Forging potential: Healthy metal-mechanics industries explore expanding domestic segments and an emerging export market

With streets choked corner to corner with taxis, cars and their blaring horns, the relatively recent arrival in Lima of motorcycle taxis is a welcome, but not surprising addition. Coordinating president of Peru’s National Society of Industries Metal-Mechanics Committees, Emilio Navarro points out how this transportation phenomenon is closely tied to industrial activities and consumer products. For example, the metal carriage frame where passengers ride and that is hooked onto the imported motorcycles must be made locally. “This type of metalworking is growing considerably since it does not require much technology, making the industry accessible to a wide range of companies with limited budgets,” Navarro told OBG. Whereas years ago only a couple of companies produced motorcycle taxis, today nearly 30 mainly small to medium-scale operations have entered this growing business.

Sectors

On a larger scale, metal-mechanics is widely connected to extractive, primary industries like mining, fishing, petroleum, sugar processing and energy. As part of major economic sectors, these activities provide constant demand for products derived from metal, such as water treatment devices, pipes, valves, general machinery and hardware, canning apparatus and even entire processing plants. Metal-mechanics also provide the construction sector with a variety of intermediate and capital goods that include structural devices, galvanised zinc sheets, metallic wires and electrical equipment (see Construction chapter). Local vehicle assembly and maintenance have pushed the industry as well, opening a large market for engines, brakes, filters and related products. Such assorted and strong internal demand has stimulated product diversification and platforms on which to expand, leading specialists like Navarro to identify much potential within the sector, which already has a large local presence.

While the unfavourable economic conditions of 2009 resulted in reduced industrial output, the metal-mechanics sector has since been gaining momentum, closing 2012 with a growth rate of 8.6% and expanding 10.5% during the first half of 2013. Much industry progress is related to booming sectors like mining and construction. In 2012 output of equipment for the distribution and control of electric energy increased 153.5%, primarily due to the high demand of electric panels, according to the Ministry of Production. There is also strong demand for goods like electric cables to supply the telecommunications sector.

Exports

Diversity is a key concept for the industry, but without an expanding export segment metal-mechanical activity would not prove as attractive a field. Since 2003 exports have continuously risen, displaying a nine-year growth rate of 435.6% by the end of 2012, with that year’s rise at a solid 14.7%. In terms of value, 2003 exports were recorded at $99m, whereas this amounted to $532m in 2012 and $278 in the first half of 2013, according to the Central Reserve Bank. The most important products exported in 2012 were general machinery apparatuses, as well as copper electrical conductors, both contributing 5% to the sector’s total exports with year-on-year growth of 41% and 45%, respectively. Peru’s Association of Exporters (Asociación de Exportadotres, ADEX) attributed this performance not only to the opening of new markets, but also to the private sector’s ability to position itself in different industrial sectors. Ysabel Segura, production manager at ADEX, believes this has been a conscious decision among companies. “In the past four years producers are taking more chances on the export market. Some have even opened their own departments for foreign trade, developing specifically targeted products,” she told OBG. Big exporters within the sector in 2012 included Metalurgica Peruana and Fima.

Main export destinations for Peru are generally in neighbouring countries, but in 2012 the US surpassed both Ecuador and Chile by one percentage point as the leading importer of Peruvian metal-mechanic goods, accounting for 15% of the market. According to ADEX, this is due in part to the more efficient use of the existing Peru-US free trade agreement (FTA). Peru’s recent signing of an FTA with the EU will also boost exports to that part of the world, where only Italy is currently a significant market for the sector. “Europe is one of the destinations to where producers of metal-mechanic products are looking to increase exports,” Navarro told OBG. “The foreign market is continually evolving so the sector aims to expand through the use of FTAs.”

Partners

Foreign presence is slowly increasing in the local metalworking industry. Peru’s leading copper wire producer, Indeco, was owned by Chilean Madeco for 10 years before selling all operations to the French cable giant Nexans in 2008 for $457.7m. More recently, in 2012 US firm Colfax acquired a 91% stake in Soldex, a major welding company with plants in Lima and Bogotá, Colombia, valued at $235m. “Rather than foreign firms trying to build new plants, we are seeing a lot of mergers and acquisitions as a means to base operations in South America,” Navarro said. “The industry is always looking for foreign partners with which to do business and generate the exchange of technology, a vital component for metalworking.”

Relying heavily on technology but also providing jobs for 280,000 workers, metal-mechanics adds significant value to products, amounting to PEN6.2bn ($2.3bn) in 2011, equivalent to 9.3% of the manufacturing industry’s added value. Though during the first 10 months of 2013 the rate of growth of the sector has suffered a slight decrease as compared with previous years, the forecast is for a growth rate of 4.5% to 5% for the year.

One adverse factor for the industry could be the country’s relatively small production of steel, which depends on imports destined primarily for infrastructure and construction. Yet, leading producers Siderperú and Aceros Arequipa have already announced plans to expand operations. Segura told OBG that other methods to cope with demand include introducing products derived from combined metals, such as copper and lead. Several mining projects are in the works to boost local steel production, such as a recent merger between Chinese-American CDII Minerals and Peruvian Minera de los Andes y el Pacífico, looking to explore iron ore operations in southern Peru. In February 2013, Australian mining company Latin Resources announced its discovery of a large iron field along the northern coast of Ancash, slated for exploitation under the project name Guadalupito. According to company samples, the field holds over 1.46bn tonnes at 5.7% heavy mineral and could contain an overall resource of around 5bn tonnes.

With nearby abundant mineral resources, consistent growth rates, diverse participation and overall confidence, Peru’s metal-mechanics industry displays many opportunities. The transversal nature of the sector may prove to be its catalyst, able to adapt and identify the needs of other industries. While this assures a market in local demand, consolidating exports to new destinations like Europe will significantly expand production. Such convincing signs suggest metal-mechanics is becoming a solid industry, already evident in the streets.