Peso Crisis Slows Scrap Trade

Although all the effects have yet to be felt, the Mexican currency devaluation is making U.S. scrap metal and paper exporters nervous.

Although the U.S. has approved $20 billion in rescue funds to the Mexican government to help the country recover from the hit it took last December when the peso was drastically devalued, some scrap metal and paper exporters -- not to mention U.S. investors -- are nervous about the future of trade with the neighboring country. Some fear that the bailout funds will push Mexican interest rates higher and cause many Mexican businesses to fail rapidly.

FERROUS EFFECT

The Mexican financial crisis will probably not greatly effect the ferrous scrap trade, according to Hank Settlethight, manager of trade and statistical data for the U.S. Bureau of Mines, Washington, as steel is a fundamental industry. "You have to ask how much of the slowdown is imported consumer goods from the U.S.," he says.

"They were still doing good business in November," Settlethight continues, "but that’s not December. A lot of steel is internal consumption, so if there’s an internal slowdown, there will be less demand. There will be some falling off, but not much. A 10-percent drop would only be 50,000 tons."

Ferrous scrap demand will closely follow general economic trends, he explains.

"If someone says there will be a 20-percent drop in the economy, it’s a good guess that the drop for scrap will probably be the same," says Settlethight. "Steel basically goes up and down with the economy."

The predicted drop in Mexican auto production will probably not have a huge effect on scrap sales, as most of the steel used in automobiles is produced in basic oxygen furnaces that only use about 25 percent scrap, says Settlethight.

"First you have to ask how much of that steel is American made and how much is Mexican," he says. "Also, since only 25 percent of that steel was made from scrap, only a fourth of the drop in auto manufacturing will affect scrap."

A slowdown in commercial construction would have more affect on scrap, he says, as minimills -- which use close to 100-percent scrap metal -- primarily produce materials for the long product and beam markets used in construction.

But a Southwestern metals processor says the financial crisis in Mexico does affect the ferrous scrap market."If you think of it in dollars, the mills were paying $100 for product A and now suddenly they are paying $150 for the same product, but they can’t increase the price of their end product by 50 percent. It tightens customers’ credit lines."

Mills in Mexico that can’t import scrap to make their products could face difficulties, he says.

But mills that do a large amount of export trade will be in a better situation. "Some dollars will come back in their pockets."

Likewise, mills that did not do much exporting before the devaluation are now looking for export opportunities. "They’ve all been more active in the past month or so," says the processor.

Some mills may even benefit from the devaluation, if their feedstock is mostly locally-produced pig iron and they are able to export the finished product, as they will get more dollars based on the export price.

Smaller companies dependent on imported scrap will suffer, says the processor, especially if they are not conveniently located near the water. "Their only hope would be to export rebar and wire rod to close places such as the U.S. and Central America."

The devaluation has not made a major difference to American scrap exporters thus far, he says, except for the challenge of finding other ways than letters of credit to pay. "This leaves sensible exporters nervous," he says. "They don’t want to sell on open account when there are financial problems. They want more security."

One potential solution would be to trade American scrap for Mexican billets, rebar, or wire rod. "This might still require a letter of credit, but Mexican banks might be more likely to allow letters of credit for export," says the processor.

The big question, he says, is what will happen to the Mexican economy in general. If the devaluation seriously affects the economy, mills will cut back on production because there is less demand for finished products, and that will decrease the demand for scrap. At the same time, the possibility of a falling domestic market in the U.S. might affect U.S. exports.

"For Mexicans, if the U.S. domestic market drops, their plight may be softened by softer scrap prices," he says.

A drop in commercial construction in Mexico is likely, as the inflation rate is rapidly rising, which would lessen the demand for scrap. But the U.S. bailout will help ease the situation, he says.

"I think the bailout will make the situation less drastic. It will help them to shorten the length of time they may suffer a recession. But how long that’s going to be is uncertain. The terms of the U.S. portion of the bailout may cause the Mexicans to bite the bullet for three or four months. It will have a major effect."

There is still some trade in scrap at the present time, but much of this may be outstanding orders placed before the currency devaluation, says the processor. Outstanding orders will probably all be filled within the next six months, he adds.

"Maybe then we’ll see the real crunch," he says. "Frankly, everybody’s nervous."