The Rise of Mexico

The Rise of Mexico—How Scrap Fits In

The proposed U.S.-Mexico free-trade agreement promises to create an export boom south of the border for the U.S. scrap industry.

BY SI WAKESBERG

Si Wakesberg is New York bureau chief for Scrap Processing and Recycling.

Only a few years ago, Mexico was a debt-ridden, inflation-haunted, politically troubled nation. Today, it is the United States 's third-largest trading partner after Canada and Japan , with trade in 1990 exceeding $58.6 billion—twice the amount recorded in 1986.

Mexico has been leaping forward in recent years, vigorously addressing its economic and environmental problems as it's experienced a stunning record of growth. Cheap labor, once the bane of the Mexican work force, is fast disappearing; the peso, regarded with suspicion in world financial markets, has strengthened considerably; the Mexican steel industry, formerly harassed by government regulations, is fast being privatized; and even the country's pollution problems are being counterposed through comprehensive regulations and cleanups.

The timing of Mexico 's renaissance is fortuitous. The U.S. Congress is considering a proposed U.S.-Mexico free-trade agreement, similar to the current pact between the United States and Canada . If signed, the treaty would complete the North American Free-Trade Agreement between the United States , Mexico , and Canada , creating a "North American Community" larger than the European Community. In fact, Mexican President Carlos Salinas de Gortari noted in an address at Harvard in 1991 that the pact would "create the necessary conditions to increase the competitiveness of the entire region so as to cope with the enormous competitiveness of the Japanese and Asian blocs."

Such a North American trading partnership could boost each country's economy by expanding trade of many products and materials—including scrap.

Catching Mexico 's Economic Wave

Mexico is a country on the upswing. Its economy has been growing at a rate of 3 percent, with 1992 growth estimated at 4 to 5 percent. Its inflation has been reduced from nearly 160 percent in 1987 to less than 30 percent in 1990. In addition, the Mexican Investment Board recently forecast the country's mining and capital investment program for 1990-1994 at $2.1 billion. Phil Alpert, a partner with National Fiber Supply Co. (Chicago), observes, "As a result of the new administration, the opening of markets, and the dramatic reduction of inflation, Mexico is experiencing a substantial boom and business has improved significantly." Is it any wonder that the spotlight these days is on Mexico and that foreign investment in the country is expected to reach $14 billion this year?

A natural result of Mexico 's industrial growth is that it is generating more scrap for domestic consumption, which could affect U.S. scrap exports in the future. Mexican executives assert, however, that the country's rapid industrial growth will increase its need to import both primary and secondary materials in the mid-1990s.

Mexico , indeed, continues to be a strong export market for many U.S. industries, purchasing approximately 73 percent of its total 1990 imports—worth $28 billion—from the United States . For scrap executives, these are heartening numbers. Arthur Miele, vice president of sales and marketing of Phelps Dodge Corp. ( Phoenix ), asserts, "The opportunities for U.S.-Mexico trade in the 1990s appear to be excellent. There's been a strong improvement in that country's economy, and the outlook for increased business is encouraging." Robert Bullard, plant manager of Alumax Recycling Group Inc. (Houston), observes that "in recent months, I've found the planes bound for Mexico filled with American businessmen." Among Mexico 's "great improvements," he notes, are the easing of restrictive business regulations and the strengthening of its currency. He admits, however, that although "the situation is much, much better than in the past, but there's still a lot to be done."

Part of what's being done is that the present Mexican administration, which took office in 1988, is privatizing many government-owned businesses, including the important steel industry. In its February issue, Fortune reports, "Since the mid-1980s, more than three-quarters of Mexico 's state-owned companies have been privatized. President Gortari has been ruthless in restructuring industry. ... The government expects to complete the sale of all state companies by next fall." Robert Draper, senior vice president of steel and steel scrap of Commercial Metals Co. (Dallas), lauds these efforts, noting, "It's most encouraging that the government has taken steps to get out of the steel business." He points out that " U.S. steel business with Mexico in the past two years has grown tremendously" and predicts even greater trade in the mid-1990s.

Mexico has sold its former state-owned steel mills to both domestic and foreign investors. Sicarta, on Mexico 's west coast, sold its blast-furnace mill to a private Mexican company and its minimill reportedly to an Indonesian firm. Several small mills have also been sold, but others such as Altos Hornos de Mexico, which produces nearly 3 million tons of steel and steel products per year, is still on the auction block.

Ferrous Exports Show "Upside Potential"

While primary steel sales to Mexico have picked up considerably, U.S. scrap steel exports to Mexico "appear to be lagging," in part due to the dollar's strength, says one scrap shipper. "There seems to be more direct business being done," he notes. "Brokers are still involved, but their activity appears to have been cut into by direct dealing."

Despite this slowdown, "there's a definite upside potential in the Mexican market, particularly as it relates to steel scrap," says John Newell, president of Newell Enterprises Inc. ( San Antonio ). And Richard Cordero, a trader with Clarendon Ltd. ( Stamford , Conn. ), believes "there will be larger exports of U.S. steel scrap to Mexico to meet its expanded mill requirements, once private interests get the mills moving."

