Grupo Simec, S.A.B. de C.V. (SIM) 20-F2023 FY Annual report (foreign)

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934

OR

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-11176

GRUPO SIMEC, S.A.B. de C.V.

(Exact name of registrant as specified in its charter)

SIMEC GROUP CORPORATION

(Translation of registrant’s name into English)

UNITED MEXICAN STATES

(Jurisdiction of incorporation or organization)

Calzada Lázaro Cárdenas 601
Colonia La Nogalera

Guadalajara, Jalisco

México 44440

(Address of principal executive offices)

Mario Moreno Cortez

Calzada Lázaro Cárdenas 601

Colonia La Nogalera

Guadalajara, Jalisco

México 44440

Telephone: (5233) 3770-6700,

E-mail: mmoreno@gruposimec.com.mx

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

Series B Common Stock — 461,676,539 shares as of December 31, 2023

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐  No ☒

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards^† provided pursuant to Section 13(a) of the Exchange Act. ☐

^†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Table of Contents

CERTAIN TERMS

Grupo Simec, S.A.B. de C.V. is a corporation (sociedad anónima bursátil de capital variable) organized under the laws of the United Mexican States (“Mexico”). Unless the context requires otherwise, when used in this annual report, the terms “we,” “our,” “the company,” “our company” and “us” refer to Grupo Simec, S.A.B. de C.V., together with its consolidated subsidiaries.

References in this annual report to “U.S. dollars” or “U.S.$” are to the lawful currency of the United States. References in this annual report to “pesos” or “Ps.” are to the lawful currency of Mexico. References in this annual report to “real” are to the lawful currency of the Federative Republic of Brazil. References to “tons” in this annual report refer to tons; a metric ton equals 1,000 kilograms or 2,204 pounds. We publish our financial statements in pesos.

The terms “special bar quality steel” or “SBQ steel” refer to steel that is hot rolled or cold finished into round square, or hexagonal steel bars that generally contain higher proportions of alloys than commercial grades of steel. SBQ steel is produced with precise chemical specifications and generally is made to order following client specifications.

This annual report contains translations of certain peso amounts to U.S. dollars at specified rates solely for your convenience. These translations do not mean that the peso amounts actually represent such dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, we have translated these U.S. dollar amounts from pesos at the exchange rate of Ps. 16.8935 per U.S.$1.00, the interbank transactions rate in effect on December 31, 2023. On November 4, 2024, the interbank transactions rate for the peso was Ps. 20.0367 per U.S.$1.00.

FORWARD LOOKING STATEMENTS

This annual report contains words, such as “believe,” “expect,” “anticipate,” “plans” and similar expressions that identify forward-looking statements, which reflect our views about future events and financial performance. We have made forward-looking statements that address, among other things our:

Actual results could differ materially from those projected in such forward-looking statements as a result of various factors that may be beyond our control. These factors include, but are not limited to:

Forward looking statements speak only as of the date of this filing, and we undertake no obligation to publicly update or to revise any forward looking statements after the date of this annual report because of new information, future events or other factors. In light of the risks and uncertainties described above, the forward looking events and circumstances discussed in this annual report might not occur.

For a discussion of important factors that could cause actual results to differ materially from those contained in any forward-looking statement, see “Item 3—Key Information—Risk Factors.”

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A. Reserved

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Risks Related to the Global Economy and Our Business

Our industry is cyclical and both recessions and prolonged periods of slow economic growth could have an adverse effect on our business.

 Demand for most of our products is cyclical in nature and sensitive to general economic conditions. Our business supports cyclical industries, such as the construction, energy, metals service centers, appliance and automotive industries. As a result, economic slowdowns or a downturn in any of these industries could materially and adversely affect our results of operations, financial condition and cash flows. The global economy experienced a strong recovery from the conditions experienced at the onset of the COVID-19 pandemic, but related labor shortages and supply chain disruptions, new or proposed legislation related to governmental spending, inflation and increases in interest rates have impacted, and will continue to impact, economic growth. Even with this economic recovery, challenges from global production overcapacity in the steel industry and ongoing uncertainties, both in the United States and in other regions of the world, remain.

