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Challenges and opportunities lie ahead

Projections for Mexico’s GDP contraction during 2020 range between -9 and -11%. COVID-induced shutdowns, along with heavy job losses in the tourism and hospitality industries, are not the only drag on the economy. The federal government has not only neglected to provide any stimulus or support for private business but has instead imposed increased tax burdens and regulations on the private sector. In general, private investment sentiment has deteriorated as previous concessions, contracts and projects have been unilaterally revised or scratched altogether by the government.

The Mexican peso has fluctuated between MX$ 20.90 and MX$ 22.43 to the US dollar over the last 30 days. This 7% range within a month has provided an additional variable with which scrap traders have been forced to contend.

On a more positive note, demand for scrap grades related to secondary aluminium is booming as die casters and smelters are striving to ramp up in order to make up for the loss of production during shutdowns. Having gone razor-thin on inventories, they are now in the market looking for scrap and finding it to be scarce. Domestic car sales have contracted almost 30% in Mexico, with current levels corresponding to figures last seen 10 years ago, while fewer used cars are being imported into Mexico. These factors translate into fewer cars being junked and therefore a reduced supply of secondary aluminium scrap.

Another grade enjoying good demand is 6000 series scrap as two new billet casthouses have gone online this year with a combined capacity of around 50,000 tonnes per annum. Strong demand is expected to continue for these grades, of which Mexico is likely to be a net importer.

Market tightness has revived VAT schemes in the Mexican scrap market. These not only distort the pricing landscape but also alter the cash-flow and fiscal risk equilibrium of the market.

Latin America will be heavily challenged by the economic impact of the COVID-19 crisis. No country in this region has a currency with reserve status and so their ability to apply stimulus or expansionary policies are severely limited when compared to China, the USA and the EU. But not all will be doom and gloom: opportunities will continue to emerge in the region.