Last year, the United States shipped 461,676 metric tons (mt) of steel scrap—mostly cut plate and structural scrap—to Mexico , down 15 percent from the 544,911 mt exported in 1990, according to the U.S. Department of Commerce, Bureau of the Census. While much of this scrap is exported from southern Texas shipping points, especially the Laredo district, there is a viable trade from California and other border states . In 1992, Mexico reportedly could import more than a million mt of steel scrap. Even if this figure is inflated, sources say that Mexico should dramatically step up its steel scrap demand in the next two years.

The burgeoning growth of Mexico 's steel industry can be readily seen in its increased mining efforts. In 1991, for example, the country posted a 16.3-percent increase in the average annual extraction of iron ore, according to Mexican Agenda, a government publication. "Production figures for the year surpassed the average production level for the past 11 years in iron and steel," the publication reports.

Mexico 's mining industry, which grew 3.2 percent in 1990, also extracts significant tonnages of other metal ores. In 1990, for example, the country produced 2,346 mt of silver, approximately 16.2 percent of world output. It produced 733 mt of bismuth, representing 28.6 percent of world output; 180,000 mt of lead; 323,000 mt of zinc; and smaller tonnages of cadmium, antimony, molybdenum, selenium, and tungsten.

Primary Aluminum Edging Out Scrap

Looking to Mexico 's demand for aluminum scrap, Howard Robinson, president of Gulf Metals Industries Inc. (Houston), remarks, "At the moment, there seems to be more opportunity for primary aluminum than for scrap." Bill Hughes, a trader for Hunter Douglas Metals Inc. (Galveston, Texas), observes that most of the material moving into Mexico consists of prime ingots, sows, T-bars, and billets, although some secondary billets and small tonnages of higher-grade scrap are also being exported. In 1991, U.S. exports of aluminum scrap to Mexico hit 17,532 mt, with another 171 mt of all-aluminum used beverage cans shipped during the year.

As Robinson explains, "The Mexicans are stepping up their reclamation processes and, therefore, appear to cover some of their needs with domestic scrap." Venezuelan aluminum scrap has also reportedly been moving into Mexico at discounted prices. Says one U.S. shipper: "Obviously, it's cheaper for the Mexicans to secure the South American material, and they're doing it." Many exporters also indicate that finding sufficient tonnages of scrap to ship is sometimes a problem. Still, "there's tremendous potential for U.S.-Mexican aluminum trading," Hughes asserts.

Mexico 's Copper Strength

U.S. copper executives point out that Mexico is approaching self-sufficiency in copper. Mexico's mining of nonferrous metallic minerals rose 3.3 percent in 1990, Mexican Agenda says, with a large portion of this gain stemming from the reopening of the Canaea copper mine, said to be the fourth largest copper mine in the world, with a 1990 output of 298,695 mt. At the same time, Mexico consumed about 194,000 mt of refined copper, using nearly 25,000 mt of scrap in the production of alloys and other copper products. Mexico 's copper refining capacity is said to be close to 265,000 mt per year, and more than 60 percent of the refined copper is reported to be consumed by the electric cable industry.

Despite Mexico 's strong copper position, the country continues to have a spot need for the red metal. "More copper finished products are being shipped to Mexico these days than primary copper," asserts one U.S. industry official, pointing to sales of wire, brass, copper alloy, and other products. "I think more cathodes will be shipped as the economy grows stronger and the pressure for metal supplies increases."

About 11,190 mt of copper scrap and copper alloy scrap was shipped from the United States to Mexico last year. In the past, U.S. exporters say they would get premiums of 5 to 6 cents a pound on sales of No. 1 copper to Mexico . However, one exporter states, "Lately, these premiums have been down to 1 to 2 cents a pound and are not really worth the trouble of shipping for export." Another copper scrap executive indicates that "the cost of doing business with Mexico has risen sharply, so we're not shipping scrap on as regular of a basis as we used to." Prices, he notes, have become too competitive since South American material can be brought in at lower quotations due to the structural framework of discounts. Another U.S. shipper agrees that "the market is against us and we're shipping very little to Mexico ." In addition, tight U.S. scrap supplies have made it difficult to accumulate sufficient material for export.

Paper Holds Promise

In addition to being a metal scrap importer, Mexico ranks as a top-five—and often top-three—consumer of U.S. scrap paper, predominantly importing old corrugated containers, old newspaper, and pulp substitutes. In 1991, Mexico imported 887,819 mt of scrap paper worth approximately $128.2 million, according to the Department of Commerce. Selling to Mexico is easier than selling to other foreign consumers because "shipments can be made by truck or rail rather than by ship," notes National Fiber's Alpert. In addition, he points out, "bureaucratic barriers are virtually nonexistent. It's an excellent country to do business with."

Mexico could become an even better place to do business when a number of new mills and expansion projects are completed. Kimberly-Clark de Mexico SA, for example, is building a greenfield 54,000-mt-per-year tissue operation in Saltillo; Sonoco de Mexico SA will be opening a new plant in Monterrey to manufacture solid fiber partitions for glass containers and specialty markets; and Cartones Ponderosa SA is wrapping up a $30-million rebuilding project of its 130,000-mt-per-year board machine and is considering buying a 240,000-mt-per-year board machine for its San Juan del Rio mill. These projects and at least three others could boost Mexico 's demand for scrap paper, especially deinking and lower grades, exporters says.

