The Sad Fall of a Philippine Steel Giant

If you want to watch the video, it is below

National Steel Corporation or NSC had once been the pride of Philippine industry. One of the biggest companies in the country, and a rare example of a well-run government owned company.

Over a span of twenty years, the company employed over 4,000 workers at Iligan City.

The Philippines had a head start on almost every other Asian country in building a steel industry. NSC could have been a global giant but a confluence of factors led to its decline and failure by 1999.

In this video, we will look at the rise and fall of a national champion.

Beginnings

Coming out of World War II, the Philippine economy was mostly agricultural and semi-colonial - dominated by foreigners. The country lacked the petroleum reserves its neighbors Indonesia and Malaysia had.

But it does have a lot of metallic minerals: Iron, copper, gold and nickel.

President Carlos Garcia called for an industrialization push to raise the economy's output and enrich its people. The government saw these minerals as the building blocks for a richly industrialized future.

The country's lack of suitable steel facilities meant they had to export their own iron ore to Japan so that they can re-import finished steel. Why not do this at home?

With the establishment of steel and rolling mills, the country can build its own ships, roads, and electric power. Furthermore, a successful steel industry opens the door to speciality alloys and industrial chemicals like sulfuric acid, soda ash, and fertilizers.

Thus to start, the country needed an integrated steel mill of its own.

Making Steel

Let us take a break to familiarize ourselves with the steel industry. The steel industry today produces steel and related steel products using two different methods.

The first method refines iron ore into steel using a vertically integrated process with four steps.

Step one would be sintering. This is where you heat fine iron ore along with fine coal and a variety of other things to create sinter.

Step two would be making pig iron, which is a high-carbon intermediary product between steel and iron.

Step three would be to put the pig iron into a blast furnace with fuel and oxygen to create steel. Modern steel making has a secondary step where dissolved gases are removed and alloys are added so to create a higher-quality steel.

Step four would be to turn the semi-finished steel into bars, sheets, wires, and tubes.

These steps are often all performed in a single facility - an integrated steel mill. And for a long time, that was how the steel industry worked. But over time, a new industry emerged making finished products out of scrap metal.

From Scrap

The second major way to create steel is to start with scrap metal rather than iron. You use mini-mills, or mini-steel plants that generate intense heat using electricity. With this, you can melt down the scrap metal, clean out any impurities, and recast it into new steel products.

It is cheaper to make steel from scrap rather than iron ore because it involves fewer steps. However, the resulting steel is generally considered to be inferior.

So the first mini-mills in the 1950s and 1960s started in the low-margin rebar business, which was all their steel was good for.

Over time however, the mini-mills got better at repurposing their scrap metal. And throughout the 1970s they moved up, eating away at the margins of the old integrated steel mills.

This example of business disruption was made famous by Clayton Christensen.

Building an Industry

In 1950 the Philippine government set up the National Shipyard and Steel Corporation or NASSCO in Iligan City - a government owned corporation.

The company's steel mill turned scrap metal into ingots, bars, steel shapes, and rods - mostly for ships. The logic behind combining the steel and shipbuilding businesses under one roof had been that the Philippines - a nation of islands - needs lots of ships. Why not build those ships at home and gain experience in them for future export?

In 1955, the government granted NASSCO 50 million pesos to set up pig iron plants. Which - when completed - would make it an integrated steel mill. NASSCO would be Asia's second such facility. Only the Japanese would attempt such a thing sooner than the Filipinos.

Privatization

Very quickly however, the country's currency suffered a crisis, affecting NASSCO's plans. The country needed to purchase steel-making equipment from abroad. But without much foreign currency, that means taking out loans.

Throughout his administration, President Garcia advocated for a "Filipino First" policy but also maintained a close relationship to the Americans.

In 1958, he visited the United States and requested a loan.

The United States Export Import Bank offered a $62.4 million loan, provided that the money be only spent on American steel-making equipment. A second requirement would be NASSCO's privatization. The government can retain a 51% share, but 49% had to be sold to a private investor.

The Exim bank apparently insisted on this due to prior "bureaucratic inefficiencies" in past government initiatives. But I have also read that American steel companies insisted on it so to protect themselves.

