Ferrous Scrap Supply, Natural Gas Costs Boosting Mexico Over China

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China first began to make its presence strongly felt on the world manufacturing stage roughly a decade ago, and the global view has been that China’s inexpensive labor and production capability are not too far superior to Mexico’s manufacturing export sector.

This series continues from Part Two, “Sourcing Metal Castings From China: The (Not-So-Secret) Hidden Costs.”

Labor Wages, Productivity Differ

China’s wages have soared in recent years and are expected to keep rising 18% a year. China was at about one-quarter of Mexico’s labor rate in early 2000 and is expected to be slightly higher by 2014. Labor productivity, in regards to the metal casting industry, remains higher in Mexico even though the gap is narrowing; i.e. 1,350 metric tons per plant as China possess 1,230 metric tons per plant as its productivity.

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Source: US Bureau of Labor Statistics

Source: US Bureau of Labor Statistics

Cheap Natural Gas, Scrap Supply Help

Considering the electricity cost, natural gas prices in Mexico are tied to those of the US, which are low because of market surplus. China pays from 50% to 170% more for industrial natural gas. US natural gas exports to Mexico hit a record last year, helping the country’s energy costs low as its industry grew rapidly.

China is likely to raise electricity prices as there are increases in the cost of coal, which acts as the country’s main source of energy for electricity production. At present, the industrial electricity price for Mexico is US $0.11 per kWh and the same with China is $0.13 per kWh.

Considering the key raw material for the metal casting industry, metal scrap is available in surplus for the US. The US is the major producer and exporter of metal scrap. In 2013, the US exported 24 million metric tons of metal scrap, out of which 10.4 million metric tons were exported to China. Both Mexico and China are dependent on developed nations for the supply of metal scrap.

Source: Asian Metal, Beroe analysis.

Source: Asian Metal, Beroe analysis.

Currency Exchange

Over the previous decade, the Chinese yuan (CNY) has become 26% more expensive in relation to the US dollar, while the Mexican peso (MXN) has become 27% cheaper in relation to the US dollar. The recent energy reform approval with Mexico will further impact the peso against the dollar.

As inflation rises in China, it’s currency is expected to have a slow-paced appreciation against the US dollar as a result of the actions of the government, which aims to have a balanced financial environment.

Source: Trading Economics, Beroe.

Source: Trading Economics, Beroe.

Up Next: Shipping costs, comparative TCO and the inevitable conclusion.

MetalMiner welcomes guest contributor Suriya Anjumohan, senior research analyst with Beroe Inc., specializing in metal castings, forgings & stampings. Beroe is the premier global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. With nearly 400 dedicated procurement specialists in 38 domains, across 9 industries, Beroe proactively invests in knowledge assets to build valuable, real-time procurement insight.

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