Thus far in 1992, sales to Mexico have been slow because Mexican mills "found they had substantial inventory at the end of 1991," Alpert notes. Looking to the rest of the year, he says, "We foresee moderate growth in demand from Mexico , and we expect this growth to be at a faster rate than domestic growth." Another paper industry source states, "I expect things to remain the same or improve. I don't see them getting worse." Pulp substitutes and ledger grades, he adds, will most likely show the greatest strength in the near term.

Interestingly, many scrap paper exporters expect the proposed free-trade agreement to affect new paper exports more than scrap exports. One paper shipper says the agreement may improve all paper trading in the long run, but he asserts that most of the agreement's benefits might be more psychological than tangible. " Mexico doesn't really have any barriers right now," he says. "We've already got free trade in paper."

Removing Remaining Obstacles

Mexico has already been working to ease the flow of materials across its border and improve its business climate in advance of the trade agreement's official debut. The country has reportedly cut its tariff rates from 100 percent to 20 percent and has eliminated import license requirements for 98 percent of all import categories. "Everything is being done to facilitate trade between the United States and Mexico ," says one Mexican official, "and in that process we are removing tariff barriers."

In the manufacturing sector, Mexico has permitted U.S. , Japanese, and German companies to establish approximately 1,250 border plants called maquiladoras just inside its border, using Mexican labor to make products for export to the United States and elsewhere. These operations are allowed to import raw materials duty-free and can sell one-third of their output in Mexico .

On the legislative and regulatory level, Mexico has been implementing stringent measures to reduce pollution and encourage recycling. One U.S. aluminum executive testifies, "Our smelter in Mexico must meet the most rigid standards to avoid pollution." Others attest that a number of plants have been shut down because they could not meet the new, strict regulations.

Despite improvements in U.S.-Mexico trade relations, a few problems persist. "Mexicans are still slow payers," asserts one U.S. metal official, who notes that payments often take 90 to 120 days. A nonferrous executive echoes, "Payment terms are still a question. We won't ship unless we see the money in our bank." And Alpert notes, "The normal business constraints apply. You check credit and you make sure you're dealing with reliable people, but there's the same spectrum of quality consumers in Mexico as there is in the United States and Canada ." Some U.S. firms, in fact, have begun to extend more lenient credit terms to Mexican firms. "Letters of credit are easier to secure and business procedures are smoother," a metal executive says, but he adds, "You still have to be careful."

Larger economic roadblocks also exist. As Fortune notes, "Although nearly three-quarters of Mexico 's economy is now open to 100-percent foreign ownership, rules vary greatly. ... mineral extraction is still closed and likely to stay that way for some time." Hence, the magazine advises, "a joint venture is the best approach for U.S. companies planning to manufacture mainly for the Mexican market," which encompasses 82 million people.

In addition, Mexico 's surging economy can't yet provide living wages for all its citizens, as proven by the continuing stream of illegal immigrants into the United States . Mexican spokesmen are confident that this tide will slow or cease altogether once the country's standard of living is raised sufficiently. Meanwhile, these aliens will continue to be perceived as a "cheap labor threat" by U.S. labor unions.

Whatever economic problems Mexico still faces, the proposed free-trade agreement could help rectify them. Political analysts, however, say the agreement will most likely not be passed this year. Not only has the political climate in the United States chilled against foreign governments during this election year, but even the Bush administration, which supports the agreement, wants to "cool it" temporarily. Pro-Mexican observers insist, however, that now is the best time to pass the agreement, before the European Community emerges in early 1993.

The Rise of Mexico—How Scrap Fits In

The proposed U.S.-Mexico free-trade agreement promises to create an export boom south of the border for the U.S. scrap industry.

BY SI WAKESBERG

Si Wakesberg is New York bureau chief for Scrap Processing and Recycling.

Only a few years ago, Mexico was a debt-ridden, inflation-haunted, politically troubled nation. Today, it is the United States 's third-largest trading partner after Canada and Japan , with trade in 1990 exceeding $58.6 billion—twice the amount recorded in 1986.

Mexico has been leaping forward in recent years, vigorously addressing its economic and environmental problems as it's experienced a stunning record of growth. Cheap labor, once the bane of the Mexican work force, is fast disappearing; the peso, regarded with suspicion in world financial markets, has strengthened considerably; the Mexican steel industry, formerly harassed by government regulations, is fast being privatized; and even the country's pollution problems are being counterposed through comprehensive regulations and cleanups.

The timing of Mexico 's renaissance is fortuitous. The U.S. Congress is considering a proposed U.S.-Mexico free-trade agreement, similar to the current pact between the United States and Canada . If signed, the treaty would complete the North American Free-Trade Agreement between the United States , Mexico , and Canada , creating a "North American Community" larger than the European Community. In fact, Mexican President Carlos Salinas de Gortari noted in an address at Harvard in 1991 that the pact would "create the necessary conditions to increase the competitiveness of the entire region so as to cope with the enormous competitiveness of the Japanese and Asian blocs."

Such a North American trading partnership could boost each country's economy by expanding trade of many products and materials—including scrap.

