Mexico’s growing demand

The entry of ferrous scrap into Mexico last year exceeded the level seen in 2020, when COVID-19 restrictions affected the country’s economy, steel demand and border logistics.

Mexico is a net ferrous scrap importer. Although its steel production continues to grow, its scrap needs are anticipated to continue at a deficit. The country is expected to consume about 18 million metric tons of ferrous scrap while generating about 14 million metric tons in 2025. Mexico also is a net importer of finished goods, especially the higher quality flat-rolled lines.

The country relies on the U.S., a net exporter of ferrous scrap, to supplement its domestic sourcing, with shipments arriving via trains, trucks and ocean vessels. Mexico also is expanding its world reach.

Data from Mexican Customs reveals ferrous scrap imports from January through September 2021 grew by 73 percent compared with the same period in 2020 and by 115 percent relative to 2019.

In the first 10 months of 2021, Mexico imported 2.37 million metric tons of ferrous scrap, while from January through October 2020, 1.37 million metric tons arrived in the country, an increase from 1.11 million metric tons in 2019.

In the third quarter of 2021, imports reached 860,917 metric tons, an increase of 35 percent from the 639,169 metric tons that entered the country from the U.S. in the second quarter.

Mexico imported 1.9 million metric tons of ferrous scrap in 2018, which declined by 21 percent to 1.5 million metric tons in 2019 and rose by 40 percent to 2.1 million metric tons in 2020 as imports doubled in the last quarter of that year to 753,851 metric tons from 368,753 metric tons the previous year. 

Usage to drive scrap demand

Ferrous scrap imports will further be driven by the opening of new steel mills and plants in Mexico, especially on the northern border, such as Ternium’s new plant in Pesqueria, Nuevo León. The company’s new hot rolling mill will allow it to expand production by up to 4 million metric tons per year.

In Nuevo León, Mexico’s National Chamber of the Iron and Steel Industry (Canacero) has 26 affiliates, including Graftech’s and Frisa’s blast furnaces and Ternium's two electric arc furnaces.

By contrast, ferrous scrap exports from Mexico fell by 25.6 percent to 534,514 metric tons between January and September 2021 from 718,126 metric tons in the same period of 2020. In September of last year, shipments from Mexico declined by 21 percent to 47,029 metric tons from the 58,866 metric tons exported in September 2020.

Mexico’s ferrous scrap exports to the U.S. have continued to decline throughout 2021, falling by 15 percent to 140,923 metric tons between July and September from 166,030 metric tons between April and June 2021.

An annual comparison also reflects a drop. In 2020, 593,166 metric tons of ferrous scrap left Mexico for the U.S., a decrease of 16 percent compared with the 706,270 metric tons exported in 2019.

Domestic scrap prices strengthened in 2021 given the tight scrap supply, with COVID-19 protocols that limited peddler activity throughout Mexico starting in 2020. Increased demand during steel mill ramp-ups also limited exports of ferrous scrap from the country.

New opportunities for Mexican steel

The USMCA, or United States-Mexico-Canada Agreement, could open new opportunities for Mexican steel distributors, helping the sector to grow in 2022. Projected infrastructure spending in the U.S. will benefit the Mexican steel industry on all fronts, including the distribution and manufacturing sectors. The evolution from the North American Free Trade Agreement (NAFTA) to USMCA, with its more extensive origin requirements and appealing regional presence incentives, continues attracting steel-consuming companies to Mexico’s northern region.

Scrap companies also are evolving to meet growing ferrous needs. Lizette Camarillo, chief communications officer of Roca Acero, a large scrap dealer in Nuevo León, says, “In 2022, we will create a culture that adapts to the emerging needs and possibilities of the market, being conscious of the uncertainties and new challenges being faced by our supply chain.”

The company will emphasize automation, simplicity and flexibility in its processes to maximize scrap generation and service to domestic and international clients, Camarillo says. “It is no longer just about scrap generation but scrap as a strategic commodity.”

Similarly, National Confederation of Steel Distributors (Conadiac) affiliates will seek to take advantage of the tariff facilities established under USMCA and proximity to the U.S. The latter makes rail and road transport more efficient in contrast to supply chain disruptions that have slowed movement in ports globally.

By not having to contract containers or maritime transport, Mexican distributors will have the advantage of faster response times on orders from the U.S., starting with the construction sector.

Total U.S. imports of steel products increased by 79.1 percent in October 2021 compared with the same month in 2020. Among the chief exporters, Mexico shipped 450,941 metric tons of steel during the month, according to preliminary data from the U.S. Census Bureau.

Likewise, Canacero reports the U.S. remained the largest destination for Mexican exports, accounting for 65.9 percent of foreign sales from the country.

Conadiac says port congestion and the lack of containers also have affected the sector, which has seen steel consumption decrease at the national and international levels in light of the lack of inputs for assembling or manufacturing products.

Mexican steel and the chip shortage

As an example of the steel consumption decrease, Conadiac cites the global semiconductor crisis, which has paralyzed the auto industry. The National Auto Parts Industry, Juarez, Mexico, estimates the country has had a deficit of 494,000 vehicles up to October 2021 compared with the same prior-year period. In the U.S., the deficit reached 1.3 million vehicles.

In Mexico, Volkswagen stopped production at its Puebla plant for a few weeks between September and October of last year. Ford and Kia also did the same.

Conadiac says steel orders by assemblers in Mexico have been declining for some time and predicts the effect will continue until the supply chain is regularized.

Deloitte shares Conadiac’s vision. In a report published at the end of November of last year, the consulting company predicts the chip shortage will extend into the first half of 2022, with all the consequences for the automotive industry and, indirectly, for the steel industry.

The bright spot

Mexico’s construction sector, the largest consumer of steel in the country, is expected to increase in 2022.

U.S. President Joe Biden’s $1.2 billion infrastructure plan, which recently was signed into law, seeks to renovate and modernize major infrastructure, such as bridges and highways. This will boost orders for companies dedicated to the production of construction materials in Mexico, including the steel industry and its distribution channels.

The Mexican government’s infrastructure projects, such as the Dos Bocas refinery and the Mayan Train, have started having a positive impact on the steel industry.

For example, in May 2021 the French company Alstom-Bombardier’s Mexican subsidiary won a tender to fabricate 42 trains for the Mayan Train project and began construction in June. The Ministry of Energy also received 20,000 metric tons of steel for the Dos Bocas refinery in June 2021.

The Felipe Angeles International Airport has had a lesser impact as the 2.7 million metric tons of steel used in this project is basically ready material that initially was destined for the New Mexico International Airport project that was canceled two years ago.

Conadiac says the largest benefits have been for companies that already work directly with the Ministry of National Defense that oversees the construction of these projects.

However, projects put out to tender by state and municipal governments have decreased, which has affected the domestic steel industry. However, Mexico is discussing stimulus and domestic investments that should boost public works this year and in 2023.

Expectations for 2022

Conadiac says it expects the Mexican steel sector to remain stable or grow moderately in the medium term as consumers redirect their spending over the next 12 months as COVID-19 restrictions end, though concerns about coronavirus variants add uncertainty.

Alfonso Garcia is ferrous analyst, Latin America, at Davis Index and can be reached by email at alfonso.garcia@ davisindex.com.