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Steel distributors in Mexico: change and convergence: with the increasing variety of manufacturers opening shop in Mexico--from construction and heavy equipment to mainstays like auto and appliance--the landscape is beginning to look a lot like home, say service center executives with operations in Mexico. Some key differences remain, however.

Article Excerpt
Mexico's metal distribution business has grown up. Far from the fragmented market of small warehouse operators and retailers of a few years ago, Mexican distributors have merged, grown and high-teched themselves into a market sector that looks very much like its equivalent in the United States.

However, there remains the question of whether this industrial transformation makes any difference in what has turned out to be a persistently sluggish economic climate. The domestic demand that many analysts expected--the kind of domestic demand that in previous decades built the United States into the world's largest industrial market--has failed to materialize despite the efforts of a string of modernizing, business-friendly political administrations.

The Mexican industrial economy continues to depend heavily on state infrastructure spending and a narrow manufacturing base fundamentally organized around export platforms and concentrated in a handful of key industrial cities.

Nevertheless, doing business in Mexico remains profitable for a variety of service center operators, and those that can survive today's difficulties will be positioned to profit when development finally does take off, both American and Mexican steel executives say.

"Everything you see in the U.S., as far as large customers, they're all down there or going down there" says Ed Ferkany, president of the Steel Division of Worthington Industries, Columbus, Ohio.

Worthington's Monterrey service center, a partnership with the Monterrey-based steel conglomerate Hylsa, serves a mainly auto- and appliance-manufacturing customer base. If about half of the flat-rolled steel consumed in the United States goes into auto production in one way or another, the same could be said for Mexican consumption. Appliance manufacturing is gaining, however, as large suppliers locate more and more of their production in and around Mexico City, says Ferkany, who launched Worthington's Mexican operation in 1996. The center is designed to handle 400,000 tons a year, but it operates a bit below capacity.

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Auto manufacturing remains the single biggest market for U.S.-style general steel distributors; European, Asian and U.S. automakers increasingly use Mexico as a platform for light trucks and small cars that sell into markets of the Western Hemisphere.

Dofasco opened a 150,000-ton steel processing and tube-making facility near Monterrey, intended to serve the auto trade, in early 2001. Acero Prime, U.S. Steel's representative in Mexico, opened a service center in Coahuila to provide just-in-time steel coil for automakers.

Manufacturing activity in Mexico is diversifying, however, especially into highly specialized production that favors higher-quality steel. For one thing, NAFTA and the Free Trade Area of the Americas process are putting pressure on the agricultural industry to install plant and equipment comparable to the norms in the U.S. and Canada. This kind of investment runs heavily to stainless and high-alloy metals for such things as milk tanks and beverage and food processing machinery, much of which must be brought in from the United States or Europe.

At Fruehauf's Mexico City truck trailer assembly plant, for example, about 60 percent of the monthly materials bill is paid in dollars to U.S.-based suppliers. But only about 35 percent of the materials, by quantity, come from the U.S. The rest is sourced domestically. Invariably, the...

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