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Focus on Mexico 2019:

Trade Winds Blow Hard

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The dual effects of Section 232 tariffs and NAFTA upheaval have put the brakes on Mexico’s steel market. The country’s return hinges on an end to the trade uncertainty.

Mexico’s metals market is in a period of upheaval. The reasons behind it lie primarily beyond its borders. 

The combination of Section 232, the uncertain future of the trilateral trade pact with its North American neighbors and concerns about low-priced imports from elsewhere have tempered growth in the country. Toss in a newly elected president whose views on various industrial issues aren’t fully understood, and it’s a recipe for a challenging period for the country’s metals supply chain.

“2019 will be one of the most complex in the siderurgical market,” says Alberto Voltolina, vice president of sales for Danieli. “The industry is going through one of its most difficult periods.”

The difficulties trace back to March 2018, when U.S. President Donald Trump imposed Section 232 duties of 25 percent on all steel products and 10 percent on aluminum from all countries, including NAFTA partners Canada and Mexico. And after an early period when the country was excluded from the charges, the tariffs went into effect for good. 

Today, a year later, Mexican steel remains subject to the 25 percent levy, which has curtailed production within the country. 

“The tariff of 25 percent has strongly affected the entire sector, because while the export of U.S. steelmakers to Mexico have been maintained with no restriction, those of Mexico to the United States were reduced by 30 percent. AHMSA had lower revenues of $250 million due to losses of direct and indirect imports,” says Luis Zamudio Miechielsen, CEO of Altos Hornos de México and its subsidiaries. AHMSA is the largest integrated steelmaker in Mexico.

According to Voltolina, the 30 percent decline in exports to the U.S. has already taken a toll on the steel industry, resulting in the loss of between 1,500 and 2,000 jobs. Mexico typically exports about 5 to 6 million tons of steel annually. 

Since the tariffs were first imposed, many industry observers believe they would be short-lived, though that didn’t come to pass. Still, there remains optimism they will eventually be pulled. But that sentiment is starting to wane. 

“The Mexican government soon expects the elimination of tariffs by the U.S. I do not expect that. Those tariffs will probably remain, or they will put in quotas,” Voltolina says.

Quotas, such as those imposed on South Korea that allows for 70 percent of the average from 2015-17, would be more tolerable to the Mexican steel industry, though still not what the country’s producers are looking for. 

For most of 2018, 232 was not the only concern for the Mexican steel industry. The country was also dealing with the threats to the North American Free Trade Agreement. 

In late fall, the three countries agreed to an updated version of NAFTA, the United States-Mexico-Canada Agreement. However, even though the three countries three chief executives signed the deal in a publicized meeting at the G20 Summit last year, the deal has yet to be ratified by any of the three countries. 

For Mexico and Canada, the continued existence of the Section 232 tariffs remains a road block to ratification.

In an interview with the National Post in March, Mexico’s Deputy Trade Minister Luz Maria de la Mora said the country would not ratify the deal without the tariffs being lifted. “We hope to have this new agreement in place. But in the absence of the new agreement, we know that NAFTA is good enough,” she said. 

Of course, the U.S. president has vowed to pull the U.S. out of NAFTA. But doing so might not amount to much, noted Bernard Swiecki at the March FMA Annual Meeting. Over the past 25 years, Congress has taken a number of legislative steps to make sure U.S. laws comply with the free trade deal. Even if the deal ends, those laws remain on the books, and aren’t likely to be rewritten.

“You could have a situation where NAFTA doesn’t exist, but all the laws that make NAFTA work are still in place. We call that Zombie NAFTA,” said Swiecki, director at the Center for Automotive Research, Ann Arbor, Mich. 

On the other hand, if the USMCA is ultimately ratified, it will have its biggest effect on the Mexican auto industry. One of the chief differences between the old agreement and the renegotiated one involves compliance by the Mexican auto industry, primarily in the area of the baseline employee compensation. “We think of the 142 vehicles we import into the U.S., 47 will have compliance problems.”

Potential solutions to the problem, beyond compliance, include adding more U.S. or Canadian content to make them compliant; pay the 2.5 percent tariff; or, if it’s a low-margin vehicle, stop importing the vehicle into the U.S. market.

The auto industry has been the driving force for Mexico’s growth, led by U.S.-based automakers opening parts and assembly plants in the country. Those investments have tailed off with the trade uncertainty, though it still figures to be a key contributor to the industrial economy.

“A lot of the manufacturing plants that were coming into Mexico to ship to the U.S. have been stopped. They’re not investing anymore. Everything’s on hold,” says Sergio Gutierrez Noriega, co-CEO of Deacero. 

Still, the automotive market continues to mature. “The situation in automotive is expected to increase at a good pace for the next two to three years, though the expectations were much better three or four years ago,” says Voltolina. 

The other major market at the moment is construction, though it too has been hampered by uncertainty. In this case, it’s a byproduct of the 2018 election that ushered in Andrés Manuel López Obrador, colloquially referred to as AMLO. 

Noriega says the first of the six years of each presidency is typically a slower one for growth, as the new president is assembling his priorities and staff. And with AMLO, this condition is magnified by the uncertainty of just how he’s going to govern. 

“We’re wondering what we have with AMLO,” said Economist Chris Kuehl at the FMA event. “You run (for office) from one perspective, then you change when you get into office. He looks a little more center left and a little less radical left with each passing day.”

The view is the same inside the country. “We haven’t had the time to measure what the view of the new government is going to be,” says Noriega. “They’ve been sending a lot of mixed signals.”

Nowhere was that more evident than with the proposed major expansion project at the Mexico City Airport. Steel industry participants were not pleased when the new president announced plans to scrap the $13 billion investment, then confused with his announcement earlier this year to operate three airport hubs at the nation’s capital. 

He further worried steelmakers when he floated the idea of eliminating tariffs on Chinese rebar, which has sold at $600 per ton locally, much higher than the offerings out of Asia. “We can’t compete with China selling at $450 per ton,” says Voltolina.

It isn’t the only issue with public spending. “Government construction is weak because projects don’t go on, and the don’t pay on time to suppliers,” says Regulo Terraza of AM Aceros, a supplier to the Mexican construction market. 

The uncertainty has led most observers, inside and outside the government, to anticipate modest growth this year. The International Monetary Fund’s most recent forecast calls for growth of 2.1 percent, consistent with other observers. And Mexico’s own Finance Ministry recently announced that growth would register between 1.1 and 2.1 percent this year, down from a previous projection that ranged from 1.5-2.5 percent. 

However worrisome the short-term outlook is, the long-term picture remains far healthier. The auto industry is firmly entrenched and maturing. And the country remains far behind on the developmental curve, allowing plenty of room for steel consumption.

Beyond the two major consumers, AHMSA’s Miechielsen says the energy market is one of the prime areas for further growth. “The main area for growth is in the energy sector, both for the reactivation of oil exploration and for the ductwork for liquid fuels and gases required by the country.”

To Terraza, another key is bringing up some of the underdeveloped areas in line with Monterrey, Mexico City and few other locations in the country. “We need the non-industrialized cities or regions like ours, Sinaloa, to increase economic flow and leave behind the traditional primary activities such as agriculture. Other regions of Mexico, such as the border and Bajio [a region of West Central Mexico that includes Guadalajara], have been the beneficiaries of foreign investment, and we need some of that to balance markets.”

And Deacero’s response to slowing demand is similar to what has gone on in the states, expanding its value-added capabilities. “We’re fabricating rebar in Mexico, which is a new market for us. We’re offering more solutions than just the products,” Gutierrez Noriega says. 

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