n° 161 – July 2019

It used to be that the number one challenge for a scrap yard was to attract enough material to buy whereas sales were the easy part, but that equation has flipped somewhat. Sales are facing more resistance and challenges while, understandably, there are more scrap units floating around to be bought. This would seem to be good news - but there is always a “but”, in this case the threat that low prices pose to the collection of obsolete scrap.  

In Mexico, non-ferrous scrap collections still depend mostly on peddlers. These have a minimum cost for their runs which, in some cases, can be as long as 1000 kilometres and can take a week or two to complete. So imagine what happens to collections of, say, aluminium cans when consumer prices fall close to US$ 1000 territory. Most of Mexico’s major cities are more than 2000 kilometres from large rolling mills, and so after freight the price is shaved anything from US$ 100 to US$ 200 per tonne. The consolidation yard must also make a profit for baling and financing the operation, so more of the price is shaved off. In the end, the very low price does not cover the fuel, effort and risk involved in collecting the cans.

It is common practice for non-ferrous scrap to hitch a ride on ferrous scrap trucks, but we all know that ferrous scrap prices have not been lending too much support to the trade of late. This story goes to show how, for some scrap grades, there is significant flexibility of volume predicated on the price, especially when several months of falling prices bring us to critically low levels. It will take significant effort by major recycling businesses along with beverage companies if recycling rates are to recover given the significant drag brought about by the pricing situation.

Other scrap metals such as copper, brass and zinc still retain significant value to support recycling, but their volumes will also suffer as their inventories will not move as fast owing to low ferrous and aluminium prices.

The Mexican economy is showing signs of weakness brought about by several factors, including potential resistance in the USA and Canada to approving the USCMA free trade agreement, as well as the continued threat of US tariffs on various Mexican products. Mexico also faces internal headwinds in the form of questionable policy decisions by the Mexican President, such as cancelling a new airport that was already one-third built and banking heavily on a new refinery to be built at a cost and within a timeframe that no expert deems feasible. Furthermore, external investors are wary of the threat posed by debt-laden state-owned oil company PEMEX; the new government has pledged to save the company but the worry is that the stability of public finances might be a casualty of that effort.       

As a result of all these factors, investment, production and construction have slowed in Mexico while domestic auto sales fell 6% year on year in the first half of 2019. According to Bank of America data, Mexican GDP contracted 0.2% during the first quarter of 2019 while preliminary figures suggest a further 0.1% contraction during the second quarter. If these numbers are confirmed, Mexico might already be technically in recession.

On a brighter note, figures from the Mexican Automotive Industry Association indicate that the auto industry’s share of Mexican GDP reached 20.7% during 2018 compared to only 13% some 10 years earlier. Thus, the auto industry has become the number one contributor to the Mexican economy, eclipsing the processed food industry (20.3% share) for the first time. The basic metal production and chemical industries are in third and fourth place, both with 6.4% of GDP.

Despite all the turbulence, the Mexican peso has remained stable and, at the time of writing, is at MX$ 19.08 to the US dollar; during the last 30 days, the low has been MX$ 19.21 and the high MX$ 18.94.