POSTSCRIPT / October 12, 2004 / Tuesday


Philippine STAR Columnist

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How high must tariff be for imported iron?

TIRING, FRUSTRATING: These supposed peace talks with separatist Muslim groups could be tiring. And frustrating.

Maybe that is the whole idea — to wear out the government and the rest of the population into accepting the fact of Muslim presence in our multi-tribal society.

Over the weekend, a faction of the Moro Islamic Liberation Front warned their leaders against forging a peace pact with the government, as that would only give birth, they said, to a young group picking up from where the old fogies leave off.

While MILF chief Murad Ebrahim was willing to sign a settlement with government, Nashreen Pangadapun, Maradeka (Liberation) secretary general, said a new front with radical leaders trained in the Middle East is likely to rise from the ashes of Murad.

If that is the case, what is the point in sitting down for peace talks?

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DANGEROUS LIAISON: This is hardly comforting to the non-Muslim residents of Metro Manila.

Even now, after establishing a toehold in Quiapo, Bicutan and other places, Muslims want a mosque erected for them in Greenhills, San Juan, where they have been very visible peddling their consumer wares.

Nashreen’s point reminds us of the birth of the MILF after the Moro National Liberation Front led by Nur Misuari was co-opted by the government.

And while this dangerous liaison was going on, a criminal band called Abu Sayyaf also broke off from the MILF to sow chaos in Sulu and Basilan.

The problem of the dominantly Christian capital is that Muslims have as much right as other Filipinos in settling anywhere in the Philippines. In fact, Manila itself had Muslim sections before the Spaniards came in the 16th Century with sword and cross.

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BALANCING ACT: Is the government killing the steel-making industry? It would seem so to Indian investors who had bought the National Steel Corp. and who now have to contend with low tariffs — as low as zero for some items — on competing imports.

But if tariffs were raised too high, local users of imported iron materials would howl in protest since that would raise their production cost and selling prices.

The government is hard put to strike a balance between the competing interests within the industry.

The Iron and Steel Industry Act (RA 7103) was passed to spur development through the immediate establishment of an integrated iron and steel industry. It provides for such incentives as tax and duty exemption on imported equipment, Official Development Assistance financing, and tax credit on domestic capital equipment.

But the idea is to spread the protection all around, not to pamper one or a few favored sectors.

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MALAYSIAN FAILURE: Before it ceased operation in 1999 under Malaysian investors, the National Steel Corp. dominated the steel-making sector.

It enjoyed an average of 7-percent tariff safeguard compared to the more than 20-percent average before the Malaysians came and took over from the government.

The NSC, btw, is the only firm with tinning lines and hot and cold rolling facilities. It operates a hot rolling facility with 2,000,000-ton capacity, cold rolling facility with 1,000,000-ton capacity, a tinplate mill with 150,000-ton capacity, and a billet plant with 300,000-ton capacity.

But a number of unfavorable factors, including the regional financial crisis of 1997, forced the NSC under the Malaysians to founder.

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NEW INVESTORS: The government made another serious move last year to reopen the NSC to try again to secure a promising future for the local steel industry.

Global Infrastructure Holdings Ltd. (GIHL) won the bidding to reopen NSC. Its Philippine subsidiary, Global Steelworks International Inc., now operates NSC’s assets in Iligan City.

The rehabilitation of NSC facilities has started, with the plant grinding with about 20,000 metric tons of steel initially sold to the domestic market.

On Sept. 4, GIHL sent a trial shipment of 5,600 metric tons of cold-rolled coils worth $3.9 million to China.

But the new investors from India have discovered that sustaining the operations of the industry was another matter. They now feel the need for secured competitive advantage, such as through protective tariff to fight off cheap imports.

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FOREX PROBLEMS: When the Philippines lost the NSC in 1999, that event spawned various problems that included foreign exchange difficulties. Downstream industries using steel products practically became import dependent.

The National Statistics Office reported from 2000 to 2003 that foreign exchange losses amounted to $673.6 million, not to mention the $142.5 million foregone value added from NSC operations.

There is a need to look at the long-term benefits of rational tariff adjustments to both the upstream and the downstream sectors. Helping the upstream sector survive would eventually benefit the downstream sector.

The initial squeeze in margins can be compensated by the reduced cost of doing business — if there is a stable domestic supplier. Reduction in raw material inventory means interest cost savings and lesser handling costs.

The benefits derived will more than offset the higher landed cost of imports resulting from increased tariff.

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ASEAN TARIFFS: Tariff protection is an option for the government for it to strengthen the industry. Countries with successful steel companies such as Japan, South Korea, and Taiwan use the same protectionist measure.

Tariff for steel products has been reduced drastically from 20 percent in the late 1980s to as low as zero percent today. The policy was adopted despite the rampant cases of dumping in the mid-90s, the Asian financial crisis, and the imbalance in world steel supply-demand.

The tariff rate for hot-rolled coil in the Philippines, for example, is only 3 percent, compared with the 20 percent of Indonesia, 50 percent of Malaysia and 10 percent of Thailand. This is under the Most Favored Nation tariff rates.

Cold-rolled coil has a tariff rate of 3 percent compared with 25 percent in Indonesia, 30 percent in Malaysia and 12 percent in Thailand.

Tin plate tariff in the Philippine is zero compared to 15 percent in Indonesia and Malaysia, 20 percent in Thailand and 10 percent in China.

For galvanized iron sheets, while the Philippines imposes 3 percent only, it is 15 percent in Indonesia, 25 percent in Malaysia, 20 percent in Thailand, and 8 percent in China.

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REAPING BENEFITS: Investors point out that an industry given a secured competitive advantage could contribute to a stabilized economy.

In the foreign exchange issue, for example, they said we would no longer be as vulnerable to fluctuations since expenses for local raw material supplies, which could be competitively priced, are peso denominated.

A local supplier gives the downstream users more bargaining power in price negotiations. It provides the rule of competition game. Foreign suppliers game is not transparent if there is no local supplier to provide the necessary checks.

The presence of a domestic manufacturer assures a more reliable supply especially in times of shortages. This lessens the industry’s vulnerability to price fluctuations or manipulations.

The active presence of a local supplier could give downstream players more flexibility to expand their business.

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(First published in the Philippine STAR of October 12, 2004)

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