Outokumpu, the Finnish stainless steel giant, has weathered a stormy 2023. Declining demand, tight scrap markets, and a political strike in Finland conspired to pummel their bottom line. While they emerged with a respectable €517 million adjusted EBITDA and a fortress balance sheet, the mood in their recent Q4 2023 earnings call was cautiously optimistic, focusing on navigating the choppy waters ahead. But buried within the transcript lies a subtle shift, a hint of a tectonic plate shifting beneath the surface. And it's happening not in their European heartland, but in a quiet corner often overlooked: Mexico.

Mexico, you see, is the often-forgotten sibling in Outokumpu's North American family. While the U.S. operation basks in the spotlight, boasting a nearly million-tonne melt capacity in Calvert and a shiny new hot rolling agreement with AM/NS, Mexico quietly operates with 250 kilotonnes of cold rolling capacity, primarily serving the local market.

And therein lies the potential for a hidden tsunami. Outokumpu has repeatedly expressed its belief in Mexico's long-term potential. CEO Heikki Malinen has passionately declared his faith in near-shoring, envisioning Mexico as a manufacturing powerhouse feeding the insatiable U.S. market. He sees their on-the-ground presence as a "superior advantage," allowing for swift, tailored service to local customers.

But for much of 2023, that vision was obscured by a dark cloud: import pressure. Outokumpu acknowledged the significant impact of Asian stainless steel flooding into the Mexican market, depressing prices and squeezing margins. While the U.S. enjoys relatively robust trade protection, Mexico remains vulnerable.

Now, here's the shift that caught my attention. While the Q4 call acknowledged ongoing weakness in Mexico, there's a distinct change in tone. Pia Aaltonen-Forsell, in her last presentation as CFO, stated, "I don't think we are at a competitive disadvantage. We are the only producer with locally anchored [production]." She further expressed confidence that "proper trade policy" could "mitigate" the import situation and "stabilize" the market.

"This is more than just optimistic rhetoric. Actions speak louder than words, and Outokumpu's recent investment decisions reveal their true intentions. Despite acknowledging the "tough situation" in Mexico, they are pushing ahead with their planned 80 kilotonne capacity expansion in the Americas, achieved with "very modest investments." This expansion, announced during their Phase 2 strategy launch, has been primarily enabled through throughput optimization and debottlenecking, implying minimal capital expenditure."

This subtle, yet significant detail paints a very different picture. It suggests that Outokumpu sees the current import pressure as a temporary blip, a storm they can weather while laying the groundwork for a future surge in demand. They are betting big on Mexico, using their strong financial position and operational efficiency to quietly expand capacity while others retrench.

Why Outokumpu's Mexico Bet Makes Sense

Trade Policy: Outokumpu is clearly confident in the Mexican government's ability (and willingness) to curb imports. The recent license requirements and tariff hikes on steel products are just the beginning. The U.S. government's expressed concerns about the import volume into Mexico adds further pressure for action. Near-shoring Momentum: Geopolitical trends are increasingly favoring near-shoring, with companies seeking to reduce supply chain risks and dependence on China. Mexico, with its proximity to the U.S. and favorable labor costs, stands to gain significantly. Outokumpu's Financial Strength: Their net cash position allows them to make strategic investments even in a down market. They are using this advantage to expand capacity cheaply, positioning themselves for future growth. Calvert Cold Rolling Expansion: The ongoing assessment of cold rolling capacity in Calvert, expected to conclude within a year, could further unlock Outokumpu's Mexican potential. Increased cold rolling capacity in the U.S. would allow them to process more Mexican hot band, further integrating their North American operations.

Quarterly EBITDA Trend in the Americas

The following chart shows the hypothetical EBITDA trend for Outokumpu's Americas business, highlighting a potential increase in Q2 2024 driven by easing import pressure and operational improvements in Mexico.

The implications are clear. While analysts focus on the slow recovery in Europe and the potential headwinds in the U.S. market, Outokumpu is quietly positioning itself for a potential eruption of growth in Mexico. Their strategic capacity expansion, coupled with their confidence in trade policy and the long-term potential of near-shoring, could unleash a hidden tsunami of profitability in 2024 and beyond. Don't underestimate the quiet corners. Sometimes, they hold the most explosive potential.

"Fun Fact: Stainless steel is 100% recyclable, making it a truly sustainable material. Outokumpu, with its 95% recycled content rate, is a leader in the circular economy, contributing to a greener future."