Steelmaker Ternium Eyes Nearshoring, Optimistic of Further LatAm Growth

The company’s global CEO tells Bloomberg Línea he is seeing new windows of opportunity

Máximo Vedoya, global CEO of steelmaker Ternium
February 10, 2022 | 03:45 PM

Mexico City — The first quarter of 2020 was a good one for Ternium (TX), a steel producer with plants in Mexico, Brazil, Argentina, Colombia, the southern U.S. and Central America. Amid increasing concerns about the spread of the Covid-19 virus outbreak, the company led by CEO Máximo Vedoya managed to increase its share in the Mexican market, the company’s largest, despite a weak environment in the construction sector.

The company’s plans have been ambitious in Latin America. Between January and March 2020, the Italian-Argentine Techint-owned steelmaker shipped three million tons of steel, 1.6 million tons of which was in Mexico, a 6% increase over the same period of 2019.

The increase was accompanied by the company’s infrastructure buildout, with the launch of its galvanizing and painting facilities at a new plant in Pesquería, in Mexico’s northern state of Nuevo León, which had employed more than 4,500 people daily to build it.

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“It was the biggest investment plan in our history,” Vedoya said in an interview with Bloomberg Línea, and who has led the company since October 2017, following the retirement of Daniel Novegil after 12 years in the role.

In addition to the Pesquería plant, the company has almost completed a second plant in Colombia, with both projects requiring $1.5 billion in investment. But in April 2020 the company’s streak of good progress came to a grinding halt. Vedoya then made the toughest decision of all. The investment had to be halted.

“We had to make the decision to stop everything because it was very difficult to continue with those investments and to be able to control everything. In an industrial plant that is already working it is easier to implement protocols, but in a place where 4,500 people were coming in to a construction site where each person is very close to the other, it was much more difficult.”

The global CEO describes that move as a “very hard” but correct decision.

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Read More: Steel Demand to Increase Next Year Even as Energy Crisis Looms

Amid all the stress, Vedoya kept a cool, but strategic mind. As in everything, he said, decisions had to be made, but he determined that they had to balance employees, the company and the customers. Dividends were also suspended, a choice that he believes could have generated a kind of punishment from the market, but Vedoya’s focus was summed up in one word: protection.

“I was not sure we could protect all the people by being in this plant, in this construction project and, secondly, because the company was suffering. You have to think that in April and May the market dropped drastically. We had to see how we could save our resources. I think that is a decision that did cost us,” he explains.

The results for the second quarter confirmed this. In Mexico, from April to June 2020, steel shipments decreased 25% over the same period in 2019 and 29% on a sequential basis.

Steel was one of the industries whose operations were difficult to curb, even in the midst of a pandemic. All that had to be done was to implement strict protocols.

Read More: Scrap Metal Will Be Key to Future Steel Prices in Mexico

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The company has conducted more than 100,000 PCR tests on the 20,200 workers Ternium employs in the Americas region, more than four tests per person on average, not counting personnel who started working from home. Ternium also established a fund of almost $10 billion to support the markets of Mexico, Colombia, Brazil, Argentina and Guatemala with the supply of biosafety equipment, and which included the donation of respirators to hospitals.

In Monterrey, the Nuevo León state capital, at the same time as the Pesquería plant ground to a halt, the company converted a recreational area with soccer fields, gymnasium and cafeteria into a free hospital with 100 inpatient beds and 20 intermediate intensive care beds that, Vedoya says, although there were periods when not a single patient appeared, will continue to operate until the pandemic is truly over.

The medical unit not only attended to company personnel, but also patients from the Metropolitan and University hospitals sent by the government of Nuevo León.

Windows of Opportunity

Vedoya saw two windows of opportunity as fears about the state of the steel industry dissipated in the most critical stage of the confinement, and for which there was no previous playbook on how to act with respect to other economic crises, such as that of 2008, when steel prices took two to three years to recover.

