The Mexican steel supply chain looks to get past COVID and USMCA drama and return to a period of strong growth.
The coronavirus pandemic hit Mexico a little later than it did the United States, with cases not taking off until May of 2020. But a later start did not lead to any significant economic breaks for the world’s 15th largest economy. Mexico was not spared COVID-19’s business effects in any meaningful way.
As Mexico’s fortunes are so closely tied to the state of the U.S. economy, the sudden COVID-related shutdowns in the states in late March last year had an immediate effect on the country, despite a lack of active cases. The Mexican economy fell off 17 percent in the second quarter.
Similar to the story in the U.S., the Mexican economy bounced back in the second half of the year, though not enough to overcome the damage done in the second quarter. Overall, GDP came in at a decline of 9 percent in 2020, the biggest year-over-year drop since the Great Depression.
“The pandemic had a huge negative impact in second quarter 2020. On top of government austerity measures and lack of relief package, many jobs were lost and industrial sectors reduced production due to cancelations and/or lack of orders,” says Guillermo Padron, DGM of iron and steel products for Mitsui & Co. “However, there were signs of recovery in the third quarter.”
The effects were demonstrated most acutely by the automotive sector. In January of 2020, the Mexican auto industry produced 320,000 units. In April, only 3,000 cars were made, representing almost a complete shutdown of one of the country’s most important industrial markets. Fortunately, the ramp up was almost as quick as the ride down, with production in October coming in at 347,000 units, Deloitte reports.
That kind of bounce back is expected to continue. Various economic forecasts, including those from the International Monetary Fund and El Economista, peg economic growth in 2021 to hit a healthy 3.5 percent. Growth will continue, but at a slower rate in 2022, the consensus indicates.
The Bank of Mexico is a little more optimistic, with a recent revision calling for 4.8 percent growth in 2020, followed by 3.3 percent next year.
Steel industry participants share the upbeat view of 2021.
“We see a good outlook for this year. Demand is growing, we have better prices, the construction sector is picking up and the balance between national and international demand is stabilizing for our region,” says Carlos Moss Velez, marketing director for Gerdau Corsa, who also points to low interest rates as a reason for optimism.
The view is the same from Padron. “There is a strong recovery, in particular automotive OEMs and parts makers.”
A strong automotive market is crucial for the Mexican industrial economy, given the outsized role it plays. Mexican steelmakers would love to see a return to the foreign investment in the sector, which had slowed in recent years.
While observers both inside and outside the steel industry anticipate a good year ahead, caution remains part of the picture. How the country handles vaccination rollout, the state of the still-sluggish energy market and government policy could play a role in how the recovery takes shape.
“It is a modest but positive outlook, but it is subject to how the pandemic is handled in the country and the creation of tax incentives, among other factors,” says Jose Rodriguez, a spokesman for ArcelorMittal.
To date, that has been a bit of a sticking point. Mexico’s government has been a little more conservative in its response to the coronavirus than other developing nations, Lloyds Bank Trade reports. The country enacted a $26 billion plan, obviously well short of the stimulus efforts undertaken by their northern neighbors. Mexican President Andres Manuel Lopez Obrador has been reluctant to inject more money into the Mexican economy, believing such efforts ultimately go to the wealthy rather than to stimulate the economy.
That’s a decision questioned by the economists. “The federal government has no plans to approve additional fiscal stimulus to benefit the economy, thus limiting the extent of the recuperation of employment and constraining a bolder recovery in consumer spending,” writes Jesus Leal Trujillo of Deloitte Research and Insights.
Interestingly, while Mexico may be slow to advance stimulus measures, the aggressive push by the U.S. on that front will likely benefit its neighbors to the south as well. “Thanks to incentives that put money in the pockets of consumers in the United States, products that are built or assembled in Mexico and exported to the country will find buyers. Without a doubt, this favors the industry in Mexico,” Rodriguez says.
Employment has been a major issue since the onset of the pandemic. At the outset, 12.5 million people left the labor force, with unemployment climbing from 3.3 percent to 4.5 percent. The recovery has brought 10.2 million people back, but many of them are now working in the “informal market.” Deloitte estimates the number of people working part-time hours doubled from October to January, exemplifying “how, despite the recovery, working conditions have become more precarious in the country.”
On the positive side, 2020 saw the implementation of the long-awaited United States-Mexico-Canada trade agreement, ending several years of uncertainty since the U.S. withdrew from NAFTA.
“There were several inserted provisions that changed the original spirit of NAFTA. In spite of this, it benefits the steel sector to accelerate the investments to satisfy demand, catch the organic growth, reduce imports and increase the regional value content for the automotive sector,” Padron says.
Even for Gerdau, which doesn’t figure to directly benefit from the deal as a result of its focus on long products rather than sheet, the deal is a good sign. “As a whole industry, we believe it will bring prosperity, and new business opportunities and stability in our market,” says Moss Velez.
On top of that, the installation of a new presidential administration in the U.S. that is not as openly antagonistic toward Mexico is another sign of hope for the steel sector. “The USA’s and Mexico’s economies are deep rooted; nearly 80 percent of Mexico’s total export destination is the USA. I believe the new administration will strengthen the commercial relations for our mutual benefit,” Padron says.
As with steel producers in the United States, the Mexican mill operators remain concerned about import levels. According to CANACERO, the trade group representing Mexican steelmakers, 41 percent of the finished steel consumed in Mexico comes from imports, while flat steel imports represent a staggering 56 percent of consumption. However, Rodriguez points out, “this will change once we start the production of our new hot-strip mill in Mexico.”
While steelmakers are concerned about that high level of import penetration, that doesn’t extend to their North American peers, even with Steel Dynamics’ new mill in Texas expected to ship some of its product south across the border. The steelmakers welcome fairly traded import products, they say.
“The imports are our largest threat; not from the U.S., but mainly from Asia and Europe. We believe we have an excellent opportunity to supply the internal market fully with national products, hence we have to be aware of all imports and possible dumping by other regions,” says Moss Velez. “We see the U.S. as not a competitor, but as an ally in this battlefield.”An improved outlook for the Mexican construction sector has Gerdau optimistic about the prospects for 2021.
(Photo courtesy Gerdau.)