplier is based on an open Leontief inverse matrix, which is an inverse matrix that does not take into account the influence of households on economic activity. The simple output multiplier was used in the international comparison because studies done for other countries report this type of multiplier instead of the total output multiplier. 67

For the simple output multiplier for Algeria, see MK Eddine (2009),” A Multiliplier and Linkage Analysis: Case of Algeria”. For the simple output multiplier of the USA, see Timothy Considine (2011), “Economic Impacts of the American Steel Industry. For the simple output multiplier of Germany, see Steel Times International (March 8, 2012), “Multiplier Effect of Steel Production”. For the simple output multiplier of India, see Joyashree Roy and Ranjana Mukhopadhyay (1997), “Energy and Infrastructure Needs in India: An Input-Output Analysis. Note that the multipliers for the USA and Germany are for the steel industry while the multiplier for India is for the basic metal industries. The multiplier for Algeria is for the iron and steel industry.

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initial change in spending for the iron and steel industry. It is always equal to 1. The production-induced output multiplier effect refers to the additional output generated by the production of inputs needed by the iron and steel industry. It can be decomposed into two effects: direct production-induced output multiplier effect and indirect production-induced output multiplier effect. Meanwhile, the consumption-induced output multiplier effect refers to the additional output generated by the increase in household income and consumption spending due to greater production in the iron and steel industry.

1. Global

As indicated in Table 4, the global production-induced output multiplier of the iron and

steel industry is 1.6. This means that a one-peso increase in investment spending for the iron

and steel industry results in 1.6 pesos of additional output due to the production of inputs needed by the iron and steel industry and related industries. The direct production-induced output multiplier of the iron and steel industry is 0.82, which means that a one-peso increase in investment spending for the iron and steel industry directly generates 0.82 centavos of additional output due to the production of inputs needed by the iron and steel industry. The indirect production-induced output multiplier of the iron and steel industry is 0.78, which indicates that a one-peso increase in investment spending for the iron and steel industry indirectly generates 0.78 centavos of additional output due to the production of inputs needed by related industries that supply the production inputs of the iron and steel industry.

The consumption-induced output multiplier of the iron and steel industry is 0.9. This

means that a one-peso increase in investment spending for the iron and steel industry generates 0.9 centavos of additional output due to higher household income and consumption spending brought about by greater production in the iron and steel industry.

Table 4. Initial, Production-induced, and Consumption-induced Global Output Multiplier

Effects of the Iron and Steel Industry

Assumed Increase Output In Investment Spending Multiplier (in pesos) Effect (in pesos)

Global Total Output Multiplier 3.50 100,000,000 350,000,000 Initial Output Multiplier 1.00 100,000,000 100,000,000 Production-induced Multiplier 1.60 100,000,000 160,000,000 Direct 0.82 100,000,000 82,000,000 Indirect 0.78 100,000,000 78,000,000

Consumption-induced Multiplier 0.90 100,000,000 90,000,000

Note: The global total output multiplier is the sum of the initial output multiplier, production-induced output multiplier, and consumption-induced output multiplier. Hence, the global total output multiplier effect is the sum of the initial output multiplier effect, production-induced output multiplier effect, and consumption-induced output multiplier effect. The production-induced multiplier is the sum of the direct and indirect production-induced output multipliers. The output

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multiplier effect is derived by multiplying the assumed increased in investment spending by the corresponding output multiplier.

2. Domestic

The domestic production-induced output multiplier of the iron and steel industry is 1.08 (see Table 5). This means that a one-peso increase in investment spending for the iron and steel industry results in 1.08 pesos of additional output due to the production of inputs needed by the iron and steel industry and related industries. The direct production-induced output multiplier of the iron and steel industry is 0.72, which means that a one-peso increase in investment spending for the iron and steel industry directly generates 0.72 centavos of additional output due to the production of inputs needed by the iron and steel industry. The indirect production-induced output multiplier of the iron and steel industry is 0.36, which indicates that a one-peso increase in investment spending for the iron and steel industry indirectly generates 0.36 centavos of additional output due to the production of inputs needed by related industries that supply the production inputs of the iron and steel industry.

