Latin American industry faces challenge of low consumption, but shows signs of a production comeback.

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The joint effort of governments and industries is necessary to allow the region to come out stronger from the crisis

Alacero - São Paulo, Brazil, July 2020. Latin America is facing the worst crisis in its modern history and is in a moment of transition, showing signs of economic reactivation, but at the same time of difficulty in controlling the pandemic. The impact of the Covid-19 crisis is strongly felt in steel consumption, which decreased 30% in April compared to the same month last year and 11% year to date. The biggest drop occurred in Argentina, of 83% compared to April 2019.

However, one of the indicators of the recovery is the production of raw steel in May, which, although it registered a reduction of 29% in comparison with May of last year, rose 8% in comparison with April of this year, basically thanks to Brazil. In May, raw steel production fell by 17% in the year to date.

By comparison, the global steel industry reduced its raw steel production by 5.2% up to May 2020, compared to the same period in 2019, while China's production increased by 1.8%. In comparison with last month, the world registered an increase of 9.1%, driven by China, which showed an increase of 8.5%.

We are entering a transition stage. The short term trend is not yet clear, as we see some positive signs, while negative ones remain. Due to the economic downturn, it is estimated that world steel demand could fall 6.4% in 2020 and recover 3.8% during 2021. This reduction is mainly due to the generalized contraction in all countries, except for China, expected to grow 1% in 2020.

Unfair imports and local production

During the first quarter, imports as a percentage of consumption reached 35%, whereas in April they rose to 41%. Local production in the first quarter, in turn, represented 81% of consumption, but in April only 74%. This substitution of production for imports in the current crisis conditions should be a red flag signaling governments to address this problem. “We must warn that now, more than ever, it is necessary to avoid unfair imports, such as those coming from China, and to encourage domestic consumption. It is a time for governments and industry to strive to create conditions that will allow us to come out stronger after this slump, in terms of developing infrastructure and value chains and strengthening the industrial fabric, which generates employment”, said Francisco Leal, General Director of Alacero. 

Latin America is struggling because it does not have sufficient economic capacity to handle the public health crisis and some governments have not taken all the necessary actions to mitigate the difficult situation. There are examples of countries, like Singapore, that can be considered models to be imitated, because in addition to using technology and dedicating resources (20% of GDP) they have implemented fiscal measures such as the temporary suspension of tax levies (VAT, individuals and legal entities), support for companies' payroll to avoid layoffs, changes in health disability regulations with a greater contribution from the government, direct help to micro-businesses and the informal economy without the obligation to pay back loans, among others. In these countries, economies showed signs of recovery more quickly.

USMCA: Positive, but in the medium range

On July 1, the new trade deal between Mexico, the United States and Canada (T-MEC) went into effect, providing an opportunity to attract investment and collaborate towards Mexico's economic recovery. However, this must be accompanied by a governmental economic policy that stimulates the business and investment environment.

The reformulation of the treaty terms, which cover wages, labor and environmental issues, must be carefully analyzed to prevent it from becoming a lost opportunity to replace China or Asia in North America's value chains. In order for the new trade treaty to be an instrument that promotes economic and social development, it must be supported by a government that offers legal certainty and respect for the rule of law.

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