Growth in Mexican automaking draws steel imports and production as ambitious plans in the country may clash with imports from U.S. and Asia, all while car producers must analyze variables from fuel economy to safety standards to consumer tastes in size and function.
Late in November Nucor Corp. and JFE Steel Corp. placed orders for a hot-dip galvanizing line and recoiling line with SMS Group. The move was the latest in a wave of steel expansions to serve the booming automobile industry in Mexico. But with several mills, as well as fabricators, service centers, and tier-one suppliers expanding to meet anticipated growth, the question starts to rise about possible oversupply.
Part of the problem with planning is the number of variables in the equation. Steel demand into the Mexican auto sector is not quite three-dimensional chess, but it is a complex business affected by many external factors. The major market for those vehicles is the U.S. domestic market. The rest of Latin America, and overseas markets are not insignificant, but the U.S. remains the key destination.
As such, carmakers in Mexico must be alert to variables beyond gross sales, into fuel economy, safety standards, and consumer taste in size and function. It is important to note that carmakers in Mexico are not, strictly speaking, Mexican. There are no purely indigenous car companies of any meaningful size. All of the factories are Mexican subsidiaries or joint ventures of the major global car makers. Nissan Motor Co. is the largest; General Motors Co. is second. All of the others are presentfor many years virtually all of the taxicabs in Mexico City were vintage-style but modern-made Volkswagen Beetles.
AMMs 22nd Annual Mexican Steel Forum is scheduled for Feb. 1-3 in Cancun; as the industry becomes more crucial, topics to be discussed include the automotive industry boom and how the Mexican steel industry can harness this growth.
Upstream, there are indigenous tier-one parts companies, fabricators, and primary metals makers. Those compete with joint-venture and subsidiary mills in country, such as Nucor-JFE and others. And in turn all domestic mills compete with imports from the U.S., a major source of supply for the auto sector, as well as against imports from Europe and Asia. In that sense the Mexican steel market is just like the ones in the U.S. and Canada: domestic producers compete against each other and club together in resisting imports, especially from Asia.
Mexican steel mills have benefited from the boom in automaking, according to Chris Kuehl, managing director and co-founder of Armada Corporate Intelligence. But just as are mills in the U.S., Mexican steelmakers are concerned about market share. In the U.S. the auto sector is a clear second to construction in terms of steel consumption. In Mexico it is just the reverse. There are several reasons for that. Vehicles are an open global market, whereas construction is almost an exclusively government function.
The net of all those variables is that a boom in Mexican auto production is not purely beneficial or harmful to metal makers in either country. Every Mexican-made car sold in the United States is one U.S.-made car not sold. But if that domestic make is formed from imported steel, and the Mexican make is formed of steel exported from the U.S. the net gain is to the domestic industry.
What is known for sure is that Mexican automaking is booming. The current projection from several studies show Mexican auto production reaching 5.3 million units by 2020, Christopher Plummer, managing director of Metal Strategies Inc., says. The highest projection is 6 million units, which would be a doubling of current production. To reach that there would have to be a compound annual growth rate of 15 percent, which would be unprecedented. Growth this year is less than 1 percent. Our own projections are 5 to 5.4 million units by 2020.
Plummer notes that Mexico exports 65 to 70 percent of the cars and light trucks it makes, of which the U.S. accounts for 70 percent of exports. Doing the arithmetic, that means the U.S. accounts for slightly less than half the cars Hecho en Mexico. A big part of the attraction is the difference in labor costs: about $3.50 an hour in Mexico vs. about $24 an hour in the U.S. including labor and benefits.
According to Austrias Voestalpine AG, automotive manufacturers from around the world will be investing around $17 billion in Mexico over the next five years, expanding the industrys role in supporting Mexicos economy. Mexico is also a champion when it comes to free trade, with 11 agreements covering 46 countries. The company cites a study by Deloitte & Touche GmbH that found Mexico could be exporting more cars than Germany by 2018.
Yet the growth is greater than suitable local suppliers can cope with, according to Voestalpine. A technology gap requiring almost $50 billion in investment opens opportunities for further players, including those offering high-gloss parts, laser cutting, and hot forming. Consequently, our metal-forming division is increasingly shifting its focus towards the Mexican automotive market. During the business year 2015-16 the Voestalpine Group generated revenue of almost 1.2 billion euros in the North American Free Trade Agreement (Nafta) region, representing 11 percent of total Group revenue. This figure is scheduled to grow to around 3 billion euros by 2020.
To supply that demand, several new mills have come into service and more are planned. The Tenigal venture of Nippon Steel & Sumitomo Metal Corp., and Ternium SA came online in 2013, a $1.1-billion mill with cold-rolled capacity of 1.5 million tonnes per year. A second galvanizing line is planned to lift capacity to 830,000 tonnes per year in 2019.
According to SMS Group, its continuous hot-dip galvanizing line and a recoiling line for Nucor-JFE will produce 400,000 tons of steel strips per year, most notably deep-drawing grades and high-strength steels for the automotive industry, including modern dual-phase steels. The line is designed to process both cold-strip and also hot-strip material. Startup is anticipated for the second half of 2019. The $270-million mill was announced in June.
