This is the sad state of product standards in the Philippines: three in every five hardware stores sell substandard steel bars to unsuspecting buyers.

And industry experts believe these were produced from steel-making equipment dumped from the People’s Republic of China.

As early as January of last year, the government was informed about induction furnaces being shipped to the Philippines from China. Beijing’s decision in 2017 to ban the use of induction for steelmaking left owners with no choice but to export their equipment to neighboring countries, particularly to Southeast Asian economies.

In a letter to Environment Secretary Roy A. Cimatu dated January 30, 2018, the Philippine Iron and Steel Institute (Pisi) sought a blanket ban on the import of induction furnaces from China. Small-scale steel makers allegedly use such equipment to produce construction-grade steel.

The Pisi argued that induction furnaces should be used for what they are originally intended for. The group appealed with Cimatu to ensure that induction furnaces in the country are utilized only for the manufacture of cast products, ferroalloys with specific properties and stainless steel.

Nearly two years later, Pisi never got either of its requests.

Exchanging a problem

IT’S not even a question for Pisi President Roberto M. Cola: induction furnaces should never be used for steelmaking. He said there’s a reason the Chinese government in 2017 directed steel makers to dismantle their induction furnaces, or else authorities will do it for them.

Induction furnace steel—in China called ditiaogang, or ground steel—is made by melting scrap metal in induction furnace facilities. Thus, the manufacturer has no effective control over the composition and quality of the product and, therefore, poses harm to buyers when passed off as standard-compliant.

As part of the nationwide crackdown, Beijing prohibited the sale of scrap to induction furnace operators to deprive them of their raw material for production.

Banks were then tasked to stop issuing loans to several steel manufacturers. These lenders were ordered instead to fund the operations of those conforming to state regulations.

By the end of the first half of 2017, the Chinese government was able to shut down capacity of roughly 120 million metric tons (MMT) per year of induction furnaces operated by more than 600 steel makers across China.

Upon power off, China virtually ended its problem with substandard steel bars. That’s when it also passed on the problem to Association of Southeast Asian Nations (Asean) member-states, including and especially the Philippines.

Less costly?

COLA told the BusinessMirror that “when induction furnaces got banned in China, what happened is, the induction furnaces were transported to Asean.”

“It flooded the Philippines, Vietnam, Thailand, Indonesia, Malaysia and Burma [Myanmar]. That’s the phenomenon today,” he explained. “Instead of exporting the product, what China is now exporting is the equipment. That’s the problem now.”

Small-scale steel makers, mostly based in the provinces, import these induction furnaces from China, as they are cheaper to buy and to operate compared to electric arc furnace, Cola said. Industry sources from both the government and the private sector also confirmed that buying a brand-new induction is less costly than investing in electric arc.

Cola estimated that savings could go as high as 10 percent. This means the required investment for induction furnace is just $90 per ton compared to the electric arc’s $100 per ton.

However, there’s an anomaly. Induction furnaces from China should be a lot cheaper than that since they were used beforehand and for a long time before the ban, the Pisi chief argued.

“The problem here is you are comparing the new against the scrap. Most of those from China are scrap value,” Cola told the BusinessMirror. “If you are to buy a brand-new induction furnace with same capacity and then same specification of an [electric arc] equipment, I think the induction furnace is priced nearly the same.”

Impurities of scrap

For Cola, the problem with induction furnace is that it’s designed to produce cast products and not construction-grade steel. As such, the equipment has no refining mechanism that removes the impurities, particularly phosphorus and sulfur, of scrap metal.

“Scrap has impurities, especially phosphorus and sulfur. It makes the steel brittle. Phosphorus brittles the steel and sulfur produces crack injury that’s why they must be controlled,” Cola explained. “Induction furnace can never do that. That’s its problem, and that’s the reason the quality [of its output] is inconsistent.”

On the other hand, electric arc furnace, which large-scale steel makers use, has the capacity to take out impurities during the refining process. The equipment even allows the manufacturer to add certain elements to the scrap to return it into its original composition, explained Ronald C. Magsajo, chairman of the statistics committee of Pisi.

“In electric arc, there is a refining process while you melt the scrap that removes its impurities,” Magsajo told the BusinessMirror. “You can take out impurities or add certain elements to bring it back to its original composition. Induction furnace has no refining process.”

