After more than 20 years of integration, the trade relationship between the United States and Mexicos steel and scrap industries faces unprecedented uncertainty.
Making good on campaign promises, President-elect Donald Trump has nominated as commerce secretary a staunch opponent of free trade pacts such as the North American Free Trade Agreement (Nafta). Nominee Wilbur Ross, a billionaire investor with experience salvaging struggling steel firms, has vowed to embark on a Nafta overhaul on day one of his tenure. That leaves numerous questions for a heavily entangled U.S.-Mexico steel relationship.
The debate over Nafta, which ostensibly created a large marketplace between the United States, Mexico and Canada, has raged among economists and politicians since before its 1994 approval, but signs point to a relatively beneficial relationship for the steel trade between the U.S. and its southern neighbor.
U.S. Commerce Department figures showed the U.S. exported 12.4 percent of its ferrous scrap to Mexico through August of 2016. The American Institute for International Steel has pegged U.S. steel exports to Mexico at 35 percent for the year, but Septembers figure stood at 40.8 and totaled 38.4 percent for all of 2015, the last year full figures are available.
On the flipside, Mexico accounts for about 9 percent of all U.S. steel imports, according to the International Trade Administration, quoting figures from IHS Global Insights, an analysis firm. In all, 68 percent of Mexicos steel exports head to the United States, as do 62 percent of Canadas exports, according to the figures.
AMMs 22nd Annual Mexican Steel Forum is scheduled for Feb. 1-3 in Cancun. Topics to be discussed include anti-dumping and countervailing duties introduced by the Mexican government on certain steel products; an examination of the implications of Mexicos energy reforms and the oil and gas price crash; and panel discussions focusing on scrap steel, service centers, logistics and distribution.
The quality of steel is also a consideration, according to one consultant, who noted that Mexico gets 35 to 40 percent of its high-quality coil sheet steel from the U.S. Another 10 to 15 percent comes from Mexican plants, with the remaining 50 percent coming from Japan, South Korea, Germany and China.
The U.S. has benefited with a large trade surplus and high-quality coil going into Mexico, according to Christopher Plummer, managing director of West Chester, Pa.-based consulting firm Metal Strategies Inc.
A burgeoning auto industry is among factors driving that surplus, Plummer said. He noted that overseas carmakers are making inroads by setting up their own steel operations to supply their Mexico-based auto lines. That has led to a flattening of U.S. imports.
The competition is growing fierce. Plummer cited several aggressive efforts such as South Korea-based Posco Ltd., which opened a 450-ton, $300-million auto hot-dipped galvanized (HDG) line in 2009 and added a second line with the same capacity in 2013. Posco started in Mexico with a 170-ton service/processing center in 2005 and now operates five such centers of varied capacity.
He further noted that Tenigal, a joint venture between Japanese steelmaker Nippon Steel & Sumitomo Metal Corp. and Latin American steel group Ternium Mexico SA de CV announced a new HDG line in April, bringing its Mexico total to 830,000 tons of capacity by 2019, as well as Altos Hornos de Mexico SAB de CV (Ahmsa) upgrading its existing capacity with a $442-million project.
Charlotte, N.C.-based Nucor Corp. also plans a $270-million automotive galvanizing line in Mexico to capitalize on Mexicos expanding automobile production, Nucor executive vice president of merchant and rebar products James R. Darsey said, adding that there are no urgent or significant threats to that joint venture with Tokyo-based JFE Steel Corp. from political efforts to overhaul or scrap Nafta.
Although Nissan was the biggest carmaker in Mexico in 2015, General Motors Co. ran second, and GM, FCA US LLC. and Ford Motor Co. accounted for 47.5 percent of the total vehicle output in Mexico with 1.6 million cars and trucks, Plummer said. They (U.S. automakers) have significant investments down there.
On the other hand, Nafta and the active trade region can sometimes be a mixed bag for the Washington-based Steel Manufacturers Association (SMA), which represents U.S. mini-mills, president Phillip K. Bell said at an Oct. 27 news conference during the SMAs interim board meeting in Chicago. The longstanding deal, in place for more than two decades, has done some good in integrating North American steel and manufacturing supply chains.
After the November election, SMA issued a formal statement on the matter: Over the years, Nafta has had its pluses and minuses. Overall, the net effect of Nafta is probably best viewed as slightly positive. We welcome a review of trade agreements to help ensure that they are fair to American workers and companies. Any review of Nafta should be careful and methodical in that Canada and Mexico are our largest steel trading partners and we have built integrated supply chains over the last 20 years with these countries.