According to Nucor, automotive production in Mexico is projected to increase from 3.4 million vehicles to 5.3 million by 2020. The joint venture positions Nucor with improved geographic reach and expanded product offering to address this roughly 50-percent growth in automotive demand and builds on JFEs commitment to serve the Nafta market. Nucor and JFE will each supply an equal amount of substrate to be further processed at the new facility.
JFE adds, the countries covered by Nafta constitute the worlds second-largest auto market. As one of the member countries, Mexico accommodates the plants of automakers from many countries, highlighting its attractiveness as a manufacturing base for the supply of cars to the United States and other parts of the world. Demand for high-quality auto steel sheet is forecast to remain stable in the region. JFE Steel has been seeking a manufacturing base in the region, the largest overseas market for Japanese automakers, and Nucor has been striving to expand its business into the supply of high-grade steel for automobiles.
Voestalpine says it has in hand a major order worth almost $600 million signed with a premium car manufacturer. The company has allocated 15 million euros to a new components manufacturing plant to be built in Aguascalientes. That city, northwest of Mexico City, is equidistant from three of Mexicos Pacific ports, Mazatlan, Puerto Vallarta, and Manzanillos, and also from the major Gulf Coast port of Tampico.
An existing 5,000-square-meter hall will be equipped with six assembly lines to produce components such as ultra high-strength body-in-white and structural parts, creating 80 new jobs. The first complex assemblies for cars, including cross-members, roof frames, and components for the rear apron, will leave the new plant from fall 2017 onwards. The plant is scheduled for full operation in July 2018.
Semi-finished parts will be partly purchased in Mexico and partly imported from voestalpine locations in Europe. The company acknowledged that raw material availability does play a certain role as not all steel grades are available locally, but would not elaborate.
Mexico is a major net importer of high-quality coil, Plummer says. Into that demand, the U.S. has peaked at 700,000 to 800,000 short tons a year sent to Mexico specifically for auto, not for appliances, he adds.
ArcelorMittal from its plant at Calvert, Ala., (the former ThyssenKrupp facility), and Steel Dynamics Inc. from Columbus, Miss., (the former Severstal mill) are both major sellers into the Mexican auto industry. In country, beyond Tenigal and the Nucor-JFE project, South Koreas Posco has two lines with total capacity of 900,000 tonnes per year; the first came into service in 2011 and the second in 2015.
By 2020 there will be close to 2 million tons of domestic capacity, Plummer says. If you project 5.5 million vehicles, each one needs a ton of steel of which half is galvanized. That means 2.7 million tons of domestic demand total. With Nucor-JFE there will be close to 2.2 million tons. Suggesting that imports from the U.S. and from Asia will not simply go away, an oversupply problem looms unless Mexico hits the high end of carmaking projections.
Mexico is currently the worlds seventh-largest automotive producer with plans to advance to fifth place by 2020, the company stated. Over the past year around 3.4 million vehicles rolled off the production lines in Mexico; this figure is scheduled to rise to over 5 million within the next four years. Voestalpine does expect further growth in Mexico by 2020 and therefore supports its Nafta strategy. With its exceptionally dynamic development, Mexico has huge potential as an automotive location. In accordance with our strategy of internationalization, we plan to (make best use of) this potential over the long term by extending our local production capacities.
Regardless of whether it is domestic, Nafta, or offshore steel going into cars made in Mexico, and regardless of where those cars are sold, demand for autos and light trucks is still dependent on the price of fuel and the age of the fleet on the road. In that variable, there is life.
The fleet is still old enough that we can talk about pent-up demand, Kuehl says. Cars are lasting longer, 150,000 miles is the new 100,000 miles. And cars all really look alike these days, so style shifts are not a major driver of sales. It all comes down to consumer confidence. If they feel secure, they will take on the debt to buy a new car. If not, they will hang onto what they have for several more years.
If U.S. demand disappoints, there are some options for Mexican-made vehicles to be sent to other export markets. That said, recall that the car companies are not purely Mexican, they are global. So decisions about what markets to supply from which factories is made on the basis of global logistics and profitability, not on the basis of local or even regional priorities.
Sure, they could pivot to South America, or Africa, or Asia, but that is not really an advantage to Mexico, Kuehl says. It may make more sense for Mexico to be a parts supplier to Asia. We will have to wait and see about the U.S. demand. I lean to a good news story.
In sharp contrast to the U.S., the scrap market in Mexico is primarily an export operation. The scrap business in Mexico tries to operate on a closed-loop basis as in the U.S., Plummer says, but the reality is that the electric melt shops that feed the flat-rolled market operate with a 95 percent or more charge of direct reduced iron. The rest is home scrap.
Altos Hornos de Mexico SAB de CV (Ahmsa) is the only metal maker back-integrated to ore.
The irony in this is that the predominance of the auto industry as the top consumer of steel means that the scrap market, especially clean scrap, is inverted. The scrap generated at the stamping plant is generally about 30 percent, Plummer says.
Looking too far ahead in Mexico is fraught, but Kuehl notes, there is a lot of infrastructure work to be done in Mexico, which means a harvestable resource in structural scrap from architectural tear-down.