Steel bars processed in electric arc furnaces usually land in corporate projects, such as high-rise buildings and condominiums, and in public infrastructure, according to Pisi officials. However—and unfortunately for the buying public—those manufactured from induction furnaces almost always end up in hardware stores.

Jumping imports

DURING the Duterte administration, the country became the 17th-largest steel importer across the globe.

According to the Global Steel Trade Monitor, Manila’s steel imports last year jumped 1 MMT to 9.1 MMT, of which nearly half came from China at 4.3 MMT. Imports from Russia came far second with 1.7 MMT to lead Japan with 726,000 MT, Vietnam with 387,000 MT and Taiwan with 383,000 MT.

The monitor also reported the country’s steel consumption in 2016—the year Duterte assumed office—doubled to 9.1 MMT, from 4.2 MMT in 2015, while imports rose over 153 percent to 8.1 MMT, from 3.2 MMT.

A year later, consumption went up to 9.5 MMT, but imports stayed at 8.1 MMT. The deficit was filled in by domestic production that picked up to 1.4 MMT in 2017 from 1.1 MMT in 2016.

“Production in 2017—the latest year for which data is available—increased 27 percent to 1.4 million metric tons from 1.1 million metric tons in 2016. Apparent consumption—a measure of steel demand—has increasingly outpaced production since 2009. The gap between demand and production remained relatively stable between 2009 and 2013, but widened rapidly since 2014 to reach -8.1 million metric tons in 2017,” the monitor read.

Aquino to Duterte

DEMAND is expected to keep on growing until 2022 as government economists decided in October to expand the list of flagship projects under the “Build, Build, Build” program from 75 originally to a hundred.

For the first half of the Duterte administration, the Philippines imported a total of 23.58 MMT of iron and steel, of which more than one-third, or 8.45 MMT, was brought in last year, according to data from the Philippine Statistics Authority (PSA).

Under Duterte, the country is purchasing iron and steel products from abroad five times faster than it did under the previous leadership. For the first three years of the Aquino administration, the Philippines imported 4.72 MMT of iron and steel based on PSA data.

This is what induction furnace operators are taking advantage of under Duterte: the heightened demand for steel, particularly for reinforcing bar, shortly known as rebar.

Rebar is the most commonly used steel product in the construction industry, as its function is to produce tension in concrete to help hold it in a compressed state. Reinforced concrete gives structures—infrastructure, buildings, houses, among others—the necessary integrity mandated under laws on product standards and consumer welfare, as well as building codes.

Late realization

INDUSTRY data gathered by the BusinessMirror showed the country’s steel consumption last year reached an all-time high 10.35 MMT, of which nearly 44 percent, or 4.52 MMT, was rebar.

Pisi’s Cola said buyers of steel bars are roughly divided into two sections: the corporate market and the reseller market. As such, of the 4.52 MMT of rebar distributed to the public last year, an estimated 2.26 MMT went to private-sector buyers contracted to do corporate projects, while the other half ended up in hardware stores selling to consumers.

“The problem lies in the reseller market because this is where direct selling to consumers takes place. You can never do testing here. It’s a technical problem, difficult to distinguish [the standard compliant with substandard],” Cola explained. “In the corporate market, every truck of delivery is tested and sampled. There is no way substandard steel can slip through here.”

Buyers, especially those in the regions, could be purchasing from their trusted hardware stores underweight or undersized rebars without them knowing it. And as tragic as it may sound, Cola warned the only time they will know that the steel bar was substandard is when it’s too late.

Own monitoring

LAST year Pisi officials traveled around the archipelago to conduct their own monitoring of the market. In its test-buy operations, the group tapped selected people to pose as unsuspecting customers purchasing rebar for, say, the construction of their house.

The rebar samples collected from the nationwide test buy were then brought to the Department of Science and Technology’s Metals Industry Research and Development Center (MIRDC) for quality and safety evaluation.

Magsajo, Pisi’s statistics chief, disclosed that rebars from 41 of the 63 hardware stores covered by the monitoring activity failed to pass required standards based on the MIRDC’s findings. Most of the substandard rebars were either underweight or undersized, while some failed to meet minimum requirements in terms of tensile strength, elongation and lug height.

