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South pull: Mexican steel market gains strength

Keywords: Tags  Mexican steel, Al Zapanta, U.S.-Mexico Chamber of Commerce, Christopher Plummer, Ternium SA, Altos Hornos de Mexico SA de CV, Deacero SA de CV, Red Bud Industries Inc. John Ferriola

Mexico’s steel market is one of the strongest in the world, due largely to growing automotive, aerospace, appliance and heavy equipment industries, although some other sectors--most notably energy and construction--are not doing as well.

Much of the demand is not necessarily being supplied by domestic steelmakers, however, according to Al Zapanta, president and chief executive officer of the U.S.-Mexico Chamber of Commerce. “There just isn’t as much of a steel industry in Mexico as there once was, although it could be beginning to turn around,” he said.

Nevertheless, Mexican crude steel production rose about 6 percent to an estimated 19,300 tonnes last year from around 18,200 tonnes in 2012 due to capacity additions, according to Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa.

He noted that Luxembourg-based Ternium SA, which owns the former Hylsa SA de CV, is expected to commission shortly a 1.5-million-tonne-per-year cold-rolled steel complex in Pesqueria, Nuevo Le—n, about the same time as its 400,000-tonne-per-year Tenigal SRL de CV hot-dipped galvanizing joint venture with Tokyo-based Nippon Steel & Sumitomo Metal Corp. (also in Pesqueria) is to come online. Both mills are part of a project that originally was slated to begin with a direct-reduced iron plant, a steelmaking operation and a 2-million-tonne-per-year hot-rolling mill. However, Ternium decided to flip-flop the sequence after the global economic downturn, starting with the downstream operations rather than upstream facilities.

But now that Ternium is no longer looking to purchase Essen, Germany-based ThyssenKrupp AG’s 5-million-tonne-per-year Cia. Siderœrgica do Atl‰ntico Ltda. steel slab facility in Brazil, Plummer said the company is considering building its own slab plant to meet its raw material needs. It buys about 3 million tonnes of steel slab each year to feed its Mexican flat-rolled mills.

Ternium is not alone in increasing Mexican steelmaking capacity, Plummer said, noting that Altos Hornos de Mexico SA de CV (Ahmsa), Mexico’s largest integrated steelmaker, added a 1.5-million-tonne-per-year blast furnace, a 1.2-million-tonne-per-year electric-arc furnace, a 1.2-million-tonne-per-year slab caster and a 1-million-tonne-per-year plate mill at its FŽnix facility in 2012-13. As a result, Ahmsa increased its crude steel production there to 4.75 million tonnes annually, up 35.7 percent from 3.5 million tonnes previously.

Also, Mexican long steel products producer Deacero SA de CV has brought on line its 500,000-tonne-per-year Acer’a Laminaci—n Ramos Arizpe mini-mill in northern Coahuila state, raising the steelmaker’s total rolling capacity to 3.2 million tonnes per year, according to Plummer. And Pohang, South Korea-based Posco Ltd. is planning to commission a 450,000- to 500,000-tonne-per-year hot-dipped galvanizing line at the port of Altamira in Mexico’s Tamaulipas state in the first quarter of 2014 to serve the Mexican and U.S. automotive and appliance sectors. Posco already operates a 400,000-tonne-per-year galvanizing line in Altamira that it commissioned in 2009.

Plummer said that even with these capacity increases, Mexico remains a net importer of 1.8 million tonnes of steel products, including coil to serve the automotive and other original equipment manufacturer (OEM) markets, such as appliances and heavy equipment.

The imports include raw materials coming from the United States and from foreign companies with Mexican operations. However, about 33 to 40 percent is re-exported as finished goods, according to a source at a U.S.-based plate distributor that has had a Mexican presence for some time. “There is no way that the Mexican economy can absorb all of the products produced there,” he said.

Demand for steel for goods produced by OEMs is being further supported by the “huge flow” of foreign-owned service centers and to a lesser degree from overseas processors, particularly in the United States and Asia, attracted by the strength of the Mexican manufacturing sector, especially automotive production, according to Carlos Rodriguez-Borjas, president and chief operating officer of Chicago-based Feralloy Corp., whose Acero Prime SRL de CV, a joint venture with Pittsburgh-based U.S. Steel Corp. and New York-based Mitsui & Co. (USA) Inc., has been operating in Mexico for 12 years.