Catching Mexico 's Economic Wave

Mexico is a country on the upswing. Its economy has been growing at a rate of 3 percent, with 1992 growth estimated at 4 to 5 percent. Its inflation has been reduced from nearly 160 percent in 1987 to less than 30 percent in 1990. In addition, the Mexican Investment Board recently forecast the country's mining and capital investment program for 1990-1994 at $2.1 billion. Phil Alpert, a partner with National Fiber Supply Co. (Chicago), observes, "As a result of the new administration, the opening of markets, and the dramatic reduction of inflation, Mexico is experiencing a substantial boom and business has improved significantly." Is it any wonder that the spotlight these days is on Mexico and that foreign investment in the country is expected to reach $14 billion this year?

A natural result of Mexico 's industrial growth is that it is generating more scrap for domestic consumption, which could affect U.S. scrap exports in the future. Mexican executives assert, however, that the country's rapid industrial growth will increase its need to import both primary and secondary materials in the mid-1990s.

Mexico , indeed, continues to be a strong export market for many U.S. industries, purchasing approximately 73 percent of its total 1990 imports—worth $28 billion—from the United States . For scrap executives, these are heartening numbers. Arthur Miele, vice president of sales and marketing of Phelps Dodge Corp. ( Phoenix ), asserts, "The opportunities for U.S.-Mexico trade in the 1990s appear to be excellent. There's been a strong improvement in that country's economy, and the outlook for increased business is encouraging." Robert Bullard, plant manager of Alumax Recycling Group Inc. (Houston), observes that "in recent months, I've found the planes bound for Mexico filled with American businessmen." Among Mexico 's "great improvements," he notes, are the easing of restrictive business regulations and the strengthening of its currency. He admits, however, that although "the situation is much, much better than in the past, but there's still a lot to be done."

Part of what's being done is that the present Mexican administration, which took office in 1988, is privatizing many government-owned businesses, including the important steel industry. In its February issue, Fortune reports, "Since the mid-1980s, more than three-quarters of Mexico 's state-owned companies have been privatized. President Gortari has been ruthless in restructuring industry. ... The government expects to complete the sale of all state companies by next fall." Robert Draper, senior vice president of steel and steel scrap of Commercial Metals Co. (Dallas), lauds these efforts, noting, "It's most encouraging that the government has taken steps to get out of the steel business." He points out that " U.S. steel business with Mexico in the past two years has grown tremendously" and predicts even greater trade in the mid-1990s.

Mexico has sold its former state-owned steel mills to both domestic and foreign investors. Sicarta, on Mexico 's west coast, sold its blast-furnace mill to a private Mexican company and its minimill reportedly to an Indonesian firm. Several small mills have also been sold, but others such as Altos Hornos de Mexico, which produces nearly 3 million tons of steel and steel products per year, is still on the auction block.

Ferrous Exports Show "Upside Potential"

While primary steel sales to Mexico have picked up considerably, U.S. scrap steel exports to Mexico "appear to be lagging," in part due to the dollar's strength, says one scrap shipper. "There seems to be more direct business being done," he notes. "Brokers are still involved, but their activity appears to have been cut into by direct dealing."

Despite this slowdown, "there's a definite upside potential in the Mexican market, particularly as it relates to steel scrap," says John Newell, president of Newell Enterprises Inc. ( San Antonio ). And Richard Cordero, a trader with Clarendon Ltd. ( Stamford , Conn. ), believes "there will be larger exports of U.S. steel scrap to Mexico to meet its expanded mill requirements, once private interests get the mills moving."

Last year, the United States shipped 461,676 metric tons (mt) of steel scrap—mostly cut plate and structural scrap—to Mexico , down 15 percent from the 544,911 mt exported in 1990, according to the U.S. Department of Commerce, Bureau of the Census. While much of this scrap is exported from southern Texas shipping points, especially the Laredo district, there is a viable trade from California and other border states . In 1992, Mexico reportedly could import more than a million mt of steel scrap. Even if this figure is inflated, sources say that Mexico should dramatically step up its steel scrap demand in the next two years.

The burgeoning growth of Mexico 's steel industry can be readily seen in its increased mining efforts. In 1991, for example, the country posted a 16.3-percent increase in the average annual extraction of iron ore, according to Mexican Agenda, a government publication. "Production figures for the year surpassed the average production level for the past 11 years in iron and steel," the publication reports.

Mexico 's mining industry, which grew 3.2 percent in 1990, also extracts significant tonnages of other metal ores. In 1990, for example, the country produced 2,346 mt of silver, approximately 16.2 percent of world output. It produced 733 mt of bismuth, representing 28.6 percent of world output; 180,000 mt of lead; 323,000 mt of zinc; and smaller tonnages of cadmium, antimony, molybdenum, selenium, and tungsten.

Primary Aluminum Edging Out Scrap

Looking to Mexico 's demand for aluminum scrap, Howard Robinson, president of Gulf Metals Industries Inc. (Houston), remarks, "At the moment, there seems to be more opportunity for primary aluminum than for scrap." Bill Hughes, a trader for Hunter Douglas Metals Inc. (Galveston, Texas), observes that most of the material moving into Mexico consists of prime ingots, sows, T-bars, and billets, although some secondary billets and small tonnages of higher-grade scrap are also being exported. In 1991, U.S. exports of aluminum scrap to Mexico hit 17,532 mt, with another 171 mt of all-aluminum used beverage cans shipped during the year.

