Supply constraints for ferrous scrap due to the COVID-19 crisis could cause a price war in Mexico’s scrap industry in the short term, according to scrap buyers and suppliers.
Material supply is especially tight in some of Mexico’s east-central states such as Tlaxcala and Puebla, where car manufacturing facilities such as Volkswagen are located, a ferrous trader at W Silver, a recycler with facilities in southwest US and Northern Mexico, told Davis Index.
At the end of March, all carmakers suspended operations at their plants in Mexico to protect employees from COVID-19, with some plants announcing plans to restart operations by mid- to end-April. Once these operations restart, auto companies should generate more scrap. Unfortunately though, according to market participants, the amount won’t be adequate to accommodate the needs of all scrap buyers, leading to increased competition to buy the material.
Scrap volumes will not return to normal levels until the original equipment manufacturers (OEM) carry out scrap purchase orders with their Tier 1 suppliers.
Other factors causing the weak supply include Mexican mills that are producing steel products only to feed the demand for government projects, a trader at Recicla Siglo XX1, a scrap processing firm located in Guanajuato state, told Davis Index.
Last week, the federal government ordered Mexican steelmakers to produce steel only for government projects, amid the COVID-19 crisis. As a result, Mexican mills have reported they must recover inventories to continue producing steel products for these governmental projects, the Recicla Siglo trader said, highlighting that the automotive industry is a primary supplier for mills to continue operating.
If this situation continues, the industry may see a supply-demand price war, a regional commercial manager at Roca Acero, a Nuevo-León based processing firm told Davis Index.
In northern Mexico, scrap suppliers are facing logistical issues to transport material as roads remain closed to contain the COVID-19 spread, a raw material buyer at Tupy in the northern state of Coahuila said, adding that the lack of material could cause a price war in the country.
Tupy’s facility specifically focuses on the automotive industry, engine blocks and heads and has a production capacity of 216,000mt per year.
Mexico steelmaker Altos Hornos de México (Ahmsa), which has a capacity of 5.5mn mt per year is working at 60pc of its capacity due to several factors including the effects of COVID-19, according to Daniel Riojas de la Garza, deputy sales director, Ahmsa.