Mexican Steel: Enjoying the Ride
A bustling automotive market is driving interest in Mexican manufacturing. Metal distributors in the region are bracing for more growth.
By Dan Markham, Senior Editor
As the metals industry in the United States and Canada plodded through a disappointing first quarter, the story was much different in North America’s other major steel market. NAFTA partner Mexico is outpacing most other economies thanks to a seemingly never-ending run of automotive investments.
“Generally speaking, the economy has been stronger in Mexico than it has been here. I think they’re in a really good spot,” says Mike Carroll, president of Louisville-based Steel Technologies, which has a large presence in the country with eight locations.
A confluence of factors is attracting the world’s automotive manufacturers, and the companies that supply them, to Mexico. The result is a bubbling market for steel processing and distribution in the country.
Over the next two years, at least four major automotive companies will invest in new facilities in the area around Monterrey. Not coincidentally, steel capacity is being added to the region through a joint venture between Mexican steelmaker Ternium and Japan’s Nippon Steel, while South Korea’s POSCO has plans to add auto sheet coil centers at its facility in Celaya City.
Such activity is turning Mexico into one of the world’s largest auto producing nations. According to IHS Global Insight, Mexico produced 2.85 million vehicles in 2012, a number that may reach 3 million units this year and 4 million by 2017-18.
These numbers delight North American service centers with a presence in Mexico, a roster that includes Steel Technologies, Worthington Steel and Steel Warehouse. And it’s attracting similar entities from around the globe.
“Automotive has been very active, with some of the major automakers building new capacity. Just in the last couple of years there’s been $8 billion or $9 billion in new investments for automotive assembly plants, much of that going in the area around our Celaya plant,” says Carroll. Steel Technologies was one of the first U.S. companies to tap into the Mexican market back in the early 1990s. Now, its holdings there include a recent 125,000-square-foot facility in Celaya and a new 300,000-square-foot plant in Pesqueria, the largest greenfield project in the company’s history.
Worthington Industries also has invested heavily in Mexico through its Serviacero joint venture with Mexico’s Serviacero Planos. The JV operates three facilities, with more than 50 percent of its business tied to automotive. It recently installed a pickle line at its Monterrey facility, the first independent, non-mill pickle line in the country.
“Automotive in North America is going to be extremely strong through 2017. We’re already at pre-recession levels,” says Geoff Gilmore, president of Columbus, Ohio-based Worthington Steel, “And the growth is specifically in the U.S. and Mexico.”
Mexico has become attractive to automakers around the globe for several reasons, says Guido Vildozo, an analyst with IHS Global Insight who specializes in the Mexican automotive market. It starts with currency. Automakers from Europe and Japan are trying to hedge against their strong currencies by establishing plants in places with more favorable exchange rates, a fact in Mexico’s favor.
Another factor is Mexico’s ready access to the entire world. The country has the most free trade agreements of any nation, with more than 40 pacts of varying types. It has access to the United States through its NAFTA agreement, while also offering duty-free delivery to South America. “This is critical because South America has grown by leaps and bounds over the last few years. There’s an interest in being able to capture the growth taking place in Brazil and Mexico,” Vildozo says.
Labor rates also provide an explanation, particularly on a comparative basis. Mexico’s labor rates obviously are well below those in the United States. For a time they were above the rates in China, but that too is changing, which alters the calculus for locating a facility. At the Platts Steel Market North America Conference, analyst John Anton of IHS Global Insight said China’s hourly labor rates are expected to explode from about $2.50 to $9.80 in the next 10 years. “If you’re going to China for cheap labor, don’t go, because it’s not going to hold on,” he said.
The automotive supply chain has already received that message. “There was a time when everyone was planning to go to Mexico, but they switched gears and went to China. But China’s rates are becoming very comparable to Mexico’s, and Mexico has a huge logistics advantage,” Gilmore says.
Despite the low-cost of its labor, Mexico also has developed a reputation for quality. “Since the signing of NAFTA, they’ve become very experienced at producing products for markets that are very demanding, where quality needs to be of the utmost. Mexico is starting to see the dividends from the learning curve it went through over the last several years,” Vildozo says.
In the case of Japan, Mexico has appeal for another highly specific reason. After the earthquake and tsunami of 2011 rocked Japan’s supply chain, the country’s automakers were looking for another locale that would insulate them against further natural disasters at home.
Combined, these factors make Mexico the go-to destination for automakers—and not just U.S. companies. In January, Volkswagen opened a new engine plant in Silao, while also announcing plans to manufacture the next-generation Golf in Puebla for the North and South American markets. Nissan’s expanded production facility in Aguascalientes, which will produce an additional 175,000 compact vehicles, is expected to start up by year’s end. Honda will open a new production facility in 2014 in Celaya to produce its subcompact Fit for customers in the Western Hemisphere. And Audi plans to locate a facility in Mexico by 2016 to produce an SUV, though the exact site has not been chosen.
