Mexico's local rebar prices fall as weak demand trumps weak peso

Monday, 06 April 2009 14:46:57 (GMT+3)   |  
       

Domestic Mexican rebar trended upwards in February and most of March due largely to the devaluation of the Mexican peso against the US dollar. However, due to ongoing soft export demand, prices decreased from last week by approximately 800 pesos/mt (US$58 /mt), so domestic offers now range from 8,200 to 8,500 pesos/mt (US$596 to $618 /mt) delivered to yard.

Mexican mills' rebar exports to the US, their main export destination, have been decreasing due to the fierce competition from US domestic mills, which have been harshly hit by the economic downturn and continue their aggressive pricing strategy to obtain orders. According to preliminary census data from the Department of Commerce, US imports of Mexican rebar in February 2009 reached 19,345 mt, compared to 51,315 mt in February 2008. Based on license data, imports in March 2009 will be even lower --  licenses recorded show imports as of March 31, 2009 totaling 9,732 mt which, compared to figures recorded in March 2008 of 56,451 mt, reflects an enormous decrease.

However, despite the weak demand from the US and tepid domestic demand, Mexican rebar prices have benefited in recent months from the devaluation of the peso against the US dollar. The Mexican peso has been losing value against the US dollar since October 2008, when the exchange rate rose to 12.67 pesos to one USD, from the previous month’s average of 10.65 pesos. By January of 2009, the peso had devaluated to 13.88 pesos to one USD and weakened further to 14.70 pesos in March.
While the continued devaluation of the peso puts upward pricing pressure on local prices for goods and commodities, including rebar, it is also indicative of a weak Mexican economy. Mexico's GDP was an estimated 9.5 percent lower in January 2009 from the previous year and it is expected to contract by 3.5 percent this year as manufacturing and exports weaken. In London last week, Mexico's President Felipe Calderon said the country will have to use a credit line of as much as US$40 billion from the International Monetary Fund to bolster its finances.

But in spite of the economic conditions, there are some positive factors that have helped boost the Mexican rebar market this year, such as Mexico's relative insulation from imports, Mexico's proximity to the Central and South American markets as export destinations, and the fact that Mexican construction has not been as badly affected as in the US.

Moreover, Mexico has learned and adapted to living through economic crises as they experience them more often and more severely than the US. This has allowed the Mexican markets to learn that, as the Chinese say, “the wheel continues spinning,” so they do not panic in times of crisis. For the most part, even amid severe economic slumps such as the current one, steel market players in Mexico continue buying and selling, albeit more cautiously, rather than paralyzing as Americans often do. Steel traders in Mexico have commented to SteelOrbis that when customers experience a steep credit crunch, they adapt by paying at a slower rate, sending smaller payments more often, or even by giving out property real estate titles as collateral for payment.

Nevertheless, Mexico's steel industry has suffered along with the rest of the world, resulting in steelmakers having to slash their production by half. While the Mexican rebar market will continue to struggle as long as the global economic recession continues to affect its neighbor to the north, it is well-positioned to survive the current slump.

Regarding growth of Mexican rebar demand going forward, the president of Mexico’s National Bureau of the Steel and Iron Industries (CANACERO), PS Venkataramanan, said at a press conference Friday that Mexico's national infrastructure plan will help the industry rebound. It is estimated that the plan will help increase the country's steel demand by an additional 1.5 million metric tons per year. CANACERO is pressuring the federal government to start infrastructure projects as soon as possible.

Mr. Venkataramanan also officially publicized for the first time that production of steel products in Mexico has dropped on average 50 percent, signaling the great toll the economic global recession has had in the Mexican steel industry.

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