Altos Hornos De MéXico, S.A. De C.V. Business Information, Profile, and History

Company Perspectives:

Alto Hornos de México occupies a prominent international position as a competitive company with one of the most efficient, cost-effective and advanced production systems.

History of Altos Hornos De México, S.A. De C.V.

Altos Hornos de México, S.A. de C.V. (often referred to by its acronym, AHMSA) is the largest steel producer in Mexico, converting raw steel into a variety of flat steel products and also into wire rod, wire derivative products, and heavy and light sections. Subsidiaries of the company mine iron ore for conversion into steel, and coal, not only for the steelmaking process, but also for sale to fuel power plants. Grupo Acerero del Norte, S.A. de C.V. (GAN) is its controlling stockholder.

Big Government-Run Enterprise: 1942–90

Altos Hornos (which means "blast furnaces") was established in 1942, when Mexico was having difficulty obtaining steel from the United States because of the World War II effort. A group of Mexican businessmen with financial support from Nacional Financiera, S.N.C. (NAFIN)—a Mexican government-owned development bank—formed a joint venture with Armco International Co., an affiliate of American Rolling Mills Co. Armco provided the equipment and technical assistance for the steel mill, which was located in Monclova, Coahuila, about 125 miles south of the Texas border. Due to war production, only secondhand equipment was available, and the blast furnace—imported from the United States, dating from 1916 and out of production since 1923—was said to be more appropriate for a museum than for an operating factory. Nevertheless, it was modernized and rebuilt and coupled with a rolling mill purchased from Youngstown Sheet & Tube. A subsidiary was established to secure necessary supplies of the coal needed to make coke, and another for exploiting the deposits of iron ore to be converted to steel. AHMSA began turning out flat steel in 1944 and plates and sheets in 1946. It also produced steel tubes from 1944 to 1953.

The ownership of Altos Hornos was mixed. The Mexican government and NAFIN took all the preferred stock. A group of financiers and industrial interests held a majority of the common stock, with NAFIN holding 25 percent. In 1954, however, NAFIN raised its share of the common stock to 75 percent. Administration of the enterprise was dominated by government functionaries.

Steel production at AHMSA averaged 38,000 metric tons a year between 1944 and 1946; 202,000 tons between 1947 and 1958; and one million tons between 1959 and 1970. Production of steel rods began in 1961, commercial bars in 1967, and wire and other heavy structural forms in 1971.

A second open-hearth furnace was installed in 1954 and a third in 1966. (Altos Hornos also began producing steel in more advanced basic-oxygen furnaces in 1971.) A new rolling mill was imported from the United States in 1953. La Perla, Chihuahua, soon became the main source of iron ore. This ore arrived by railroad until 1982, when it was replaced by a ferroduct. Plants were established in 1957 and 1967 to convert the ore into cinder. This was followed by plants at La Perla (1973) and Monclova (1982) to turn the ore into pellets.

By the late 1960s steel production at Altos Hornos had increased to two million metric tons of raw steel a year and, in 1976, an adjoining plant was completed, increasing nominal annual capacity to 3.75 million metric tons a year. The Monclova complex was the largest of its kind in Latin America, and AHMSA was operating 27 subsidiaries. However, overproduction was proving a problem throughout the world, and large complexes with aging equipment were giving way to smaller but more economical, technologically advanced mills. Altos Hornos was barely profitable in the 1970s. Administration was centralized in Mexico City in 1971 and given over to inexperienced personnel. Labor relations deteriorated during the decade and were punctuated by strikes, slowdowns, and sitdowns. Among those who left the company in the early 1970s was Harold R. Pape, the U.S. engineer credited with the critical role in AHMSA's operation since its inception. In the late 1970s Sidermex, S.A. de C.V., a government-owned corporation, took control of management. According to Ted Kuster of New Steel, "The succession of mill managers who started out as mere bureaucrats but left the job as unaccountably wealthy men became a national joke."

