Automakers Spur $3 Billion Boom for Made-in-Mexico Steel
“Auto exports are going to be the new oil for the Mexican economy,” Marco Oviedo, chief economist of Barclays Plc in Mexico, said in a telephone interview from Mexico City.
Steelmaker Altos Hornos de Mexico SA, known as Ahmsa, has almost completed a $2.3 billion expansion designed partly to supply automakers. Ternium SA (TX) and Nippon Steel & Sumitomo Metal Corp. (5401) are teaming up on a $330 million investment to finish rust-resistant steel, and South Korea’s Posco (PKX) is spending $300 million to more than double capacity for similar products.
Further growth is likely: The Mexican Automobile Industry Association predicts output will climb almost 40 percent to 4 million vehicles in 2017 as Nissan Motor Co. (7201), Honda Motor Co. (7267), Mazda Motor Corp. (7261) and Volkswagen AG (VOW)’s Audi unit build factories that join long-standing plants for U.S. carmakers General Motors Co. and Ford Motor Co.
Mexico has become a magnet for automakers seeking low labor-cost output with access to North and South American markets and other regions through the nation’s trade agreements with more than 40 countries. In some cases, Japanese automakers were taking advantage of the yen’s strength against the dollar at the time they announced their investments.
“The automotive sector in Mexico is one of the stronger ones around the world,” Paul Robinson, senior economist at researcher IHS, said in a telephone interview from Washington. “Because the expansion on the automotive side has come so fast and so recently, the steel industry is a little behind.”
While Mexico is the world’s 13th-largest maker of steel overall, its production of automotive-grade metal that has been galvanized, or coated in zinc to prevent rust, remains low, said Oscar Albin, president of the National Autoparts Industry in Mexico City. That has been largely imported from the U.S. and other countries, Albin said.
Mexico’s steel imports climbed 36 percent to a record 9.6 million tons last year, according to trade group National Iron and Steel Industry Chamber.
Among the larger exporters of steel to Mexico are the U.S. plants of ArcelorMittal (MT), AK Steel Holding Corp. (AKS) and U.S. Steel Corp. (X), said Kenneth Hoffman, head of metals and mining research at Bloomberg Industries. Local producers will be able to compete with those imports by offering a shorter supply line and lower transportation costs.
“Carmakers often demand that the suppliers be nearby with the promise of big demand,” Hoffman said. “We saw the same thing when a number of German and Japanese carmakers moved into the American South and steel producers followed.”
Ford (F) would consider buying more Mexican-made steel for its factories in Hermosillo and Cuautitlan as long as it met the automaker’s quality standards, said Leo Torres, supply chain director for the company’s Mexico unit.
“If I have a ton of steel I can import to my plants in Hermosillo or Cuautitlan and I can buy the same ton in Mexico for the same price, my logistics costs are going to benefit and my inventory costs are going to benefit,” he said in a telephone interview from Mexico City yesterday.
The Mexican steel industry will invest $11 billion in the next four years, Alonso Ancira, president of the iron and steel chamber and chairman of Ahmsa, said last month. The industry directly employed 53,000 workers at the end of 2011, according to the trade group.
There are potential challenges, too. A global glut of the metal may undermine investment in Mexico, Ancira warned, calling on the Mexican government to crack down on “unfair competition.”
At the same time, demand may drop as manufacturers replace some parts traditionally made of steel with aluminum to reduce vehicle weight and comply with stricter fuel-economy standards.
Mexican vehicle output has jumped 91 percent since 2009, the Mexican Automobile Industry Association said.
Japanese automakers shifted production outside their home market to maintain competitive pricing in the U.S. as the yen strengthened for two straight years before declining against both the dollar and the peso in 2012. Their new assembly lines will boost Mexico’s automotive production capacity even further.
Nissan is scheduled to open a $2 billion factory by the end of the year next to an existing plant in the central state of Aguascalientes. The Yokohama, Japan-based company is the largest automaker in Mexico with 24 percent of 2012 vehicle output, followed by Volkswagen, GM (GM), Fiat SpA (F) and Chrysler Group LLC, and Ford.
About 150 miles away in the state of Guanajuato, Tokyo- based Honda plans to open an $800 million factory next year with capacity for 200,000 Fit small cars.
Mazda’s new factory in the same state, slated to open in 2014, will make Mazda2 and Mazda3 small cars. Annual capacity in the $650 million plant will be 230,000 vehicles by 2016, Mazda said in January. That’s 21 percent more than the Hiroshima, Japan-based company discussed as recently as November, when it added 50,000 small cars per year for Toyota Motor Corp. (7203) to its capacity of 140,000 vehicles.
Volkswagen’s Audi chose the state of Puebla, east of Mexico City, for a $1.3 billion plant to assemble its Q5 sport-utility vehicle starting in 2016.
Mexico accounted for 19 percent of North American car and light truck production last year, up from 11 percent in 2000 and 6 percent in 1990, the Federal Reserve Bank in Chicago said in a newsletter dated May 2013. The nation surpassed Canada in auto output in 2008 and the gap has widened every year since, they said.
Labor costs in the Mexican automobile industry are about 20 percent of what they are in the U.S. and Canada, according to Luis Lozano, the lead automotive partner at PriceWaterhouseCoopers LLP in Mexico City.
“Auto exports have gone from 4 percent of the gross domestic product to close to 6 percent,” said Oviedo of Barclays. “With all the investments that have been announced, they’re going to rise to 8 to 9 percent very soon. That’s almost twice oil exports last year as a percentage of GDP.”
Steelmakers have followed. Ternium, based in Luxembourg, is completing a $1.1 billion plant near Monterrey, Mexico, with an annual capacity of 1.5 million tons to supply automakers, home- appliance manufacturers and others.
The project includes the joint venture with Nippon Steel & Sumitomo Metal, which will be able to finish 400,000 tons of rust-resistant steel a year, starting in July.
Posco (005490), based in Pohang, South Korea, said in 2011 that it would more than double the capacity of its continuous galvanizing line in Altamira, Mexico, by adding 500,000 tons.
Posco’s American depositary receipts slid 2.6 percent to $69.98 in New York today, while Ternium’s dropped 2.2 percent to $19.21. Both companies have fallen this year as steelmakers globally struggle with excess production capacity and lower demand. Nippon Steel & Sumitomo Metal declined 1.8 percent to $25.31 today.
Posco signed a letter of intent with Ahmsa last year to form a joint venture in which the Mexican company would send its Korean counterpart iron ore while tapping its expertise in producing automotive steel.
Ahmsa, an integrated steelmaker that has been in bankruptcy proceedings since 1999, is finishing a $2.3 billion investment this year in its so-called “Fenix” project to add 1.7 million tons of annual capacity. The project includes steel for automotive applications, Christopher Plummer, managing director of consulting firm Metal Strategies Inc., said in a telephone interview from West Chester, Pennsylvania.
Mexico is “significantly short of domestic capacity for the high-quality steel coils that are needed,” Plummer said. “With these lines, they’ll make major steps in becoming self- sufficient.”
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