The United States' removal of Section 232 tariffs on Mexican steel products is likely to underpin a slow recovery in Mexico's ferrous scrap market, market participants said.
Scrap prices in Mexico declined in the immediate aftermath of the enactment of the Section 232 tariffs, with No1 busheling in the steelmaking regions of Monterrey and Bajio declining by 8.8% and 6.9% respectively from the start of July to the end of December.
Those prices have since fallen further, with No1 busheling in Monterrey at 5,300 pesos per tonne on Tuesday May 21 (down by 14.5% from year end) and the same grade in Bajio at 5,600 pesos per tonne (down by 8.2%).
While the removal of the 25% tariff on Mexican steel shipments to the US is likely to partially revive domestic steel consumption in the country, which will help improve demand for key ferrous scrap products there, industry participants said an improvement in the domestic economy is equally important for a full recovery in those prices.
“Mexican steel mills will recover their sales volume in the US but not immediately. Mexican mills sell most of their production [in Mexico], so I expect that a recovery of ferrous scrap prices without [Section] 232 will be slow as the domestic market is slow due to the new government,” one Mexican mill source said.
“Poor” steel sales real reason for weak scrap price
The US' 25% tariffs against steel imports from most countries indirectly affected demand for ferrous scrap in Mexico, market participants told Fastmarkets AMM.
Steel products that left Mexico – a crucial hub for original equipment manufacturers (OEMs) in North America – were subject to the duties but not all steel consumers could absorb the extra cost. As a result, finished steel product sales from Mexico have fallen since the tariffs were implemented, negatively impacting demand for ferrous scrap products.
“It was poor [domestic] steel sales that really affected demand for ferrous scrap,” a scrap dealer in the Monterrey region said.
Mexico's crude steel production growth slowed sharply last year, rising by only 0.9% year on year in 2018 after climbing by 6.3% year on year in 2017, according to World Steel Association data.
In the first quarter of this year, crude steel production in the country fell by 4.4% to nearly 4.98 million tonnes from 5.21 million tonnes in the same period in 2018, data from the association showed.
But in fact, Mexican steel exports to the US rose in 2018, with sharply higher steel prices in the US in the second and third quarters of 2018 making imports lucrative even with the 25% tariffs. The country exported nearly 3.5 million tonnes of steel mill products to the US last year, up by 10.9% from 3.16 million tonnes in 2017, US Census Bureau data showed.
In the first two months of this year, Mexican steel exports to the US fell by 0.8% year on year, coinciding with a weakening in steel product prices in the US.
Domestic consumption key to ferrous scrap recovery
“I think internal influences are more important [in shoring up] scrap prices now than external influences,” the mill source said.
In October, Mexico's then President-elect Andrés Manuel López Obrador scrapped a $13.3-billion project that would have given Mexico City a new airport and instead opted for a less-ambitious project that would convert a military air base into a commercial airport.
The announcement shocked the financial markets in Mexico, with billions of dollars vaporizing from the value of the main stock index, a Reuters report said at the time. The government had to broker a deal with bondholders, who had bought $6 billion in debt to fund the construction, and buy back $1.8 billion of the bonds to prevent a default.
“Our economy is slowing down... the new government has sent discouraging signals to some industry sectors,” a second Mexican scrap dealer said.
Policy uncertainty from the new left-leaning government will likely weigh on business activity this year, and investment in the public and private sector is at a minimum level, market participants in Mexico said.
Gross fixed investment in Mexico fell by 1.9% year on year in February after gaining by 1.6% in January versus the same month last year, data from Mexico’s INEGI statistics institute showed. Investment in machinery and equipment, which are steel-intensive, fell by 4.8% while investment in construction activity was unchanged in the same comparison due to a decline in non-residential construction being offset by an increase in residential construction.
The International Monetary Fund has forecast that economic growth in Mexico will reach 1.6% this year, down from growth of 2% in 2018.
Mexico-US steel trade dynamics: what’s next?
The US had been a net exporter of steel mill products to Mexico from 2011-17. Only in 2018, after the Section 232 tariffs were imposed in July, did the US became a net importer of Mexican steel products, according to import and export data from the US Commerce Department.
The elimination of the Section 232 tariffs against Canada and Mexico will likely push US hot-rolled prices to “sub-$600 [per] ton,” Jefferies analyst Martin Englert wrote in a research note on May 20.
Such a development could be seen as a positive catalyst for US flat-rolled producers in that it will likely translate to improved export opportunities for flat products to Mexico, he added.
Fastmarkets AMM’s daily Midwest hot-rolled coil index was calculated at $30.90 per hundredweight ($618 per short ton) on May 20, the lowest level in more than 18 months. The index had reached a nearly 10-year high in the immediate aftermath of the Section 232 import restrictions being implemented but prices have since fallen, erasing pretty much all the gains made previously.