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Mexico Metals Report Q4 2011
Business Monitor International, Nov 2011, Pages: 41
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, and has surprised to the upside in recent months, with record levels of output. While the recovery will be export-led in 2012, it will face increasing headwinds in the form of global macroeconomic uncertainty, weak US growth, as well as the electoral cycle, which could dampen output growth.
The Mexican steel industry has had a stellar performance in 2011, with output already reaching pre-crisis levels. This is uncommon given that several steel production countries continue to produce below capacity utilisation and remain well below their pre-crisis levels. Steel output came in at record 1.7mn tonnes in August, growth of 22.3% y-o-y. This brings year-to-date growth to an average of 12.5% y-o-y, with a significant proportion of the growth occurring over the summer months.
During the period between June and August 2011, average growth was 23.6% y-o-y. The recent numbers have forced BMI to upwardly revise its forecasts for the year, and BMI now sees growth of 13%, to 18.9mn tonnes up from the previous forecast of 7.5%. Having said that, BMI's forecasts remain below the 15% growth rate forecast by Mexico's Iron and Steel Industry (Canacero).
While BMI had previously anticipated an improving environment for the Mexican steel industry, recent global and domestic events will pose additional headwinds to BMI's still-strong growth estimates. Indeed, currently, steel output is still about 10% below the pre-crisis high in 2008, and BMI sees a gradual recovery to levels seen in 2008. These forecasts remain unchanged from BMI's last quarterly update and are below the 15% growth rates forecast by Mexico's National Iron and Steel Industry Chamber (Canacero).
There is still insufficient evidence that this robust performance will spill over into stronger domestic demand, implying that Mexican growth over the long term may continue to underperform its historic average. Moreover, the steel industry will face additional headwinds in the form of higher electricity costs. That said, Canacero announced in recent months that US$11.5bn will be invested over the next four years into the industry in order to modernise and increase the steel sector's capacity.
There are several explanations as to why Mexican production has been so strong in recent months. However, the most compelling in BMI's view are to do with the earthquake in Japan, which could have seen US companies source steel exports from neighbouring Mexico as Japanese firms were unable to fulfill orders. Secondly, the Mexican peso has depreciated by approximately 25% against the Japanese yen since April and this has made Japanese producers uncompetitive. As such, we believe that Mexico may have eaten in Japan's share of exports this year, which helps explain the strong production figures, despite the relatively weak domestic demand story both in Mexico and the US.
Despite the strong growth in Mexican steel output in recent months, we believe that growth rates will moderate as the global economy slows. Indeed, we recently revised down BMI's real GDP growth estimates for the US from 2.4% to 1.6% in 2012. Given that it remains Mexico's most important export market, this slowdown will have a negative effect on Mexican production. Secondly, we note that Mexican real GDP growth is also set to slow over the coming quarters. Indeed, the combination of a slowdown in the US, the upcoming presidential cycle in Mexico and limited domestic credit growth does not bode well for the outlook for the Mexican economy.
That said, over the medium term, we expect production growth to be driven by demand factors, but also by a large growth in capacity. Canacero projects investment of MXN11.55bn from 2010-15, representing a 29% increase over the previous five-year period. Among the developments is Altos Hornos de México (AHMSA)'s Fénix Project, which aims to increase production capacity to 5mn tonnes by the end of 2012, 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 recently announced that its No.6 blast furnace has achieved its designed daily output capacity of 4,000 tonnes since production began in April 2011.
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