Vertical integration: Do it all

The problem with too much of Philippine industry is that there’s too little local value added.

In electronics, for instance, of the $23 billion exported last year some $14 billion was spent on imported components that could have been produced here but aren’t for a variety of reasons.

Back in his time Marcos recognized this and introduced the 11 major industrial projects (MIPs), one of which was copper. At the time Atlas Consolidated was among the world’s largest copper mines (the largest in Asia), but its concentrate was being shipped directly offshore and much of the potential gain to the Philippine economy was lost. So he ordered that a copper smelter be built, and it was. And for some 30 years or so it has been operating successfully, but not currently sourcing its raw material (copper concentrate) from local mines. As the volumes are not there, it imports concentrate.

The copper ingots produced are shipped to the London Metal Exchange warehouse, to be sold for processing into rods, bars, and ingots. Some of that is then shipped back to the Philippines for the manufacture of copper wire and cable. A link in the chain is missing; revenue is lost to others. So the Board of Investments commissioned the Wallace Business Forum to research the feasibility and viability of putting up a plant to produce copper wire rod, and look at the possibility of further downstream integration with the automotive, household, and other industries. This we have done, and now we are delving into the practical issues to make copper rod production a reality.

If it works and the government recognizes that mining is good for a country, and encourages it again, then we may have an almost complete chain. The final link is to attract more (we have some, but not enough) end-use manufacturers, washing machines and refrigerators, motor cars and ships, and the many other products that use copper.

A nice side benefit of the smelter is that it secretes sulfuric acid as a byproduct in the manufacture. So a fertilizer plant was put up next to the copper smelter of the Philippine Associated Smelting and Refining Corp. (Pasar), as fertilizer uses the acid as a raw material.

It goes further. A smelter has about 60 percent of its cost in power. Electricity, as you well know, is expensive. So Pasar will put up its own plant, and as the most economical size is larger than Pasar’s need, it will supply the excess to the Visayas grid, addressing the current worry of shortages.

And if the copper rod plant is put up there, an export zone can be created and users of rod can be enticed to locate there, too, providing jobs where they are needed in the countryside—a full community of copper freaks. It’s an ambitious concept, but ambition is what drives progress in the world. It can be done.

The other MIPs conceived by Marcos were: an aluminum smelter; diesel engine manufacturing; cement industry expansion; coconut industry rationalization; an integrated pulp and paper mill and a petrochemical complex; heavy engineering industries and an integrated steel project; and alcogas.

The only two that got anywhere are the cement and alcogas projects, and both successfully. The others got derailed for various reasons.

The coconut industry was seized by Cojuangco, who used coconut levy funds to buy the United Coconut Planters Bank a controlling stake in San Miguel Corp. The Supreme Court has ruled that the stake is owned by coconut farmers. It will now be turned over to the National Treasury on behalf of the millions of coconut farmers and be used for projects in developing the coconut industry.

A pulp and paper mill needs wood. Greedy, unscrupulous loggers in complicity with local governments have decimated the forests. There’s no wood left, so you can forget this one, and anyway the world is going soft, hard copies of anything are rapidly disappearing.

An aluminum smelter needs aluminum. The only local source is in Samar. To meet needed volumes bauxite will have to come from Australia. The numbers no longer add up.

Meanwhile, the petrochemical project is finally taking off after being derailed by a Supreme Court decision in the early 1990s. The vision is to have a fully integrated petrochemical industry, from oil refinery to naphtha cracker to well-diversified downstream production, in about a decade. Strong domestic demand and the opening up of the larger Asean market will create the opportunity for the petrochemical industry to move forward.

Integrated industries still make sense and the Department of Trade  and Industry is reviewing them with “Roadmaps,” some 50 of them. Not all cover the full line from start to finish; some are just those where potential advantage is seen that can be developed. And it’s a good idea. But what the Philippine government has never been short of is ideas; what it has been very short of is the ability to convert these ideas into working reality.

I’m willing to withhold judgment this time, but with considerable skepticism. Already the DTI has said it can’t proceed with further studies because it has no funds. Here we are talking of concepts that could add billions of dollars to the Philippine economy, and we’re quibbling over spending a million or two.

That doesn’t encourage confidence that now will be any different. You don’t make money without spending money.

So will the DTI put full support behind these projects and support them all the way until fruition? You tell me.