The consumption-induced output multiplier of the iron and steel industry is 0.62. This

means that a one-peso increase in investment spending for the iron and steel industry generates 0.62 centavos of additional output due to higher household income and consumption spending brought about by greater production in the iron and steel industry.

Table 5. Initial, Production-induced, and Consumption-induced Domestic Output Multiplier Effects of the Iron and Steel Industry

Assumed Increase Output In Investment Spending Multiplier (in pesos) Effect (in pesos)

Domestic Total Output Multiplier 2.70 100,000,000 270,000,000 Initial Output Multiplier 1.00 100,000,000 100,000,000 Production-induced Multiplier 1.08 100,000,000 108,000,000 Direct 0.72 100,000,000 72,000,000 Indirect 0.36 100,000,000 36,000,000

Consumption-induced Multiplier 0.62 100,000,000 62,000,000

Note: The domestic total output multiplier is the sum of the initial output multiplier, production-induced output multiplier, and consumption-induced output multiplier. Hence, the domestic total output multiplier effect is the sum of the initial output multiplier effect, production-induced output multiplier effect, and consumption-induced output multiplier effect. The production-induced multiplier is the sum of the direct and indirect production-induced output multipliers. The output multiplier effect is derived by multiplying the assumed increased in investment spending by the corresponding output multiplier. 5. Total Household Income Multipliers of the Iron and steel industry

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A. Global The global total household income multiplier of the iron and steel industry is 0.32 (see

Table 6). This means that a one peso change in investment spending in the iron and steel industry results in 0.32 centavos of additional household income in the economy. Hence, a 100 million peso investment in the iron and steel industry is estimated to generate 32 million pesos of additional household income in the economy.

Table 6. Global Total Household Income Multiplier and Multiplier Effect of the Iron and Steel Industry

Total Household Assumed Increase in Multiplier Effect on Income Multiplier Investment Spending Household Income (Global) (in pesos) (in pesos) Iron and Steel 0.32 100,000,000 32,000,000

Note: The global total household income multiplier is the last element in each column of the semi-closed global Leontief inverse matrix. It represents the additional household income generated by a change in consumption spending, investment spending, exports, and imports. The impact variable (change in investment spending) was arbitrarily chosen. The impact variable could be a change in consumption spending, government spending, export demand, and import demand.

B. Domestic As seen in Table 7, the domestic total household income multiplier of the iron and steel

industry is 0.24. This means that a one peso change in investment spending in the iron and steel industry results in 0.24 centavos of additional household income in the economy. Hence, a 100 million peso investment in the iron and steel industry is estimated to generate 24 million pesos of additional household income in the economy. Table 7. Domestic Total Household Income Multiplier and Multiplier Effect of the Iron and

Steel Industry

Total Household Assumed Increase in Multiplier Effect on Income Multiplier Investment Spending Household Income (Domestic) (in pesos) (in pesos) Iron and Steel 0.24 100,000,000 24,000,000

Note: The domestic total household income multiplier is the last element in each column of the semi-closed domestic Leontief inverse matrix. It represents the additional household income generated by a change in consumption spending, investment spending, exports, and imports. The impact variable (change in investment spending) was arbitrarily chosen. The impact variable could be a change in consumption spending, government spending, export demand, and import demand. 6. Employment Multiplier Effects of the Iron and Steel Industry

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A. Global

As previously presented in Table 6, a 100 million peso investment in the iron and steel

industry is estimated to generate 32 million pesos of additional household income in the economy. In terms of employment, a 100 million peso investment in the iron and steel industry is expected to generate at least 155 additional jobs in the economy (see Table 8).68

Table 8. Global Employment Multiplier Effect of the Iron and steel industry

Household Income Effect (100 million peso change in 32,000,000 Investment spending; in pesos)

National Annual Average Compensation (pesos) 205,963

Number of Additional Jobs 155

Note: The global household income multiplier effect is taken from Table 6. The number of additional jobs is derived by dividing the household income multiplier effect by the annual average compensation. Note that the number of additional jobs has been rounded off to the nearest whole number. The annual average compensation was taken from the 2009 Annual Survey of Philippine Business and Industry. B. Domestic

It was shown in Table7 that a 100 million peso investment in the iron and steel industry

is estimated to result in 32 million pesos of additional household income in the economy. In terms of employment, a 100 million peso investment in the iron and steel industry is expected to generate at least 117 additional jobs in the economy (see Table 9).

