Insight Conversation: Alejandro Wagner, Alacero

Latin America's steel industry produced approximately 58 million mt of crude steel in 2023, representing only 3% of global steel production. The industry in the region is currently challenged by stagnant local demand resulting from high interest rates, limited investments, slow economic growth, declining industrial production and heightened pressure from increased imports.

In Brazil, for example, steel imports rose to take up almost 20% of the market in 2023. This prompted the government to implement quotas and tariff systems, which are aimed at helping to stem the influx of steel products into the country. The quota system is valid from June 2024 to May 2025, and any volume exceeding the quota will be subject to a 25% tariff.

Alejandro Wagner was the executive director of the Latin American Steel Association (Alacero) from 2021 to May 2024. Before representing the region's steel producers in the association, Wagner worked at Ternium and the Argentinian Agency for Investment and International Trade.

In this interview with S&P Global Commodity Insights Editors Mayara Baggio and Jose Guerra, Wagner provided insights into the steel industry in Latin America, focusing on the different consumption and production patterns in Mexico, Brazil and Argentina. He addressed concerns about increased imports, the importance of dynamics in steel-consuming sectors and the challenges related to the energy transition.

What warning signs should the Latin American steel sector heed following its performance in 2023?

Our projections for this year, developed jointly with the countries involved and shared at World Steel [Association] in April, indicate a stable scenario with a 0.2% growth in steel consumption across the region for 2024. However, we continue to observe a trend of declining production coupled with increasing imports.

Of utmost importance is the vitality and expansion of steel-consuming industries such as construction, automotive, agricultural machinery and household appliances, which serve as reliable economic and even social indicators when the economy is thriving.

Nevertheless, a concerning aspect arises when the imported steel originates from China, given the distinct regulatory frameworks and operational practices that Chinese companies adhere to, differing from those prevalent in Latin America.

What are your thoughts on the current Brazilian safeguards? Are they adequate to deter foreign product entry in the long term?

The current Brazilian safeguards, while necessary, are deemed insufficient. At present, they primarily encompass a range of tariff barriers. Specifically focusing on Brazil, it is commendable that the Brazilian government has implemented these measures in response to advocacy from the Brazil Steel Institute. However, these safeguards are not comprehensive and are only applicable for a restricted duration of 12 months.

The implementation of quotas and tariffs yields distinct statistical outcomes. For instance, Mexico stands out as an exemplary case study. In either September or October 2023, Mexico raised import tariffs on nearly 200 products to 25%, a contrast to addressing the issue with just 15 products.

Consequently, Mexico has emerged as a beacon within Latin America. Previously facing a more significant import challenge than Brazil, Mexico demonstrated a significant shift in the situation. Notably, companies like Ternium in Mexico responded to this measure by announcing investments exceeding $3 million for expanding local production capacity. This development exemplifies a pathway for progressively substituting imports with domestically produced goods starting from 2026.

Emulating Mexico's approach would represent a pivotal and historic milestone for Brazil. While the initial step has been taken and acknowledged, further actions are imperative. The recent events in Brazil, which hold historical significance, mark a substantial move forward. Acknowledging the progress made, it is essential to continue negotiations, viewing this as an initial stride toward establishing a more comprehensive framework.

How would you characterize the state of the steel industry in Argentina? Does it share similarities with other Latin American steel markets, or does it exhibit distinct features?

Argentina presents a unique economic scenario, with both similarities and distinctions from other countries in the region. Amid an anticipated 4% to 5% GDP [gross domestic product] contraction this year, all sectors are expected to be impacted. Given the direct correlation between steel and economic activity, a corresponding decline in steel consumption ranging between 15% and 30% is foreseen, contingent upon the pace of economic recovery, potentially in the latter half of the year or even more prominently in the final quarter.

The prevailing theme is one of uncertainty and expectation. The Argentina economic landscape is notably different from that of Brazil and Mexico, especially Mexico, due to recent governmental changes and consequential policy shifts. This transition has led to a rapid GDP decline, subsequently impacting steel consumption, production, and overall economic activity. While the effectiveness of these new policies remains uncertain, there exists a degree of optimism within the private and public sectors regarding potential market recuperation by the end of this year, particularly looking towards the following year.

Moreover, the significant initial dip in steel consumption in Argentina's first quarter can be attributed to surplus inventory throughout the supply chain.

The shift in government policies led to changes in economic dynamics, prompting stakeholders such as distributors, producers and assemblers to accumulate excess inventory. As a result, production and consumption decreased, driven not only by the economic transformation but also by the pre-existing inventory surplus. Any forthcoming demand uptick toward the year's end is likely to prompt inventory replenishment, underscoring the nuanced nature of the current situation in Argentina.

Traditionally, Latin America has served as a supplier of raw materials. However, critical minerals are now gaining prominence. What are your expectations concerning these emerging opportunities, and do you believe the region is prepared to capitalize on this new market?

Argentina possesses the world's second-largest lithium reserves after Bolivia, presenting significant potential. Mining always begins with environmental considerations and the necessary regulatory framework. Once these processes are successfully navigated, progress is promising. Chile serves as a leading model in this domain. Success hinges on managing the extraction process with sound environmental practices.

Given the soaring demand for electric cars globally, the region holds a strong position to be a growth catalyst.

How is the region progressing toward cleaner production methods amid the energy transition? Are there significant shifts toward increased scrap use, investments in electric arc furnaces? Are different strategic paths being pursued?

We are progressing in the right direction, focusing on a combination of solutions tailored to each country's regulations and resources, driven by investments. Technologically, the groundwork is laid, but cost remains a concern, especially to scale up and accelerate the transition seen in developed regions like the US and Europe.

In Latin America, challenges differ due to varying priorities, with a dilemma between decarbonization and social problems in countries with significant poverty rates. Despite this, the region holds great potential with abundant natural resources for sustainable energy like wind and solar power, already seen in various investment projects across countries like Brazil, Chile, Argentina and Bolivia.

Currently, Latin American steel boasts a significantly lower carbon footprint compared to global averages and China. Addressing the issue of steel imports from China -- each sheet brings in 45% more carbon dioxide than locally produced steel -- further emphasizes the region's idle production capacity.

The focus must shift toward refining policies, establishing priorities and investing in new technologies and processes with reduced carbon emissions to maintain sustainable growth and prevent unfair trade practices in South America.