Thusly the joint venture Iligan Integrated Steel Mills or IISMI was set up with Jacinto Steel winning the bid as the private investor. A few years later in 1962, the Jacintos bought the whole thing.

IISMI

The privatization process took several years and its delays started to cause serious problems. The Jacintos told the government that $62 million would now no longer be enough to build an integrated steel mill. Rather, they had just enough for a cold and hot-rolling mill.

Recognizing the sheer amount of capital required to finish the plant, the government guaranteed the Exim bank loan. The Bank of the Philippines then lent IISMI another 30 million pesos to finish the integrated steel mill.

IISMI struggled to turn a profit throughout its entire existence. The exact reasons why are ... conflicting. One view says that the Jacintos treated IISMI as an ATM, cross-subsidizing the family's other business ventures.

Another view notes that the government failed to sufficiently protect the steel company. IISMI faced domestic competition in its own backyard and received nowhere near the same support that steel companies got in other parts of Asia.

For instance, Japan's government provided raw goods subsidies, bans of imported steel, and voluminous tax incentives for all six of its domestic steel companies.

Anyway, the cold and hot rolling mill was completed some time in 1967 or 1969 - the exact date is not clear. IISMI then asked for another $70 million USD loan to finish the blast furnace by 1972.

Appropriation

But by then it was the 1970s and an era of global oil price shocks led to economic turmoil. In 1970, the peso devalued from 3.50 to 6.50 to a dollar, driving up the prices of imported goods like food and industrial equipment.

The peso devaluation made it difficult for indebted industrialists to service their foreign currency-denominated debts. So they turned to the government for assistance. Whether or not they got it depended on their standing with the President.

At the time, the President was Ferdinand Marcos and he did not favor the Jacinto family. Thus, the Development Bank of the Philippines foreclosed on IISMI's loans and went after their assets.

After martial law was declared in 1972, the military seized those assets and gave them to National Steel Corporation - a Development Bank subsidiary. This process was completed in 1974.

NSC's Glory Years

The government's intention in creating NSC was to stabilize the industry, retain thousands of jobs, and save creditors. So for the first few years of its life, the company was in survival mode - just keeping the lights on.

Banks who lent to bankrupt local steel factories faced potentially game-ending loan losses if the factory's assets aren't taken over by some other entity. Thus, NSC merged with a number of other bankrupt local steel factories, expanding its capacity from 141,000 tons in 1974 to 452,000 tons five years later in 1979.

By then, the company exited survival mode as the country's 11th largest corporation. NSC was the Philippines' leading producer of billets, tinplates, and flat-rolled steel - holding a monopoly over the country's steel industry throughout the next two decades.

NSC's speciality was flat steel products and they were very good at it. Its steel goods were exported to China, Indonesia, and the United States, who preferred NSC's products over domestic competitors despite the cost of sending them abroad on ships.

Iligan City

The company was a generous patron of Iligan City. For instance, throughout the 1990s NSC provided up to 75% of the city's total revenues.

The company also provided ample healthcare and housing benefits to its 4,000 employees. The lowest basic salary was 14,000 pesos a month.

This was at a time when the average hourly wage was something like 9-20 pesos.

Furthermore, there were 10-15% annual salary increases as well as mid-year bonuses, year-end bonuses and sick leave monetization benefits.

NSC employees were "steeltowners" - members of a "high class village". They always hired taxi cabs, were all dressed up, and their women would go out with "many layers on their face" - a reference to the thickness of their applied makeup.

Despite the turmoil of the 1980s, the company and its employees experienced only strike in 22 years. Employee turnover was below 1%. People were proud to be NSC workers.

The 1990s

In the 1980s, trade reforms brought steel product tariffs down to 3%, and cheap imports from Taiwan and South Korea flooded the market.

Despite this, NSC weathered the challenge and was still profitable. In 1983 the company spent 27 billion pesos on system computerization and other upgrades.

NSC did this because the market for its core flat steel products was starting to decline. Going into the 1990s, the company still turned a profit - 538 million pesos in 1991, for instance - but it was trending down.