As Robinson explains, "The Mexicans are stepping up their reclamation processes and, therefore, appear to cover some of their needs with domestic scrap." Venezuelan aluminum scrap has also reportedly been moving into Mexico at discounted prices. Says one U.S. shipper: "Obviously, it's cheaper for the Mexicans to secure the South American material, and they're doing it." Many exporters also indicate that finding sufficient tonnages of scrap to ship is sometimes a problem. Still, "there's tremendous potential for U.S.-Mexican aluminum trading," Hughes asserts.

Mexico 's Copper Strength

U.S. copper executives point out that Mexico is approaching self-sufficiency in copper. Mexico's mining of nonferrous metallic minerals rose 3.3 percent in 1990, Mexican Agenda says, with a large portion of this gain stemming from the reopening of the Canaea copper mine, said to be the fourth largest copper mine in the world, with a 1990 output of 298,695 mt. At the same time, Mexico consumed about 194,000 mt of refined copper, using nearly 25,000 mt of scrap in the production of alloys and other copper products. Mexico 's copper refining capacity is said to be close to 265,000 mt per year, and more than 60 percent of the refined copper is reported to be consumed by the electric cable industry.

Despite Mexico 's strong copper position, the country continues to have a spot need for the red metal. "More copper finished products are being shipped to Mexico these days than primary copper," asserts one U.S. industry official, pointing to sales of wire, brass, copper alloy, and other products. "I think more cathodes will be shipped as the economy grows stronger and the pressure for metal supplies increases."

About 11,190 mt of copper scrap and copper alloy scrap was shipped from the United States to Mexico last year. In the past, U.S. exporters say they would get premiums of 5 to 6 cents a pound on sales of No. 1 copper to Mexico . However, one exporter states, "Lately, these premiums have been down to 1 to 2 cents a pound and are not really worth the trouble of shipping for export." Another copper scrap executive indicates that "the cost of doing business with Mexico has risen sharply, so we're not shipping scrap on as regular of a basis as we used to." Prices, he notes, have become too competitive since South American material can be brought in at lower quotations due to the structural framework of discounts. Another U.S. shipper agrees that "the market is against us and we're shipping very little to Mexico ." In addition, tight U.S. scrap supplies have made it difficult to accumulate sufficient material for export.

Paper Holds Promise

In addition to being a metal scrap importer, Mexico ranks as a top-five—and often top-three—consumer of U.S. scrap paper, predominantly importing old corrugated containers, old newspaper, and pulp substitutes. In 1991, Mexico imported 887,819 mt of scrap paper worth approximately $128.2 million, according to the Department of Commerce. Selling to Mexico is easier than selling to other foreign consumers because "shipments can be made by truck or rail rather than by ship," notes National Fiber's Alpert. In addition, he points out, "bureaucratic barriers are virtually nonexistent. It's an excellent country to do business with."

Mexico could become an even better place to do business when a number of new mills and expansion projects are completed. Kimberly-Clark de Mexico SA, for example, is building a greenfield 54,000-mt-per-year tissue operation in Saltillo; Sonoco de Mexico SA will be opening a new plant in Monterrey to manufacture solid fiber partitions for glass containers and specialty markets; and Cartones Ponderosa SA is wrapping up a $30-million rebuilding project of its 130,000-mt-per-year board machine and is considering buying a 240,000-mt-per-year board machine for its San Juan del Rio mill. These projects and at least three others could boost Mexico 's demand for scrap paper, especially deinking and lower grades, exporters says.

Thus far in 1992, sales to Mexico have been slow because Mexican mills "found they had substantial inventory at the end of 1991," Alpert notes. Looking to the rest of the year, he says, "We foresee moderate growth in demand from Mexico , and we expect this growth to be at a faster rate than domestic growth." Another paper industry source states, "I expect things to remain the same or improve. I don't see them getting worse." Pulp substitutes and ledger grades, he adds, will most likely show the greatest strength in the near term.

Interestingly, many scrap paper exporters expect the proposed free-trade agreement to affect new paper exports more than scrap exports. One paper shipper says the agreement may improve all paper trading in the long run, but he asserts that most of the agreement's benefits might be more psychological than tangible. " Mexico doesn't really have any barriers right now," he says. "We've already got free trade in paper."

Removing Remaining Obstacles

Mexico has already been working to ease the flow of materials across its border and improve its business climate in advance of the trade agreement's official debut. The country has reportedly cut its tariff rates from 100 percent to 20 percent and has eliminated import license requirements for 98 percent of all import categories. "Everything is being done to facilitate trade between the United States and Mexico ," says one Mexican official, "and in that process we are removing tariff barriers."

In the manufacturing sector, Mexico has permitted U.S. , Japanese, and German companies to establish approximately 1,250 border plants called maquiladoras just inside its border, using Mexican labor to make products for export to the United States and elsewhere. These operations are allowed to import raw materials duty-free and can sell one-third of their output in Mexico .

On the legislative and regulatory level, Mexico has been implementing stringent measures to reduce pollution and encourage recycling. One U.S. aluminum executive testifies, "Our smelter in Mexico must meet the most rigid standards to avoid pollution." Others attest that a number of plants have been shut down because they could not meet the new, strict regulations.