Table 9. Domestic Employment Multiplier Effect of the Iron and steel industry

Household Income Effect (100 million peso change in 24,000,000 Investment spending; in pesos)

National Annual Average Compensation (pesos) 205,963

Number of Additional Jobs 117

Note: The domestic household income multiplier effect is taken from Table 7. The number of additional jobs is derived by dividing the household income multiplier effect by the annual average compensation. Note that the number of additional jobs has been rounded off to the

68

This was derived by dividing the household income multiplier effect by the national annual average compensation of 205,963 pesos, which was based on the 2009 Annual Survey of Philippine Business and Industry. Note that the 2009 Annual Survey of Philippine Business and industry is the latest issue of the nationwide survey of business enterprises and industries in the Philippines.

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nearest whole number. The annual average compensation was taken from the 2009 Annual Survey of Philippine Business and Industry. 7. Strength and Dispersion of the Production Linkages of the Iron and Steel Industry

The strength of the production linkages of the iron and steel industry can be measured

using backward and forward linkage indexes. An index greater than 1 indicates that the production linkage of the industry is strong, while an index less than 1 indicates that the production linkage of the industry is weak.

The dispersion of the production linkages of the iron and steel industry is measured

using the coefficient of variation. If the coefficient of variation of the industry is less than the average coefficient of variation for the economy, the dispersion of the production linkages is deemed more evenly dispersed. Otherwise, the dispersion of the production linkages is considered less evenly dispersed.

A. Strength and Dispersion of the Global Backward and Forward Linkages of the Iron and Steel Industry The global backward linkage index (power of influence) of the iron and industry is 1.1,

which means that the global backward linkage of the iron and steel industry is strong. Since the iron and steel industry has strong backward linkage, it stimulates the production of inputs by various industries in the economy. Based on data from the input-output table, the major backward linkages of the iron and steel industry are as follows: blast furnace and steel making furnace, steel works, and rolling mills; households; electricity; wholesale and retail trade; petroleum refineries including LPG; crude oil and natural gas; banking; manufacture of other non-metallic mineral products; manufacture of plastic furniture, plastic footwear, and other fabricated plastics; and ownership of dwellings.

The coefficient of variation of the global backward linkages of the iron and steel industry

(2.57) is less than the average coefficient of variation for the whole economy (2.59). Hence, the dispersion of the global backward linkages of the iron and steel industry is more evenly dispersed relative to other industries in the economy. This means that the iron and steel

industry benefits more industries in terms of backward linkages. Based on the strength and dispersion of its backward linkages, the iron and steel industry can be considered a key industry or sector because it has strong and more evenly dispersed backward linkages.

The global forward linkage index (sensitivity of dispersion) of the iron and steel industry

is 1.0, which indicates that the forward linkage of the iron and steel industry is neither strong nor weak. One possible explanation for this is the high import demand of the industry, which is as high as the intermediate demand for iron and steel products in the economy.69

The dispersion of the global forward linkages of the iron and steel industry is less

evenly dispersed relative to other industries in the economy since its coefficient of variation (2.00) is greater than the average coefficient of variation for the whole economy (1.6). The iron and steel industry benefits fewer industries in terms of forward linkages. From the perspective of forward linkages, the iron and steel industry cannot be considered a key industry or sector

69

This is based on data from the input-output table.

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because the strength and dispersion of its domestic forward linkages are weak and less evenly dispersed. This is in part a consequence of the heavy import dependence of the industry.

B. Strength and Dispersion of the Domestic Backward and Forward Linkages of the

Iron and Steel Industry The domestic backward linkage index (power of influence) of the iron and steel industry

is 1.1. Hence, the domestic backward linkage of the iron and steel industry is strong. This means that the iron and steel industry stimulates the production of inputs by more industries in the economy. Based on data from the input-output table, the major domestic backward linkages of the iron and steel industry are as follows: blast furnace and steel making furnace, steel works, and rolling mills; electricity; households; wholesale and retail trade; petroleum refineries including LPG; crude oil and natural gas; manufacture of other non-metallic mineral products; telecommunication services; banking; real estate activities; and manufacture of asphalt, lubricants, and miscellaneous products of petroleum and coal.