The collapse of world oil prices in 1982 led to a devaluation of the peso and a severe recession in Mexico; AHMSA's debt reached about $540 million at this time. Product quality suffered from worker discontent and deterioration of equipment. At the same time overstaffing resulted in high labor costs. Little notice was given to the degradation of the surrounding environment, and workers suffered from pollution-related respiratory ailments. The company was not profitable in the 1980s, and it was so inefficient that many policymakers wanted to sell it for scrap, but its lack of competitiveness was masked by access to a protected domestic market. In 1990 AHMSA set a company production record for raw steel of nearly 3.1 million metric tons.

By the end of the decade, however, the Mexican government was seeking to dispose of this economic albatross. To make Altos Hornos more attractive to investors, it slashed the labor force by more than half and closed some of its facilities, including the antiquated Siemens Martin open-hearth furnaces. The company was sold, with certain other properties, to Grupo Acerero del Norte (GAN) in 1991 for $145 million in cash, $535 million in promised investment, and $350 million in assumption of long-term debt.

Private Company in the 1990s

GAN was a holding company established by members of the Ancira family, who had made a fortune in mining, and the Autrey family, owners of Mexico's leading wholesaler and retailer of pharmaceutical products. By 1994 Altos Hornos was spending more than $300 million on a modernization project, including a larger-capacity basic-oxygen furnace, a new continuous caster, and a rebuilt hot-strip mill and coke oven. More than $60 million was earmarked to build water-treatment systems and make other environmental improvements. The investment program enabled AHMSA to become the first Latin American steelmaker to receive ISO 9002 certification—a standard of high quality—for certain manufacturing processes.

The flight from the peso by investors in late 1994 led to a heavy loss by Altos Hornos in 1994 and a recession that resulted in a sharp slump in domestic steel demand. However, the devaluation of the peso also resulted in much lower production costs in dollar terms, allowing the company to sell its steel abroad cheaply. Forty-three percent of AHMSA's output was exported in 1995, compared to only 5 percent the previous year. The company earned a net profit of 886.5 million pesos (about $130 million) that year on a 23 percent increase in sales. It also became Mexico's first and only producer of tin-free steel, a product formerly imported for use in food and beverage packaging.

AHMSA also had signed long-term supply agreements with a number of German, Japanese, and U.S. companies. These included a joint sales agreement with Chaparral Steel Co. for marketing steel beams in 1993 and a joint venture in 1994 with Inland Steel Industries, Inc., supplying such customers as Ford Motor, Chrysler, and Whirlpool. GAN became self-sufficient in both iron-ore and coal supplies by purchasing a number of Mexican properties and reopening the La Perla mine, which had been closed in 1991 because of low ore grades and obsolete equipment. AHMSA began to build a new coal-fired power station for electricity generation and to collect the methane gas that builds up in coal mines as a supplementary fuel in its blast furnaces. A new galvanizing plant began production in 1996.

AHMSA registered new records in 1996 for net sales of 15.31 billion pesos (about $2 billion) and net income of 5.03 billion pesos (about $660 million). Both figures dwindled in 1997, however, and in 1998 the company lost 1.86 billion pesos ($188.2 million) on net sales of 13.5 billion pesos ($1.36 billion). Although sales of finished products reached 2.89 billion metric tons a year, export sales fell to 14 percent of the total, a result that management blamed on financial crises in Asia and Eastern Europe.

In mid-1999, GAN and AHMSA filed for bankruptcy protection, suspending payments on $1.85 billion in debt, including $942 million in loans that were coming due during the year. The business journalists who had been praising GAN's efforts to modernize its subsidiary now reported a different picture entirely. For example, AHMSA, according to Jonathan Friedland and Joel Millman of the Wall Street Journal, "underwrote trash collection ... paid for a nature preserve that featured 400 white-tail deer, and expanded the airstrip at Monclova's airport. The airport became 'international' after Ahmsa bankrolled a daily commercial flight to San Antonio by guaranteeing the purchase of half the seats—although Mr. Ancira commuted to a home in the same city on one of the group's five private aircraft. ... 'It was bread and circuses for the populace,' sums up Jose Manuel Luna, a Monclova historian. 'The way they spent money was nuts.'" As for the vaunted modernization drive, a former company consultant told Friedland and Millman, "You normally have to go east of the Russian border to see this type of technology."

