Mexican steel and aluminum producers were under pressure to reduce natural gas consumption, but many of them ended up suspending production as operating with lower gas levels was unsustainable and lossmaking for them.
The country's natural gas association AMGN, called on industrial, commercial, and residential users on Feb. 17. to temporarily reduce consumption following the power blackouts in seven northern states.
"This reduction will help the industry and government to prioritize the service to strategic facilities, such as hospitals and clinics, as well as operating conditions for the Integrated National Natural Gas Transportation and Storage System, or SISTRANGAS, to be re-established as soon as possible, for the benefit of all consumers of natural gas in Mexico," AMGN said in the statement.
According to several sources from the steel and aluminum sectors, they were requested to lower natural gas consumption by 80%-100% -- which was not sustainable to maintain operations.
Though it is too early to exactly estimate the impact of such a cutback, sources expect metal availability to be limited in the following weeks.
"In the best case scenario, we will have gas by [Feb. 19], but there is no clarity at all," a steelmaker source said.
The natural gas usage was curtailed after frigid temperatures in Texas reduced natural gas output and Mexico was unable to import the 4 Bcf/day of natural gas it sources from the US, according to the Federal Electricity Commission.
According to CFE, roughly 60% of the electricity produced in the country is generated with natural gas, most of which is imported from the US through a system of pipelines.
High production cost
Moreover, the reduction of natural gas output led gas prices to heights not seen in decades in the US, which translated into a jump in costs involved in the production of both metals.
Mexico imports 90% of natural gas, with the US being the largest supplier since 2015, data from the energy Secretariat, or SENER, showed.
According to steelmakers, the estimated rise in cost of production was in the range of $110-$145/mt.
"For steelmakers, it was better to stop completely, otherwise costs could increase up to $800/mt, which is clearly unsustainable," another steel producer said.
The impact will go beyond steel prices, a source added. "It will delay further back orders and new orders and hamper the process of normalization of inventory throughout the chain," he said.
On the other hand, an aluminum smelter said that the impact on production will affect the entire supply chain, which suggests a rise in aluminum product prices amid strong demand in the automotive sector.
However, another aluminum smelter expects potential disruptions in demand after clients canceled volumes due to gas shortages, forcing the company to change production plans.
"Our gas supplier said Texas will determine its position regarding gas distribution today, then we will make decisions," he said.
According to a statement from Mexico's National Energy Control Center on Feb. 17., only 1,500 MW of industrial load remains to be recovered from the 6,524 MW lost on Feb. 15, causing rolling blackouts in the northern and northeastern regions of the country.