The coefficient of variation of the domestic backward linkages of the iron and steel

industry is 2.86, which is less than the average coefficient of variation for the whole economy (2.90). Hence, the dispersion of the domestic backward linkages of the iron and steel industry is more evenly dispersed relative to other industries in the economy. This means that the iron and steel industry benefits more industries in terms of backward linkages. Based on the strength and dispersion of its domestic backward linkages, the iron and steel industry can be considered a key industry or sector because it has strong and more evenly dispersed backward linkages.

The domestic forward linkage index (sensitivity of dispersion) of the iron and steel

industry is 0.29, which indicates that the domestic forward linkage of the iron and steel industry is weak. The iron and steel industry does not strongly stimulate forward linkages in the economy.

The dispersion of the domestic forward linkages of the iron and steel industry is 2.11,

which is greater than the average coefficient of variation for the whole economy (1.81). Hence, the domestic forward linkages of the iron and steel industry are less evenly dispersed relative to the other industries in the economy. The iron and steel industry benefits fewer industries in terms of forward linkages. From the perspective of forward linkages, the iron and steel industry cannot be considered a key industry or sector because the strength and dispersion of its domestic forward linkages are weak and less evenly dispersed. The high import dependence of the iron and steel industry is one reason for the weaker and less evenly dispersed forward linkages of the industry.

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Annex C:

ANALYSIS OF PHILIPPINE COMPARATIVE ADVANTAGE IN IRON AND STEEL PRODUCT EXPORTS

(HS72-73)

In analyzing the comparative advantage of a country in a specific commodity, both the standard (SRCA) and the bilateral (BRCA) comparative advantage indicators are used. The SRCA determines the commodities which a country has a comparative advantage relative to the world, while the BRCA indicator examines the comparative advantage of a country in comparison to another country.70 In this paper, the Philippine comparative advantage in Iron and Steel Products (HS73) through time (2003 vis-à-vis 2011) and across Asian nations will be studied. The relative changes in measures of comparative advantage can be used to keep track of the performance of the Philippines in the global steel market.

Table 1 shows the Philippine standard comparative advantage in iron and steel exports (HS 72 and 73, 4-digit level) with each line’s share in the country’s total exports in 2003 and 2011. It can be observed that there were more iron and steel commodity lines exported in 2003 compared to 2011. The Philippines lost its comparative advantage in scraps, exporting tanks, casks, drums, cans, boxes and similar containers, sewing needles, knitting needles, bodkins and table, kitchen or other household articles. Nevertheless, this change in the steel export structure should not be taken as a major downturn. For one, with less exporting activities in metal scraps, the supply of scrap in the domestic sector, which is used as raw materials by the upstream iron and steel sector is relatively more plentiful. Also, the share of iron and steel commodities (HS 73) export value in the country’s total export only became significant in 2011. In 2003, only three lines have a share in the total export within the range from 0.01-0.02%. 2011 improved to having all the Philippine iron and steel lines with comparative advantage have a share in the total exports of the country within the range of 0.02%- 0.24%.

Table 1

Philippines Steel Exports (HS 72 and 73) with Revealed Comparative Advantage 2003, 2011

2003 2011

Product Code

Product Name

SRCA Value

Share in total

Exports (value)

Product Code

Product Name

SRCA Value

Share in total Exports (value)

7204

Ferrous waste and scrap; remelting scrap ingots or iron or steel

1.09 1.09% 7304

Tubes, pipes and hollow profiles, seamless, of iron ...

1.47 0.12%

70

The Bilateral Revealed Comparative Advantage has a formula of:

where the numerator is the share of commodity k in the total exports of country i to the world while the denominator is the share of commodity k in the total exports of another country, country j, to the world

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7306

Other tubes, pipes and hollow profiles (for exampl...

1.27 0.02% 7306

Other tubes, pipes and hollow profiles (for example..

1.25 0.08%

7307

Tube or pipe fittings (for example, couplings, elb...

1.17 0.01% 7307

Tube or pipe fittings (for example, couplings, elb...

2.95 0.13%

7308

Structures (excluding prefabricated buildings of h...

1.80 0.00% 7318

Screws, bolts, nuts, coach screws, screw hooks, ri...

