Reviving our steel industry

Last November, I wrote about the rise and fall of the National Steel Corp. (NSC).

For those unaware, the Philippines was the second Asian nation to build a steel manufacturing plant (in Iligan City, Mindanao). It was envisaged to be the basis for the rapid industrialization of the country.

At its peak, the NSC was the 11th largest Philippine enterprise and the first government-owned and controlled corporation to obtain an ISO certification. It competed with foreign imports and, until 1994, secured a 62% domestic market share for flat steel products. It exported 40,000 metric tons of steel annually to China, Indonesia, and the US. Its financial performance was exemplary despite political turmoil in the 1980s and early ’90s. More significantly, the NSC played a vital role in the country’s industrialization. After all, no country can achieve industrialized status without a thriving steel industry as a backbone.

Things went awry when the Ramos government decided to privatize the NSC. The intentions were good — by privatizing the NSC, government would raise much needed cash while relegating NSC’s capex requirements to the acquiring firm. The acquiring firm would infuse new technologies and expertise into the company, thereby enhancing the NSC’s output for which the entire economy would benefit. However, the Ramos government made a disastrous mistake — and that is selling the NSC to the wrong buyer. The buyer was a Malaysian firm called Wing Tiek Holdings (WTH).

The first manifestation of serious trouble came when Wing Tiek appointed an absentee CEO, an ill-qualified COO, and other Malaysian executives of dubious capabilities. The new management team changed existing management systems and operating procedures. It did away with regular weekly coordination meetings, monthly board meetings, quarterly management update meetings, and semestral management planning conferences. These eroded employee commitment to long-revered corporate values and strategic goals. Without well-coordinated management directions, the company was rudderless.

Wing Tiek also imposed a clampdown on regular financial disclosures to banks, thus demolishing institutional relationships developed through many years on the bedrock of transparency and trust.

The Malaysians fired the technical consultancy group who lead NSC to higher heights and replaced them with a designee of one of its stockholders. The new consultancy group provided advise meant to milk the company for whatever it was worth. Raw material purchasing operations were consolidated and relegated to the Marubeni-Westmont Trading Corp. of KL. This diminished the transparency of NSC’s procurement system and opened up opportunities for transfer-price manipulations and funds-siphoning operations.

An unprecedented loss of more than P2 billion was incurred in 1996 – which, ironically, was the best year in Philippine economic performance during the 1990s. The losses of the now privatized NSC continued, cumulatively reaching more than P8 billion prior to its 1999 shutdown.

After an operational lull of almost five years, the Ispat Group of India bought the company from NSC’s creditor banks. Ispat failed to revive the NSC.

Today, NSC’s 145-hectare plant in Iligan city is abandoned, rotting, and infested with squatters. It is a succinct metaphor of the state of Philippine industrialization.

Since writing my article last November, I’ve been in contact with a group called the Men of Steel (MoST). This is a group composed of 13 ex-NSC top management members. These are the men who built NSC and lead it in its heyday. Among them are Rolando S. Narciso, Antonio Arrobio, Roberto Cola, Anthony S. Dizon, Domingo Gotauco, and Jose Negre.

MoST was formed as the technical working group of the Department of Trade and Industry, under the late President Benigno Aquino’s time. They were responsible for crafting the resurgence roadmap of the Philippine steel industry.

Despite President Rodrigo Duterte’s apparent disinterest in a manufacturing resurgence and preference for importing everything from China, the men and women of MoST still believe that the local steel industry can be revived using the existing Iligan facility. It can still be an important export earner and backbone for industrial products, “Made in the Philippines.”

The following are some of MoST’s recommendations:

First of all, the ownership and management of the Iligan plant must be sorted out.

The ownership of the former NSC and its assets has long been transferred by government to the private sector. At present, the lligan plant is owned by GSPI, a private-sector corporation which is directly indebted to a group of Philippine banks, duly secured by mortgages. Hence, the responsibility to protect and preserve NSC’s assets falls on GSPI’s shoulders.

However, if no decisive action is taken by GSPI to free up the assets for re-development, then the lligan LGU must step in because its huge tax receivable is in jeopardy.

Unfortunately, a government take-over by NSC is premature at this time. It could be misconstrued as a government bail-out of an undeserving investors and creditors who, in the first place, mishandled the whole thing. Should this prospective take-over be deemed a bail-out, then it can evolve into a possible graft case.

Appropriate government intervention is through though the Department of Finance (DoF). The DoF has protocols relating to the protection of the state’s financial exposures in private institutions and securing government’s share of uncollected property taxes secured by mortgages.

With ownership issues sorted out, the government will do well to revive the Presidential Iron and Steel Committee (PISC). This is because the strategic importance and complexity of developing the steel industry is too big for any single government agency to take on. It requires extensive inter-agency coordination at the highest levels of the state.

The next step would be to amend the Iron and Steel Industry Act (RA 7103) to attune it to today’s economic realities and to legally enable the PISC to make policy decisions. There is wisdom to tapping the National Development Corp. (NDC) to act as the action arm of the PISC.

New studies must be commissioned on the best way to leverage NSC’s existing assets toward building a competitive flat steel plant whilst addressing supply chain gaps. Fundamentally, the government must decide whether to rehabilitate, augment, and upgrade the steel mills, or build a new hot mill, cold mill, tinplate line, and, possibly, a galvanizing line. At this point, a strategic partner who can provide technology and financial muscle can be considered too.

Setting up a seasoned management team would be the next step.

The Marcos-lead economic team must realize that being a consumer lead economy, one which is perilously import dependent, is unsustainable. The economy must be re-calibrated with stronger production and manufacturing capabilities. A thriving steel industry is fundamental to this.

There is much to do to revive our steel industry and the men and women of MoST are ready and willing to contribute their wealth of experiencing towards this end. We hope that the Marcos administration takes heed and leverages the collective talent of MoST.

Belated Merry Christmas to all!