One of the most recent additions, according to Dean Linders, vice president of marketing and sales at Red Bud, Ill.-based Red Bud Industries Inc., has been Steel Technologies de Mexico SA de CV’s newest greenfield facility in Monterrey.

John Ferriola, chairman, president and chief executive officer of Charlotte, N.C.-based Nucor Corp., Steel Technologies’ parent company, said the 800,000-ton-per-year flat-rolled steel processing and pickling operation includes the North American market’s largest Eco Pickled Surface (EPS) pickling line, which he said is an effective and environmentally friendly technology that offers significant advantages over traditional acid pickling.

The Mexican steel industry also is being bolstered by some companies just north of the border, according to Paul Robinson, senior economist for Englewood, Colo.-based IHS Global Insight Inc.’s pricing and purchasing service. He cited the 2-million-tonne-per-year hot-briquetted iron (HBI) facility that Linz, Austria-based Voestalpine AG is building in Corpus Christi, Texas, as an example, noting that the steelmaker is planning to send about half of its HBI output to Mexico for further processing. Voestalpine has already announced that it has signed a memorandum of understanding with Ahmsa and is negotiating with several other Mexican steelmakers.

The new and expanded facilities are great for coil processing equipment builders, Linders said, noting that if companies are buying steel coils they need machines to process them. However, that does not mean equipment builders are setting up shop in Mexico because under the North American Free Trade Agreement (Nafta) there are no heavy duties on equipment exported to Mexico.

Rodriguez-Borjas said that Mexican service center capacity is approaching saturation point, at least until there is more clarity about the impact of the tax reform recently implemented by the Mexican government, which he said is making a lot of companies more careful about investments than they were several years ago. The tax reform, which is aimed at increasing the nation’s tax revenue, is clearly not a pro-industrial growth policy, he said. In fact, it is feared that it could have a dampening effect not only on the Mexican steel industry but also on the Mexican economy as a whole, which like the United States is still slowly recovering from the economic downturn.

While benefiting from its many free-trade agreements, including Nafta, as well as low labor costs and proximity to the U.S. marketplace, the Mexican economy grew only about 1.3 percent year on year in the third quarter of 2013 and 0.8 percent vs. the previous quarter, according to the country’s statistics agency, Instituto Nacional de Estad’stica y Geograf’a (Inegi).

Inegi said that Mexican industrial production rose by only 0.1 percent in October compared with a year earlier, the first increase since July. Lower construction activity in October compared with a year earlier partially offset a 3.5-percent increase by the manufacturing sector and a 0.5-percent rise in Mexican mining output.

Mexico approved a 7.5-percent tax on mining companies’ earnings before interest, taxes, depreciation and amortization, as well as an additional 0.5-percent charge on sales of gold, silver and platinum, that went into effect Jan. 1, but its mining sector remains stronger than in many other countries, including the United States, the plate distributor source said, which bodes well for Mexican mining equipment demand. In fact, he said that about half of the mining equipment Peoria, Ill.-based Caterpillar Inc. makes in Mexico is sold there vs. the 60 to 70 percent that it exported previously.

However, Mexican mining association C‡mara Minera de MŽxico (Camimex) said the new taxes “represent a decline in (the Mexican mining industry’s) competitiveness, which will cause a collapse of 60 percent for the mining program, estimated at $30 billion between 2013 and 2018.” Camimex said that Mexico’s mining industry revenues were up 14 percent year on year to $23.12 billion in 2012, with investments by mining companies rising 43 percent to $8.43 billion.

Much of the strength of the Mexican steel industry, which Robinson claimed is one of the strongest steel markets globally, is due to the strong demand for autos worldwide.

“Mexican auto production is booming and is projected to grow significantly over time,” George Magliano, senior principal automotive economist at IHS Automotive, said. Much of this is due to the “massive wave” of new auto assembly plants that either have opened in the past few years or are scheduled to do so through 2020.