2.89 0.24%

7310

Tanks, casks, drums, cans, boxes and similar conta...

1.71 0.01% 7325 Other cast articles of iron or steel.

1.12 0.02%

7311

Containers for compressed or liquefied gas, of iron...

1.41 0.00%

7319

Sewing needles, knitting needles, bodkins, crochet...

4.78 0.00%

7323

Table, kitchen or other household articles and par...

1.13 0.00%

7325 Other cast articles of iron or steel.

1.30 0.00%

7326

Other articles of iron or steel.

2.10 0.00%

Source: Tradesift calculation using UN Comtrade data, 2003 and 2011

This is supported by Figures 1 and 2, which show the partner countries where Philippines export iron and steel goods in 2003 and 2011 respectively. In 2003, the highest export value of the iron and steel export of the Philippines to a partner country was $1.28 million. By 2011, the country’s highest iron and steel export value is greater than $12.29 million. Such exports of steel commodities went primarily to five countries namely US, Italy, Germany, Japan and Thailand.

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Figure 1 Importing markets for Articles of iron and steel (HS73) exported by the Philippines in

2003 Source: International Trade Center, Trade map 2011

Figure 2

Importing markets for Articles of Iron and Steel (HS73) exported by the Philippines in 2011

Source: International Trade Center, Trade map 2011

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Nonetheless, relative to its neighboring Asian countries, Philippines exports of iron and steel commodities still pale in comparison to its extent and breadth of its Asian neighbors as reported in Table 2. Table 2 summarizes the iron and steel export structure of eight selected Asian countries: China, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore and Thailand. It specifically gives the total value of the iron and steel exports, total number of iron and steel lines (4-digit) which the country exports to the whole world, the number of iron and steel lines which the country has a comparative advantage relative to the world, and the (3) share in export value of the iron and steel lines with comparative advantage in the country’s total exports. As the data suggests, among the selected Asian countries, only the Philippines exports 24 out of 26 lines of iron and steel to the world. The country does not export the commodities, (1) barbed wire of iron or steel; twisted hoop or single and (2) anchors, grapnels and parts thereof, of iron or steel. The value of its iron and steel exports is also the smallest - only a value worth of $338 thousand compared to the corresponding exports of other Asian countries. Moreover, it has the second lowest number of iron and steel lines with comparative advantage (5 lines) as well as in the share of the commodities with comparative advantage in its total exports (0.59%). China is the highest in terms of lines with revealed comparative advantage (14), which contributes 1.78% in its total exports in value. This is followed by Thailand, which has 12 lines with comparative advantage comprising 1.15% of its total export value.

Table 2

Summary of Iron and steel exports of Selected Asian countries, 2011

Country

Iron and steel Exports Share of SRCA in

Total Exports (Value)

Exports (in US$

thousand) Total lines

Lines with SRCA

China 51,196,168 26 14 1.78%

Indonesia 1,905,828 26 11 0.69%

Japan 14,241,132 26 7 1.30%

Korea 11,690,016 26 9 1.57%

Malaysia 2,956,036 26 4 0.91%

Philippines 338,313 24 5 0.59%

Singapore 2,818,284 26 7 0.35%

Thailand 3,461,019 26 12 1.15% Source: Tradesift calculation using data from UN Comtrade, 2011

It is interesting to note however the case of Japan and Singapore. Both countries have

the same number of iron and steel lines with comparative advantage, but the share of the commodities to the total export value of Japan is higher than in Singapore (1.30% and 0.35% respectively). This may be due to the difference in the demand for the countries’ commodities. For one, Singapore’s iron and steel commodity which has the greatest revealed comparative advantage value is sheet piling of iron or steel, whether or not drilling (code 7301), but this export commodity is not unique for Singapore as shown in Table 3. Indonesia, Korea, Malaysia and Thailand all have comparative advantage in the same commodity. On the other hand, only

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Japan has a comparative advantage in exporting railway or tramway track construction material (code 7302). Due to this, the total export value of iron and steel commodities of Japan fairly exceeds that of Singapore.71