“We conducted test buys in 2018. Randomly, we go to a store, purchase a rebar, then bring it to the MIRDC for testing. We have it tested straight up. We found out that around 60 percent of the stores at that time sell substandard rebars. [The results of] these test buys were submitted to the DTI [Department of Trade and Industry] under Undersecretary Castelo because the Consumer Protection Group is under her jurisdiction,” Cola said.

In documents shared with the BusinessMirror, the Pisi wrote at least five letters to the DTI between December of last year and August of this year. In those letters, the group reported the sale of substandard rebars in La Union, Ilocos Sur, Ilocos Norte, Cagayan, Nueva Ecija, Tarlac, Bataan, Zambales, Pangasinan, Mindoro, Batangas, Laguna, Cavite, Cagayan de Oro, Lanao del Norte, Agusan del Norte, Davao, Cotabato and Zamboanga.

Various mechanisms

TRADE Undersecretary Ruth B. Castelo confirmed there is a proliferation of substandard rebars in the reseller market, but said the Fair Trade Enforcement Bureau (FTEB)—an attached agency of the DTI—is a step ahead in hunting down their retailers.

For the first half of this year alone, the FTEB destroyed a total of 57,250 pieces of substandard steel products, valued at roughly P6.46 million, according to data obtained by the BusinessMirror. As such, its first-semester confiscation already topped its combined capture from 2016 to 2018 of 3,543 pieces of noncompliant steel, amounting close to P500,000.

“There is always a possibility that some importers or manufacturers will attempt to manufacture and/or import substandard steel products to save costs. However, DTI has mechanism in place to prevent such problems,” Castelo said in an interview with the BusinessMirror. “Proliferation of substandard construction materials is being prevented through the regular enforcement and monitoring activities conducted by DTI-FTEB.”

As to the manufacturing side, Castelo said the DTI’s Bureau of Philippine Standards (BPS) has been conducting surprise audits of steel plants around the archipelago. Since 2016, the agency tasked to issue Philippine Standard (PS) licenses to manufacturers was able to audit the mills of 13 PS licensees for steel bars, three of which were recommended for cancellation on stopped production or nonproduction of the specific product.

Last year the BPS also suspended the PS license—and, therefore, the right to operate—of Wan Chiong Steel Corp. after it found the Pampanga-based firm of producing deformed rebars. The steel maker had to put up its steel products for quality and safety testing at least thrice—failing to pass on the first two tests—before it retrieved its PS license in May, according to Castelo. Its substandard steel bars were destroyed in June.

Expert opinion

PISI officials have nothing against the DTI’s ongoing crackdown on manufacturers and resellers of substandard rebars. They just think it’s futile.

“The best way of course is to ban [induction furnaces],” Magsajo put bluntly. “The DTI is tasked to watch over the reseller market, and it should be strict in that area. The corporate players can guard themselves on their own, but the buying public cannot. To be fair [with the DTI], it has a lot of products to monitor. Some products may be bumped off for the other, but the agency has to at least be consistent.”

According to Cola, almost 80 percent of the steel products that failed to comply with required standards based on MIRDC’s findings were produced from induction furnaces. He said the PS license of these substandard rebars showed they were manufactured by small-scale steel firms infamous for operating induction furnace facilities, which China banned in 2017.

“The rebar, as a mandatory product, you have to get a license to manufacture. For you to get a license, you need to have a unique logo in your bar, which you register. When a steel product encounters a problem, when the structure it built collapses, the manufacturer can be identified. We knew [these substandard rebars] were made from induction furnaces based on their logo,” the Pisi chief explained.

However, only China is on the Pisi’s side in its appeal to prohibit the use of induction for steelmaking. Expert opinion, both from the government and the private sector, points the substandard problem to the process, not the equipment.

SteelAsia, UK Cares

COLA and Magsajo are both executives of SteelAsia Manufacturing Corp., the country’s largest steel maker that has an annual production capacity of 2.1 MMT of rebar.

SteelAsia is the first and lone steel manufacturer in the Philippines certified to conform with the standards set by the United Kingdom Certification Authority for Reinforcing Steels (UK Cares). Steel makers certified by UK Cares can export steel bars to the UK and former British colonies without being required to undergo their products in quality and safety assessment, Cola said in explaining what the certification provides.