Plummer said that most of the major automakers are making further investments in Mexico, including Detroit-based General Motors Co., which recently announced that it plans to invest $691 million in its Mexican operations; Japan’s Mazda Motor Corp., which is opening a $650-million assembly plant in Guanajuato; Japan’s Nissan Motor Corp., which is building a $2-billion plant in Aguascalientes; Dearborn, Mich.-based Ford Motor Corp., which announced a $1.3-billion plant expansion in Hermosillo; Tokyo-based Honda Motor Co. Ltd., which announced an $800-million plant expansion in Guanajuato; and Tokyo-based Honda Motor Co. Ltd., which is building a $1.3-million facility. Also, Wolfsburg, Germany-based Volkswagen AG opened its $440-million Silao facility in 2013.

But that isn’t the whole story. Much of their supply base will continue to follow the automakers to Mexico. “The migration of the auto supply base has just started,” Magliano said. “Much more is yet to come.”

He said that while Mexican auto output was up only 3.4 percent to 3 million light vehicles last year from 2.9 million in 2012--a significant improvement from 1.9 million vehicles in 2000--it is dwarfed by expectations that Mexican auto production will increase to 4.6 million vehicles annually by 2020.

About 80 percent of the automobiles produced in Mexico are exported, Plummer said, with about 70 percent of those exports going to the United States. Domestic auto sales of 1.1 million vehicles last year were up 10 percent from 1 million in 2012 and 22.2 percent from 900,000 in 2000, but they are expected to increase to only 1.4 million by 2020.

There also is strength, or potential strength, in several other Mexican steel-consuming sectors, including aerospace, appliances and heavy equipment, according to Rodriguez-Borjas.

One trend bolstering these sectors has been the reshoring of North American manufacturing that previously moved to China and other Asian countries, with much of that reshoring benefiting Mexico rather than the United States and Canada.

Prompting the reversal has been higher wages in China and elsewhere in Asia, which has increased the cost of manufacturing there, Linders said, noting that freight costs from Asia and quality issues with certain Chinese products combined with the number of free-trade agreements makes Mexico a very attractive alternative. “Currently, Mexico’s manufacturing costs aren’t that much higher than those in China,” he said.

Reshoring of manufacturing to North America, especially to Mexico, could really start to take hold over the next five years, Zapanta said.

Rodriguez-Borjas said that will be especially true for labor-intensive manufacturing, while more automated production will likely be reshored back to the United States. He added that the Mexican energy sector could get stronger if the government continues on its path of energy reform, allowing for greater private investment.

“The Mexican oil and gas industry is still very strong, no matter what you hear,” the plate distributor source said, noting that with the need for more energy transmission pipelines in the country, plate demand for that application is up about 10 percent year on year.

However, the Mexican energy market has been said to be in a bit of disarray when it comes to drilling for oil and natural gas as there are problems getting some shale oil and natural gas projects off the ground in a business environment that, until very recently, discouraged outsiders from investing in those projects.

The plate distributor source acknowledged that the oil and gas industry depends on government support, but when it comes to stated governmental policies vs. business, business always wins out in Mexico, despite lip service to the contrary.

That seemed prophetic in mid-December when President Enrique Pe–a Nieto approved what he called “transformational” energy reform that now allows foreign investors to jointly develop oil and natural gas projects with state-owned energy companies, such as Petr—leos Mexicanos SA de CV, in exchange for a portion of profits.

This could open up Mexico to more midstream steel investment, including for oil country tubular goods and line pipe, Zapanta said.

Robinson agreed, but said that while this reform could pump up demand somewhat, he doesn’t believe it will give the Mexican economy the kind of boost it is receiving from the nation’s automotive industry.

Mirroring its neighbor to the north, Mexico’s construction sector is lagging most other steel-consuming market segments, although perhaps not to the same degree. The plate distributor source said that while nonresidential construction is still bumping along the bottom in the United States, it started to pick up in Mexico last May, although Mexican long product mills’ operating rates are still in the 60- to 65-percent range.

Rodriguez-Borjas placed some of the blame on Mexico’s new government leaders, whom he said haven’t been very effective in applying all of the nation’s available funds to promote infrastructure construction. “That has resulted in severe delays of certain projects,” he said.

Plummer criticized Mexico’s poorly developed financing sector, which he said has made it difficult for contractors, especially in the housing and public works sectors, to get loans.

Overall, the future looks relatively bright for the Mexican steel market. “I think that the Mexican economy will continue to grow and that the country’s steel industry will benefit from that growth,” Robinson said. “A lot, however, depends on how successful the Mexican government is at spurring growth from its reforms, especially its reform of the energy sector.”

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