Exactly how the Trump administration will tackle the issue remains to be seen. A September position paper Commerce Secretary nominee Ross co-authored for the Trump campaign took aim at renegotiating Nafta, stating, To date, the U.S. has lost over 850,000 jobs and its trade deficit with Mexico has soared from virtually zero to roughly $60 billion.
The paper says, Mexico has shrewdly exploited the (value-added tax) backdoor tariff to further its competitive advantage, raising the tax to 16 percent since Naftas passage. This discourages U.S. exports to Mexico, encourages U.S. manufacturers to offshore to Mexico, and has helped to increase our annual trade deficit in goods with Mexico from nearly zero in 1993 to about $60 billion.
This is yet another case in which Corporate America wins, but Mr. and Ms. America lose.
Needless to say, Naftas impact remains in dispute.
Jeff Schott, senior fellow at the Washington-based Peterson Institute for International Economics suggests that steel industry challenges stem from larger forces, especially, lower international steel prices. First things first: What is the problem?
Several industry groups agree the problem is overseas steel imports.
In its official 2016 public policy agenda issued in February, the American Iron and Steel Institutes states: The United States must make more aggressive diplomatic efforts and work with our partners in Nafta and the European Union to ensure a united front and challenge Chinese trade and industrial policy. AISI urges increased vigilance with respect to Chinese export trends and developments in China that are driving them. AISI is also concerned that a number of other countries are implementing their own state-owned capitalist models, including Vietnam, Malaysia, and others.
In a September report on the Nafta steel industry from the Organization for Economic Co-operation and Development Steel Committee Meeting in Paris, the group cites the impact of overseas competition, noting, Since January 2015, employment in the steel industry in the U.S. has declined by 14,500 workers, and, Recent negative impacts of the global steel overcapacity to the Mexican steel sector include a 10-percent decline in employment over the past year, and capacity utilization remains well below 70 percent in 2015-16.
The report concludes that North American steel producers continue to be plagued by offshore imports, which are adversely affecting steel market conditions. . . . Global steel overcapacity remains the biggest issue plaguing the North American and global steel markets.
Alan Wm. Wolff, Washington-based senior counsel at Dentons LLP. and a member of its International Trade Practice agrees. The number one priority for steel is China, he said, downplaying the need for a Nafta overhaul.
A former deputy trade representative who worked on domestic steel issues for 25 years, Wolff said that of the companies that relocated to Mexico 20 years ago, many have subsequently moved to Asia. A lot of people are recalling plants moving south, but that was a long time ago, he said. A lot of the emotion has to do with something that happened a long time ago.
Naftas biggest sin is the fact that member disputes are settled by its Extraordinary Challenge Committee, which can rule on U.S. business interests and override domestic law, Wolff said.
My own view is that Nafta is a strong positive for the U.S. and North American economies, Wolff said in an email. It should be brought up to date by addressing rules for the digital economy which hardly existed 20 years ago when Nafta was created. . . . For steel, the major issue in the world today is overcapacity in China. That could be addressed as a common issue for North America, but Nafta need not be revised to accomplish this. I believe that Nafta review of trade remedies should revert to final action by domestic courts to be consistent with the U.S. Constitution.
Were I advising the steel industry I would concentrate primarily on the China overcapacity problem and not on Nafta revisions.
Any potential infrastructure bill the Trump administration delivers also could affect potential Nafta renegotiation.
An infrastructure boom could be good for the U.S. steel industry, the Peterson Institutes Schott said. if it were federally funded with U.S. first provisions. Under past stimulus bills, Canada and Mexico have objected to Buy American provisions, which gave U.S. steel priority in projects, he noted.
If the U.S. wants to renegotiate Nafta, Canada and Mexico are going to want some things, too, Wolff said. He agrees the Nafta partners would likely want there to be no Buy American clause for steel in any upcoming infrastructure bill. That request could even extend to domestic projects funded locally, not federally.
Steel would have to look at that from a defensive position, Wolff said.
Mexican industrial executives at AMMs recent North American Automotive Metals Conference in Dearborn, Mich., were skeptical that a Trump presidency would have a significant or immediate impact on U.S. trade with Mexico or U.S. investment in Mexicos booming automotive sector.