We are unable to predict the duration of current economic conditions or the magnitude or timing of changes in economic activity. Future economic downturns, prolonged slow growth or stagnation in the economy, a sector-specific slowdown in one of our key end-use markets, such as nonresidential construction, or changes in inflation could materially adversely affect our business, results of operations, financial condition and cash flows, especially in light of the capital-intensive nature of our business.

Our operations are sensitive to volatility in steel prices and the cost and availability of raw materials.

We rely on international markets and certain key suppliers to obtain the raw materials that are critical to the manufacture of steel products. The prices of certain raw materials, including scrap metal and ferroalloys are negotiated on a monthly basis with our suppliers and are subject to market conditions. At any given time, we may be unable to obtain an adequate supply of these critical raw materials with price and other terms acceptable to us. The availability and prices of raw materials may also be negatively affected by new laws and regulations, allocation by suppliers, interruptions in production, accidents or natural disasters, war and other forms of armed conflict or political instability, changes in exchange rates, worldwide price fluctuations, including due to global political and economic factors, changes in governmental, business and consumer spending, inflation, increases in interest rates, labor shortages, and the availability and cost of transportation. Many countries that export steel restrict the export of scrap, protecting the supply chain of some foreign competitors. This trade practice creates an artificial competitive advantage for foreign producers that could limit our ability to compete.

If our suppliers increase the prices of our critical raw materials, we may not have alternative sources of supply. In addition, to the extent that we have quoted prices to our customers and accepted customer orders for our products prior to purchasing necessary raw materials, we may be unable to raise the price of our products to cover all or part of the increased cost of the raw materials or pass along increased transportation costs. Also, if we are unable to obtain adequate, cost-effective and timely deliveries of our required raw materials, we may be unable to timely manufacture sufficient quantities of our products. This could cause us to lose sales, incur additional costs, experience margin compressions or suffer harm to our reputation and customer relationships.

Excess capacity and oversupply have in the past and may continue in the future to weigh on the profitability of steel producers, including us.

The steel industry is affected by global and regional production capacity and fluctuations in steel imports and exports, which are themselves affected by the existence and amounts of tariffs and customer and distributor stocking and destocking cycles. The steel industry has historically suffered from structural overcapacity globally, and the current global steelmaking capacity exceeds the current global consumption of steel, especially for long products. This overcapacity is affected by global macroeconomic trends and amplified during periods of global or regional economic weakness, leading to weaker global or regional demand. In particular, China is both the largest global steel consumer and the largest global steel producer, and the balance between its domestic production and consumption has been an important factor influencing global steel prices. At various points in recent years, reduced Chinese steel demand has not been fully offset by reduced Chinese steel production, which has led to a flood of Chinese steel exports into the markets in which we compete, weighing on demand and depressing market prices. While most recently constraints imposed on Chinese steel production have tempered the risk of excess production, such risk remains, along with the risk of increased exports, in particular if there is a global recession or a Chinese slowdown. See “Risk Factors—Risk Factors Related to Our Business—Unfair trade practices, import tariffs and/or barriers to free trade could negatively affect steel prices, which could in turn adversely affect our results of operations.”

Market prices for iron ore also underpin those of steel (as its principal input component) to some extent, and iron ore prices depend both on supply and demand conditions. Excess iron ore supply relative to demand has led to depressed prices at various points in recent years and could recur, with potentially a corollary effect on steel prices. No assurance can be given that iron ore prices will not decline further, particularly if there is an economic downturn, Chinese steel demand declines, worldwide capacity increases due to new mines coming online or steel demand declines again due, for example, to impacts from the negative effects from the continuing Russia/Ukraine conflict, the Israel-Hamas conflict or other regional conflicts, in particular on energy supply and prices. A renewed phase of steel and iron ore oversupply could materially adversely affect our results of operations and financial condition.

Increases in the cost, disruption of supply or shortage of energy could adversely affect our business and results of operations.

Our steel plants are large consumers of electricity and natural gas. The prices for and availability of electricity and natural gas can be volatile. Energy prices are often affected by weather, political, regulatory and economic factors beyond our control, and we may be unable to raise the price of our products to offset increased energy costs. Disruptions that impact the supply of our energy resources could temporarily impair our ability to manufacture our products, which may adversely impact our results and financial condition. Furthermore, increases in our energy costs that are not similarly applicable to our competitors’ operations could materially adversely affect our business, results of operations, financial condition and cash flows.

