New Dawn for Mexican Steel Puts Brazil in the Shade

By Michelle Howard September 23, 2014

Mexico is emerging as the preferred choice for investors in Latin American steel making as a landmark energy reform and exposure to a U.S. recovery help outshine regional rival Brazil, where the gloom of recession has taken hold.

While steel executives in Brazil, Latin America's biggest economy, call ever more forcefully for market reforms, Mexico has pushed through a major energy overhaul and other reforms which are expected to lure billions of dollars in new investment.

Demand for steel, a building material used in everything from cars to pipelines to skyscrapers, is a bellwether for economic strength, especially in manufacturing.

Steel makers Altos Hornos de Mexico and Ternium are well placed to take advantage of better growth prospects in Mexico, while Gerdau SA is seen as the best Brazil bet, given its strong presence in the United States.

Mexico's steel chamber CANACERO forecasts 2014 steel output will grow nearly 7 percent to reach 19.4 million tonnes. Brazilian steel output, in contrast, is set to decline 2.5 percent this year, according to industry group Instituto Aco Brasil.

CANACERO estimates steel output will rise another 1.5 percent in 2015.

Industry experts in Mexico say 2014's output boost reflects the sector's recovery to pre-financial crisis levels, while major new oil projects courtesy of the reform are not expected to come online until after 2015.

Mexico's energy ministry has said historic tenders, in which private oil majors will be able to operate fields on their own for the first time in decades, won't be awarded until the second or third quarter of next year with significant steel procurement to follow.

Aco Brasil would not give guidance for Brazilian steel output in 2015, saying only that the first half of the year in particular would be "challenging".

While Brazil produces more steel than Mexico in raw numbers - or 34.2 million tonnes in 2013 - figures from the World Steel Association show that the rate of growth in Mexican steel output over the past decade has outpaced Brazil's by over a quarter.

Mexican industrial output has trended higher this year, while Brazil's industry output has fallen as the economy has stumbled.

Last year, it seemed Brazilian steel might be turning a corner with demand supported by a rush to finish World Cup buildings and government measures to prop up the auto sector.

But things have gone downhill since then. Brazilian car sales are on the verge of their biggest drop in more than a decade as the economy contracts.

CSN's net income fell 96 percent during the second quarter of this year and most Brazilian mills are not competitive enough to maintain margins through exports.

Its shares are down 30 percent year-to-date, despite an aggressive buy-back program. Gerdau is also down over 30 percent, while Usiminas has lost more than 40 percent.

In contrast, shares in Ternium have fallen 16 percent. Shares in Altos Hornos have been suspended since 1999 over unpaid debt. The company is protected from creditors under an old law, and has continued to operate.

Leonardo Correa, an analyst at BTG Pactual, wrote in a recent note that the outlook for Brazilian steel remained "very challenging."

"Our sense speaking to corporates is that demand remains sluggish," he said, having already cut his earnings estimates for the sector this year by 10 percent.

In Mexico, investment in the steel sector is seen rising another $3 billion by 2016, mostly because of surging car production, which has more than doubled in the last five years.

Mexican Reforms
Mexican growth is expected to accelerate in coming years.

President Enrique Pena Nieto has enacted a raft of economic reforms that included putting an end to the 75-year monopoly of state oil giant Pemex, which paves the way for joint ventures with international oil firms.

The government says the energy reform will lead to more than $50 billion in new oil sector investments through 2018.

"The growth prospects for Mexico's steel industry are very favorable," said Francisco Orduna, a spokesman for top Mexican steel producer, Altos Hornos de Mexico.

"The recent energy reform opens new possibilities for more investment by Pemex, which is the biggest single (Mexican) purchaser of steel used in oil platforms, tanks, ships and pipelines," he added.

In another boost for Mexican steel, Pena Nieto announced a five-year 7.8 trillion peso ($587.5 billion) infrastructure plan, including a new $9 billion airport for Mexico City.

AHMSA says it expects to provide steel for the airport.

Meanwhile, the U.S. economy is recovering.

Part of the North American Free Trade Agreement, Mexico should benefit from more robust U.S. growth despite a recent trade spat between the two over import duties on Mexican rebar - a steel product used to reinforce concrete in construction.

"Mexico is very connected to what happens to the U.S. manufacturing market as a whole," said Andre Nascimento, steel analyst at commodities research group CRU. "As the U.S. grows, and our economists forecast it will grow faster than Brazil in the next four years, Mexico will benefit."