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Industry challenges in Mexico

Feb 03, 2020 | 07:00 AM |

The Mexican steel market faces a variety of headwinds, but industry observers have a degree of optimism that conditions will improve this year, reports Myra Pinkham

While the Mexican steel market continues to face a number of challenges, some industry observers are expressing at least a measure of optimism that things will improve with the expected ratification of the US-Mexico-Canada Agreement (USMCA) upgrade of the North American Free Trade Agreement (Nafta) trade pact. Even so, it is very likely that any improvement will be gradual.

“It is very common for the Mexican steel industry to have ebbs and flows,” Al Zapanta, president and CEO of the US-Mexico Chamber of Commerce, said, given that many Mexican metals producers, including steel producers, tend to be relatively small by comparison with those elsewhere in the world. In addition, many of the smaller producers have been acquired by larger, foreign companies.

Over the last few years, some forecasts indicated that the Mexican steel market would be booming, bolstered by the auto market, which is one of its key end- use sectors, Christopher Plummer, managing director of Metal Strategies Inc., noted, but those predictions have not materialized.

Instead, after peaking in 2017, both Mexican steel production and demand have been declining since then. Canacero, the Mexican steel trade association, reports that in 2019 the country’s raw steel production declined by 7.7% to 18.7 million tonnes, its finished steel production fell by 9.3% to 17.7 million tonnes, and its apparent steel consumption fell by 5.7% to 26.9 million tonnes on the back of a 6.1% decline in the apparent consumption of products containing finished steel.

Marina Maliushkina, a senior analyst for Fastmarkets MB research, said the decline in Mexican steel output included an 11% decline in flat-rolled products. She said there was also a sharp fall in long-product output, down by 10% during the same period, but that sector has been supported to some extent by an increase in rebar exports to the US. This has been helped by the combination of the removal of antidumping duties on some rebar producers and of Mexican steel Section 232 tariffs last year. She noted, however, that while Mexican steel exports to the US have picked up with the removal of the Section 232 tariffs, theincrease has not been dramatic as there is a mechanism by which those tariffs could be re-introduced if there is a surge in imports.

According to Canacero, total Mexican finished steel imports were down by 1.6% last year to 10.0 million tonnes, while total Mexican steel exports were 3.4 million tonnes, a 10.6% decline.

Maliushkina said that the weakness in the Mexican steel market is not that surprising, given that during the first half of 2019 the Mexican economy had fallen into a recession for the first time since the global financial crisis. While there was some growth later in the year, it is believed that for the full year 2019 Mexican GDP was essentially flat.

Potential improvements

Zapanta said that both the Mexican economy and the Mexican steel market are likely to  improve once the USMCA is ratified. It has already been accepted by the US and Mexico, and was also expected to get a green light in Canada shortly after its parliament resumes business at the end of January. He said that is largely because of the trade agreement’s expected positive impact upon the Mexican automotive market and the amount of domestic steel used in light vehicles produced in Mexico.

Benjamín Zermeño Zirión, president of the Mexico-based Serviacero Worthington steel service center joint venture, agreed, stating that he believes that once the USMCA is ratified it will result in more confidence in the Mexican economy and that, in turn, will result in greater investment in Mexico –not only in its automotive sector, but in other steel-consuming industrial markets as well. He said that is one reason that the Mexican government is predicting 2% GDP growth this year.

It remains to be seen whether such GDP growth will indeed occur, especially amid concerns held by some observers that the administration of the new Mexican president, Andrés Manuel López Obrador, may not be particularly business friendly.

Plummer noted that it has been described as being more nationalist or socialist than the previous administration. Zapanta pointed out that the Obrador administration has stopped several major infrastructure construction projects, including the building of a new airport in Mexico City. Zirión said, “There is a question of how much the Mexican government will allow private investors to go into the
energy sector going forward.” Plummer said that given these factors and certain trends in the major end-use markets, he believes that Mexican steel apparent consumption could decline moderately again this year, possibly by about 3%.

Despite the possible positive impact of the USMCA, Maliushkina said that the growth of Mexican manufacturing activity is expected to remain at just below 1% in 2020. This is a deceleration from the rate of growth seen between 2014 and 2018. She also noted that the IHS Markit Mexican manufacturing  purchasing managers index (PMI) was pointing to a contraction of the manufacturing sector at the end of 2019.

While the PMI had been below 50% for seven of the past 12 months, it fell to 47.1% in December – its lowest level since 2011. In a press statement on the PMI data, Pollyanna De Lima, IHS Markit’s principal economist at IHS Markit said, “So far, it’s difficult to see a light at the end of the tunnel and any meaningful rebound in 2020. In fact, businesses are at their least optimistic towards growth prospects in the series history, with many concerned about lingering uncertainty, a lack of investments and ongoing troubles in the automotive sector.”

Maliushkina said that last year there was also a 5% decline in Mexican construction activity – the sector which accounts for about 60% of domestic steel use. She said that included a 6% decline in public works construction and a 4.5% fall in residential construction.

A large contributing factor to the weakness in public works construction was the cancellation of the Mexico City airport project, which Zirión said reduced demand for steel long products. “This year, however, construction activity will either pick up somewhat or at least it won’t be quite as bad as it was in 2019,” he predicted.

That depends upon whether the Mexican government begins working more with the private sector to promote incremental investment in the nation’s infrastructure, which has been declining over the past six to seven years, Máximo Vedoya, Ternium S.A.’s chief executive officer, said during the company’s third quarter earnings conference call.

