The market situation has generated a "strong price war" among local companies, Raymundo Díaz Oñate, president of Mexican steel distributors confederation Conadiac, told Steel First in an interview.
"Distributorsboth members and nonmembers of Conadiachave been fighting (each other) to win sales, so there is a strong price war, and profit margins are minimal," the executive said.
"Sometimes distributors want to earn (as low as) 200 Mexican pesos ($16.52) per tonne, and thats absurd," he said.
Some, for example, have been trying to sell rebar for 10,200 Mexican pesos ($842.60) per tonne, which he said is already a low level in that market. "We have found some offers on the market even below 10,000 Mexican pesos ($826.28) per tonne," Díaz Oñate warned.
The Mexican distribution market has been "much cluttered" as a result.
"We are requesting to the steel plants and all steel distributors a certain order (for the market) to be profitable," he said.
There are about 50 service centers in the country, and their average utilization rate has been at some 60 to 70 percent of their total processing capacity, according to Díaz Oñate.
In the first quarter this year, the market was "fatal," with "very low activity" stirring from a weak construction sector, the executive said.
The automotive and auto parts industries, on the other hand, have helped to improve activity in the steel market in the first few months of 2013, Díaz Oñate said.
"We expect an improvement in activity in the second half of the year if structural reforms are implemented in the country, and then maybe by the end of the year we will see a better situation," he said.
Despite the expected improvement in demand, the distribution market is set to become even more pressured as new companies start new units in Mexico.
Early this year, a top executive in the sector said that at least 10 new foreign service centers will be installed in Mexicos central area over the next few years.
Díaz Oñate agreed that the high number of players in the market might lead to a consolidation process in the future.
"It is very likely indeed that we have to make alliances with other ones," he said. "But right now we must seek to have the quality required to supply the automotive and auto parts plants."
As much as $16 billion is expected to be invested in the automotive sector in Mexico over the next few years, driving local vehicle output to as much as 4 million units per year, according to the Mexican Ministry of Economy.
Moreover, Mexicos auto parts industry has surpassed the South Korean one and now ranks as the fifth-largest in the world, according to the national suppliers association, Industria Nacional de Autopartes AC (Ina).
A considerable amount of the steel consumed by these and other Mexican industries has been coming from the international market, which has triggered growing criticism from local steelmakers.
Imports will continue, though, as the Mexican steel industry does not manufacture specific steel products, especially some for the automotive industry, Díaz Oñate said.
"We welcome the (foreign) steelmakers that are offering steel products to Mexico, but they have to export with equity, trying to avoid oversupply, which is what harms us all," he explained.
In order to replace some imports, such steelmakers as Altos Hornos de México SAB de CV (Ahmsa) and Ternium México SA de CV have been developing projects to produce more high-value-added products in the country.
"Terniums project is focused to replace imports of products, mainly for the automotive industry, and thats goodall projects that could reduce imports are good," he said.
Called Tenigal, Terniums project consists of a hot-dipped galvanized mill in Pesquería, Nuevo León state, designed to produce 400,000 tonnes per year of high-grade galvanized and galvannealed steel sheets for the automotive industry.
Ahmsas Fénix project is also expected to help Mexico to reduce its flat steel imports, Díaz Oñate said.
Brazil-based steelmaker Gerdau SA has been also building a greenfield long steel plant in Mexico, the executive noted. Named Gerdau Corsa, the plant is expected to come onstream in the second half of 2014, and its output will mainly replace imports of structural profiles.
However, not every expansion project is necessarily positive for the Mexican industry, Díaz Oñate warned.
"Does it make sense to increase capacity?" he said. "In the case of rebar, for example, there is already a strong oversupply in Mexico, so plants that just increase their production levels will cause a major problem of oversupply."