Despite improvements in U.S.-Mexico trade relations, a few problems persist. "Mexicans are still slow payers," asserts one U.S. metal official, who notes that payments often take 90 to 120 days. A nonferrous executive echoes, "Payment terms are still a question. We won't ship unless we see the money in our bank." And Alpert notes, "The normal business constraints apply. You check credit and you make sure you're dealing with reliable people, but there's the same spectrum of quality consumers in Mexico as there is in the United States and Canada ." Some U.S. firms, in fact, have begun to extend more lenient credit terms to Mexican firms. "Letters of credit are easier to secure and business procedures are smoother," a metal executive says, but he adds, "You still have to be careful."

Larger economic roadblocks also exist. As Fortune notes, "Although nearly three-quarters of Mexico 's economy is now open to 100-percent foreign ownership, rules vary greatly. ... mineral extraction is still closed and likely to stay that way for some time." Hence, the magazine advises, "a joint venture is the best approach for U.S. companies planning to manufacture mainly for the Mexican market," which encompasses 82 million people.

In addition, Mexico 's surging economy can't yet provide living wages for all its citizens, as proven by the continuing stream of illegal immigrants into the United States . Mexican spokesmen are confident that this tide will slow or cease altogether once the country's standard of living is raised sufficiently. Meanwhile, these aliens will continue to be perceived as a "cheap labor threat" by U.S. labor unions.

Whatever economic problems Mexico still faces, the proposed free-trade agreement could help rectify them. Political analysts, however, say the agreement will most likely not be passed this year. Not only has the political climate in the United States chilled against foreign governments during this election year, but even the Bush administration, which supports the agreement, wants to "cool it" temporarily. Pro-Mexican observers insist, however, that now is the best time to pass the agreement, before the European Community emerges in early 1993.

The Rise of Mexico—How Scrap Fits In

The proposed U.S.-Mexico free-trade agreement promises to create an export boom south of the border for the U.S. scrap industry.

BY SI WAKESBERG

Si Wakesberg is New York bureau chief for Scrap Processing and Recycling.

Only a few years ago, Mexico was a debt-ridden, inflation-haunted, politically troubled nation. Today, it is the United States 's third-largest trading partner after Canada and Japan , with trade in 1990 exceeding $58.6 billion—twice the amount recorded in 1986.

Mexico has been leaping forward in recent years, vigorously addressing its economic and environmental problems as it's experienced a stunning record of growth. Cheap labor, once the bane of the Mexican work force, is fast disappearing; the peso, regarded with suspicion in world financial markets, has strengthened considerably; the Mexican steel industry, formerly harassed by government regulations, is fast being privatized; and even the country's pollution problems are being counterposed through comprehensive regulations and cleanups.

The timing of Mexico 's renaissance is fortuitous. The U.S. Congress is considering a proposed U.S.-Mexico free-trade agreement, similar to the current pact between the United States and Canada . If signed, the treaty would complete the North American Free-Trade Agreement between the United States , Mexico , and Canada , creating a "North American Community" larger than the European Community. In fact, Mexican President Carlos Salinas de Gortari noted in an address at Harvard in 1991 that the pact would "create the necessary conditions to increase the competitiveness of the entire region so as to cope with the enormous competitiveness of the Japanese and Asian blocs."

Such a North American trading partnership could boost each country's economy by expanding trade of many products and materials—including scrap.

Catching Mexico 's Economic Wave

Mexico is a country on the upswing. Its economy has been growing at a rate of 3 percent, with 1992 growth estimated at 4 to 5 percent. Its inflation has been reduced from nearly 160 percent in 1987 to less than 30 percent in 1990. In addition, the Mexican Investment Board recently forecast the country's mining and capital investment program for 1990-1994 at $2.1 billion. Phil Alpert, a partner with National Fiber Supply Co. (Chicago), observes, "As a result of the new administration, the opening of markets, and the dramatic reduction of inflation, Mexico is experiencing a substantial boom and business has improved significantly." Is it any wonder that the spotlight these days is on Mexico and that foreign investment in the country is expected to reach $14 billion this year?

A natural result of Mexico 's industrial growth is that it is generating more scrap for domestic consumption, which could affect U.S. scrap exports in the future. Mexican executives assert, however, that the country's rapid industrial growth will increase its need to import both primary and secondary materials in the mid-1990s.

Mexico , indeed, continues to be a strong export market for many U.S. industries, purchasing approximately 73 percent of its total 1990 imports—worth $28 billion—from the United States . For scrap executives, these are heartening numbers. Arthur Miele, vice president of sales and marketing of Phelps Dodge Corp. ( Phoenix ), asserts, "The opportunities for U.S.-Mexico trade in the 1990s appear to be excellent. There's been a strong improvement in that country's economy, and the outlook for increased business is encouraging." Robert Bullard, plant manager of Alumax Recycling Group Inc. (Houston), observes that "in recent months, I've found the planes bound for Mexico filled with American businessmen." Among Mexico 's "great improvements," he notes, are the easing of restrictive business regulations and the strengthening of its currency. He admits, however, that although "the situation is much, much better than in the past, but there's still a lot to be done."

