Steel Mills

Ternium Challenged by Pandemic and Low Steel Pricing

August 6, 2020

“The second quarter has been one of the most challenging quarters I can remember,” said Ternium CEO Máximo Vedoya. Steel demand fell in the second quarter with steel companies in many regions shutting down blast furnaces. Ternium operations in Brazil and Argentina were able to keep operating, albeit at reduced volumes, and increased shipments to other Ternium facilities in the region. Net income for Ternium was $44 million with EBITDA declining only slightly from the first quarter.

Mexican shipments fell 29 percent sequentially in the second quarter due to market disruptions and shutdowns related to COVID-19. With pandemic restrictions easing in the country, manufacturing is making a gradual return. Auto, home appliances, lighting and electrical motors are running at full or near pre-COVID-19 capacity. Net sales for the Mexico division fell 3 8 percent to $851.5 million with shipments totaling 1.17 million tons. Average revenue per metric ton fell 17 percent year-over-year to $725. Shipments are expected to improve in the third quarter as Ternium’s Mexican production facilities return to normal production rates.

Private construction was slowing before the pandemic and came to a halt during the quarter. The sector is not expected to regain growth anytime soon. Infrastructure, on the other hand, is improving due to two large government infrastructure projects. A major infrastructure bill is not likely in Mexico due to cautious government spending. A major infrastructure bill in the U.S. will have little impact on Ternium shipments, but will “clearly favor prices and shipments from all the companies in North America,” said Vedoya.

Slab exports from the Brazil operations increased during the second quarter and were partially offset by fewer shipments to third parties domestically. Utilization rates are expected to increase significantly in Q3 with more shipments within the company and to third parties.

So far, proposed quota changes for the slab export agreement with the U.S. have not materialized. “I would say that with the way prices are today in the U.S., I think it’s more profitable to export slabs somewhere else than to the U.S.,” said Vedoya, noting the minimal price difference.

On steel pricing in general, Vedoya was surprised at the low prices in the U.S. “I think that prices in North America are in a level that we haven’t seen in quite a while…almost $30 below domestic prices in China. This has not happened since I don’t remember when. I think the last time was about 2009.”

Vedoya said that imports to the U.S. are not causing depressed pricing, but instead are due to low demand and market share competition between domestic steel mills.

“Having said that, prices in the U.S. should improve, sooner than later,” said Vedoya. “Because it doesn’t make any sense, these prices compared with prices in the rest of the world.”

Ternium is not likely to push a huge price increase due to an uncertain outlook. Also, 50 percent of sales in Mexico are locked in contracts with second-quarter prices being realized in the third quarter.

Vedoya was asked if the Mexican market might “decouple” from the United States due to U.S. oversupply and pricing. Vedoya said prices in Mexico are driven by imports from Asia and only slightly from the U.S. With prices as low as they currently are, Asia imports will decline. “So, if this tendency of prices continues in the U.S., it is probable that in some of our markets in Mexico we are going to decouple from the U.S.”

Editors Note: Ternium CEO Máximo Vedoya will be one of the featured speakers during the SMU Virtual Steel Summit 2020 later this month.