Mexico - Las Truchas Steel Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 220 ME APPRAISAL OF THE LAS TRUCHAS STEEL PROJECT MEXICO August 10, 1973 Industrial Projects Department This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS WEIGHTS AN-D MEASURES Except where otherwise indicated, all 1 Metric Ton = 1,00 Kilograms (kg) figures are quoted in Mexican Pesos (M$) 1I Metric Ton 3' 2,205 poitds and U.S. dollars (US$) of June 1973 1 Kilometer = 0.62: miles 1 Meter (m.) - 39.3 inches M$1.00 = us$o.08o M$12.50 = US$1.00 M$1 ,OO,O000 = US$80,000 ABBREVIATIONS AND: ACRONYMS AHMSA Altos Hornos de Mexico, S.A. (Gevernment-oined' steel company> AISI American Iron and Steel Institute (U.S.), B.O.F. Basic Oxygen Furnace BSC British Steel Corporatvon C & F Cost and Freight CIF Cost, Insurance, Freight CNIHA Camera Nacional de la Industria del Hierro y Acero (.Tron and Steel Manufacturers Association)- db Decibel Di{T Dead Wieight Tons EC European Community Fe Iron FOB Free on Board Fundidora Fundidora de Fierro y Acero, S.A. (Private steel company) GDP Gross Domestic Product GFCF Gross Fixed Capital Forzation HYISA Hojalata y Lamina, S.A. (Private steel company) IDB Inter-American Development Bank Ilsi International Iron and Steel Institute JISF Japan Iron and SteeJ. Federation- Marina Secretaria de la Marina (Navy Min.Lstry) NAFINSA NacionaL Rinanciera., S .A. (Nati-onal development bank) ODA Overseas Development Administration (U0K0) SiCARTSA Siderurgica Lazaro Cardenas - Las Trucnas, S.A. (Projett CGompaniy) SITC Standard Industrial Trade Classification TAINISA Tubos de Acero de Mexico, S.A. (Privatea steel company)  MEXICO APPRAISAL OF T?E LAS TRUCHAS STEEL PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS .................... ............ i - iii I . INTRtOD:UCTJTON ..... v ............... II. THE COMPANY ... ............ . .....,.,.. 2 A. History *..*......................................e. 2 B Capital Structure . ....... . . .. . . .. . 2 III. THE MEXICAN STEEL INDUSTRY, MARKET AND PRICES ............ 3 A. Existing Producers .. . .. ......................* 3 B. Historical Consumption ............................. . . 3 C. Projected Demand . ....................... .... 4 D. Estimated Market for SICARTSA ..... 4 E. Steel Prices ....... .. ......... .. . . 5 F, Comparison of Mexican and World Prices ..... 5 G. Future Steel Development Policy ..................... . 6 IV. THE PROJECT AND ITS EXECUTION . ........................... 7 A. Technical Description .. 7 B. The Port of Lazaro Cardenas . .. ....... 9 C5 Transport of Finished Products ..... ....4. *........ 9 D. The City of Lazaro Cardenas ..................... 10 E. Environmental Protection ............... 10 F. Project Organization and Management ................. 11 G. Employment and Training .................... .. ... . 12 H. Project Schedule ....... ..... ............. ... a.* 12 V. CAPITAL COST FINANCING PLAN AND PROCUREMENT .. 13 A. Capital Cost ............... ... ...... .... 13 B. Adequacy of Capital Cost by World Standards ...... 14 C. Financing Plan ... .... ................ .......... 14 D. Procurement and Disbursement under the Bank and IDB Loans .................. ,. 16 E. Other Procurement .................................... 17 This report has been prepared by Messrs. Pigossi9 Jaffe, Thadani and Parker of the Industrial Projects Department and Mr. Hutcheson of the Mexico Division, Latin American and Caribbean Region.  Table of Contents (Continued) Page No. VI. FINANCIAL ANALYSIS ................ . . . . . 17 A. Projected Revenues . .... 17 B. Operating Costs ....., ,.,....* .... .. . 18 C. Transport Costs .= ...5,5. a ................. .. 18 D. Escalation in the Financial Projections 19.... ,,* 19 E. Future Profitability .............................. go. 19 F. Financial PosLtion .. ...0 ....................... . 20 C. Sensite4vity Analysis ............................. 21 H. General Project Risks and Sensitivity Implications ... 22 19 Further Expansion (Stage II) ......................... 22 V7I. ECONOMI0, JUSTIFICATION OF THE PROJECT..... 23 Ah LEa Truchas Versus Alternative Steel Expansions 23 ,. Economic Return , e * . * .. . * , . . .. * , *.* 23 C. Foreign Exchange Savings .......................... oo 24 D. Regional Impact of the Project ....................... 24 VIII. AGREEMENTS REACHED DJRING NEGOTIATIONS *.**.*.*. O***v* 24 Steel Development Policy ........ ................ s.,,0** @ 25 Infrastructure ............ ,;, ............. ....,, 0.0 25 Organization .......... ............................... 25 Financial . ........ .. .25 Ecology ................................................ 26 General .............................................. 26  Table of Contents (Continued) AYNNS 1. The Market and Prices for Steel in Mexico. 2. World Steel Trends and Prices. 3. The Steel Commission. 4. Technical Description. 5. The Port of Lazaro Cardenas. 6. Transport of Finished Products. 7. The New City of Lazaro Cardenas. 8. Environmental Protection in Plant Design. 9. SICARTSA Organization During Construction Period. 10, Training Program. 11. Project Implementation Schedule. 12. Capital Cost and Procurement. 13. Production and Revenue Buildup. 14. Operating Costs for One Million Tons Finished Products per Annum Output. 15. Financial Analysis. 16, Economic Evaluation. 17. Regional Impact of the Project. MAPS 1. Major Steel Production Centers. 2. Michoacan - Guerrero Development Region. 3. General Location Map.   MEXICO APPRAISAL OF THE LAS TRUCHAS STEEL PROJECT SUMiARY AND CONCLUSIONS (i) A Bank loan of US$70 million equivalent has been requested to help finance an integrated iron and steel works on Mexico's Pacific coast, with Nacional Financiera, S.A. (NAFINSA), the Government development bank, and Siderurgica Lazaro Cardenas-Las Truchas, S.A. (SICARTSA), a Government- owned company, as joint borrowers and the Government as guarantor. In its first stage, to which the Bank loan would apply, the works will have an annual capacity conservatively rated at one million tons of light non-flat finished steel products, with provision made for later expansions to over 5 million annual tons. Construction is now beginning and the completion target for Stage I is mid-1976. The works will be located near iron ore reserves sufficient for at least 25 years of steel production at thie Stage r level. Coal supplies will be imported through an adjacent deep-water port that is being financed and constructed separately by the Government. A new city to house SICARTSA's employees similarly is being conqstructed by a Government trust fund. (ii) The Government's objectives for the project are twofold: first, to meet projected increases in domestic non-flat steel demand with a modern steel works that later can be expanded to produce a full range of steel products at costs competitive wlth world standards; and secondly, to further the goal of directing public investment towards under-developed areas of Mexico and away from the concentrated wealth and economic activity of the nation's center. These have proven to be compatible objectives. Even without the inclusion of regional benefits or the economies to be expected with later expansions, the project's viability can be demonstrated, and the Bank's analysis has been carried out from this perspective. Neverthel ess, institutional aspects of the steel industry's growth and its relationship to the Las Truchas project, as well as regional planning needs, have been central to the Bank's discussions with the company and Goverrnmert throughout this appraisal, The Bank's