ReportsnReports.com: Mexico Metals Report Q3 2011
Business Monitor International 's "Mexico Metals Report Q3 2011" is now available at ReportsnReports.
- Dallas, TX (1888PressRelease) August 18, 2011 - The Mexican steel industry's recovery will continue in 2011, but at lower rates than in 2010. While it will be export-led, the recovery will be constrained by low levels of demand from the domestic construction sector. Moreover, the Mexican steel sector will continue to face increasing headwinds.
The Mexican steel industry continued to show an improvement in the early part of 2011, with growth averaging 6.1% year-on-year (y-o-y) for the first four months of the year. Moreover, growth has steadily risen since the beginning of 2011, with April data showing growth of 8.0% y-o-y. That said, we note that the Mexican steel industry will face increasing headwinds over the coming months and this was already apparent in the April numbers. First, while April registered strong y-o-y growth, output declined by 3.6% on a month-on-month (m-o-m) basis from March. However, this is consistent with the disruptions to global supply chains from the Japanese earthquake, which could also weigh on May and June numbers.
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While we had previously anticipated an improving environment for the Mexican metal industry, recent global and domestic events will pose additional headwinds to our still-strong growth estimates. Indeed, currently, steel output is still about 10% below the pre-crisis high in 2008, and we see a gradual recovery to levels seen in 2008. These forecasts remain unchanged from our last quarterly update and are below the 15% growth rates forecast by Mexico's Iron and Steel Industry (Canacero). Indeed, we continue to believe that there is still insufficient evidence that this robust performance will spill over into stronger domestic demand, implying that Mexican growth over the long term will continue to underperform its historic average. Moreover, as previously mentioned, the steel industry will face additional headwinds. 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.
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In the short term, we highlight that the recent increase in electricity prices will cause a headache to Mexican producers and weigh further on their competitiveness in the international market. Indeed, the Mexican government recently announced a 3.12% increase in electricity, which according to Concamin (the Mexican industrial chamber confederation) brings the total increase in electricity price increases since December 2010 to 16.3%. These hikes in electricity will continue to dampen Mexico's competiveness, which according to Canacero, is already at a disadvantage. Indeed, electricity accounts for 41% of costs of production and may be 46% higher than that of Mexico's competitors in the US, according to Canacero. Moreover, we note that the Mexican peso has appreciated by 4.0% since the beginning of 2011, and almost 10.0% since the beginning of 2010, further weighing on Mexico's competitiveness.
Over the medium term, we expect production growth to be driven both by demand factors, but also by a large growth in capacity. Canacero projects investment of MXN11.55bn over 2010-15, representing a 29% increase over the previous five-year period. Among the projects is AHMSA's Fénix Project, which aims to increase production capacity, 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's 1.3mn tonnes per annum (tpa) No. 6 blast furnace, which is part of the project, was commissioned in Q111 having been delayed since 2009 due to the company's cost-cutting measures amid the recession.
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