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Mexico: multiple threats to economic recovery

With September production down 33% compared to the same month last year, the Mexican automotive industry continues to be affected by chip shortages while railroad blockades in the state of Michoacan are further compounding the shortfall of raw materials and components. This not only affects the demand for scrap used to produce the secondary alloys consumed by the automotive industry but also threatens the country’s economic recovery.

Mexico continues to have more unemployed and under-employed labourers than in pre-COVID times. The extreme lack of incentives and highly conservative fiscal policy could continue to limit the recovery. The economy is expected to grow by 6.2% in 2021 and 4% in 2022, figures which are on a par with those from other economies around the world; however, it cannot be ignored that the Mexican economy contracted 8.5% during 2020 amid COVID policy turmoil, lack of incentives and an extreme fiscal policy.

The north of the country hosts mostly export-oriented industries and is enjoying a remarkable boom which has translated not only into virtually total employment but also is prompting business lobbies to work diligently to permit foreign migrant workers.

One of the industries doing extremely well is aluminium extrusions, which is leading to robust demand for 6000 series scrap across the country; the demand is such that it is now resulting in growing imports from other regions of the world. Another industry performing very well is steel as US fabricators look to the south to try to compensate for limited production owing to labour shortages at home. The improved steel demand is translating into higher steel scrap demand and imports.

The poor volumes and stagnant prices for aluminium used to produce automotive secondary alloys are creating cash-flow problems for smaller players in the supply chain, and so more volumes are currently concentrated on larger, longer-tenured and better-funded yards.

The Mexican central bank has imposed three 0.25% rate hikes since June and the reference rate now stands at 4.75%; another 0.25% rate hike is expected before the end of the year. There is concern that higher rates might be another threat to the country’s economic recovery.

Public policy as a whole is difficult viewing as the government has embarked on a counter reform programme in the electricity and oil sectors, undoing liberalizing reforms undertaken during the previous administration. This might develop into a further headwind for private investment and economic recovery.