Ferrous Scrap South of the Border

Jun 7, 2018, 21:13 PM
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May/June 2018

By Megan Quinn

Steel-Scrap-Demand_Mexico_Lane Gaddy likes to think of his 11 scrapyards as a microcosm of scrap trade between the United States and Mexico. W Silver Recycling (El Paso, Texas), which manages the scrap byproducts of manufacturers that have facilities in Mexico and the U.S. border region, relies on open-for-business borders and friendly trade relationships to move personnel and scrap between facilities in places that include Amarillo, Texas, and the northern Mexico city of Apodaca. The company’s work can mean “a lot of traffic back and forth between the countries, depending on what we need done that day,” he says.

W Silver’s cross-border business in some ways mirrors the larger relationship Mexico and the United States have with the ferrous scrap market. The United States, the world’s leading ferrous scrap exporting country, has scrap to sell, and Mexico has a strong steel manufacturing sector that demands ferrous scrap to feed its mills to make car parts and other manufactured steel goods. This relationship could be at risk, however: President Donald Trump has begun renegotiating the North American Free Trade Agreement, saying it is unfair to U.S. workers. In March, Trump also imposed a 25-percent tariff on steel imports and a 10-percent tariff on aluminum imports. He has exempted Mexico from these tariffs until June 1 while NAFTA negotiations are underway.

In the 24 years NAFTA has been in effect, ferrous scrap recyclers and steelmakers have become used to shipping ferrous scrap and finished steel across the border without added tariffs, quotas, or taxes. Recyclers and brokers say too many factors are at play to predict how the two countries might fare if Trump proposes major changes to the trade agreement. Some say the relationship is strong enough for these steel industry players to keep doing business—or even to find new opportunities and partners in these two countries with which to trade. Yet others worry any trade changes might impede scrap shipments and cause longstanding business relationships to wither if Mexico looks to decrease its dependence on the United States’ ferrous supply. “The majority of our business model is based around the flow of materials between the countries and manufacturing in Mexico,” says Gaddy, W Silver Recycling’s CEO. “So we’re waiting to see what will happen.”

NAFTA and its Trade Impacts

The North American Free Trade Agreement was created in 1994 to expand trade among the United States, Canada, and Mexico and to make the countries more competitive globally. “NAFTA in a broad sense has made the U.S., Mexico, and Canada competitive [with] other manufacturing regions in the world that have taken a lot of market share, predominantly in Southeast Asia,” Gaddy says. For Mexico, it helped the country develop its manufacturing sector, which has opened doors for recyclers to buy and sell scrap there more easily, he says.

A major driver of the ferrous trade along the U.S.-Mexico border is manufacturing, especially in the automotive sector. Automakers with plants in Mexico, such as Ford Motor Co., Fiat Chrysler, and General Motors Co., manufacture and stamp body panels made from steel with U.S. origins, says Jonathan Bostock, director of operations for industrial materials recycler SMS Foremex (Mexico City) and chair of the Bureau of International Recycling’s Latin America Committee.

NAFTA helped usher in major foreign direct investment in Mexico, and auto manufacturing and trade increased rapidly once NAFTA hit its stride, according to a report from the Federal Reserve Bank of Chicago, which tracks Mexico’s auto industry since NAFTA. This is in part because Mexico phased out key trade restrictions such as a 20-percent import duty on vehicles, and it allowed parts plants to be 100-percent foreign-owned, the report says.

The auto manufacturing sector, along with other industrial manufacturing, helps drive Mexico’s scrap supply, Bostock says. In the years after NAFTA took effect, Mexico began producing more and more steel. Mexico’s steel production relies mainly on electric-arc furnaces, which are fueled almost entirely by scrap. In 1991, Mexico produced 7.96 million mt of steel, 57 percent of it in EAFs. By 2016, Mexico produced about 18.8 million mt of steel, 74 percent of it using EAFs, according to the U.S. International Trade Commission. This growth has helped grow businesses like Bostock’s. “We mainly service industrial accounts, so the [NAFTA] impact for us has been huge,” he says. “It has brought more and more suppliers and [original equipment manufacturers] to Mexico that have set up, and obviously they generate more scrap for the market.” Mexican steel producers consume much of the ferrous scrap Mexico generates, he says. Even though Mexico generates more of its own ferrous scrap than in years past, it still doesn’t generate enough, especially obsolete grades, “so it buys a lot from the U.S. border states” to keep feeding demand, Bostock says.