Part of what's being done is that the present Mexican administration, which took office in 1988, is privatizing many government-owned businesses, including the important steel industry. In its February issue, Fortune reports, "Since the mid-1980s, more than three-quarters of Mexico 's state-owned companies have been privatized. President Gortari has been ruthless in restructuring industry. ... The government expects to complete the sale of all state companies by next fall." Robert Draper, senior vice president of steel and steel scrap of Commercial Metals Co. (Dallas), lauds these efforts, noting, "It's most encouraging that the government has taken steps to get out of the steel business." He points out that " U.S. steel business with Mexico in the past two years has grown tremendously" and predicts even greater trade in the mid-1990s.

Mexico has sold its former state-owned steel mills to both domestic and foreign investors. Sicarta, on Mexico 's west coast, sold its blast-furnace mill to a private Mexican company and its minimill reportedly to an Indonesian firm. Several small mills have also been sold, but others such as Altos Hornos de Mexico, which produces nearly 3 million tons of steel and steel products per year, is still on the auction block.

Ferrous Exports Show "Upside Potential"

While primary steel sales to Mexico have picked up considerably, U.S. scrap steel exports to Mexico "appear to be lagging," in part due to the dollar's strength, says one scrap shipper. "There seems to be more direct business being done," he notes. "Brokers are still involved, but their activity appears to have been cut into by direct dealing."

Despite this slowdown, "there's a definite upside potential in the Mexican market, particularly as it relates to steel scrap," says John Newell, president of Newell Enterprises Inc. ( San Antonio ). And Richard Cordero, a trader with Clarendon Ltd. ( Stamford , Conn. ), believes "there will be larger exports of U.S. steel scrap to Mexico to meet its expanded mill requirements, once private interests get the mills moving."

Last year, the United States shipped 461,676 metric tons (mt) of steel scrap—mostly cut plate and structural scrap—to Mexico , down 15 percent from the 544,911 mt exported in 1990, according to the U.S. Department of Commerce, Bureau of the Census. While much of this scrap is exported from southern Texas shipping points, especially the Laredo district, there is a viable trade from California and other border states . In 1992, Mexico reportedly could import more than a million mt of steel scrap. Even if this figure is inflated, sources say that Mexico should dramatically step up its steel scrap demand in the next two years.

The burgeoning growth of Mexico 's steel industry can be readily seen in its increased mining efforts. In 1991, for example, the country posted a 16.3-percent increase in the average annual extraction of iron ore, according to Mexican Agenda, a government publication. "Production figures for the year surpassed the average production level for the past 11 years in iron and steel," the publication reports.

Mexico 's mining industry, which grew 3.2 percent in 1990, also extracts significant tonnages of other metal ores. In 1990, for example, the country produced 2,346 mt of silver, approximately 16.2 percent of world output. It produced 733 mt of bismuth, representing 28.6 percent of world output; 180,000 mt of lead; 323,000 mt of zinc; and smaller tonnages of cadmium, antimony, molybdenum, selenium, and tungsten.

Primary Aluminum Edging Out Scrap

Looking to Mexico 's demand for aluminum scrap, Howard Robinson, president of Gulf Metals Industries Inc. (Houston), remarks, "At the moment, there seems to be more opportunity for primary aluminum than for scrap." Bill Hughes, a trader for Hunter Douglas Metals Inc. (Galveston, Texas), observes that most of the material moving into Mexico consists of prime ingots, sows, T-bars, and billets, although some secondary billets and small tonnages of higher-grade scrap are also being exported. In 1991, U.S. exports of aluminum scrap to Mexico hit 17,532 mt, with another 171 mt of all-aluminum used beverage cans shipped during the year.

As Robinson explains, "The Mexicans are stepping up their reclamation processes and, therefore, appear to cover some of their needs with domestic scrap." Venezuelan aluminum scrap has also reportedly been moving into Mexico at discounted prices. Says one U.S. shipper: "Obviously, it's cheaper for the Mexicans to secure the South American material, and they're doing it." Many exporters also indicate that finding sufficient tonnages of scrap to ship is sometimes a problem. Still, "there's tremendous potential for U.S.-Mexican aluminum trading," Hughes asserts.

Mexico 's Copper Strength

U.S. copper executives point out that Mexico is approaching self-sufficiency in copper. Mexico's mining of nonferrous metallic minerals rose 3.3 percent in 1990, Mexican Agenda says, with a large portion of this gain stemming from the reopening of the Canaea copper mine, said to be the fourth largest copper mine in the world, with a 1990 output of 298,695 mt. At the same time, Mexico consumed about 194,000 mt of refined copper, using nearly 25,000 mt of scrap in the production of alloys and other copper products. Mexico 's copper refining capacity is said to be close to 265,000 mt per year, and more than 60 percent of the refined copper is reported to be consumed by the electric cable industry.

Despite Mexico 's strong copper position, the country continues to have a spot need for the red metal. "More copper finished products are being shipped to Mexico these days than primary copper," asserts one U.S. industry official, pointing to sales of wire, brass, copper alloy, and other products. "I think more cathodes will be shipped as the economy grows stronger and the pressure for metal supplies increases."

