Mexican Steel 2005:
Slower Growth, Lower Prices

“For the first time in three years, industrial production awakened in Mexico [in 2004],” said consultant Jorge Vazquez of Harbor Intelligence, who predicted more moderate growth for Mexico’s economy and steel market in 2005. Vazquez was the keynote speaker Jan. 25 at American Metal Market’s Mexican Steel 2005 conference in Monterrey.

Mexico’s three main steel markets are construction (50 percent of steel consumption), automotive (10 percent of consumption) and domestic appliances (5 percent of consumption). With interest rates at all-time lows, Harbor Intelligence predicts home building in Mexico will grow by 13 percent in 2005, boosting construction- and appliance-related steel sales. Major appliance production in Mexico is expected to increase by 2.8 percent.

The consultants forecast that Mexico’s auto production will increase by 20 percent in 2005—vs. a 2 percent decline last year—due to the introduction of several new models, such as the Ford Fusion and Mercury Milan, slated for production in Mexican plants.

Last year, Vasquez admitted, he predicted steel prices would increase by 36 percent, when in fact they jumped by an unprecedented 115 percent. His prediction of a 7 percent increase in Mexican steel consumption was fairly close to the actual 5 percent gain, however.

Higher steel prices and consumption were partly a reflection of accelerating world economic activity, as many parts of the globe saw strong real GDP growth in 2004, including a whopping 9.7 percent in China and a robust 4.4 percent in the United States, Vazquez reported. Mexico’s GDP jumped 4.2 percent last year—up from just 0.7 and 1.3 percent the previous two years.

This macroeconomic growth in the U.S. and Mexico boosted industrial production in both countries by around 4.0 percent. “The Mexican economy is not tied to U.S. GDP, but rather to U.S. industrial production,” Vazquez continued, adding that exports constitute one-third of Mexico’s GDP, and 90 percent of Mexican exports end up in the United States.

Higher industrial production in North America and other parts of the world naturally led to an acceleration in steel consumption. Global apparent consumption jumped 8.8 percent from 2003 to 2004. Steel consumption in
the United States and Canada jumped by 16.9 percent, and in Mexico by 4.9 percent.

Accelerated consumption boosted world steel production, in turn, by 8.8 percent, including a whopping 23.2 percent in China, 4.8 percent in the United States and Canada, and 9.9 percent in Mexico, Vazquez said.

This increased production added to the shortage of raw materials, pushing production costs upward. Higher oil prices and skyrocketing freight rates, along with a weakening of the U.S. dollar, added to the cost pressure on steel.

Despite the higher costs, profitability for the mills hit record levels in 2004. “The impact of higher steel demand on prices was greater than the increase in production costs. Therefore, margins increased significantly,” Vazquez said.

Steel industry consolidation continues to give mills more control over prices. The Top 10 producers have increased their share of world production from 20 to 28 percent, he noted.

For 2005, he forecast that the cost of key steelmaking raw materials will continue to increase, though at a slower pace. Demand for steel will decelerate as the economies in the U.S. and Mexico slow and industrial production follows suit.

Harbor Intelligence predicts U.S. GDP will slow to 3.0 percent this year, while Mexican GDP slows to 3.7 percent. U.S. industrial production, a main driver of Mexican steel consumption, will decline to the 3.7 percent level.

Given the high steel margins, however, mills will continue to expand production, causing prices to decline by an average of 16 percent in 2005—though they will remain 78 percent higher than the average in 2003. Vazquez predicted hot-roll will end the year around $506 per metric ton, down from $728 in December 2004.

Spectre of excess capacity
Speaking on North American trade issues, Tom Danjczek, president of the Steel Manufacturers Association in Washington, D.C., expressed concern about planned additions of steelmaking capacity all over the globe, which could lead to serious excess capacity, weaker prices and increased trade friction. SMA represents 38 North American minimills, which produce about half the steel in the United States.

U.S. steelmaking capacity has been reduced by 15 million tons since 2000, during a time when market demand has increased. Imports into the United States increased by 9.5 million tons in 2004, a 40 percent increase over 2003, he reported.

In contrast, world steel production capacity in 2004, at 1.016 billion tons, exceeded world demand by more than 100 million tons. With world production capacity projected to reach a possible 1.268 billion tons by 2008, compared to a demand of 1.051 billion tons, the surplus production could double in the next four years, with onerous implications for global competition and pricing.

“Are we heading back into a cycle of excess capacity to demand?” he asked. “The fact is that North American capacity has declined, but there are many examples of new capacity being put in place with the aid of government subsidies elsewhere in the world.”

He noted that China has added so much steelmaking capacity that it is expected to begin exporting steel this year, in contrast to importing 35 million tons in 2004. “China’s shift from a net importer to a net exporter will affect us all,” Danjczek said.

Eduviges Baro, interim general director of Canacero, Mexico’s iron and steel association, said that NAFTA has created a closer trade relationship between Mexico, the United States and Canada. Each country has adopted similar policies to protect the region from trade-distorting practices by foreign competitors.

The oversupply and depressed prices that characterized the steel market in the decade prior to 2002 have given way to a market more oriented toward managing volume to control prices and maintain healthy profit margins.

Labor efficiency is up 15 percent in the United States, 22 percent in Canada and 37 percent in Mexico, in terms of man hours per ton produced. “2004 was a great year, with the industry working at 90 percent capacity,” Baro said, raising the question: “Was 2004 a sole event or a starting point? Will this be the model for more stable prices and income for the mills?”

He called for further consolidation among world producers, and the elimination of 60 million tons of obsolete capacity.

Canacero projects 4 percent growth in apparent steel consumption in Mexico in 2005. Operating at over 90 percent production capacity this year, Mexico will produce 17.8 million tons, a 7 percent increase over 2004.

Though the short-term outlook for Mexican steel is strong, mills need to plan for the future. “The steel industry’s investment in Mexico has been delayed,” he added. “Greater capital investment is needed for a better prepared steel industry.” n