Table 3 Selected Asian Countries’ Iron and steel Commodities (HS73)

with Standard Revealed Comparative Advantage, 2011

Country Iron and steel Commodity with SRCA China 7303 7312 7316 7323

7304 7313 7317 7324

7307 7314 7319

7308 7315 7321

Indonesia 7301 7309 7320

7304 7310 7323

7305 7312

7308 7316

Japan 7302 7318

7304 7319

7305 7320

7315 Korea 7301 7308 7319

7305 7309

7306 7311

7307 7312

Malaysia 7301 7309 7313

7305 7310 7317

7307 7311 7318

7308 7312 7319 Philippines 7304 7325

7306

7307

7318

Singapore 7301 7315

7304 7316

7307 7319

7312 Thailand 7301 7312 7320

7307 7313 7323

7310 7315 7325

7311 7318 7326 SOURCE: Tradesift calculation based on UN Comtrade data 2011

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See Appendix, for the trade map of these countries.

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The comparative advantage of a country can also be examined bilaterally, i.e. relative to

the export performance of another country. Philippine iron and steel commodities with bilateral comparative advantage vary depending on the partner country. Philippines vis-à-vis some selected Asian countries in exporting iron and steel commodities (4-digit) in 2011 is presented in Table 4.

Table 4 Philippines Bilateral Revealed Comparative Advantage

in 4-digit Iron and steel commodity, 2011

Country Phil BRCA in Iron and steel export

Lines Code Description

China 7 7304 Tubes, pipes and hollow profiles, seamless, of iro...

7306 Other tubes, pipes and hollow profiles (for exampl...

7307 Tube or pipe fittings (for example, couplings, elb...

7309 Reservoirs, tanks, vats and similar containers for...

7318 Screws, bolts, nuts, coach screws, screw hooks, ri...


7326 Other articles of iron or steel.

Indonesia 5 7306 Other tubes, pipes and hollow profiles (for exampl...





Japan 8 7306 Other tubes, pipes and hollow profiles (for exampl...


7308 Structures (excluding prefabricated buildings of h...



7323 Table, kitchen or other household articles and par...



Korea 6 7303 Tubes, pipes and hollow profiles, of cast iron.

7304 Tubes, pipes and hollow profiles, seamless, of iro...





Malaysia 5 7304 Tubes, pipes and hollow profiles, seamless, of iro...



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Singapore 5 7306 Other tubes, pipes and hollow profiles (for exampl...





Thailand 5 7304 Tubes, pipes and hollow profiles, seamless, of iro...





SOURCE: Tradeshift calculation based on UN Comtrade data 2011 Generally, the Philippines’ comparative advantage relative to the Asian countries are in

tubes, pipes, screws, bolts, nuts, and other articles and casts of iron and steel. Compared to China nonetheless, aside from the general commodities mentioned, the Philippines shows a bilateral comparative advantage in reservoirs, tanks, vats and similar containers also. Meanwhile relative to Japan, the table, kitchen or other household articles of iron and steel becomes a comparative advantage of the Philippines. Although the Philippines possesses such comparative advantage, the iron and steel imports of the country still exceed its exports to other Asian nations. This can be shown by the net trade index of a country. A positive net trade index means that the reporter country’s exports of a commodity (in this case, Philippines’), is greater than its imports of the commodity from a partner country (Asian country). A negative net trade index, on the other hand, entails that a country’s imports of a commodity are more than its exports of the commodity. A zero net trade index implies that the country neither export nor import the commodity to and from a partner country; while a net trade index equals 100 indicates that a country is only exporting the commodity to the partner country and does not import that commodity at all.

Table 5 reports the net trade index of the Philippines with selected Asian countries. It

shows that that (1) the Philippines exports articles of iron and steel to all the selected Asian countries but (2) it imports the commodity from China, Indonesia, Japan, Korea, Malaysia and Thailand only. Among the seven Asian countries, only the Philippines’ bilateral trade with Singapore has a positive net trade index, which has a value of 100, implying that the Philippine exports certain iron and steel products to Singapore but it does not import such goods from Singapore. It is interesting to note that the Philippines’ biggest gap in its imports and exports of iron and steel commodity is experienced in the country’s bilateral net trade with Malaysia (-95.04), followed by China (-94.23).

