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Mexico Metals Report Q2 2011
Business Monitor International, April 2011, Pages: 43
Business Monitor International's Mexico Metals Report provides industry professionals and strategists, corporate analysts, metals associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Mexico's metals industry.
The Mexican steel industry’s recovery will continue in 2011 at lower rates than in 2010. While it will be export-led, the recovery will be constrained by low levels of demand from the domestic construction sector.
In Q111, the Mexican steel industry was only showing small improvements over 2010 performance, indicating that output had reached a plateau. In the first two months of the year, Mexican crude steel output was up just 2.2% year-on-year (y-o-y) to 2.74mn tonnes. This comes after a year of solid growth, with 2010 output up 23.1% y-o-y to 17.06mn tonnes and almost returning to pre-recession norms. Particularly worrying is the fact that output in January and February was well down on the previous months, with February output the lowest monthly figure for 12 months.
We believe the operating climate for the steel industry will improve gradually over 2011, having upgraded our GDP growth projection for 2011 from 3.4% to 4.1%. Our GDP growth projection concurs with that of the Mexican steel and iron industry chamber Canacero, which claimed this would support a 15% growth in production and consumption in 2011. However, there is still insufficient evidence that this robust performance will spill over into stronger domestic demand, implying that Mexican growth over the long term will continue to underperform its historic average. As such, we expect growth to be less than Canacero hopes with crude output up 7.5% to 18.33mn tonnes and finished steel consumption up 6.5% to 16.62mn tonnes. Growth in the US is the most important factor for Mexican production.
Production will be shored up by growth in capacity. Canacero projects investment of MXN11.55bn over 2010-15, a 29% increase over the previous five year period. Among the projects is AHMSA’s Fénix Project, which aims to increase production capacity, reduce fixed costs and improve the company’s competitive advantage in products such as plate and structural shapes. The company expects that the Fénix Project will involve investment of US$827mn in new steel plants and mines. The company’s 1.3mn tonnes per annum (tpa) No. 6 blast furnace, which is part of the project, was commissioned in Q111 having been delayed since 2009 due to the company’s cost-cutting measures amid the recession.
Extra capacity will spur growth from the supply side, which should be absorbed by an expected 18.3% rise in semi-finished and finished steel exports to 6.14mn tonnes, as well as manufacturing using domestically produced steel. We now expect to US real GDP growth to hit 2.8% in 2011, from 2.0% previously, as the unexpected cut in payroll taxes boosts US private consumption. What is good news for the US consumer remains good news for Mexican manufacturers. However, domestic demand will suffer as consumer credit capacity struggles to return to pre-crisis levels, which will increase the dependence of Mexican metals producers and their domestic processors on export markets, particularly the US. It will also limit demand in the property market, which will stifle recovery in construction long products. The main risks to Mexican steelmaking concern domestic credit growth as well as the effects of tax cuts on the US consumer. If the Bank of Mexico decides to raise the policy rate before the end of the year, it will undoubtedly act as a break on growth in construction steel, although this may be outweighed by increased government spending ahead of the 2012 general election. If US consumers and businesses use tax relief to continue shoring up damaged balance sheets rather than boost purchases of manufactured goods, this would spell bad news for Mexican steel growth in 2011.
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