Ternium's Steel Strategy: Navigating USMCA Tariffs and Positioning for Latin American Dominance

The U.S.-Mexico-Canada Agreement (USMCA) has evolved into a critical battleground for Latin American steel producers, particularly Ternium, as tariff dynamics reshape regional trade. Recent U.S. policy changes—doubling Section 232 tariffs on steel and aluminum to 50% (excluding the UK)—have intensified pressure on Mexican exports. Yet for Ternium, Latin America's largest steelmaker, these headwinds present an opportunity to solidify its position as a low-carbon, USMCA-compliant supplier. Here's how the company is turning regulatory complexity into a competitive advantage—and why investors should take note.

The Tariff Tightrope: Challenges and Compliance

The U.S. tariff hikes, effective June 2025, pose immediate risks for Ternium. Mexican steel exports to the U.S., which totaled 2.3 million tons in 2024, now face a 50% duty unless they meet stringent USMCA rules of origin. These rules require a minimum regional content threshold, favoring producers like Ternium that source raw materials from North America. The company's $3.2 billion DRI-EAF (Direct Reduction Iron-Electric Arc Furnace) plant in Pesquería, set to begin production in mid-2026, is designed to meet these criteria. By using North American-sourced iron ore and renewable energy, the plant aims to produce 2.6 million tons of low-carbon steel annually, avoiding tariffs while reducing CO₂ emissions by 40% compared to traditional methods.

Decarbonization as a Double Win

Ternium's green strategy isn't just about compliance—it's a play for ESG-driven investors. The Pesquería plant's “hydrogen-ready” design and partnerships with renewable energy projects (e.g., a 99 MW wind farm in Argentina) align with global decarbonization trends. By targeting a 15% reduction in emissions intensity by 2030, Ternium positions itself as a preferred supplier to automakers and infrastructure firms under pressure to meet sustainability goals. This differentiation could offset tariff-related cost pressures and secure long-term contracts with U.S. firms seeking to avoid Section 232 duties.

Diversification Amid Domestic Stagnation

Mexico's domestic steel demand remains sluggish, with 2024 production down to 18.2 million tons, due to stalled infrastructure projects and weak economic growth. Ternium is countering this by expanding into Brazil and Argentina. For instance, its new slab mill in Pesquería could supply Brazilian markets—though historical trade data shows limited penetration (e.g., Mexico exported just 27,000 tons of steel to Brazil in 2023). To overcome this, Ternium is leveraging circular economy initiatives, such as recycling 2.9 million tons of scrap annually, to reduce costs and meet regional demand.

Nearshoring's Silver Lining

While tariffs threaten Ternium's U.S. exports, they may accelerate “nearshoring” as U.S. firms relocate production to Mexico to qualify for USMCA exemptions. Ternium could capitalize by supplying low-carbon steel to automakers and manufacturers reconfiguring supply chains. However, the company must navigate rising input costs: U.S. tariffs on Chinese raw materials (up to 60% by year-end) could squeeze margins unless Ternium secures North American suppliers.

Risks and Mitigation

• Execution Risks: The Pesquería plant's 2026 startup depends on permits and labor stability. Ternium's 98% on-time project record offers reassurance, but delays could erode investor confidence.
• Chinese Competition: Brazil's market remains vulnerable to cheaper Chinese imports (80% of flat steel imports in 2023). Ternium's USMCA alignment and local partnerships help, but pricing wars could emerge.
• Regulatory Uncertainty: The 2026 USMCA review may tighten rules of origin, forcing Ternium to adjust sourcing strategies.

Investment Thesis: A Buy at Discounted Valuations

At 6.2x EV/EBITDA versus peers' 8.5x average, Ternium is undervalued. Its $3.2 billion expansion and ESG focus could boost returns on invested capital (ROIC) to 15% by 2026, exceeding Nucor's 12%. Analysts project a 12-month price target of $25/share—20% upside from current levels. Risks are mitigated by Ternium's diversified revenue streams and 2030 carbon targets, which align with global investment trends.

Conclusion: A Steel Giant's Moment

Ternium is at a crossroads: navigate USMCA's complexities, and it could dominate North American low-carbon steel; falter, and it risks becoming a casualty of overcapacity and trade wars. Its strategic investments in decarbonization and USMCA compliance, coupled with an undervalued stock, make it a compelling bet for investors willing to ride out near-term volatility. The company's ability to turn regulatory hurdles into a shield against competition could cement its place as Latin America's steel titan for decades.