Table 5 Net Trade Index of the Philippine Iron and steel commodity, 2011

by selected Asian countries

Net Trade Index Country

100.00 Singapore

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-0.81 Indonesia

-5.54 Thailand

-46.19 Japan

-77.64 Republic of Korea

-94.23 China

-95.04 Malaysia SOURCE: Author’s computation based on UN Comtrade data 2011

Moreover, Philippines is a net importer of iron and steel commodity in general. Table 6 presents the Philippine net trade index in each iron and steel commodity (4-digit). Among the 26 steel commodities, 23 of them have negative net trade index value less than 100, 2 of them have an index equals negative 100 (Code 7313 and 7316), implying that the country purely imports them, while only one has a positive net trade performance of 10. 59 (Code 7307). It is only in the tube or pipe fittings of iron and steel commodity group does the country have a greater export value than its import.

Table 6 Net trade index of the Philippines in Iron and Steel Commodity, 2011

Code Description

Net trade index

7301 Sheet piling, etc of iron/steel -97.98 7302 Rrail, crossing piece, iron/steel -98.75 7303 Tubes, pipes and hollow profiles, of cast iron -94.18 7304 Tubes, pipes and hollow profiles, seamless, or iron or steel -6.45 7305 Tubes&pipe nes, ext diam >406.4mm,of iron &steel -99.94 7306 Tubes, pipes and hollow profiles of iron or steel, nes -4.67 7307 Tube or pipe fittings, of iron or steel 10.59 7308 Structures (rods,angle, plates) of iron & steel nes -88.24 7309 Iron&steel reservoirs,tanks,vats (cap >300l) -48.88 7310 Iron &steel tank,cask,drum can,boxes (cap<=300l) -83.62 7311 Containers for compressed or liquefied gas, of iron or steel -93.08

7312 Iron & steel strandd wire,ropes,cables, etc,not electrically insulated -95.35

7313 Iron & steel wire,barbed,twisted hoop, etc ,for fencing -100.00 7314 Cloth, grill, netting&fencing, of iron & steel wire -98.10 7315 Chain and parts thereof, of iron or steel -98.93 7316 Anchors, grapnels and parts thereof, of iron or steel -100.00 7317 Nails, staples & sim art, iron & steel -98.94 7318 Iron & steel screws,bolts,nuts,coach-screws, etc 39.62 7319 Iron & steel sewing/knitting needle& sim art for hand use -98.93 7320 Springs and leaves for springs, of iron or steel -94.14 7321 Iron & steel stoves,ranges,barbecues &sim non-elec dom app. -99.54 7322 Iron & steel radiators, air heaters&hot air distributors, etc. -98.52 7323 Iron & steel tables & household articles -89.74 7324 Sanitary ware & parts thereof, of iron or steel -99.74 7325 Cast articles of iron or steel nes -25.43 7326 Articles of iron or steel nes -34.46

SOURCE: Author’s computation based on UN Comtrade data 2011

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Final Remarks on HS 73 Comparative Advantage

The Philippines iron and steel exports have improved in 2011 relative to 2003. The country has expanded its exports in HS 73 by 4.05% compared to 2003. Although the country lost comparative advantage in seven iron and steel lines, it does not hurt the country’s export performance. The iron and steel commodities exported in 2011 has a greater significance in the country’s total exports relative to 2003. The share of the iron and steel commodity in the country’s total exports in fact increased by 2.79%. Furthermore, the pressure in the domestic price of metal scraps subsided as the country lost comparative advantage in the commodity.

Nevertheless, the export performance of Philippines in terms of magnitude and revealed

comparative advantage still pale in comparison to a sample of Asian countries. The value of the country’s iron and steel exports to the world is even less than 500 thousand US dollars while the rest of the Asian countries’ iron and steel exports are worth two million US dollars at least. The Philippines is also the only Asian country among the sample which does not export two iron and steel commodities, barbed wire of iron or steel; twisted hoop or single and anchors, grapnels and parts thereof, of iron or steel. Furthermore, the country has the second lowest number of iron and steel lines with comparative advantage among the Asian countries sample. This is may be due to the fact that the Philippines is a net importer of iron and steel commodities in general. As a matter of fact, only the tubes, pipes commodity group (HS 7307) shows a positive net trade position for the country.

In conclusion, as far as the Philippine trade performance in the global iron and steel

market is concerned, there is relative progress. However, compared against its Asian neighbors, the country has a long way to go. . .