Mexican Scrap Imports Slow

When scrap processors in the United States consider doing business with Mexico, questions about the Mexican economy, its political uncertainty, NAFTA and its impact on U.S./Mexican relations, and the country’s steelmaking infrastructure inevitably arise. The swings in the Mexican economy during the past five years have only magnified U.S. scrap processors’ concerns.

The recent fluctuations of the Mexican economy, when the Mexican peso saw rapid devaluation, created a tremendous ripple effect. Many smaller U.S. scrap processors sharply reduced their movement of material into the country. Other U.S. vendors expressed concern over Mexican consumers being able to come up with hard currency to pay for the material.

This widely held concern, however, was not necessarily founded. For many companies that continued to move material into Mexico, payments were made as scheduled. And some Mexican companies found export to the U.S. more lucrative during the peso devaluation than before. According to several U.S. railroads, the export of material from Mexico to the U.S. jumped during that period, giving Mexican companies access to hard currency.

The same could not be said for those Mexican companies whose finished products were devoted to domestic markets. Overall Mexican consumption dipped, creating problems for many companies which could not ship material to markets outside the country. Only recently has this trend started to turn around. Recent figures report steel consumption slowly starting to climb, which should allow for greater confidence on the part of U.S. ferrous scrap suppliers selling materials into Mexico.

In a presentation given late last year, Lenhard J. Holschuh, secretary general of the International Iron and Steel Institute, Brussels, Belgium, confirmed that the impact of the devaluation of the Mexican peso was a decline in domestic sales. Holschuh estimates that Mexican domestic markets for steel declined by about 1 million tons or 9 percent during 1995.

Despite the fall in Mexico’s steel consumption, Latin America’s total steel use in 1995 was 31.5 million tons, which shows a .5 million ton or 1.6 percent increase from 1994. Holschuh predicts that 1996 will bring a further rise in Latin American steel consumption of 2.5 percent – good news for U.S. scrap exporters.

The Mexican steel industry holds some promise of growth. However, the country’s infrastructure to consume ferrous scrap metal remains limited. According to figures from the Mexican National Iron & Steel Chamber, domestic steel consumption was 13.2 million tons last year, while scrap consumption was 3.4 million metric tons. From this amount, only 2.2 million metric tons originated in Mexico, while the rest was imported from other countries, especially the U.S.

According to the most recent figures available from the U.S. Bureau of the Census – for October 1995 – exports of scrap ferrous metal into Mexico for that month totaled slightly less than 87,000 metric tons, bringing the year-to-date figure for the first 10 months of 1995 to about 654,000 metric tons.

While Mexico’s total imports of U.S. scrap in 1995 remains fairly close to those of the prior year, other Latin and South American countries are importing far less ferrous scrap from the U.S. Excluding Mexico, Latin American consumption of ferrous scrap totaled around 114,000 metric tons for the first 10 months of the year.

For Mexican mills, a problem that needs to be overcome is the lack of the most efficient steel operations. There are a number of recently completed projects which are being called "world class." However, many Mexican steel producers remain limited in their scrap intake due to outdated machinery.

Another key prohibitive, according to ERM-Southwest, Inc., a consulting firm in Houston, is concern over quality issues, notably for steel cans. The firm says many Mexican foundries and steel mills operating in Mexico do not accept cans "because of the belief that they contain too much tin."

Several U.S. scrap processors in the Southwest note that in the recent past Mexico provided a steady market for ferrous scrap metal. But according to one scrap processor who ships a sizable amount of material to Mexico, the short-term market does not look too strong. One problem is the inability of some Mexican consumers to remain competitive for scrap.

Robert Griggs, president of Odessa Metals, Odessa, Texas, notes that the devaluation of the Mexican peso has resulted in a recent sharp decline in the export of material. At the same time, the cost to move material into Mexico has crept up. Unless a scrap processor is right next to the border, Griggs adds, "you will have better luck finding sources on the domestic side."

From the Mexican perspective, there are ongoing concerns about the instability of the ferrous scrap market. Dr. Rafael Rubio, assistant vice president for external affairs for Hylsamex, Monterrey, Mexico, one of the country’s largest steel companies, says many Mexican steel mills are dependent on raw material, including U.S. ferrous scrap. But, he says, the problem with this heavy dependence is that mills are susceptible to price volatility in the ferrous scrap market, something that frequently occurs.

To protect against wild price swings, Hylsamex, along with a number of other Mexican steel mills, is using a greater amount of direct-reduced iron. For the company’s mill in Monterrey, the mix is roughly 60 percent DRI to 40 percent scrap metal, a figure that is unlikely to change, according to Rubio.

Supporting the growth in DRI usage, the most recent figures from the International Iron and Steel Institute report slightly about 3 million metric tons of DRI were produced in Mexico during the first 11 months of last year, an 11.9 percent increase from 1994.

There are a number of large steel producers in Mexico. These facilities have been able to invest sizable amounts of money into improving their production capabilities. According to Carlos Perezalonso, an analyst with Santander Investment Securities, Mexico City, Hylsamex built a new mill which is now running at near capacity.

While these two companies are primed to grow, other mills have been hard-hit by the devaluation of the peso. According to Perezalonso, one steel company has had problems paying its European bond financing.

Despite concerns, including dumping charges and countercharges between the U.S. and Mexican steel product producers, Mexican steel companies are bullish on long term success. According to CANACERO, the trade association of Mexican steel companies, more than $1 billion in capital improvements are slated for Mexican steel mills. This is in addition to investments of more than $3 billion already made by the mills.

Shippers of ferrous scrap from the U.S. to Mexico see short-term problems but long-term strength. Mary Elston, Southern Pacific’s ferrous steel commodity manager, notes that the Mexican economy is starting to recover. "We are seeing strong buying," she says. "That economy is settling down, and they need more scrap."

Elston adds that one problem for railroads is the problem of getting gondolas back from Mexico in a timely fashion. She says that in some instances it may take longer than one month to have a gondola back in SP’s service. This is a big problem, especially as a continuing shortage of gondola cars plagues the industry.

Although most economic forecasts expect to see steady improvements in the Mexican economy, concerns still remain about Mexican steel producers’ ability to meet U.S. ferrous scrap prices. If they can, the demand for U.S. scrap could start to increase.

The impact could be significant, as Mexican steel consumers start to compete more aggressively with U.S. domestic consumers. But according to Griggs, the price now being paid for scrap by U.S. mills is much higher than what Mexican mills could pay.

Recent indications show a steady improvement in the Mexican steel industry. With only a handful of Mexican steel companies as the primary Mexican consumers of U.S. scrap, the future depends on these mills using more of the material.