Naturally, these massive investments will call for changes in the supply base. “Tier 1s are fairly well established in Mexico, given it has been a significant manufacturing base for the U.S. But Tier 2s and 3s need to see some development,” says Vildozo. Companies such as Honda and Mazda have brought along some of their suppliers, “which is slightly different from what we’ve seen before, where existing suppliers picked up the business.”
On the metal supply side, Mexico historically has been heavily dependent on U.S. mills to provide product. But with its growing domestic base from primary producers Ternium and AHMSA, and the increasing participation of global mills, that is no longer the case. “The U.S.-based mills have been losing some market share,” says Arturo Marroquin, operations manager at Acero Prime, a Mexico-based toll processor. “We’ve seen it change over the past five to six years, and it will change more in the next five to six years.”
Gilmore at Worthington Steel says his company’s Mexican facilities are open to sourcing material from several different locations, including its traditional U.S. mills, Mexican suppliers and even traders. “The supply chain has been good. We have nice relationships and plenty of options.”
One link in the chain that may not need additional capacity is the steel distributors and processors, Marroquin says. “We’re attracting investment of steel service centers, including U.S. companies, Japanese companies and Korean companies. We have heard of 10-plus new service centers just in the Central Region. The processing market is going to be very saturated.”
Worthington has similar concerns. Gilmore says his company’s growth in the Mexican market in the coming years is not likely to come through new facilities, but new processing options such as its pickle line. “We’re open to expansion, but our focus will be on additional capabilities at some existing facilities. We may see an opportunity to add more value, but I don’t think greenfields are our No. 1 priority,” he says.
Opportunities in this rapidly growing automotive market are not without challenges. Primary among them is the availability of quality labor. “You’re talking about almost a million units of additional capacity. That requires skilled labor. There will be a challenge of trying to find people and keep people,” Vildozo says.
Despite its growth prospects and free trade agreements, Mexico remains very beholden to the whims of the U.S. market. More than 85 percent of the autos produced in the country are sold to the north, thus any disruption to the U.S. economy will be felt immediately by the Mexican industry.
Moving material across the border, in either direction, is an issue, but one that companies learn to manage. Southwest Steel Coil is a distributor based in Santa Teresa, N.M., 6.5 miles from the Mexican border. About 90 percent of its sales go into Mexico.
“There are waits going in and waits coming out, but you allow for that fact,” says Ed Camden, president of Southwest Steel Coil. “If you make calls in Chicago, you build in the traffic. Down here, we build in the border line.”
Marroquin is concerned that Mexico’s existing infrastructure will be insufficient to handle the growth. “We think more infrastructure is needed in the railway system. And we have seen trucking, not super saturated, but busier than before. There will be challenges to continue to grow transportation, but opportunities as well.”
Vildozo is fairly confident Mexico’s infrastructure won’t impede its growth. “There’s always uncertainty looking into the future as to whether we will see bottlenecks, but at least for now, the way the government is planning, there shouldn’t be any issues.”
As in the U.S., Mexico had a presidential election in 2012. Enrique Pena Nieto took office in December and is pledging much-needed reforms that would allow Mexico’s economy to grow even further. Nieto also has vowed to fight the widespread drug-related violence that has resulted in the brutal deaths of more than 55,000 people in the past six years—and has scared off untold foreign visitors and businesspeople.
The metals industry is aware of the safety concerns and does its best to protect its employees and others. “Steel Technologies, like any company, takes precautions on doing business in Mexico,” says Carroll. “Our feeling is they’ll continue to make headway on the issue, and that it has probably bottomed out. Obviously, everyone is hoping hard for the best.”
While the automotive sector, concentrated in the North Central region of the country, is the leading light for Mexico right now, it is not the only end market of note. Steel sheet distributors believe similar growth is possible in the appliance market, once North American demand finally picks up. The recent uptick in housing starts in the U.S. may provide that necessary spark.
“I think appliance could be very strong there. As you start to see residential construction come back—and the signs look good right now—that’s a market that could really heat up,” says Gilmore.
Additionally, as a developing nation, Mexico stands to benefit from tremendous internal demand growth. The spread of industry will help develop Mexico’s middle class, which will give workers the wherewithal to purchase many of the products they produce.
Mexico’s overall growth is evident in other ways. Fabtech Mexico, sponsored by the Fabricators and Manufacturers Association, International, is now in its fifth year, rotating annually between Monterrey and Mexico City. This month’s Monterrey event was expected to include 91,000 square feet of exhibit space for the latest metal forming, fabricating, welding and finishing equipment. The trade show is 2½ times larger than in 2009, says Bob Hoper, vice president of media and exhibitions for Rockford, Ill.-based FMA. “Fabtech is a mirror of the state of the industry. If people aren’t making parts, they’re not buying equipment. And if they’re not buying equipment, they’re definitely not buying trade show space.”
Obviously, that’s not the case in Mexico. “We have identified Mexico as a manufacturing area that’s only going to grow in importance. Fabtech Mexico is by far the fastest growing event we have,” Hoper adds.
That reflects the general feeling among metal distributors who see Mexico as an important growth market. “We want to expand our platform and be positioned for what we see as a very strong environment in the years ahead,” Carroll says.