An expert weighs in on the Mexican steel industry and the USMCA.
The United States-Mexico-Canada Agreement is designed to bolster trade among North American countries. A revision of the North American Free Trade Agreement, the USMCA requires 75 percent of a vehicle’s parts to be made in North America in order for trade among the three countries to remain tariff-free. among other things. In addition, 70 percent of a vehicle’s steel and aluminum must also originate in North America. Production workers on the continent must earn at least $16 per hour.
According to Jesus Cañas and Chloe Smith, who did research on behalf of the Federal Reserve Bank of Dallas, Mexico’s GDP had declined 0.2 percent through the third quarter of 2019. “The consensus GDP growth forecast for 2019, compiled by Banco de Mexico, remained at 0.0 percent in December,” say Cañas and Smith. “Growth for 2020 is forecast to be 1.1 percent.”
This can create questions about the state of the Mexican steel industry.
“Mexico imports a lot of specialized steel, so if Mexico has to import steel, it must import it from the U.S. and Canada,” says Xu Yu, executive director of Prodensa Group, Houston, Texas, who spoke on the topic at last month’s FMA Annual Meeting in San Antonio. “This is before Mexico can import from countries like South Korea, which was quite a big exporter to Mexico. Russia, China and Thailand were importers to Mexico, but now [the USMCA] will limit a lot.”
Originally a Mexican-based company and with locations in Mexico and the U.S., among other countries, Prodensa Group is dedicated to providing management consulting and start-up project management for manufacturing investment primarily in the U.S. and Mexico. Prodensa manages the launch operations through strategic advisory and business intelligence to start up implementation and operations management for companies from North America, Asia, and Europe in industries such as metal machinery, the automotive industry, aerospace, and alternative energy.
“We tailor our services to what clients need,” says Yu.
Canada was the last North American country to ratify the USMCA – on March 13, 2020. From that date, it will take the USMCA approximately three months to be enacted.
Mexico is already a large importer of U.S. steel. In fact, the country doesn’t import much specialized steel, according to Yu. Instead, “Mexico imports a lot of steel for the automobile industry. Mexico does have steel mills, and they do produce steel but mainly for construction and commercial steel,” she says, adding that Mexico’s main importer has been the U.S., as well as Korea, Japan and China.
Yu breaks down the use of its imported steel. “Mexico imports 61.5 percent steel for construction, 10.6 percent for automotive, 18.8 percent for metal products, 7.8 percent for heavy machinery, and 1.3 percent for electric equipment,” says Yu. “Currently Mexico exports 5.1 million tons of steel product and imports 14.7 million tons, so Mexico imports way more steel than exports. We’re just talking here about steel products, not the sheets or anything. Mexico has 14 steel producers, and the annual production of raw steel is about 19.9 million tons.”
The past year was a difficult one for the Mexican steel production industry. Mexican production fell 8 percent in 2019 to 18.6 million tons. Mexican steel mills hope the ratification of the USMCA reverses that trend.
“The advantage of the USMCA is proximity. Because of that tie, Mexico has quite good opportunities for infrastructure and manufacturing,” says Yu. “The U.S. border states – Texas, New Mexico, Arizona, and California – are the number one states that export to Mexico. Mexico is the largest export market for those states.”
“Without the tariffs, [trade is] better,” says Yu. “With the USMCA, I think it will increase consumption of the steel and metal products like aluminum within the region. Since January 2020 Mexico became the biggest trade partner of the U.S. Canada is the U.S.’s second trade partner.” She notes that the trade wars between China and the U.S. have decreased trade between these two countries in 2019.
Although Mexico is an important partner in the USMCA agreement, Yu observes that Mexico’s infrastructure needs more investors. “The USMCA will increase Mexico’s capacity for steel production, so this will require more investment [in Mexico] because currently it’s not enough,” she says. “We expect the USMCA will provide certainty for the investment because businesses don’t like uncertainties. Like what is going on right now is the coronavirus, which leaves uncertainty in the marketplace.
“The USMCA will provide certainty for businesses to plan their supply chain. The supply chain takes years to develop, so you cannot change the supply chain in months or days,’ says Yu. “It takes years, so we overall think the USMCA will provide certainty for investments, and also for companies – either domestic or foreign countries – and the USMCA will shift more supply chains from Asia to North America. We see that chance. If you want to meet the USMCA requirement, you have to buy within the region because the regional content requirements are quite high.”
How the new trade agreement between all three North American countries will pan out is still uncertain. But if Mexico obtains more investors and builds up its infrastructure, the country’s steel industry can become more profitable. ?