We pay special rates for electricity and natural gas in Mexico and enter into fixed-price energy contracts. Failure to maintain such preferential or fixed-price agreements could increase our energy costs, which may adversely affect our business and results of operations.

We buy electricity from the Mexican federal electricity commission (Comisión Federal de Electricidad or “CFE”) at preferential rates after successfully obtaining the Qualified User Registry (Registro de Usuario Calificado). We also pay special rates to Petróleos Mexicanos (“PEMEX”), Iberdrola, Eustas, Shell, Ecogas and Engie for the natural gas used at our facilities in Mexico. In certain deregulated electric markets in the United States, we have third party electric generation contracts under a fixed price arrangement that mitigate our exposure to volatility in energy markets. In addition, we purchase natural gas from various suppliers in the United States and Canada at purchase prices established as a function of monthly New York Mercantile Exchange settlement prices. We also contract with different natural gas transportation and storage companies to deliver the natural gas to our facilities and enter into futures contracts to fix and reduce volatility of natural gas prices both in Mexico, Brazil and the United States.

We cannot assure you that these special rates will continue to be available to us in Mexico or that such rates may not increase significantly in the future. We also cannot assure you that we will be able to continue entering into fixed-price arrangements or that the price paid in such agreements will not increase. Changes in the price or supply of electricity or natural gas in the markets in which we operate could materially and adversely affect our business and results of operations.

Competition from other steel producers may adversely affect our business.

We face significant competition from other steel producers that compete with our products on price, quality and service. The markets for our products are highly competitive and a number of firms, domestic and foreign, participate in the steel, steel products and raw materials markets. Depending on a variety of factors, including the cost and availability of raw materials, energy, technology, labor, transportation and capital costs, currency exchange rates, dumping and excessive production, government subsidies of foreign steel producers and other global political and economic factors, our business may be materially adversely affected by more intense competitive forces.

Competition from other materials could significantly reduce demand and market prices for steel products, which could have an adverse impact on our results of operation and financial condition.

In many applications, steel competes with other materials that may be used as steel substitutes, such as aluminum, concrete, composites, glass, plastics and wood. Increased use or availability of such materials in substitution for steel products could significantly reduce demand and market prices for steel products, which could in turn have an adverse impact on our business, results of operation and financial condition. 

Unfair trade practices, import tariffs and/or barriers to free trade could negatively affect steel prices and our ability to export our products outside of Mexico, which could in turn adversely affect our results of operations.

Our business is significantly exposed to unfair trade practices, including “dumping”, government subsidies, and other unfair trade and pricing strategies by competitors. In particular, countries with centrally controlled economies, such as China, continue to subsidize their steel industries. In periods of lower global demand for steel, there is an increased risk of additional volumes of unfairly-traded steel exports into the markets in which we produce and sell our products. Such imports have had and could in the future have the effect of reducing prices and demand for our products.

Additionally, the global nature of our operations exposes us to import tariffs, quotas, protectionist policies, and other trade barriers that may limit our ability to access key markets or undermine our competitiveness. Countries may enact new tariffs or expand existing ones, potentially restricting the flow of steel and steel-related products into certain markets or making exports economically unviable. While these policies aim to protect domestic producers, they can also cause disruptions by displacing excess steel into markets that do not impose similar restrictions, further intensifying competition and exerting downward pressure on prices. Moreover, retaliatory tariffs or countermeasures by affected countries could create additional uncertainties, limiting our market access or inflating operational costs.

We are unable to predict how future trade policies or restrictions will evolve, nor can we guarantee that retaliatory or protectionist actions will not escalate, further complicating the global steel trade. Any prolonged application of tariffs, quotas, or other barriers to free trade could significantly disrupt the steel industry, negatively affecting our sales, profit margins, and long-term competitiveness. Consequently, these uncertainties could materially harm our financial performance and overall business outlook. See “Item 8—Financial Information—Legal Proceedings.”

Labor disputes may disrupt our operations and relationships with our customers. Our ability to reduce labor costs may be limited in practice or encounter implementation difficulties.

