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Steel frenemies

Can China and Mexico’s contentious steel trade relationship be fixed?

Latin America has become a beacon for excess capacity of steel in the world—reportedly around 328 million tons—due to the economic stress on Europe and the shrinking of some markets. Countries such as Russia, Turkey, Ukraine and South Korea have substantially increased their exports to the region, but no steel producing nation has had the export impact of China.

According to the Latin American Steel Association (ALACERO), exports of steel products from China to the world increased 16 percent in 2012, while exports to Latin America alone increased by 27 percent. ALACERO sources said that during the first three quarters of 2012, Brazil was the main destination for China’s exports to Latin America (649,763 metric tons), while exports to Mexico’ continued to register the highest increase (121 percent) from China compared with the January-September 2011 period, surging from 132,974 metric tons to 293,873 metric tons.

Chinese exports zero in on Mexico

 Comparing China’s exports during January-September 2012 with the same period of 2011, it is noticeable that export tonnage levels of several steel products increased more than 100 percent. The imports from China of flat products jumped 183 percent; in particular, cold rolled coil imports to Mexico from China surged 525 percent. Sheets and coils from different steel alloys also increased considerably in this period (240 percent). Regarding long steel, immense increases in wire rod volumes were noted until the third quarter of 2012 (2432 percent), rising from 843 tons in 2011 to 21,342 tons in 2012.

In March 2013, the president of the National Iron and Steel Industry Chamber (CANACERO), Alonso Ancira Elizondo, talked about the “lack of reaction (from the Mexican government between 2000 to 2012), at the economic ‘tsunami’ effect that generated the European crisis, the low growth in Asia and our open borders which left us armless against an unfair competition, causing an increment of 170 percent on imports in 2012, coming from countries without trade agreements.”

The highest increase in imports, he explained, was from Russia, Brazil, Turkey, Ukraine, China and South Korea, and most of those imports arrived under unfair competition such as dumping, producer price subsidies, export incentives and different protectionist measures. Elizondo lamented that last year national production was down 2 percent, and prices went even lower—around 30 percent—without any benefit for the consumer at the end of the supply chain.

 Automotive industry drives Mexico’s steel growth

In Mexico, imports of flat steel increased 183 percent, with the automotive sector benefiting from investments from companies such as Honda, Nissan, Mazda and, imminently, Audi. With production valued at a record level of US$75 billion at the end of 2012, the Mexican auto industry overtook South Korea as the fifth largest producer worldwide, and three years ago surpassed Brazil, according to Oscar Albín, president of National Auto-parts Industry (INA). China leads the list of highest auto-parts producers in the world, followed by Japan, USA and Germany.

The growth forecast for the Mexican automotive sector for 2013 is between 3 and 4 percent, reaching a total value of around US$90 billion by 2015. Raymundo Díaz, president of the National Confederation of Steel Distributors (Conadiac), said that Mexico’s overall steel consumption will grow between 3.5 and 4.7 percent in 2013, while automotive-related steel consumption alone will increase 4.7 percent or more.

Diaz noted that while a large influx of imported steel is harmful for the sector, Mexico requires import steel products that are not manufactured domestically with the required qualities. “There are mills that don’t produce certain products and we have to import them,” he said. “That way we create balance between supply and demand.”

Juan Carlos Villarreal Cantú, president of the Planning Commission at CANACERO, echoed the sentiment. “Out of 100 percent of imports, we can only supply 30 percent with our mills’ production,” he said, which explains why opportunities for Chinese steel exporters has increased along with strong demand for steel in the Mexican automotive industry.

Margaret Myers, Manager of the China-Latin America program of the Inter-American Dialogue, also attributed Mexico’s proximity to the US as an added attractive element for Chinese exporters, particularly how the transportation network in Mexico is integrated into the US and Canada. “In that way, China is part of NAFTA because it contributes significantly to the assets that end up in US and Canada,” Myers said.

 

A new approach to Mexican-Chinese steel relations

 During an official tour to Asia in early April 2013, President Enrique Peña Nieto of Mexico got together with his counterpart from the People’s Republic of China, Xi Jingping, with the objective of increasing the exports from Mexico to China and correcting the historical deficit in the trade balance between both countries. During the trip, the president witnessed a memorandum of understanding between Altos Hornos de México (AHMSA) and China’s Xingxing Cathay International Group. Pursuant to this agreement, AHMSA will export 10 million tons of iron ore concentrate per year to China; the contract will run for 10 years and is renewable for 10 more. The amount of iron ore exported will be equivalent to US$1.5 billion per year, for a total of US$15 billion that could vary if there are changes in the price of iron ore.

Days after, the world woke up to news that China’s steel output went down unexpectedly in March, compared with the previous month. Steel inventories, meanwhile, reached unprecedented levels. This led analysts to warn that the supply of key raw materials could exceed demand, which in turn would limit China’s import appetite in the coming months.

Between 2006 and 2011, the trade balance of raw materials in favor of Latin America multiplied by six; however, the slowdown in the Chinese economy in 2012 resulted in less demand for raw materials from the region. Last year Latin America accumulated a surplus of US$26.36 billion on raw materials and a deficit of US$46.07 billion on steel products and products with high steel content.

“The value of raw material exports to China was not enough to stop the growing deficit in the steel trade balance,” stated a report in ALACERO’s recent Foreign Trade Yearbook for China-Latin America. “This situation shows the weakness of a model heavily focused on natural resources versus one that promotes industrialization of the region.”

According to analysts, there are differences in the relationships that China has with Mexico and the rest of the Latin American emerging countries. “There are two things that differentiate China’s relationship with Mexico of others,” said Kevin Gallagher, associate professor of International Relations at Boston University and author of The Dragon in the Room: China and the future of Latin American Industrialization. “Several South American countries export raw materials to China and import cheap goods from China, which puts pressure on the domestic markets of these countries. Therefore, in reality, China pays for its imports of Peruvian and Chilean copper, Argentine soybean, Brazilian wheat, Colombian coal etc. through the export of low-value manufactured goods to these countries.”

However, “Mexico is different because its main export commodity is crude oil bound for the US, while a small volume of Mexico’s exports go to China,” Gallagher said. Both countries also compete directly in a wide range of products. “Over 90 percent of Mexican exports are competing with Chinese products in markets where China is gaining market share and Mexico is losing.”

This dynamic could inspire the rise of other, non-manufactured exports such as services, a suggestion proposed by several experts. But ultimately, Mexico must find a way to narrow the trade imbalance with China.  According to a Wikileaks diplomatic cable released in 2011, Neil Dávila, head of Mexico’s federal agency for promoting foreign commerce and investments, was quoted as saying “We do not want to be China’s next Africa,” referring to the perception of Africa’s massive influx of cheap Chinese imports amounting to “neo-colonialism” that harms the growth and survival of domestic African industries. While it is unlikely that China will ever have that much influence on the Mexican economy, many fear that they are already close.


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