About 11,190 mt of copper scrap and copper alloy scrap was shipped from the United States to Mexico last year. In the past, U.S. exporters say they would get premiums of 5 to 6 cents a pound on sales of No. 1 copper to Mexico . However, one exporter states, "Lately, these premiums have been down to 1 to 2 cents a pound and are not really worth the trouble of shipping for export." Another copper scrap executive indicates that "the cost of doing business with Mexico has risen sharply, so we're not shipping scrap on as regular of a basis as we used to." Prices, he notes, have become too competitive since South American material can be brought in at lower quotations due to the structural framework of discounts. Another U.S. shipper agrees that "the market is against us and we're shipping very little to Mexico ." In addition, tight U.S. scrap supplies have made it difficult to accumulate sufficient material for export.

Paper Holds Promise

In addition to being a metal scrap importer, Mexico ranks as a top-five—and often top-three—consumer of U.S. scrap paper, predominantly importing old corrugated containers, old newspaper, and pulp substitutes. In 1991, Mexico imported 887,819 mt of scrap paper worth approximately $128.2 million, according to the Department of Commerce. Selling to Mexico is easier than selling to other foreign consumers because "shipments can be made by truck or rail rather than by ship," notes National Fiber's Alpert. In addition, he points out, "bureaucratic barriers are virtually nonexistent. It's an excellent country to do business with."

Mexico could become an even better place to do business when a number of new mills and expansion projects are completed. Kimberly-Clark de Mexico SA, for example, is building a greenfield 54,000-mt-per-year tissue operation in Saltillo; Sonoco de Mexico SA will be opening a new plant in Monterrey to manufacture solid fiber partitions for glass containers and specialty markets; and Cartones Ponderosa SA is wrapping up a $30-million rebuilding project of its 130,000-mt-per-year board machine and is considering buying a 240,000-mt-per-year board machine for its San Juan del Rio mill. These projects and at least three others could boost Mexico 's demand for scrap paper, especially deinking and lower grades, exporters says.

Thus far in 1992, sales to Mexico have been slow because Mexican mills "found they had substantial inventory at the end of 1991," Alpert notes. Looking to the rest of the year, he says, "We foresee moderate growth in demand from Mexico , and we expect this growth to be at a faster rate than domestic growth." Another paper industry source states, "I expect things to remain the same or improve. I don't see them getting worse." Pulp substitutes and ledger grades, he adds, will most likely show the greatest strength in the near term.

Interestingly, many scrap paper exporters expect the proposed free-trade agreement to affect new paper exports more than scrap exports. One paper shipper says the agreement may improve all paper trading in the long run, but he asserts that most of the agreement's benefits might be more psychological than tangible. " Mexico doesn't really have any barriers right now," he says. "We've already got free trade in paper."

Removing Remaining Obstacles

Mexico has already been working to ease the flow of materials across its border and improve its business climate in advance of the trade agreement's official debut. The country has reportedly cut its tariff rates from 100 percent to 20 percent and has eliminated import license requirements for 98 percent of all import categories. "Everything is being done to facilitate trade between the United States and Mexico ," says one Mexican official, "and in that process we are removing tariff barriers."

In the manufacturing sector, Mexico has permitted U.S. , Japanese, and German companies to establish approximately 1,250 border plants called maquiladoras just inside its border, using Mexican labor to make products for export to the United States and elsewhere. These operations are allowed to import raw materials duty-free and can sell one-third of their output in Mexico .

On the legislative and regulatory level, Mexico has been implementing stringent measures to reduce pollution and encourage recycling. One U.S. aluminum executive testifies, "Our smelter in Mexico must meet the most rigid standards to avoid pollution." Others attest that a number of plants have been shut down because they could not meet the new, strict regulations.

Despite improvements in U.S.-Mexico trade relations, a few problems persist. "Mexicans are still slow payers," asserts one U.S. metal official, who notes that payments often take 90 to 120 days. A nonferrous executive echoes, "Payment terms are still a question. We won't ship unless we see the money in our bank." And Alpert notes, "The normal business constraints apply. You check credit and you make sure you're dealing with reliable people, but there's the same spectrum of quality consumers in Mexico as there is in the United States and Canada ." Some U.S. firms, in fact, have begun to extend more lenient credit terms to Mexican firms. "Letters of credit are easier to secure and business procedures are smoother," a metal executive says, but he adds, "You still have to be careful."

Larger economic roadblocks also exist. As Fortune notes, "Although nearly three-quarters of Mexico 's economy is now open to 100-percent foreign ownership, rules vary greatly. ... mineral extraction is still closed and likely to stay that way for some time." Hence, the magazine advises, "a joint venture is the best approach for U.S. companies planning to manufacture mainly for the Mexican market," which encompasses 82 million people.

In addition, Mexico 's surging economy can't yet provide living wages for all its citizens, as proven by the continuing stream of illegal immigrants into the United States . Mexican spokesmen are confident that this tide will slow or cease altogether once the country's standard of living is raised sufficiently. Meanwhile, these aliens will continue to be perceived as a "cheap labor threat" by U.S. labor unions.

Whatever economic problems Mexico still faces, the proposed free-trade agreement could help rectify them. Political analysts, however, say the agreement will most likely not be passed this year. Not only has the political climate in the United States chilled against foreign governments during this election year, but even the Bush administration, which supports the agreement, wants to "cool it" temporarily. Pro-Mexican observers insist, however, that now is the best time to pass the agreement, before the European Community emerges in early 1993.