Mexico steel overcomes Covid slump, foresees growth

Mexico's steel industry took advantage of high global prices and recovering demand in 2021 to bounce back from a pandemic slump, but the government's efforts to reform the power sector pose risks to growth in the long run.

The country's steelmakers returned to pre-Covid 19 production levels in 2021 and plan to continue the momentum next year to grow annual output and reduce Mexico's reliance on imports.

Mexico will produce just under 19mn metric tonnes (mt) of steel in 2021, according to David Gutierrez Muguerza, director of the Canacero steel chamber and chief executive of steelmaker Deacero.

That is slightly above the 18.4mn mt produced in 2019 and far above the 16.8mn mt of output during the first year of the pandemic in 2020, according to Canacero.

The higher production comes as demand increased amid an economic recovery in Mexico and an even stronger one in the US, which is by far Mexico's biggest export market for steel. Mexico exported an estimated 3.5mn mt of steel in 2021, and 66pc of its exports went to the US in 2020.

Total steel consumption in Mexico will be around 28mn mt this year, Canacero estimates, compared with 24.2mn mt in 2020 and 27.5mn mt in 2019.

Output will continue to grow next year as new plants come fully online, such as steelmaker Ternium's new rolling mill in Pesqueria, Nuevo Leon.

That mill is expected to reach 80pc of its 4.4mn mt/yr of hot-rolled coil capacity by March 2022, and then 90pc of its capacity by June or July 2022.

"The industry will grow in production next year as new plants come online," said Ternium chief executive Maximo Vedoya, adding that domestic consumption is expected to grow by 3pc in 2022.

Steelmakers are also looking to capitalize on global supply chain disruptions and the US-China trade war to make Mexico more attractive as a manufacturer.

"We see it more as an opportunity than a problem," Vedoya said about the supply chain problems. "Knowing that we cannot count on products produced elsewhere is positive for us. We have to bring that value chain to Mexico."

The industry expects these trends, plus the projected increased production next year, will help reduce imports to below the 11.5 mt the country imported in 2021.

Still, it will be challenging to eliminate imports, Gutierrez said. In 2020, 38pc of Mexico's steel imports came from the US, while 18pc came from South Korea and 16pc from Japan.

"We are going to lower imports somewhat, but we will continue being a country that imports steel," he said.

Additionally, in 2021 some Mexican manufacturers imported more steel as there was less supply and higher prices in the domestic market.

Despite the industry's optimistic plans, its reliance on electricity means President Andres Manuel Lopez Obrador's proposed constitutional power market overhaul could limit steelmakers' growth.

Lopez Obrador sent a bill to congress in October that would change the constitution to restore state power company CFE's market dominance by capping private-sector participation at 46pc.

The reform seeks to cancel all private-sector generation permits — some 40,924 MW, or 48pc, of Mexico's installed capacity — in a move industry lawyers claim will contravene the constitution and free-trade agreements including the US-Mexico-Canada free trade agreement (USMCA).

Because much of that private-sector generated capacity is solar and wind power, steelmakers worry the reform, if approved, would prevent them from accessing the levels of renewable power that customers in their export markets will demand, Gutierrez said.

Steelmakers are also concerned that if the power sector were under state control, the government would not invest enough in power generation and transmission, leading to a lack of sufficient electricity.

"We are worried that there will not be enough investment and there will not be enough energy going forward," Gutierrez said.

"There are areas in Mexico where energy is produced but it cannot be taken elsewhere because of lack of transmission capacity," he added, expressing concerns about Mexico's power infrastructure.

By Jens Erik Gould