n° 167 – July 2020

Mexico now has the fourth highest number of COVID-19 deaths in the world, and three of the four countries with the highest fatality figures are in the Americas. Cases recorded in Mexico are not high because there is less testing done than in other countries. At the same time, Mexico lacks a social system that would enable it to put most of its population in lockdown, so there is really not much option but to restart the economy with as many precautions in place that each operation can afford and envision. 

The automotive industry restarted in June and production was down 29%, exports down 39% and domestic sales down 41% when compared to the same month last year. Secondary smelters have resumed operations and their order levels are around 70% of pre-COVID levels. Most smelters are still sitting on healthy scrap inventories, which is helpful as scrap flows into yards are still to recover fully and are at some 70% of the volumes seen prior to the virus outbreak. Demand both domestically and for export is quite healthy but not robust enough to push scrap prices higher.

The new US-Mexico-Canada Free Trade Agreement (USMCA) came into effect in July - and it is certainly bittersweet for Mexican industry: on the bright side, it provides much-needed certainty about the US-Mexico trade relationship; but on the darker side, it imposes a higher USMCA content for vehicles of 75% versus 62.5% under the old NAFTA. This is a challenge for an industry that, by nature, has a diverse and global supply network.

The USMCA also dictates that 40% of the value of a car must be produced by labour paid at US$ 16 per hour or higher. This is another difficult requirement for an industry in which margins are limited and trade chains are complex. Some parts manufacturers are working aggressively to meet the new rules, others are planning to relocate and some might end up deciding to bite the 2.5% tariff bullet if they do not manage to qualify as tariff-free under the new rules. Furthermore, this is an election year in the USA and so it is far from certain that the current rules will remain in place under a new president.

The Mexican peso has remained volatile between MX$ 23.60 and MX$ 22.20 to the US dollar. Before the pandemic, the Mexican peso was trading in the range of MX$ 19.00 to MX$ 20.00.

There is much uncertainty surrounding the duration or shape of any potential recovery, and the road is likely to have some curves ahead. But what is certain is that people will continue to consume and to rely on products made of metal, much of it from scrap.

Alejandro Jaramillo - Alejandro Jaramillo (Mexico)

Alejandro Jaramillo

Glorem SC (MEX), General Delegate of the BIR Non-Ferrous Metals Division


Country
Mexico
Issue
n° 167 – July 2020