Automotive demand should continue to support the generation of prime grades in the Mexican scrap market in 2017, but volatile exchange rates, the political landscape and changing governmental regulations abroad could have unknown impacts, market participants warned.
The automotive sector has obviously made a big change in the Mexican scrap industry in the last three to five years, All Star Metals
LLC president Nikhil Shah told delegates in early February at American Metal Markets 22nd Mexican Steel Forum in Cancun, Mexico.
There is an abundance of automotive manufacturers coming into Mexico (with) Tier 1 suppliers following them, Shah said. As that
investment continues, the amount of scrapprimarily bushelinggenerated from such startups will continue.
Worthington (Industries Inc.)s view on (the future of the Mexican automotive industry) is at least stable, Thomas Romer, specialty
markets operations manager at the Columbus, Ohio-based service center, said during the panel discussion. We dont see any crash; we dont see any big gains. With a wall or without a wall, people still need cars.
Panel participants noted, however, that the volatility of the exchange rate between the Mexican peso and the U.S. dollar will likely
continue to drive scrap supplies out of Mexico and into the United States at times, preventing a closed-loop system. The weakness in the peso makes Mexican scrap a bargain for U.S. buyers.
Whenever there is a difference between the Mexican and the U.S. market, the material is going to flow there, whether thats in peso or
U.S. dollar (terms), Shah said.
Can this closed loop system be achieved? Possibly yes, but it is difficult in ferrous because of all of the factors, he acknowledged.
Over the past five years, the exchange rate hit a high of 22 Mexican pesos against the U.S. dollar, vs. a low of less than 12 pesos, according to Shah.
He noted, however, that the impact over the past two years has been a lot more pronounced than it was in the last five.
In the final months of 2016 and into 2017, the rate jumped from roughly 18 pesos to 22 pesos, an increase seen as likely related to the U.S. presidential election in November.
We always have to keep in mind that there is this X factor in our marketplace that we dont control, Shah said.
At the end of the day, scrap dealers look at net profit, whether its recorded in pesos or dollars, Romer commented on the currency exchange front. Although the volume of Mexicos scrap production and consumption are close to balance, the grades dont necessarily match up, he noted.
The original equipment manufacturers (OEMs) in Mexico are requesting higher grades of steel to build these cars, Reciclacentro chief executive officer Javier Perez Dominguez pointed out another challenge facing scrap suppliers to the Mexican manufacturing sector. As a scrap company, its something we have to face and level up in order to process all of the scrap that the steel mills are requesting.
The panelists agreed that political news can also influence market sentiment--and not always negativelybut readily acknowledged
that President Trumps vow to redraft the North American Free Trade Agreement (Nafta) has been on everyones mind.
We dont know exactly what the changes are going to be, Dominguez commented. But we are sure there are going to be lots of opportunities in Mexico for both steel and scrap suppliers.
These are factors we havent seen, Shah added, citing potential U.S. importation taxes, Nafta renegotiations and Trumps proposed
There is once again uncertainty, he said.