Hylsamex, S.A. de C.V.

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Hylsamex, S.A. de C.V.

Munich 101
San Nicolas de los Garza, Nuevo Leon 66452
Mexico
Telephone: 52 8 328 2828
Fax: 52 8 331 1885
Web site: http://www.hylsamex.com.mx

Public Subsidiary of Alfa, S.A. de C.V.
Incorporated: 1943 as Hojalata y Lamina, S.A.
Employees: 7,715
Sales: 13.65 billion pesos ($1.43 billion) (1999)
Stock Exchanges: Mexico City; NASDAQ (for American Depositary Receipts)
Ticker Symbols: HYLSAMX; NYLMB YP
NAIC: 21221 Iron Ore Mining; 331111 Iron & Steel Mills

Hylsamex, S.A. de C.V. is Mexico’s second-largest steel manufacturer. Its products include flat steel, bars, rods, pipes, coils, and wire, used primarily for the construction, auto-parts, and home-construction industries. The company also has subsidiaries for scrap processing, freight services, and steel distribution. In addition, Hylsamex owns iron-ore mines and holds stakes in a mining consortium, a power-generating company, and a steel producer in Venezuela. It participates in strategic partnerships with more than ten companies, including United States’ and German firms. Hylsamex is a subsidiary of Mexico’s largest industrial conglomerate, Alfa, S.A. de C.V.

Visa Subsidiary: 1943–74

Members of the Monterrey-based Sada, Garza, and Muguerza families became Mexico’s first significant industrialists early in the 20th century. The holdings of this interrelated extended family, known informally as Grupo Monterrey, were divided in 1936. One of the two, Valores Industriales S.A., known by the acronym Visa, founded Hojalata y Lamina S.A., known by the acronym Hylsa, in 1943. Hojalata y Lamina referred to sheets or plates of flat-rolled steel, a product needed by Visa’s brewery for its bottle caps during World War II, when U.S. firms—the former source of supply—diverted shipments to the war effort.

Hylsa was founded with an original investment of 203 million pesos (about $42 million) by members of the Muguerza, Sada Muguerza, and Garza Sada branches of Grupo Monterrey. Camilo Garza Sada was named chairman. At first the company made only flat sheets of steel (4,300 tons in 1945), but that year an electric (rather than open-hearth) furnace was installed, and it also began making its own steel bars. The labor force grew from the original 16 to 560 in 1950. A sister enterprise, Cia. Minera Las Encimas, was established in 1951 to exploit iron deposits in Pihuamo, Jalisco. Hylsa’s facilities, still not large enough to meet the ambitions of its owners, were modernized in 1953 with U.S. and Mexican government loan guarantees. That year another electric furnace, plus trimming and finishing mills, was installed.

Hylsa’s steel production still depended on scrap iron as its basic material, but the principal provider, the United States, had restricted its export. At this time only blast furnaces could convert iron ore into the raw material needed for steel. The search by Hylsa for a cheaper method led to the construction of a pilot plant to produce sponge iron by direct reduction of iron ore. The method tried was costly and did not produce enough of the material, but a new process developed in 1957 under the direction of company engineer Juan Celada proved successful on an industrial scale. The HyL process, which involved exposing iron-ore pellets to natural gas, was patented, and by 1980 rights had been sold in more than 50 countries. A facility was put into service with a capacity of 200 tons of sponge iron a day. A second such installation was added in 1960, and by 1974 there were four.

Aceros Alfa Monterrey, S.A. was established in 1954 to use Hylsa’s steel for the production of pipe. Aceros de Mexicano, S.A. was created in 1957 to make corrugated-steel bars for reinforcing concrete. In 1959 Hylsa—the largest privately owned steel company in Mexico—produced 238,095 metric tons of steel products (18 percent of the national total), compared to only 34,750 tons in 1950. The company acquired a plant at Apodaca, near Monterrey, in 1963 to produce bars, corrugated rods, wire, and light structural shapes from flat-rolled sheets. This was supplemented in 1969 by a new plant at Xoxtla, Puebla, operated by a new subsidiary, Hylsa de Mexico, S.A. In all, parent Hylsa’s steel production came to 24 percent of the national total in 1970. The company also opened Mexico’s first plant for iron-ore pellets that year, in the state of Colima. In 1972 it purchased a rebar facility that was the first continuous-casting plant in Latin America.

