Mexican Steel: La Oportunidad Still Knocks
Steel producers and processors are still positioning themselves to expand business in Mexico, despite the country’s recent recession and scary reputation.
By Myra Pinkham, Contributing Editor
U.S. steel suppliers see new opportunity to sell their wares south of the border as the Mexican manufacturing economy recovers more quickly than the United States, creating a deficit of certain steel products, particularly high-end flat-rolled carbon sheet and structurals.
With this occurring just as new production capacity for those products is coming on stream in the southern U.S., experts say it is unlikely U.S. mills will increase their investments in Mexico any time soon. But there could be additional opportunities for service centers and processors to set up shop in Mexico to serve growth markets such as automotive and capital equipment.
The Mexican steel market is clearly dependent on the United States. The World Steel Association estimates that steel consumption in Mexico will be about 19 million tons in 2011, less than 20 percent the size of the U.S. steel market.
Historically, Mexico has not had enough steel production to meet its domestic demand in major end-use markets such as automotive, appliance and construction, says Rodrigo Vazquez, director of steel analysis for Harbor Intelligence, Monterrey, Mexico. In fact, for the past several years, more than 30 percent of Mexican steel demand has been met by imported steel—largely flat-rolled sheet and plate and large flange structural beams. Just over 50 percent of Mexican steel imports come from the United States.
Automotive production in Mexico has been on the increase in the past decade, with General Motors, Ford, Chrysler, Nissan and Volkswagen opening facilities there. Likewise for auto parts suppliers, appliance makers and heavy equipment manufacturers. The result is a growing deficit of high-end flat-rolled sheet and plate, says Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa. The U.S. steel industry exported more than 1.2 million tons of steel sheet and strip products to Mexico in 2010, according to the American Iron and Steel Institute.
At the same time, Mexico is a big exporter of semi-finished steel, as well as long products such as concrete reinforcing bar and wire rod. Mexico exported about 600,000 tons of these products to the United States last year. Overall, Mexico exports about 50 percent of its steel and up to 80 percent of its manufactured goods to the United States each year, says Richard McLaughlin, managing director of Hatch Beddows in Pittsburgh.
For the past few decades, a steady stream of U.S. and other non-Mexican companies have opened up manufacturing facilities in Mexico to take advantage of the favorable wage rates. Recent reports of drug-related kidnappings and shootings most likely have slowed that flow of investment. Experts say it is difficult to calculate how much cross-border trade has been affected by the violence, though some OEMs reportedly are spending as much as 5 percent of their revenue on security.
“Mexico is a very attractive market, given the lower labor costs and the ability for manufacturers to produce products that are ultimately destined for the U.S.,” says Terence Rogers, executive vice president and chief financial officer of Chicago-based Ryerson Inc. Ryerson made its first foray into the Mexican market about three years ago through a joint venture and has since opened up three service centers there, most recently in Monterrey. “We plan to further expand our presence there and to also continue serving Mexico from some of our U.S. facilities,” he says. One of the stated purposes for Ryerson to open up its new El Paso, Texas, service center last October was to serve the El Paso/Juarez, Mexico, region with a variety of carbon steel, stainless steel and aluminum products.
“Our experience has been very positive in Mexico,” says Jim Mortensen, general manager of automotive sales for Dearborn, Mich.-based Severstal North America. “We have seen the volume we have sold to Mexico increase every year since we opened Severstal Columbus [then known as SeverCorr] in 2007 in Columbus, Miss. While a lot of mills go in and out of the Mexican market depending on how demand is in the United States, for Severstal Columbus, Mexico is a home market for our products.”
Executives at the new ThyssenKrupp Steel USA and ThyssenKrupp Stainless USA mills in Calvert, Ala., also see Mexico as one of their target markets. In fact, they are already sending steel to Mexico, even as they continue ramping up their new production facilities.
Vazquez at Harbor Intelligence observes that Mexico, like much of the world, was hit hard by the global economic downturn, which caused a 28 percent decline in the nation’s steel consumption in 2009. “Since then it has recovered fairly nicely, rising about 31 percent in 2010, bringing consumption back to pre-recessionary levels,” he says.
Experts expect 5 to 6 percent GDP growth this year in Mexico, well outpacing the 3 percent rate in the United States. “Not only has the economic recovery in Mexico been more substantial than that in the United States, the Mexican economy is expected to grow for at least the next five years,” led by strength in automotive, Vazquez says.
Last year, Mexican automotive-related production—not just vehicles but also parts and components—increased by 50 percent. The sector should continue to see double-digit growth in the next few years as established automakers increase their output and more U.S., Japanese and South Korean OEMs open new production facilities, Vazquez says.
The Mexican auto market held up well, even during the economic downturn, and continues to surge, says Plummer, echoing Vazquez. In February, companies in Mexico produced a record 203,000 light vehicles, or 2.5 million vehicles on an annualized basis.
Mexican appliance production also continues to outpace the economy’s recovery, Vazquez adds, with production up 14 percent last year. In the capital goods sector, machinery and equipment production was up 43 percent in 2010.
The growth in Mexican manufacturing output is definitely good news for steel suppliers in the United States and other countries, as none of Mexico’s steel producers currently have the capability to make the high-end carbon sheet used by automotive and appliance makers. One exception is South Korea’s Pohang Iron and Steel Co., which recently ramped up a 400,000-metric-ton cold-rolled and galvanized plant and distribution center in Mexico’s Tamaulipas state. Posco reportedly is considering doubling the facility’s annual capacity to 800,000 tons, although that plan has not yet gotten the green light.
