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Analysis

Signs of Recovery

By Daniel González | Mon, 04/26/2021 - 15:53

Mining production in Mexico started showing signs of recovery after 1Q21, following a year marked by an economic recession due to the pandemic. Since June 2010, the mining industry has been considered a strategic industry for the country but in 2020, it was forced to suspend activities in 2Q20, which generated uncertainty among investors. But it also opened new windows of opportunity. In times of economic tribulations, precious metals generally are considered a safe haven, a trend that mining companies operating in the country knew how to take advantage of. CAMIMEX reported that the total value of mining production stood at US$11 billion in 2020, 4.5 percent below 2019, when it was valued at US$11.9 billion.

 The Bank of Mexico reported that by the end of January 2021, the mining sector had started returning to the levels of production it enjoyed before the pandemic. The central bank set the index it uses to measure the country’s total production at 87.27 points, 5 percent above the 77.4 points registered in March 2020, the month in which the first case of COVID-19 was reported in Mexico. By April 2020, it had dropped 10.6 percent, ending at 69.13 points. Among the causes for the drop in production were the mandatory shutdown enforced by the Mexican government during the second quarter of 2020, as well as the weak performance of the automotive and oil and gas industries, and the drop in demand in manufacturing countries in China and Southeast Asia.

 The high price of precious metals during this time helped buttress the sector’s performance in 2020. In a global economic climate marked by uncertainty, precious metals once again became the solution to the mining equation, especially metals such as gold and silver, for which Mexico is a top extraction and production leader.

As a result, some precious metal companies in Mexico ended 2020 with positive results. Grupo México, the country’s largest mining company, closed 2020 with US$8.5 billion in sales, a 7.5 percent increase over 2019. “It was a record year in copper, molybdenum and silver production,” Grupo México said in a press release. “Due to strict health and safety protocols, we have applied during the pandemic and despite the very complicated environment, we managed to achieve a new copper production record.” Industrias Peñoles, Mexico's second-largest mining group and a producer of zinc, copper, lead, gold and silver, also performed well in 2020 with over US$4.6 billion in sales, an annual increase of 4.5 percent. Fresnillo, a leading gold producer, also improved its sales performance in 2020, closing with US$2.6 billion in sales, representing 14.8 percent growth.

 According to INEGI, mining production in Mexico represents 2.5 percent of the country’s GDP, and 8.3 percent of its industrial GDP. For this reason, production recovery levels will depend on synergies between the public and private sectors. A large part of the industrial activity in the US, Mexico’s main trading partner, depends on its domestic mining industry and its extractive capacity, which is key to industries such as the automotive sector. According to CAMIMEX, fluorspar, graphite and strontium were the three minerals in the US that generated the most demand in 2020, in addition to iron and carbon, essential minerals for the production of chassis, brakes, engines and valves for the automotive industry.

 Today, the mining industry’s goal in Mexico is to recover production levels it had before the pandemic. To achieve this, both the public and private sectors will need to work together not only in production, but also in the implementation of best practices that will allow for a greater workforce development (mining sector salaries in Mexico are 40 percent above the national average), while protecting the environment and focusing on the well-being of the communities where mining activities take place.

 Projections, for the time being, are flattering. The International Monetary Fund (IMF) has recently upgraded Mexico’s recovery forecasts for this year. The IMF expects the economy to grow 5 percent in 2021. Signs of recovery in economies such as the UK, the US, Japan, China and Southeast Asia are considered the motor that will power the global economy, where Mexican mining plays an influential role. “The upside in global forecasts for 2021 and 2022 are due to developed economies, particularly the upward adjustment of 1.3 percentage points in the US, which is expected to grow by 6.4 percent this year. This makes the US the only large economy projected to outpace estimated GDP growth in 2022 in the absence of the pandemic. Other advanced economies, including the Eurozone, will also recover this year, but at a slower pace. Among emerging economies, China is projected to grow by 8.4 percent this year,” explained Gita Gopinath, Director of the IMF’s Research Department.

 The following are projects that are expected to lead the recovery in Mexican mining production in 2021: Juanicipio in Zacatecas (Fresnillo and MAG Silver); Sonora in Sonora (Bacanora Lithium and Ganfeng Lithium); Buenavista Zinc in Sonora (Southern Copper); Los Filos in Guerrero (Equinox Gold); La Yaqui Grande in Sonora (Alamos Gold); Camino Rojo in Zacatecas (Orla Mining); Media Luna in Guerrero (Torex Gold) and Metates in Durango (Chesapeake Gold).

The data used in this article was sourced from:  
IMF, Bank of Mexico, INEGI, CAMIMEX,MBN, Grupo México
Daniel González Daniel González Senior Writer