Seven Fat and Seven Lean Years: 1974–88

Grupo Monterrey was broken up again in 1974, this time into four parts. One of the four, Grupo Industrial Alfa, S.A. (later simply Alfa, S.A.) received Hylsa, Empaques de Carton Titan, a packaging company, and 25 percent of the television broadcasting company Televisa S.A. Originally Hylsa constituted two-thirds of Alfa’s assets. As Alfa’s steel division, it was divided into three parts. Hylsa proper was responsible for mining and the transformation of iron ore into basic steel. Aymax was established for specialized steel products. Hyl was in charge of technology and services with regard to the HyL process. Soon after, Galvak became the company’s galvanizing and coated-products division.

In 1975 Hylsa was still Mexico’s second-ranking producer of steel and had revenues of 2.18 billion pesos ($174.4 million). Two years later it passed 1 million metric tons of output for the first time. Production reached 1,512,000 tons in 1981, just before world oil prices nosedived and, as a result, Mexico’s overheated economy crash-landed. Interest on Hylsa’s debt (95 percent of it in dollars) came to 21 percent of its sales in 1983. It had to shoulder Alfa’s debts as well as its own, and its financial and operating costs were increasing twice as fast as the rate of inflation. By early 1987 Hylsa owed more than $1 billion, but since at least 90 percent of its sales were domestic, it was earning depreciated pesos rather than dollars. Hylsa’s debt, which included $300 million in overdue interest, had reached $1.21 billion owed to 68 lenders in 11 countries by the spring of 1988, when about 70 percent of the foreign creditors accepted in exchange for debt owed by the company a package of cash and the Mexican government’s own debt. The other foreign lenders and Mexican banks agreed to extend loan repayments over 15 years and also received 21 percent of Hylsa’s common stock. This agreement reduced the amount due to $574 million. Meanwhile, as the Mexican economy slowly recovered, Hylsa’s sales increased from 150.82 billion pesos (perhaps about $485 million) in 1985 to 2.4 trillion pesos ($853 million) in 1988.

Recovery in the 1990s

In 1995 Hylsa opened the first Mexican steel minimill, located just outside Monterrey. The $400 million facility had an annual capacity of 730,000 metric tons of flat-rolled steel and was considered the most advanced in the world for producing thin-slab sheets. Thin-slab production was considered far more advanced and efficient technologically than ingot steel. The company also spent about $260 million between 1988 and 1992 to upgrade its pipe- and long-products operations. In addition, in 1991, the wire and rod division purchased three facilities from rival Altos Hornos de Mexico, S.A. for $42 million. Taking the name Hylsamex in 1992, when the company’s divisions were integrated into the subsidiary rather than parent company Alfa, the company began offering its stock in Mexico City and New York in 1994.

In 1997 Hylsamex took a 30 percent share in Consorcio Siderurgia Amazonia, Ltd., a group of Latin American steel producers that purchased 70 percent of Venezuela’s CVG Siderurgica del Orinoco (Sidor), the last major government-owned steel producer in the hemisphere, for $1.2 billion. Hyslamex soon raised this stake to 35 percent. But a drop in world oil prices depressed Venezuela’s economy the following year, and Hylsamex’s share of Sidor’s losses in the first quarter of 1999 alone came to $46 million.

Hylsamex spent $1.6 billion on capital projects in the 1990s, replacing 78 percent of its installations. Following the inauguration of the thin-slab-casting minimill, which was established with the participation of the German firm SMS Schloemann-Siemag AG, a $140-million expansion, completed in 1999, doubled its capacity to 1.5 million metric tons. In 1998, Galvak’s capacity was increased from 240,000 to 400,000 annual tons of galvanized and coated steel and other products, the division signed an agreement with AK Steel Holding Corp. to supply each other with products for distribution in their respective markets, and the HYL Technology Division installed a new direct-reduction facility.

