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Mexican steel sector hoping for continuing strength

Keywords: Tags  Mexico, Mexican steel, steel consumption, Al Zapanta, U.S.-Mexico Chamber of Commerce, Carlos Rodriguez-Borjas, Feralloy Corp., Phillip M. Wylie Ryerson Inc.

The Mexican steel sector, pushed by strong demand from the automotive and energy industries, has been more resilient than the U.S. steel market, continuing to see steady growth even during the second half of 2012. It hasn’t been without its headwinds, however.

Surging imports and the possibility of weaker demand in 2013--should the United States economic growth stall amid political wrangling over the debt ceiling and deficit spending--still pose risks.

“Mexico did not take as big of a hit as the United States during the (global) financial crisis and, as its downturn wasn’t as pronounced, it was able to stabilize quicker,” said Al Zapanta, president and chief executive officer of the U.S.-Mexico Chamber of Commerce. “The Mexican economy has recovered to a decent level. While it isn’t a great economy right now, it isn’t bad either. It is fair to middling.”

Mexico has seen 3.8-percent gross domestic product (GDP) growth in 2012, although that growth could cool slightly to 3.3 percent in 2013, according to the Organization for Economic Cooperation and Development, influenced by the economic situation in other countries, particularly the United States, before recovering to 3.6 percent in 2014. This is quite stronger than the U.S. GDP, which increased to an annualized 2 percent in the third quarter from 1.3 percent in the second quarter, according to an advance estimate by the U.S. Bureau of Economic Analysis.

There also is uncertainty about some Mexican policies for the next six to 12 months, with the nation in the midst of a presidential transition as Enrique Pena Nieto assumes power and replaces Felipe Calderon, Zapanta said.

Carlos Rodriguez-Borjas, president and chief operating officer of Chicago-based Feralloy Corp., attributed this “nice growth rate” in Mexico’s manufacturing sector to strong foreign investment. “Across the board, there are more foreign companies coming into Mexico, especially with the inflation of labor costs in China. Mexico is becoming the next low-cost production country for a number of manufacturing companies, especially for those based in the United States,” he said.

Phillip M. Wylie, president of Chicago-based Ryerson Inc.’s southwest region, agreed, stating that Mexico is well positioned to service U.S. companies.

However, foreign investment, as well as certain other factors like escalating imports, has put a lot of pressure on Mexican steelmakers, Zapanta said, noting that Mexico’s steel industry is nowhere near what it was 20 or so years ago.

Mexican steel demand has recovered quite nicely since the financial crisis, Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., said. The country’s apparent steel consumption was expected to total a record 21.5 million tonnes last year, up from 18.1 million tonnes in 2011, and is expected to increase another 6 percent to 22.8 million tonnes in 2013. It has been increasing each year since 2009, when Mexican steel consumption fell to 14 million tonnes.

A lot of that demand is being driven by a strong automotive sector, Rodriguez-Borjas said, pointing to new investments by Ford Motor Co., General Motors Co., Honda Motor Co. Ltd., Mazda Motor Corp., Nissan Motor Co. Ltd. and Volkswagen AG.

Mexican auto production last year was expected to reach a record 2.9 million vehicles, up from 2.5 million in 2011, according to Plummer, and he forecasts that output will reach nearly 3.5 million vehicles by 2015, driven largely by demand from the United States and elsewhere in the world as vehicle purchases by Mexicans remain quite low.

However, Zapanta said that could change over time as the Mexican middle class has been growing.

Geoff Gilmore, president of the Columbus, Ohio-based Worthington Steel Co. subsidiary of Worthington Industries Inc., pointed out that Mexico has attracted both automakers and their Tier 1 and Tier 2 parts and components suppliers, as well as the steel mills, service centers, processors and fabricators that service them.

One area of potential growth is Mexico’s energy sector, Rodriguez-Borjas, said, noting that there are already a number of natural gas and oil pipelines being constructed in Mexico. “In the next five years or so, I expect to see big growth in that sector,” he said.

“It makes sense, given Mexico’s location on the Gulf,” Jeff Simons, vice president of sales and marketing at O’Neal Steel Inc., Birmingham, Ala., said, but noting that Mexico’s poor infrastructure could hold back growth. “Once that is better developed, it could provide significant opportunity.”

Mexico has had difficulty meeting growing demand for energy, especially natural gas, Plummer said, even though drilling activity there increased about 18.5 percent through the first seven months of 2012. “This has resulted in steelmakers, as well as others, paying higher prices for natural gas,” he said.

The Mexican Federal Electricity Commission has been pushing to have more natural gas pipelines built, Zapanta said. According to a report from the Mexican Secretariat of Energy on the natural gas market through 2026, eight pipelines stretching about 3,107 miles across Mexico have already been proposed. These projects reportedly would require tens of thousands of tonnes of steel products, and Mexican steel association Canacero is looking for the pipelines to have a minimum 60-percent local steel content.

The Mexican government also has been pushing to improve its transportation infrastructure, including roads, bridges, railways and ports, Zapanta said. Rail infrastructure improvements could be particularly important, given that there is a need to connect the nation’s two Class 1 railroads with each other and with Veracruz and other major ports due to the increased desire to utilize rail to move freight. This desire has been accentuated by concerns about crime in Mexico, he said. “The situation has been blown up out of proportion by the press. Most of the deaths are bad guys killing bad guys, not tourists or industrial workers.”

Nevertheless, crime concerns have increased the use of rail, as it is a more secure mode of transportation than trucking, he said. Crime--both metal thefts and that involving drug cartels--hasn’t dampened investment in Mexico. “Companies have just become more strategic and tactical about their investments. We aren’t seeing much new investment in the (north) but rather in other areas of the country, which are more secure,” Zapanta said.

O’Neal hasn’t had any issues moving material as a result of crime, Simons said. “We have, however, implemented travel restrictions for our workers. They are under rigid rules as to where they are allowed to go and when and who needs to be with them.”

Not all of Mexico’s increased steel demand was met by domestic mill shipments, which Plummer said would be down 2.5 percent last year due partly to a 44.1-percent surge in imports to 9.8 million tonnes from 6.8 million tonnes in 2011.

Some of those imports resulted from the structural deficit of high-quality flat-rolled steel in Mexico, and therefore were welcomed into the country, Plummer said, while some had come from the ramp-up of the ThyssenKrupp Steel USA LLC mill in Calvert, Ala.

However, Rodriguez-Borjas said that some of Mexico’s imports of commercial-grade steel, especially from Russia and China, have been more of a problem, as they have been arriving at very low prices. “There are some trade cases in the works to protect domestic producers from these imports,” he said.

Mexico’s imports likely will start falling when a number of steel production capacity projects come online, Plummer said. South Korea’s Posco Ltd. is doubling the capacity of its auto sheet plant in the country by adding two 450,000-tonne galvanizing lines, the second of which is due to be commissioned in mid-2013. Ternium SA is installing a 450,000-tonne galvanizing line at its joint-venture facility with Nippon Steel Corp. near Monterrey. That line also is expected to be operational in 2013, as is a 40-percent increase in crude steel capacity at Altos Hornos de Mexico SA de CV. And Gerdau Group has resumed its joint-venture project to build a greenfield facility with Aceros Corsa SA de CV to produce 1 million tonnes of crude steel and 700,000 tonnes of structural profiles annually starting in late 2014.

The direction of Mexico’s steel industry in 2013 lies largely with the United States, Rodriguez-Borjas said. “As the United States goes, Mexico goes. If there is another big economic slowdown in the United States, Mexico will feel it.”

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