| MEXICO CITY/RIO DE JANEIRO, Sept 23
MEXICO CITY/RIO DE JANEIRO, Sept 23 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
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
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
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
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
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
"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 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."
(1 US dollar = 13.2752 Mexican peso)
(Editing by Simon Gardner and Gunna Dickson)