Key Dates:

1943:: Hylsa is founded to produce steel for use in bottle caps.
1957:: Hylsa develops a new process to convert iron ore into iron suitable for steelmaking.
1969:: The company opens a major plant for steel products in the state of Puebla.
1974:: Hylsa become the steel division of Grupo Industrial Alfa, S.A. de C.V.
1981:: Production reaches a record 1.51 million metrictons, just before Mexico’s economy sinks.
1988:: Hylsa’s debt of $1.2 billion is restructured and reduced.
1992:: The company is reorganized as Hylsamex, S.A. de C.V.
1999:: Hylsamex turn out a record 2.85 million metric tons of steel products.

Hylsamex’s Raw Materials Division included two Colima mines, at Alzada and Manzanillo, and 51 percent of a mining consortium at Pena Colorada. They turned out a combined total of 3.2 million metric tons of pelletized iron ore in 1999. The output was shipped by rail to Hylsamex’s production plants for conversion from ore into iron by direct reduction. The San Nicolas de los Garza plant, just outside Monterrey, housed the Flat Production Division, whose main installations were the thin-slab minimill, and the older mill, which had a capacity of one million tons a year and was converted from producing five-ton ingots to ten-ton ones in 1996. The Flat Products Division sold 1.7 million metric tons of steel in 1999, of which 200,000 tons were exported. The Bars and Rod Division, with plants at Xoxtla and Apodaca, sold 976,000 tons. The Tubular Products Division, located at San Nicolas de los Garza, sold 168,000 tons.

Established in 1995, Acerex was the company’s processing joint venture with Worthington Steel Co. After the installation of a middle-gage slitter it cut to length 250,000 tons in 1999. Galvak turned out 466,000 tons of products from San Nicolas de los Garza. Hylsamex’s share of Hylsabek, the joint venture with Belgian steelmaker N.V. Bekaert, S.A. for wire and wire-related products organized in 1992, was sold at the end of 1999 for about $11.5 million. A new unit called Galvacer was created in 1999 to enhance Hylsamex’s participation in products of high aggregate value. It was composed of Galvak, Galvamet (Galvak’s joint-venture unit for making insulated panels), the Tubular Products Division, and a unit devoted to small- and medium-sized Mexican customers that sold 103,000 tons of steel products in 1999. Galvacer’s task was to market a number of products, including hot- and cold-rolled sheets of steel, galvanized and coated steel, insulated panels and constructive systems, various kinds of pipes, and structural frames.

President and chief executive officer of Hylsamex since 1995, Alejandro Elizondo was chosen 1999 Steelmaker of the Year by the U.S. trade publication New Steel. The company-organized Industrial Union of Hylsa Workers was representing its employees. As of 2000, there had never been a strike at Hylsa. Employees and their families belonged to Nova, an association in Monterrey that provided medical services and recreational facilities such as basketball courts, soccer fields, and swimming pools. Nova also provided banking services such as loans and saving plans and offered cultural activities such as plays and concerts.

Hylsamex was solidly profitable in the late 1990s. It sold a record 2,849,000 metric tons of steel products in 1999. Net sales came to 13.65 billion pesos ($1.43 billion). Net income was 716 million pesos ($74.9 million). The long-term debt at year’s end was 10.88 billion pesos ($1.38 billion). In September 2000, the company closed its ore mines, the Xoxtla plant, and two of the three in the Monterrey area because of the soaring price of natural gas. Hylsa was especially vulnerable because the direct-reduction process requires large amounts of this fuel. The company was paying an all-time high of $7 per million cubic feet of gas, compared to about $2 at the beginning of the year, thereby increasing its total production costs per ton of steel by 65 percent.