Mexico Rides the Auto Wave

Mexico’s industrial economy continues to get a boost from investment by global carmakers. This focus on automotiven has helped the country manage through the difficult steel environment.
 
By Dan Markham, Senior Editor
 
Thanks to its strong position in the global automotive market, Mexico’s steel industry has weathered the economic headwinds better than competitors in the U.S. and other parts of the world.

Mexico is now the seventh-largest automobile producer in the world, churning out 3.4 million vehicles in 2015. That number is projected to hit 5.1 million units by 2020, when the country would become the globe’s fifth-largest supplier. About 85 percent of current production is exported, mostly to other NAFTA countries, but also to Europe, Asia and South America. Auto exports will continue to fuel the market through the end of the decade, but the government is taking steps to keep more of that production for domestic use. Last year, it banned the import of used cars into Mexico to boost the market for new vehicles.

Growth in Mexico’s auto production is expected to pause a bit this year before resuming in 2017. “OEM production is forecast to grow only 2 percent this year. There are a lot of model changes and some new platforms being launched. We’ll have to wait for next year,” says Benjamin Zermeño, a director for Serviacero Worthington, a joint venture between Mexico’s Serviacero and Worthington Industries.

Guido Vildozo, an automotive analyst for IHS, supports that view. “In the grand scheme of things, we’re still seeing positive momentum. We won’t grow as much this year as we have in the past few years, as we only have Audi and Hyundai plants kicking in during the second half of the year. Those will take some time to mature.”

Investments such as those by Germany’s Audi and South Korea’s Hyundai reflect the appeal of Mexico to automakers from around the world—a motivated workforce, relatively low wages and ready access to various ports. Additional plants from foreign steelmakers Kia, Mercedes, Nissan, Toyota and BMW are in the works, while U.S. automakers will likely resume expansions in the country by the next decade. “There’s still plenty of momentum from a new plant perspective, and we’ll see supplier investment for quite some time after that,” Vildozo says.

Investment by American metals companies in Mexico has been significant in the last two decades. U.S.-based service centers have established a significant presence in the country, most notably Steel Technologies and Worthington, but also Ryerson, Olympic, Samuel, Feralloy and others.

Marmon/Keystone made its first foray into the country in 1994, and today has facilities in Monterrey, Queretaro and Mexico City, with more locations planned in the future. “We’re expecting many manufacturers to move at least some of their U.S. manufacturing into Mexico. We expect it will be a growth area for us,” says Barry Glaser, Western Region vice president for Marmon/Keystone.

As big as it is, Mexico’s automotive supply chain has much more opportunity for growth. While the metal processing and Tier 1 supply base is world class, Vildozo says, the same is not true further down the line. The Tier 2 and Tier 3 system is not nearly as well developed.

The metals supply chain will be further tested by changes in materials used by automakers to meet emissions requirements in the U.S., Europe and elsewhere. More and more, vehicle designs are incorporating parts made from lighter aluminum, high-strength steels and specialty metals to take weight out and improve mileage. Alejandro Reyes Castrejon of Monterrey-based steelmaker Villacero says the absence of domestically produced special steels for the automotive industry, among other alloys, is the biggest obstacle facing the supply chain. Such high-demand products must be imported.

Among Mexico’s other challenges, it lacks the infrastructure needed to reach its full potential, says Vildozo. There aren’t enough highways and rail lines coming out of the manufacturing center for maximum effectiveness. Additionally, manufacturers sometimes struggle to find the necessary manpower. Transitioning the employment base from agricultural work to skilled labor “has not been as easy as originally planned,” he says.

Surprisingly, investment by steel producers in Mexico to meet the demands of the booming auto market has been relatively modest. Steel capacity added in the last decade has been primarily for electric arc furnace production of long products. One exception is the recently completed Hyundai Steel facility in Monterrey to serve the new Kia plant. “The mills have chosen a strategy to not put in the equipment to make the higher-quality sheet. The integrated steelmakers haven’t made enough money,” says steel analyst Becky Hites of Steel-Insights, LLC.

Steel production in Mexico is currently in a state of flux, with domestic steelmakers Altos Hornos de Mexico, ArcelorMittal and Deacero cutting costs and production in 2015, including suspension of $250 million in planned investments by AHMSA. At the same time, Gerdau is ramping up production at its Corsa long products mill; Grupo Simec is spending $600 million on a greenfield site to produce SBQ large round blooms, large-diameter bars and wire rod in Apizaco, Tlaxcala; and Talleres y Aceros is building a 1.2-million-ton minimill, with a Castrip facility, near Orizaba, Veracruz.

Like steelmakers in the U.S., Mexico’s industry has been hurt by competition from low-cost imports, particularly from China. The Mexican government is taking steps to impose greater restrictions on products that may be imported—quite a change for a country that has more free trade agreements than any other.

In announcing its new mill, Gerdau Corsa General Director Felipe Reinaux cited his hope to stave off foreign offerings. “The production of structural profiles in Mexico by Gerdau Corsa will allow the substitution of the country’s current imports,” he said.

Outside the auto industry, conditions are more mixed. Like the U.S., Mexico is a major supplier of petroleum products, so the energy industry’s current downturn is taking its toll on the country’s economy. In fact, automotive supplanted energy as the country’s top industry in 2015. Still, oil and gas represent 30 percent of the Mexican economy. “Private construction is starting to come alive, but we’re not going to see any government spending due to lower prices of oil,” Zermeño says.

The energy market is heavily concentrated in the southern section of the country, one of the “four Mexicos,” describes Jesus Cañas, a business economist for the Federal Reserve Bank of Dallas. The others are the auto hub in Monterrey, the service sector around Mexico City and the agricultural states in the north.

Castrejon believes the Mexican government would prefer to become less dependent on the unpredictable fortunes of the energy market in the years to come, instead spurring other types of industrial development. Appliance and aerospace are two markets that could become more prominent in the future, while overall economic development could increase internal consumption of Mexico’s metals, he says.

Cañas believes the low oil prices, and the declining value of the peso vs. the dollar, are the two biggest problem areas for the Mexican economy. On the other hand, he says, the Mexican government has effectively managed the country’s monetary and fiscal policy while enacting reforms that will support further development of all industries. Reforms have lowered the costs for electricity and telecommunications, improved the education and labor picture, while also managing inflation. “Five years from now I see good economic growth, if they take care of some of the political and social unrest,” Cañas says.

Metals industry veteran Gonzalo Beltran of ISIIM, Nuevo Leon, is optimistic about the effects of the federal government’s economic and political initiatives. “The constitutional reforms the government has made, plus a good control of inflation and more exports, could be a detonator to great growth for the next few years.”

Mexico’s industrial economy is also on the minds of politicians north of the border. Air conditioner manufacturer Carrier recently announced plans to relocate a production facility from the U.S. to Monterrey, resulting in an unexpected loss of more than 1,000 jobs in Indiana. Such moves have become fodder for political vitriol in the U.S. presidential election, but Mexican observers doubt the heated talk will result in any meaningful changes in trade policy or activity between Mexico and the U.S. “It’s more rhetoric and a crazy guy saying stupid things. There’s too much being invested in Mexico,” says Zermeño. Cañas agrees: “We are so interconnected economically, I think it’s beyond political rhetoric.” Adds Beltran: “All of the time, the most important thing for Mexico is the status of the U.S. economy.”

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Monday, October 23, 2017