Mexico: scrap yet to benefit from strong auto sector

At the time of writing, the peso exchange rate is MX$ 19.2127 to the US dollar; it has remained near this level for some weeks after reaching MX$ 20.0583 on September 11. Even the current level is high compared to the first half of the year when the exchange rate was at the low MX$ 16 level. Although a higher exchange rate benefits exports and foreign investments, there are concerns since it is perceived that this devaluation of the Mexican peso is due to fears the recent reform of the judiciary system could erode legal certainty in the country.

Mexico’s new President took office on October 1 and is expected to follow the same policies as the previous government since she comes from the same party. For businesses, this means being prepared for more increases in the minimum wage and other labour reforms that will make Mexican workforces more expensive. As usually happens in these cases, small and medium-sized companies will have a more challenging time adapting to the new laws.

From January to September 2024, the number of new employees registered showed a decrease of 39.7% from the same period in 2023. This is the lowest figure since 2020, the year of the pandemic. The downturn in job creation has been an ongoing trend: the previous administration ending on September 30 created just half the jobs of the Peña Nieto presidency (2012-2018). Informal labour in Mexico has always been significant, representing more than 50% of the total workforce. Therefore, it is hard to know how many of the “uncreated” jobs went to the informal market.

In some brighter news, the Mexican automotive industry is having a good year: from January to September 2024, production increased by 6.1%, export sales by 7% and internal sales by 10.5% compared to last year. Considering that the automotive industry is Mexico’s primary foreign investment source, these numbers strengthen our country’s economy. However, this strength will also be a point of contention with America where both parties feel the pressure of voters to bring more jobs to the USA.

Curiously, the automotive industry’s great performance is not visible on the scrap side, with several auto industry suppliers purchasing lower volumes than in previous years and a lack of reports from scrap processors of a higher generation of scrap typically linked to auto production. However, we may see more aggressive scrap purchasing in the coming months as some consumers realize that current premiums for primary aluminium are much higher than they were for 2024 contracts.

On the geopolitical front, the future of the USA-Mexico relationship remains uncertain, with the outcome of the US Presidential election likely to play a significant role. Regardless of the result, friction over certain aspects of the USMCA trade agreement is expected. However, the nature of the points of contention may vary depending on the winner of the US election, making it crucial for businesses and policy-makers to closely monitor the situation and adapt their strategies accordingly.