Market Monitor - Focus on steel and metals - Mexico

• Steel consumption picked up again due to demand from the automotive sector
• Payments take between 90-120 days on average
• Exchange rate volatility expected to cause payment delays

Mexico´s domestic production of crude steel increased 4.1% year-on-year in 2014, to 18.99 million tonnes, while apparent steel use increased 12.2%. Steel imports grew 19.5%, reaching 12.4 million tonnes, mainly in Japan, South Korea and China. In contrast, steel exports decreased 3.6%, to 5.8 million tonnes, causing a steel trade deficit.

In 2014 and in H1 of 2015 domestic steel demand has been driven by strong growth in the automotive industry (both car makers and car part manufacturers) as well as by a robust performance in the pipeline installation segment. This has offset weaker performance of the construction sector, which has recorded a modest recovery since Q2 of 2015; especially in the infrastructure segment (due to higher government spending). This upturn is encouraging but still not entirely satisfactory, since construction performance was subdued for a long period.

On average, payments in the Mexican steel and metals industry take 90 to 120 days. The record of payment delays and insolvencies in this sector has been stable over the last six months. However, non-payment notifications are expected to increase in the coming months, due to deprecation of the peso against the dollar, making imports more expensive.

External risk factors for the Mexican steel industry are the volatility of international metals prices, rising uncertainty concerning Chinese economic performance and oil price developments. Domestically, government investment plans in projects resulting from the recent energy reform to infrastructure remain susceptible to change.

As in 2014 our underwriting stance remains cautious, given potential exchange rate and steel price volatility that could adversely affect production costs, and the growth in imports that could harm domestic production.

To accurately assess a credit limit application in this sector, we currently ask for audited financial statements for the year 2014. If those are not yet available, we could consider year-end 2014 management accounts signed by a company director, together with the most current financial information. Some underwriting cases can be supported by trading experience and/or guarantees or promissory notes (pagarés).