In recent years, as Mexican EAF steel production has increased, its ferrous scrap imports from the United States have also increased, says Joe Pickard, ISRI’s chief economist and director of commodities. Mexico remains “extremely reliant on ferrous scrap from the United States, even as it looks for other sources of supply,” such as Canada, he says. In 1994, Mexico imported 618,479 mt from the United States. By 2008, those imports hit 828,946 mt. After a dip
between 2008 and 2014, U.S. ferrous exports to Mexico shot up again in 2015 to 1.07 million mt and in 2016 to 1.38 million mt. In 2017, the United States shipped nearly 1.54 million mt of ferrous scrap to Mexico, valued at nearly $386 million, one of the highest volumes since NAFTA took effect.

Mexico’s strong appetite for ferrous is good business for U.S. recyclers, says Ben Glick, vice president of Tri-State Iron & Metal Co. (Texarkana, Ark.). His company trucks between 5 and 15 percent of its ferrous shipments to Mexico each quarter, he says.

In addition to trading ferrous, Gaddy says, U.S. recyclers along the border handle commodities such as secondary aluminum, copper and brass, and prime steel scrap. “It is not a consistent march of scrap moving just one way. It’s good that the material can move across the border because of supply and demand, and it helps the prices not get too high or low,” he says.

Concerns About Trade Policy Changes

Before NAFTA, Gaddy says, W Silver and scrapyards like it “saw a lot of peddler or dealer-driven traffic. There was cross-border activity, but typically the materials in Mexico were mostly sold to the United States” and not the other way around, he says. “There just wasn’t a lot of consumption in Mexico. There were limited steel mills, limited aluminum, and zero copper trade. Now, with NAFTA, there’s more consumption in Mexico and more infrastructure in Mexico” where both Mexican and U.S. scrap can go, he says.

When President Trump signed an executive order in January to renegotiate NAFTA, recyclers started bracing for more changes—though it’s anybody’s guess how negotiations among the three nations will go and what that ultimately will mean for trade. Because W Silver has operations in both the United States and Mexico, the issue could be especially complicated for his business, Gaddy notes. If the free-trade provisions of NAFTA end, “I think you probably won’t see the materials crossing the border to the same extent. Scrap generated in Mexico would probably be exported to other countries that have a [free trade] agreement,” he says. “For us, our business model would have to shift.”

Bostock thinks the Mexican and U.S. economies are too interconnected to break off their free-trade relationship without causing serious damage, “especially if you take into consideration that 70 percent of steel produced in the U.S. goes to Mexico to be manufactured into car parts and other goods. And Mexico generates so many products for the U.S.”

Enrique Acosta, partner in BMB Metals (Stuart, Fla.), a scrap metal trading firm that sources metals from Latin America, including Mexico and the Caribbean, predicts that if NAFTA falls apart, there could be “logistical nightmares” such as customs inspections changes, inventory management issues, and major supply-chain disruptions that could last for months. “What does that do to the manufacturing process?” he asks. “Everyone is counting on immediate delivery. … At the end of the day, I’m quite concerned.”

The countries’ scrap trade relationship also faces a separate but related issue of tariffs the United States enacted under Section 232 of the Trade Expansion Act of 1962, a provision that allows the president to enact protections for U.S. manufacturers on national security grounds. On March 1, President Trump imposed a 25-percent tariff on steel imports and a 10-percent tariff on aluminum imports, a move he says will protect the American aluminum and steel industries—which supply material for “critical infrastructure and national defense”—from being displaced by “rising levels of imports of foreign steel” and overproduction from places like China, according to the Commerce Department.