Altos Hornos subsequently sought mergers with other steelmakers that failed to reach fruition. An agreement was not reached until May 2001, when a consortium of Mexican and U.S. banks received 40 percent of the shares in exchange for excusing $500 million in debt. (GAN retained 50.1 percent of the shares, compared to the 77 percent it held at the end of 1998.) The banks also agreed to allow AHMSA to retire nearly $200 million in debt at a discount, paying out this sum by selling an oxygen plant, a water-treatment plant, and real estate. The remaining $1.14 billion in debt was to be serviced from current cash flow. Altos Hornos registered a net profit of 1.36 billion pesos ($142.09 million) in 1999 on net sales of 13.08 billion pesos ($1.36 billion) and 1.13 billion pesos ($117.5 million) in 2000 on net sales of 12.54 billion pesos ($1.31 billion).

Altos Hornos in the Late 1990s

AHMSA was the largest steel producer in Mexico in 1998, accounting for 27 percent of the overall domestic steel market. It was manufacturing a variety of flat steel products, such as plate, hot- and cold-rolled coil, and tin plate), as well as certain long products, such as wire rod, heavy and light sections, and wire derivative products. In the domestic market, its products served primarily the manufacturing, construction, petroleum, packaging, and home appliance industries. Exports accounted for only 7 percent of net sales in 2000, of which North America was the destination for 85 percent.

AHMSA also was operating, through subsidiaries, six iron-ore and nine coal mines. Minera del Norte, S.A. de C.V. (MINOSA) was the subsidiary for the extraction, exploitation, and sale of iron ore used by the company in making steel. Minerales Monclova, S.A. de C.V. (MIMOSA) was in charge of the extraction, exploitation, and sale of metallurgical coal used in the company's steelmaking process. Minera Carbonifera Río Escondido, S.A. de C.V. (MICARE) was extracting and selling steam coal used by Mexico's Federal Commission of Energy for the generation of electrical energy in its coal-fired plants. La Perla Minas de Fierro y Carbon, S.A. de C.V. was the proprietor of a pellet plant and ferroduct for transporting iron ore to AHMSA's own pellet plant in Monclova.

Altos Hornos owned 50 percent of Centro de Servicio Placa y Lámina, S.A. de C.V., a joint venture with Ryerson Tull to distribute steel through a marketing network. Linea Coahuila-Durango, S.A. de C.V. was its half-owned joint venture with Industrias Peñoles, S.A. de C.V. dedicated to rail transport in order to haul metallurgical coal to its plant. Immobiliaria Dos Carlos, S.A. de C.V. was a residential real estate venture in the Monterrey area still subject to approval by the government of the state of Nuevo Leon.

Principal Subsidiaries: Cerro de Mercado, S.A. de C.V.; La Perla Minas de Fierro, S.A. de C.V.; Minera Carbonifera Río Escondido, S.A. de C.V. (MICARE); Minera Monclova, S.A. de C.V. (MIMOSA); Minera del Norte, S.A. de C.V. (MINOSA).

Principal Competitors: Hylsamex, S.A. de C.V.; Siderurgica Lázáro Cardenas Las Truchas, S.A. de C.V.

Chronology

• Key Dates:
• 1942: Altos Hornos de México (AHMSA) is founded.
• 1944: Production begins, with output of flat steel and steel tubes.
• 1976: Altos Hornos is the largest steel mill in Latin America.
• 1991: Altos Hornos is sold to Grupo Acerero del Norte, a private holding company.
• 1999: Company files for bankruptcy protection.
• 2001: Altos Hornos reduces its debt by giving creditor banks 40 percent of its stock.