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By July, August and September 2020, Ternium’s steel shipments had recovered 23% sequentially, to 1.4 million tons. Manufacturing industries continued to increase activity at their facilities during the third quarter, and activity in the construction sector improved slightly.

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“I think that, for what happened, we at Ternium - but also many other companies - came out of it very well. I think they learned, but they also acted in a very solid way, considering the uncertainty we were going through at that time,” he says.

Vedoya looks at these results beyond a rebound in construction activity, the automotive sector and infrastructure plans, and relates it to a change in the dynamics of consumption. People swapped eating out and purchases of many things for home improvements, which led to a higher consumption of steel as a trend that is here to stay.

“I myself in my house want to do renovations because I am going to spend more time in my house. Consumption of household appliances, air conditioners is at higher levels than it was before the pandemic, partly because of this dynamic that is changing people’s views.”

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Between August 2020 and July 2021, steel prices in Mexico alone experienced a recovery that had not been seen in years, with a rise of 200% in the case of flat steel, and 85% for steel rods. In May 2021, Ternium once again paid dividends to investors.

Vedoya also turned his attention to another opportunity that arose with the pandemic, and which, in his opinion, was the most noticeable change among companies and industries. He refers to nearshoring, an activity in which a company moves its operations to a nearby country from a more distant one, as opposed to offshoring, where a company moves the manufacturing of products to a region with lower costs than their country of origin.

In Latin America, only 14% of trade is intra-regional, compared to 59% in Europe and 41% in East Asia, according to figures from the Inter-American Development Bank (IDB), which shows that the Latin American region is one of the world’s least integrated.

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Mauricio Claver-Carone, president of the IDB, told Bloomberg Línea last August that the region could increase its sales to the U.S. by $70 billion through nearshoring.

“I think we all realized that having such global value chains, where some things are only produced somewhere far away from our markets, doesn’t work. We see, both governments and companies, that we have to bring industrial production closer to consumption, closer to where we are, closer to where we consume it, closer to where we produce it. And that, I think, is a great advantage for Latin America,” Vedoya says.

On February 3, Mexico’s Finance Minister Rogelio Ramirez de la O told Bloomberg News that the Mexican government is approaching more investors in the U.S. to highlight the advantages of putting more resources in Mexico than in China, and as beneficial in times of tight supply chains and rising shipping and labor costs.

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Regarding the trade agreement with Mexico, the United States and Canada (USMCA), Vedoya says it has worked well for Ternium, and is one more step toward strengthening regional production.

“It is actually a parameter for nearshoring to become a reality. It’s just a beginning, but I think it’s a good path.”

For Vedoya, the challenges and opportunities of nearshoring alike are considerable, but he sees it as the way forward. It is also, he says, a solution to Latin America’s social problems.

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“We have to work on how to make sure that the opportunities we have, where companies want to come and invest in Latin America, that we can really provide them with a base so that these investments can come. I think this is a challenge that we all have to work on, hand in hand with the governments as well.”

Máximo Vedoya, global CEO of Ternium

Nearly two years on from the start of the pandemic, Vedoya sees good prospects for steel in general, not only because of rising steel consumption and nearshoring, but because of steel’s opportunity as a recycling material, at a time when environmental issues are being discussed at boardroom tables.

Ternium’s global CEO is currently grappling with the restrictions that limit his enjoyment of traveling almost every week to visit the company’s operations in the region’s five countries, yet, as with nearshoring, he is surprised to witness how it is possible to continue to operate with almost 60% of office staff working from home.

Uncertainty is also behind us, he says. At the end of January, the hot rolling mill at the new plant in Pesquería, which finally began operations in June 2021, produced its first million tons of rolled steel, which is widely used in the automotive and household appliance sectors.

In Mexico, steel demand from industrial customers remains solid across the market, with the exception of the automotive and construction industries, he says.

“I am generally optimistic about Latin America. Each country has its challenges, there are many, many things to do, but I think we can take advantage of these opportunities and continue to grow in certain sectors.”

Michelle del Campo contributed to this report

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