Mexico and Canada are exempt from the 25-percent steel tariff until June 1, a move President Trump said is tied to NAFTA negotiations. “We’re negotiating right now … and we’re going to hold off the tariff on those two countries to see whether or not we’re able to make the deal on NAFTA,” he said during the tariff announcement. However, he also has said he will not extend the deadline again. Should the United States decide to continue with the exemption, it likely will place import quotas and other restrictions on exempted countries, Trump administration officials said May 1.

The tariff does not apply to imports of ferrous scrap, only imports of primary and semifinished steel products like iron and steel ingots, primary stainless steel, and sheet piling, says Adina Renee Adler, ISRI’s senior director of government relations and international affairs. Yet the tariff announcement could have wide-ranging effects, some industry experts say. Canacero, Mexico’s steel trade association, says implementation will drastically limit Mexico’s ability to access the United States’ steel market. In a statement to the U.S. Commerce Department, Canacero argued that Mexico should not be subject to the tariff because its trade does not pose a national security risk, and because the tariffs go against NAFTA’s objectives of giving Canada, Mexico, and the United States equal access to each other’s markets. The United States consistently has a trade surplus in steel products with Mexico, it says, noting that “in 2017, the U.S. trade surplus with Mexico in steel and steel products reached $3.4 trillion, which shows how important the Mexican market is for the steel industry in the U.S.” In its statement, Canacero said it would call for retaliatory measures, saying Mexico is “obliged to immediately answer with the application of equivalent and reciprocal measures.” Other unnamed Mexican officials also have warned of retaliation, Reuters reported.

New Trade Relationships

The possibility of NAFTA changes also creates an opportunity for Mexico to begin expanding and strengthening its relationships past the United States and into other Latin American and Caribbean countries, Acosta says. “Every country in Latin America with a population over 15 million has a well-established ferrous sector,” he says, including Brazil, Chile, Ecuador, and Colombia. “These ferrous industries compete with each other for international scrap.” International trade with these ferrous markets is in its infancy, he says, but he sees potential for growth. There might even be a way to use the recent trade restrictions China has placed on most scrap imports to foster more scrap processing in Mexico and other Latin American countries as a “pit stop for upgrading scrap material,” he says, by leveraging the region’s low cost structure, including lower labor and fossil fuel costs.

Mexico has already started looking to foster new trade relationships beyond NAFTA. It reached an agreement with the European Union in April on a new free-trade deal, which will make all trade goods between the two duty-free, Reuters reported. The agreement is a strategic move for Mexico to reduce its reliance on the United States, Gaddy says. “Mexico knows they can’t have all their eggs in the NAFTA basket.”

Bostock, however, remains optimistic about NAFTA negotiations and says opportunities remain for ferrous scrap trade between the United States and Mexico, provided negotiations continue favorably for both countries. As China continues to increase scrap import regulations, he believes U.S. recyclers can also look more to Mexico to sell other commodities, such as nonferrous metals. Mexico has the demand and “U.S. companies have very easy access to new business right now,” he says.

Those new to working in Mexico should familiarize themselves with local traditions, language, and rules. It can make the difference between a successful trade and a cultural misunderstanding, Gaddy says. “Finding partners that understand Mexico is so important,” he says. “You can’t just assume you’re in a different place geographically and not culturally.” Acosta says it’s important to be able to speak Spanish or at least have a Spanish-speaking Latin American contact to help facilitate business, “otherwise things can get lost in translation.”

Understanding the local tax rules, brokerage and customs fees, and other financial elements also is key, Gaddy adds. “If things aren’t done the right way, it can be significantly costly,” he says. Logistics also can be different between the two countries. In the United States, companies often depend on third-party logistics businesses like freight forwarders and customs brokers to move material, but in Latin America, companies often take responsibility for arranging these items, Acosta says. At BMB, “we deal directly with the shipping lines and negotiate and book our containers at origin,” he says. Moving scrap between and within the two countries can be different, too. Customs inspections sometimes involve narcotics searches, and theft and fraud are common problems, Acosta says. “You have to know who you’re doing business with,” he says, “but you can also make great partnerships.”

Megan Quinn is reporter/writer for Scrap.

How will NAFTA negotiations affect the growing U.S. ferrous trade with Mexico? 

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