Enrique Villaseñor, a board member of Mexicos Industria Nacional de Autopartes, said in September that changes to Nafta dont hinge on the policy goals of a U.S. president, noting that ... Its not going to be like in January Nafta is gone. Any shakeup of Nafta would require not only presidential determination but also congressional approval, as well as successful negotiations with both Mexico and Canada, he contended.
Villaseñor made the comments during a question-and-answer session following a discussion on Mexicos auto industry.
Norberto Vidaña, aluminum market intelligence manager at Monterrey, Mexico-based Nemak SAB de CV, agreed. All the investment that has been made by American and Canadian companies is not going to be jeopardized, he said. U.S. lawmakers must weigh not only the presidents desires but also those of industrial groups that have investments on both sides of the U.S.-Mexico border.
The United States and Mexico have worked closely on trade issues, especially in the flat-rolled steel arena, even as presidents come and go, according to Angel Lagarda, vice president of business development at Serviacero Worthington SA de CV, a joint venture between Mexicos Serviacero Planos SA de CV and Columbus, Ohio-based Worthington Industries Inc. Both countries have imposed steep duties on sheet imports from China and South Korea, he noted.
One executive who runs Mexico operations for a U.S.-based service center agrees.
For this past year Ive seen auto growing dramatically, the executive said, who asked not to be named. Builders and suppliers have been moving into Central Mexico, and Id expect it to continue to grow.
Ive seen enough high investments go in that Id have a hard time seeing the brakes put on, he said.
Business remains flat, he said but between the new investment creating significant demand for materials as well as the election results, there is new optimism.
He said some red tape has increased on both sides of the border, and Mexico has taken steps to protect its producers. That kind of complicates things, he said. Even so, the auto industry requires a higher quality of steel, making it tougher for foreign competitors: Your main trade partner is going to be the U.S.
Metal Strategies estimates for trade for all steel products between the U.S. and Mexico for 2016 show Mexico has surplus in semis (mainly slab from ArcelorMittal Lazaro Cardenas) and pipe and tube, while the two countries are about neutral now in long products, Plummer said in an email. But the figures show a distinct U.S. advantage in flat-rolled trade, with Mexico exporting an estimated 1 million tons to the U.S., while the U.S. is on pace to export 2.8 million tons to Mexico.
Theres a big difference in quality from the U.S. imports, he said.
There also appears to be a quality difference on the scrap side. Through July 2016, Mexico imported 773,000 tons of U.S. scrap and exported 51,000 tons to the U.S., Plummer said.
Because of Mexicos large and growing auto, truck and appliance sector, Plummer said they are producing an excess of No. 1 bundle scrap. Of Mexicos 51,000 tons exported through July, 19,000 tons was No. 1 bundle. By contrast, the U.S. exports virtually no No. 1 bundle anywhere, he said.
Despite the incoming administrations vow to change these dynamics, a 2014 Council on Foreign Relations Inc. report titled North America, Time for a New Focus highlights the complex relationship. The report notes that North American trade has evolved, shifting from primarily finished goods to pieces and parts that move back and forth across borders as part of regional supply chains. A study by the National Bureau of Economic Research reported that on average 40 percent of the value of products imported from Mexico and 25 percent of those from Canada actually come from the United States; the comparable input percentage with the rest of the world is about 4 percent. This means that of the $280 billion in goods that the United States imported from Mexico in 2013, some $112 billion of the value was created in the United States; for the $322 billion that the United States imported from Canada, the value created in the United States was $83 billion. . . .
The North American automotive industry is one of the most integrated sectors; roughly three out of every four export dollars remain within the region, the report continues. The degree of interconnected production is also impressive: automobiles often cross North Americas borders several times before completion. Other sectors are also deeply intertwined: 81 percent of the regions personal and household goods exports were absorbed back into North America in 2012, along with 73 percent of iron and steel.
In total, intraregional exports were 48 percent of North Americas total exports in 2012. These high percentages reflect the shift toward continent-wide production over the past two decades. This integration has become important for the regions overall competitiveness and for employment in all three nations.
Plummer noted that U.S. automakers have moved most small car production to Mexico because its more economical. He cited an example of Ford is moving a small auto line from Wayne, Mich., to Mexico, but changing over the Michigan plant to build F-150 pickup trucks which sell better, use more steel and generate higher profits.
In many cases its not as simple as people think, Plummer said. But as manufacturing grows in Mexico, It becomes increasingly difficult to service (Mexican plants) from Great Lakes steel mills, Plummer said.