He said that while it remains uncertain whether infrastructure investment will pick up in 2020, it should do so by 2021. Automotive is another major Mexican steel end-use market, which, according to Canacero’s website, accounted for 10.6% of Mexican steel use in 2018. Even though Mexican automotive production was down by 4% year-to-date through November, Plummer said the impact upon steel use was partially offset by the mix of vehicles produced, given that Mexican light truck  output – which contains 80-90% more steel – was up by 2.8% year-to-date.

Plummer said that the fact that in November total Mexican auto output was down 13.7% year-onyear bodes poorly for the short- to medium-term outlook. Maliushkina said that not only have Mexican local sales continued to be weak, buy also auto exports, which had been propping up Mexican auto  production earlier last year, have been declining on an annual basis since August.

Plummer said that given that about 80% of the light vehicles produced in Mexico are exported, the automotive supply chain, including for steel and other metals and components, is very complex and is affected by trade issues and other global uncertainties.

USMCA impacts

The expected imminent ratification of the USMCA is expected to have a positive impact upon Mexican steel market, Zapanta said, especially given that it mandates that 75% of the content for autos and other transportation equipment is sourced from North America.

However, Zirión said it might be hard for Mexico to comply with the domestic content requirements, given the percentage of scrap and steel slabs that are imported into Mexico. Scrap might be the lesser problem, Plummer said, given that about 75% of Mexican crude steel is produced by EAFs and some mills use as much as 95% direct reduced iron in their charge – most of which is sourced locally.

Slab imports could be more of a challenge. Zirión said they could necessitate the building of additional new steelmaking capacity to produce more domestic slabs, although he said there have not been any such announcements yet.

Maliushkina said that the ratification of the USMCA could also result in more auto-related investments in Mexico, because it will be removing the uncertainty that automakers faced while the deal was still under negotiation. But given the complexity of the auto supply chain, including multi-year and multi-decade supply chain arrangements, Plummer said that it will take a while for this to benefit the
Mexican auto market and steel suppliers to that market.

Maliushkina agreed, stating that while Mexican auto output is forecast to drop by 3% again this year, it could start picking up in 2021.

At the same time, she observed that some US steel mills located, or locating, close to the border are hoping to benefit from the long-term growth prospects of the Mexican auto market. That  includes the recently announced Sinton, Texas, flat-rolled steel mill to be built by Steel Dynamics Inc. (SDI), which is expected to start up in mid-2021. Mark Millett, SDI’s president and CEO, said during the company’s third quarter earnings conference call that “meaningful increases in Mexico’s manufacturing base” is one of the factors supporting his company’s US and Mexico growth strategy.

Plummer estimated that about30-40% of the Sinton mill’s output, much as is already the case with the existing Calvert joint venture mill of ArcelorMittal and Nippon Steel in Alabama, will be targeting Mexican automotive and other high-end markets. The same could be true if Big River Steel decided to build a second facility in Brownsville, Texas, as many speculate will happen.

Domestic capacity grows

There have also been some investments in additional Mexican steelmaking capacity, largely based on the belief that the Mexican automotive sector will grow over the long term. Plummer observed that Ternium recently brought a second, 430,000 tonne per year, hot-dip galvanizing (HDG) line online at its Tenigal automotive joint venture site, and it is in the midst of building a new 4.1 million tonne per year hot strip mill in Pesqueria, near Monterrey. It is slated to come online in late 2020 or early 2021, to supply Tenigal with hot-band feedstock, replacing the hot-rolled coil that would otherwise come from Japan.

ArcelorMittal is building a new 2.5 million tonne per year hot strip mill in Lazaro Cardenas, which is expected to come online mid-year. Plummer estimated that somewhere between 1.5 million and 2 million tonnes of that output is targeted for the automotive market. In addition, Grupo Simec is in the process of bringing online a 600,000 tonne per year special bar and wire rod plant in Apizaco, Tlaxcala, and the Nucor-JFE Steel Mexico joint venture recently commissioned a 400,000 tonne per year hot-dip galvanizing line at its new plant in Silao, Guanajuato.

Over the past three years several steel service centers made significant investments in Mexico, anticipating that by 2021 Mexican auto output, which is currently a little over 3.7 million light vehicles per year, would increase to close to 5 million units per year. But Zirión said that since the growth in that market has been less than anticipated, many Mexican service centers and processors are
experiencing overcapacity.

The energy sector

The Mexican energy sector has recently seen limited investment, although the country’s drill rig count was up by 158% year on year in 2018 and up by another 31% year to date through October. Plummer said that it has helped that over the past two years, under its previous administration, the Mexican government had opened up drilling through Petroleos Mexicanos (Pemex), the stateowned
petroleum company, to international bidders for the first time.

“But there are concerns that the Obrador administration could put significant constraints both on private investment on that and on the building of energy transmission pipelines,” Zirión said. Plummer said that would be a mistake given that, with both oil and natural gas prices being much more expensive in Mexico than in the US, there is a clear need for more pipelines between the two countries. Plummer said that Mexican pipe and tube production only accounts for 1.5% of the country’s apparent finished steel consumption since about 79% of the tubular products produced in the country are exported.

Maliushkina said that while 2019 was a tough year for the Mexican steel market because of all the uncertainty related to demand and trade issues, it helped that steel exports began to pick up in the second half. “That should continue this year with US steel prices – especially flat-roll prices – maintaining their upward momentum in early 2020,” she said. “Mexican steel demand, however, will remain challenging in 2020 for both flat and long products with both construction activity and automotive output expected to decline.”

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