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Update on Mexico

Not a Carbon Copy

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MCN Editor Dan Markham Mexico’s economy tracks with the fate of the U.S., but it retains characteristics and concerns all its own.

The Mexican industrial economy faces many of the same challenges as their neighbors to the north, and a few unique to them. 

Like the U.S., Mexico experienced healthy GDP growth in 2021, coming off the pandemic-dampening prior year. The economy grew almost 6 percent last year, pretty much in lockstep with the United States, which is often the case. 

The OECD projected growth will slow this year to approximately 3.3 percent. Subsequent forecasts by other economic watchers pegged slightly more modest growth, hampered by inflation, supply chain issues and geopolitical concerns, among others. In January, the Banco de Mexico revised its projection from 3.2 to 2.2 percent.

The participants in the Mexican industrial economy see a similar story. 

“Although some improvement has been seen, we are still below the pre-pandemic rates,” says Jaime Lujan, director of flat steel sales for ArcelorMittal Mexico. “Construction ended December 2021 down 11.7 percent vs. December 2019 and manufacturing finished a bit more encouraging at -1.8 percent vs. December 2019.”

Gerdau’s Carlos Moss Velez says supply chain issues have really threatened the continued recovery in Mexico’s economy. “It was estimated the restrictions would ease at the end of 2021, but on the contrary it continues and now with the geopolitical risk, may intensify. As a consequence, there could be an increase in prices of commodities and other goods and services.”

Regulo Terraza isn’t anticipating any kind of return to pre-COVID conditions. “Business activity will never be the same as before the pandemic. Market behavior changed in order to fulfill other kinds of necessities, and we experience faster economic decisions in order to prevent continuous price hikes,” says Terraza of AM Aceros, a supplier of structural steel products.
 
Price hikes, of course, have been just as prevalent in Mexico as in the United States, contributing to the downgrade in expectations. “High inflation, high interest rates and slow pace of growth are not a good recipe,” Velez says. 

Looking longer term, the industry participants believe Mexico will resume its normal growth levels both overall and in the industrial sector. Such success is dependent on a number of factors, including the resumption of healthy collaboration between Mexico and its North American partners. 

The USMCA, or T-Mec as it’s called in Mexico, was designed as an improvement on NAFTA, though its effect to date is minimal. “Sincerely not,” Terraza answered to whether its implementation in 2020 has led to many changes. 

Velez agrees. “In general, for the steel sector, the pre-established conditions remain.”

But there are reasons for hope, others say. ArcelorMittal’s Lujan believes the provision that tightens the rules of origin on steel products for cars made in North America will benefit Mexico’s steel industry.

“Several industrial supply chains are demanding that steel be produced in the region. Although for the automotive part it is not mandatory until 2025 for light vehicles; we see that both automotive and industrial companies joined this initiative once it was announced to implement the changes immediately,” Lujan says. 

And Ramon Sotomayor of Serviacero adds the new labor regulations in the agreement will be felt in Mexico, even after the country enacted labor reforms in 2021 that will push up expenses. “Mexico will have to compensate for this loss of competitiveness in labor with greater competitiveness in other areas such as energy, taxes and others.”

While Mexico spent 2021 engaged in labor reform, in 2022 the country’s government has embarked on a similar project investigating the energy segment. President Andrés Manuel López Obrador is pushing to reverse the prior government’s efforts to increase private influence in the energy sector. 

Though Mexico has long been an importer of steel products, not surprising given the world-leading number of free trade agreements it belongs to, there is hope that new investments will lead to more domestic sourcing. New steelmaking investments in and around the country have significantly increased capacity to serve the Mexican market.

“It can be said that there is already sufficient capacity to supply the industry with quality, in volume and with greater diversity in alloy specifications and applications. The start of operations of new mills in the country with state-of-the-art technology (Ternium and Arcelor) and South Texas (SDI) provide greater certainty that sufficient supply options are available,” says Sotomayor. 

Naturally, the producers agree. “Mexico has an outstanding installed capacity that allows it to supply most of its market,” Lujan says. 

ArcelorMittal has been investing consistently in Mexico, and now has liquid steel production capacity of 6 million tons, 4 million of which is earmarked for the flat-rolled market. Ternium completed an expansion in 2021 of its hot-rolling mill in Pesqueria, pushing its capacity to 4.4 million tons of hot-rolled and 1.6 million tons of cold-rolled material. Steel Dynamics’ new 3-million-ton flat-rolled facility in Sinton, Texas, is also expected to sell extensively into the Mexican market. 

“Mexico has been characterized as an importer, but that will change completely this year as it now has the installed capacity to produce the steel that local demand requires. The most important thing is to take care of the market, take care of the industry and the jobs it generates,” says Lujan.

Terraza says market forces are also working to keep more foreign material out than in the past. Previously, higher domestic prices enticed steel consumers to look overseas for steel products, but the current pricing levels have been more in line with the global market. “It is more convenient for distributors and wholesalers like us to buy lower quantities, receive the material faster and avoid buying large quantities of stock,” he says. 

While investment in the steel industry has accelerated, the same isn’t true elsewhere. From 2010 to 2016, U.S. companies, as well as corporations outside North America, plowed a considerable amount of money into the Mexican industrial economy, particularly in the automotive sector. That is no longer the case.

“Foreign investment in Mexico shows no signs of growth, and in the long term, new investment projects with high impact have ceased to be heard about,” Sotomayor says. 

Many of the investments into Mexico involved production of smaller, light vehicle automobiles, which have fallen out of favor in the U.S. market. Additionally, the push toward battery electric vehicles can further change the production dynamic, and the Mexican industry must be nimble enough to shift in any new direction to maintain its levels.

In 2021, production was hampered by the chip shortage, just as it was in the U.S. Original projections called for the production of approximately 3.4 million vehicles, but only 3 million were made. However, early predictions call for production gains of 16.7 percent this year and another 13.6 percent in 2023. If met, that would push production to 4 million units, which would exceed pre-pandemic levels.

Many of the industry participants would like to see Mexico’s federal government enact policies that would spur industrial growth, which doesn’t seem to be a priority. “The government doesn’t care much about economic development in Mexico; they care about social development,” said Carlos Mendizabal Perez, the vice president of Industrias Selbor SA de CV at the March FMA Annual Meeting in Miami.  

Sotomayor agrees. “Social/political stability in our country seems to be the biggest threat [to growth],” he says. “Industry must work hand in hand with the government to generate the conditions of trust conducive to continue attracting investment.”

Mexico’s fate will likely be tied to the success of the United States’ for the foreseeable future, one that can be boosted by engaging in near-shoring of manufacturing opportunities. But the country can’t simply rely on riding the coattails of the behemoth to the north.

“An important point is how we respond to policy changes in that country,” Velez says, citing the push toward electrification of automobiles as an example. “Mexico must follow these movements and respond with competitiveness and efficiency.” 

Caption:
Producers believe expansion of capacity will allow the domestic market to satisfy demand in the country. 
(Photo courtesy Gerdau)

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