However, in a statement sent to the BusinessMirror, UK Cares itself said it assesses all forms of steel-production processes—whether that be electric arc or induction—in terms of quality and regulatory standards, determining in the certification the performance of the output rebar and what it can offer to the construction supply chain.

In an e-mail, UK Cares said: “The Cares assurance process is a proven, independent means of assessing product taking into account a wide range of factors. Cares certification is only issued to reinforcing steel products which have met these standards and have been inspected by our expert auditors.”

“Regardless of the process involved in product manufacture, it is vital that the assurance of steel products entering the market is carried out independently in this way, as Cares assurance delivers vital confidence to specifiers and consultants procuring these materials for their projects,” the Kent-based certification body added.

Method of production

THE question stands: will the government grant Pisi’s appeal and prohibit the use of induction furnace for steelmaking? No, not yet.

“There is none yet [final policy on induction furnace] because the method of production is not looked into until recently when we received the Asean directive encouraging governments to ban the use of induction furnaces,” Castelo said. “We also see manufacturing plants with brand-new induction furnaces that they purchased from China. There is no prohibition against the use of induction furnaces as of this time.”

The BusinessMirror learned the DTI and the Department of Environment and Natural Resources (DENR) had a meeting on September 11. During the meeting, the two offices agreed on seven deliverables geared toward formulating the government’s policies for tighter environmental and product standards in steelmaking.

The DTI and the DENR agreed, among others, to undertake up to 60 days of surveillance and study of local and imported billets and steel products from induction and electric arc.

The two offices also decided to arrange visits for their high-ranking officials to steel plants that make use of electric arc furnaces and induction furnaces, inviting also the environment and trade chiefs. Further, there will be demo sessions of steel-making practices wherein BPS auditors will observe to learn which are critical to see during audit.

Actual vs underdeclaration

IF there’s any hope for Pisi and electric arc furnace operators, it’s that two high-ranking officials of the DTI are in favor of banning the use of induction furnaces for steelmaking.

One of the trade officials saw the condition of workers inside induction furnace facilities—it’s a sweatshop in these factories. The trade official bared that workers there don’t wear protective gear in spite of extreme exposure to scrap metal, combustion and mixed chemicals.

The other trade official described the induction process as “garbage in, garbage out,” wherein the quality of the scrap is carried over in the output steel bar since the furnace has no refining mechanism. As such, this trade official said it’s just right to ban the use of induction furnaces for steelmaking. If the government allows such technology to flourish, the trade official argued it is complicit in putting people’s lives at risk.

In July the Board of Investments (BOI) rejected the application of Philippine Sanjia-Steel Corp., operating in Misamis Oriental, to become a new domestic producer of steel bar using coreless electric furnace smelting technology. The BOI denied the steel maker’s registration on numerous concerns, one of which is the industry’s report that banned induction furnaces from China are being shipped to Southeast Asian economies.

The BusinessMirror also learned the applicant declared a yearly production capacity of 27,000 MT in obtaining its environmental compliance certificate (ECC). However, its actual production capacity is 300,000 MT every year. Apparently, the firm underdeclared its capacity in order to secure its ECC from the regional and not the national office of the DENR, where requirements are more difficult to secure.

Unsuspecting buyers

THE Pisi has so far tested rebar samples from 164 hardware stores across the country this year. Of this total, nearly 38 percent, or 62 retailers, were found selling substandard rebars.

The Pisi found one sample of an underweight 16-mm steel bar, manufactured by a Valenzuela-based firm, in a hardware store in earthquake-prone Baguio City. A 16-mm steel bar of 6 meters of length should weigh roughly 9.48 kilograms. However, the product bought from the Baguio City retailer was lacking nearly 1 kilo in weight. This means the product is substandard.

According to Cola, the Valenzuela-based firm is among the several induction furnace operators whose factories are situated in Central Luzon and within the periphery of Metro Manila. Bulk of the output of these induction furnaces are delivered to hardware stores in the regions, going as far north as the Cordilleras, and are sold to unsuspecting buyers, he added.

Cola emphasized that what Pisi is asking from the government is a blanket ban on the use of induction furnaces for steelmaking, but still allowing them to be utilized for what they were originally made for.

Until a definite policy is issued on the use of induction furnaces, a tragedy may just be waiting to happen for millions of people all along believing structures they live in or visit were built using quality materials.

Cola appeared to hate that he has to say this: “At least China was right on this one.”