Steel bargains could be coming from Mexico
Collapsed demand and lower prices at home at a time when supply has expanded will make more steel mill products from Mexico available for buyers in the U.S. and Canada.
By Tom Stundza -- Purchasing, 12/11/2008 2:00:00 AM
Steel trade between the U.S. and Mexico typically averages 6.5 million net tons a year. One nation usually is a more dominant supplier than the other based on the values of the dollar and the peso. But, with the regional economy in crisis, Mexican-made steel may be much more available and at bigger bargain prices for buyers in the U.S. and Canada throughout 2009.
Supply is expanding yet home-market demand in Mexico for carbon and stainless steel sheet especially is sliding. Reason: The country's production of cars and trucks, refrigerators, ovens and ranges, washing machines and dryers has plummeted. "Mexico's economy now is performing well below its potential," says senior economist Alfredo Coutino at Moody's Economy.com. "As domestic demand has weakened, industrial production has contracted in mining, manufacturing and construction."
Analyst Michael Gambardella at J.P. Morgan Securities in New York says "the steel sector is under a terrific amount of pressure (since) end-customer demand has drastically decreased, leading service centers to cut inventories and sharply reduce orders from mills." The steel mills, in turn, have been forced to start a round of price cuts that drove November hot-rolled steel prices to $700–$750 in Mexican markets, or about $100 under the U.S. baseline prices.
Mexico's iron and steel industry, one of the oldest in Latin America, is centered in Monterrey, where the country's first steel mills opened in 1903. In 2008, there has been 5.7% expanded supply at 20.5 million net tons from existing steelmaking plants. Demand, however, has fallen 4.6% to 18.5 million tons. So, the proximity to the U.S. market is a key driver of expanded Mexican exports northward, especially given slowing demand in domestic and South American export markets.
Also looking to boost Mexican exports is the recent World Trade Organization order to the U.S. that it must fix tariffs on imports of Mexican steel in line with international commerce rules. The ruling follows a WTO appellate decision, made last April, which found against the U.S. for imposing excessive dumping fees on stainless steel from Mexico.
Steel expansion will boost capacity
Looking ahead at the supply base, even-higher Mexican steel production is coming—as there has been greenfield and brownfield steelmaking and steel-processing capacity newly announced by ArcelorMittal Mexico and other local firms of AHMSA and Industrias CH along with, Gerdau of Brazil, Nucor of the U.S., Pohang Iron & Steel Co. (POSCO) of South Korea and Ternium of Luxembourg.
AHMSA is Altos Hornos de México S.A. de C.V., the nation's largest integrated steelmaker, headquartered in Monclova. ArcelorMittal Mexico, the Mexico City-based subsidiary of the world's largest steelmaker, owns and operates the large integrated long products Sicartsa mill and the Lázaro Cárdenas flat-rolled mini-mill. Industrias CH S.A. de C.V. is the rapidly growing steel producer and processor based in Mexico City that owns the Simec Group of Guadalajara, which just bought Republic Engineered Products, the largest U.S. producer of special bar quality (SBQ) steel.
Multi-national steelmaker Ternium plans to invest $4.2 billion over the next five years to build a flat-rolled steel plant in the Monterrey area that will market hot-rolled, cold-rolled and galvanized sheet. A Ternium statement says the steelmaker believes demand for value-added sheet steel products in Mexico "will grow steadily in the medium term, driven by new construction and industrial development."
Mini-mill steel producer Nucor of Charlotte, N.C., plans to announce by year's end the site of a new $125 million sheet and coiled plate processing center in Mexico with pickling, slitting, cut-to-length and blanking capabilities and annual capacity of more than 500,000 tons. Posco plans to build a 2 million ton/year hot-rolled sheet plant at the port of Altamira that will add cold-rolled sheet and as much as 500,000 tons/year of galvanized steel.
And there also are news reports of capacity-expansion investments by steel rod and wire producer Deacero Group of Monterrey, the Tamsa (or Tubos de Acero de Mexico S.A.) steel tubing subsidiary of Tenaris Group and the huge Mexico City-based processing and distribution Villacero Group. They all expect more manufacturing companies to be relocated to Mexico eventually to offset higher costs elsewhere.
Large-tonnage stainless steel investment is being made by ThyssenKrupp Stahl at its Thyssen Mexinox plant in San Luis Potosí. The firm also is building a stainless steel processing facility in Calvert, Ala., so an analysis by the Steel Business Briefing online newsletter suggests that U.S.-Mexican stainless steel trade "has the potential to triple" in the coming years.
With all that capacity, and given that home-market manufacturing expansion won't happen for a while, the existing steel mills appear to be gearing up to switch export emphasis from South American customers to steel users in the North American Free Trade Agreement (NAFTA) partners. Mexico has well established trading links of steel mill products to the U.S. and Canada, importing an estimated 4.4 million net tons this year while exporting 3.6 million northward. Overall, Mexican distributors, processors and manufacturers sourced 8 million net tons of steel in 2007 from foreign nations while the country's mills shipped 6.5 million tons overseas.
Domestic steel demand dips
Metalworking in Mexico was healthy through August and then dropped off the cliff. "The Mexican apparent steel consumption has started to decrease, as key-consuming industries have slowed down," reports analyst Rodrigo Vázquez at Harbor Intelligence, who contributes to the Mexican Flat Steel Monthly Report newsletter. Steel market insiders, who had projected a 5% rebound in steel use this year to offset a 2% dip in 2007, now say consumption will slide 5% in 2008 to 18.5 million net tons—and drop again as much as 8% in 2009 to 17 million tons.
Steel producers at a recent annual Canacero conference in Cancun told the media there is much uncertainty about end-use markets because of tight credit as all major construction projects and durable goods production plans are being reevaluated. In fact, adjusted forecasts from economists now suggest declines in the overall Mexican economy in 2008 and 2009 will stunt earlier steel-demand growth projections for the NAFTA partner. This would open the door for more Mexican steel being available to U.S. and Canadian buyers—except there is little immediate need north of the Rio Grande for more supply.
The overall Mexican automotive sales market was 1.1 million cars and trucks in 2007, down 4% from 2006. Mexico's automobile factories have lost more domestic business this year because tariffs expired on cheaper used cars from the U.S. With the regional economy plunging, sales of new, Mexican-built vehicles will mimic trends in the U.S. and Canada—and cause cutbacks in assembly. This will loosen more sheet steel for export.
With manufacturing in a slide, commodity prices have fallen sharply and volatility has increased across Mexico. In fact, steel prices are dropping just as rapidly in Mexico as in the U.S., according to buyers. And, since the U.S. is the main offshore buyer of Mexican-made steel, "excess steel supply will remain supportive of lower prices in the coming months," says Vázquez.
Yet, Mexican steel production could remain at high levels for some time to come, says the Camara Nacional de la Industria del Hierro y del Acero (Canacero), the nation's steel association. The Mexican steel industry's goal is to boost annual steel production to 32 million tons by 2020 through a series of short and medium-term strategies, reports Mexico City-based Canacero.
Canacero says "this vision of industry will bring important benefits to our country: an investment of $19 billion [and] the creation of 30,000 additional jobs directly related, that could grow to 300,000 indirectly related jobs," according to a trade group statement. In the short-term, the trade group adds: "In general, we are hoping for a recovery in the demand cycle for steel in 2009 and 2010, with less inflation pressure and more accessible prices for raw materials compared to what we have seen in 2008."
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