The flat steel market was being consumed by these cheaper South Korean and Taiwanese steel imports, and the incumbents needed to upgrade. Many were moving into coils.

Company management realized they needed to invest more in order to stay ahead of market trends. Believe it or not, NSC still hadn't yet become a truly vertically integrated steelmaker - it lacked iron and steel making capabilities.

The company needed money to build those facilities. But the government had none to spare - with too much exposure to too many state owned corporations.

President at the time Fidel Ramos publicly mulled that the government "ain't supposed to run a steel company." Thus it looked for a private investor to take over.

Privatization 2

In 1993, the government auctioned off a majority share in NSC. The winner would have to continue and complete NSC's business plans and retain global competitiveness.

The winner was a Malaysian company called Wing Tiek Holdings. The transaction was finalized in 1995 - the year many NSC employees mark as the end of life as they knew it.

The key problem was that while the buyer was indeed from the steel industry, they were foreign steel traders not steel makers. Top management had no idea what they were doing and the government - which still held a 12.5% share - should have seen that from the start.

The CEO didn't even move to the Philippines, commuting to Kuala Lumpur at great cost. They stopped holding planning and update meetings, eroding the trust the company had with its employees.

They switched suppliers to their own trading corporations. In the 4th quarter of 1995, the new management team ordered a massive quantity of raw steel goods at peak prices. This cost the company a great deal of money.

And critically, they clamped down on financial disclosures to banks - opening up windows for fraud. Whether any actually happened is not clear, but the opportunity was there.

Losses skyrocketed. In 1995, the company laid employees off for the first time since 1974. Economically, 1996 was one of the best years in Philippine history. That same year, NSC lost 2 billion pesos - an unprecedented loss.

Asian Financial Crisis

Early in 1997, Wing Tiek sold NSC to another Malaysian trading firm - Hottick Investment Limited. The company was apparently very highly levered - having needed to borrow some $800 million USD in order to close the transaction.

So the Asian Financial Crisis of 1997 was quite inconvenient to their plans. Hottick parachuted in another Malaysian top management team with no idea what they were doing.

The planned upgrades never happened. The upgrades that had been done prior to the 1995 privatization transaction suffered from a lack of maintenance. And meanwhile, cheap imported products continued to flow in from abroad.

The Crisis resulted in another massive devaluation of the peso. NSC's US dollar denominated loans and raw materials became extremely expensive. Creditors and suppliers ended their relationships with NSC. Employees took early retirement buyouts, which stretched coffers yet further.

An attempted intervention by the city failed. So in November 1999 the company ended operations and 1,800 remaining employees lost their jobs. City revenues dropped by 72 million pesos that year.

End

There is a sad coda to this story. In 2004, a group from India organized a new company Global Steel Philippines Inc or GSPI to purchase NSC's plant assets. By now those assets had not done anything in five years, but still had some worth.

It was later uncovered that the Indian investor groups were connected to Mittal Steel of ArcelorMittal. Today, the second largest steel company in the world. So at least the new management team were steelmakers with some legitimate experience.

Despite this, the company failed to take off. The company did produce and ship some flat steel, but far below its total capacity. A chronic lack of funds - GSPI unsuccessfully went back to the national government for additional support - as well as an adversarial relationship with the local community and government led to another closure.

NSC's decline and fall reverberated across Iligan City and its major industries. Losses to supporting businesses were estimated at 1.4 billion pesos a year with local scrap metal collectors, service contractors, and the power utility suffering the heaviest.

Conclusion

Cheap imports caused the downfall of other Philippine industries. Indonesian and Taiwanese cement for instance led to the closure of various domestic cement plants across the country.

But the steel industry was a bit different. While imports did contribute to the decline of the company's original core markets, NSC was still making profits into 1995. Ultimately, the company fell into the hands of an incompetent management team before suffering an unprecedented financial crisis.

From time to time, proposals come out of the woodwork about a potential revival. But none of those have panned out thus far. Today, the 145-hectare plant and its adjacent 600-unit housing complex sits in Iligan City, most recently used as a quarantine center. A reminder of what could have been.