Likewise, only one Mexican steel producer—Altos Hornos de Mexico (Ahmsa)—makes carbon plate, while ThyssenKrupp Mexinox is the country’s only domestic stainless producer.
This will soon change, as several domestic carbon steel mills are looking to increase their production capabilities, Vazquez says. For example, Ternium SA is in the midst of a $4.2 billion carbon flat-rolled project in Monterrey. The new mill will eventually have the capacity to crank out 2 million metric tons of hot-rolled, 1 million tons of cold-rolled and 300,000 tons of hot-dipped galvanized coil.
Last October, Ternium and Japan’s Nippon Steel Corp. signed a definitive agreement to form a joint venture, also near Monterrey, to be called Tenigal SRL de CV. It plans to produce about 400,000 metric tons of high-grade and high-quality galvanized and galvannealed steel sheet for the auto industry, including products for outer panel and high-strength applications, by 2013.
On the long products side, Industrias CH is building a new 500,000-metric-ton billet plant in Rio Bravo in Tamaulipas state to feed its Aceros y Laminados Sigosa steel sections mill in Matamoros. About 250,000 tons of capacity from that billet mill should come on stream by the end of this year, with the balance due by the end of 2012, company officials say.
On the stainless side, about 60 percent of Mexinox’s steel is used to service the Mexican market, says Stephan Lacor, vice president of sales for ThyssenKrupp Stainless USA. While Mexinox’s order book is pretty full, he is optimistic the company will be able to keep up with demand with the help of product shipped from the new Calvert mill, once the melt shop is up and running in late 2012 or early 2013. Currently, Mexinox gets material from ThyssenKrupp’s European operations.
Lacor does not expect to see other stainless mills invest directly in Mexico, although there will likely be more distribution investments geared toward the stainless steel market. “North American Stainless [a mill based in Ghent, Ky.] already has a distribution center in Monterrey that has cut-to-length processing capabilities. Several stainless service centers, including Ryerson and Macsteel Service Centers USA, also have a presence in Mexico,” he notes.
ThyssenKrupp is just as bullish about the Mexican market on the carbon side. “There is a genuine need for the kinds of capabilities that we can provide to supply premium substrate into Mexico,” says Daniel Knezha, manager of marketing and commercial systems for ThyssenKrupp Steel USA in Calvert. “We intend to increase our presence in Mexico, and we don’t feel the necessity to own a facility there to do so. We have a very sound strategy to supply the market externally,” from the nearby location on the Alabama gulf coast.
Bob Holt, ThyssenKrupp Steel USA’s vice president of sales and marketing, says the carbon mill will continue to ramp up for a few more years, but is already selling some steel to Mexican customers.
The percentage of the mill’s output that will eventually head south of the border, vs. to domestic customers, will be dictated by the market.
Severstal is taking a similar approach to the Mexican market. The steelmaker is in the midst of a $550 million expansion that will double the carbon production capabilities at its new Columbus, Miss., mill to 3.4 million tons. It will also double the facility’s galvanizing capacity.
Mortensen observes that while some of the additional capacity at Severstal Columbus will be heading to Mexico, it is pull-through demand, and not push-through volume that will dictate how much. The mill’s wide selection of products, including automotive grades, vacuum degassed steel, high-strength low-alloy steels and advanced-high-strength steels, will attract Mexican customers, he says.
“We are continuing to develop and strengthen our relationship with both distributors and OEMs in Mexico,” Mortensen says. “We will be where our customers demand us to be. Our customers are increasing production in Mexico, so we will be supporting them there,” although from across the border. “I think there is sufficient mill capacity in Mexico right now,” he adds.
Several major carbon steel service centers and distributors also have operations in Mexico, some of them long-standing. For example, O’Neal Industries Inc., Birmingham, Ala., has had a small manufacturing facility in Monterrey for about 10 years, making heavy frames and chassis for large equipment. “It is a natural for heavy manufacturing OEMs producing products destined for the U.S. market, as well as distributors serving those OEMs, to build facilities in Mexico,” says Bill Jones, O’Neal’s vice chairman.
Macsteel Service Centers de Mexico has operated a facility in Monterrey since 2003. It had to double the facility’s size in 2009 to meet the needs of its customer base of U.S. transplants and local Mexican companies, says Russ Delaney, president of western North America for Macsteel Service Centers USA. The company plans to add nearly 50 percent more to its current footprint as demand continues to grow.
Last year, Nucor announced its NuMitt LLC joint venture with Mitsui & Co. (USA) Inc., through which Mitsui’s Steel Technologies division will operate a Mexican processing center. “This makes a lot of sense for Nucor,” says McLaughlin at Hatch Beddows, given the number of flat-rolled mills Nucor has in the Southeast.
Acero Prime S de RL de CV is another successful Mexican processor with U.S. backing. A joint venture of Feralloy Corp., U.S. Steel Corp. and Mitsui, Acero Prime recently announced its addition of a new multi-blanking line in Ramos Arizpe, Mexico, to produce steel blanks for both the appliance and automotive markets.
The pace of American investment in Mexico has eased due to the economy and possibly safety concerns, says Vazquez at Harbor Intelligence. “There was more interest by U.S. service centers and processors to invest in the Mexican market before the financial crisis. That has since slowed down somewhat, but now that the Mexican economy is strong again, there could be some reactivation of interest.”
“We feel the Mexican market offers a number of long-term opportunities,” says Ryerson’s Rogers, especially with the breadth of manufacturing on the increase there. Mexico will continue to be the fastest growing market in the NAFTA region, Lacor agreed.
“It’s a great time to do business with Mexico,” Knezha says. “While the violence makes us more wary and on
our guard, it really hasn’t affected any of the decisions we have made.”