Approximately 58% of our employees in Mexico and 42% of our employees outside of Mexico are represented by labor unions and are covered by collective bargaining agreements, which are subject to periodic renegotiation. Strikes or work stoppages could occur prior to, or during, negotiations preceding new collective bargaining agreements, during wage and benefits negotiations or during other periods for other reasons, in particular in connection with any announced intentions to adapt our employee headcount. Further, any such strikes or stoppages could occur at various of our facilities. Prolonged strikes or stoppages could have an adverse impact on our results of operation and financial condition.

Failure to comply with environmental laws and regulations may result in fines, penalties or other significant liabilities or prevent us from operating our facilities.

We are subject to a broad range of environmental, health and safety laws and regulations in each of the jurisdictions in which we operate. These laws and regulations impose increasingly stringent standards regarding general health and safety, air emissions, discharges of wastewater, the use, handling and transportation of hazardous, toxic or dangerous materials, waste disposal practices and the remediation of environmental contamination, and health and safety matters, among other things. The costs of complying with, and the imposition of liabilities pursuant to these laws and regulations can be significant, and compliance with new and more stringent obligations may require additional capital expenditures or modifications in operating practices. Failure to comply can result in civil and/or criminal penalties being imposed, the suspension of permits, requirements to curtail or suspend operations and lawsuits by third parties. Despite our efforts to comply with environmental laws and regulations, environmental incidents or events that negatively affect the operations of our facilities may occur. In addition, we cannot assure you that we will always operate in compliance with environmental laws and regulations. If we fail to comply with these laws and regulations, we may be assessed fines or penalties, be required to make large expenditures to comply with such laws and regulations, or be forced to shut down non-compliant operations and face lawsuits by third parties. In addition, environmental laws and regulations are becoming increasingly stringent and it is possible that future laws and regulations may require us to undertake material environmental compliance expenditures and require modifications in our operations. Furthermore, we need to maintain existing and obtain future environmental permits in order to operate our facilities. The failure to obtain necessary permits or consents or the loss of any permits could result in significant fines or penalties or prevent us from operating our facilities. We may also be subject, from time to time, to legal proceedings brought by private parties or governmental agencies with respect to environmental matters, including matters involving alleged property damage or personal injury that could result in significant liability. Certain of our facilities in the United States have been and continue to be the subject of administrative action by federal, state and local environmental authorities. See “Item 8—Financial Information—Legal Proceedings.”

We may incur significant liabilities if we are required to remediate contamination at our facilities.

Certain of our U.S. facilities are currently under investigation for environmental contamination and we incur costs and liabilities associated with the assessment and remediation of contaminated sites. While some of these investigations and remediation efforts relate to legacy activities by prior owners of our facilities, we may in the future be subject to similar investigations or required to undertake remediation measures. In addition to the impact on current facilities and operations, environmental remediation obligations can give rise to substantial liabilities in respect of divested assets and past activities. We recognize a liability for environmental remediation when it becomes probable that such remediation will be required and the amount can be reasonably estimated. As estimated costs to remediate change, or when new liabilities become probable, we adjust the record liabilities accordingly. However, due to the numerous variables associated with the judgments and assumptions that are part of these estimates and changes in governmental regulations and environmental technologies over time, we cannot assure you that our environmental reserves will be adequate to cover such liabilities or that our environmental expenditures will not differ significantly from our estimates or materially increase in the future. Failure to comply with any legal obligations requiring remediation of contamination could result in liabilities, imposition of cleanup liens and fines, and we could incur large expenditures to bring our facilities into compliance. See “Item 8—Financial Information—Legal Proceedings.”

Global or regional health epidemics, such as the COVID-19 pandemic, and other public health emergencies, have impacted and could continue to have a material adverse effect on our business, results of operations, financial condition and cash flows.

The COVID-19 pandemic continued to impact countries, communities, supply chains and markets in 2023, though to a generally lesser extent than during 2020-2022. Similar pandemics or global health emergencies in the future and related efforts to reduce their spread, including quarantines, travel restrictions, business closures, and mandatory stay-at-home or work-from-home orders, could be instituted. We may be subject to risks arising out of the turbulence of the economic recovery associated with global health crises, such as the COVID-19 pandemic, including inflationary pressures, which have generally increased the costs of our labor, raw materials, energy supplies and other production inputs, adversely impacting our results of operations and profitability. In addition, we have experienced, and may continue to experience, supply chain disruptions or operational issues with our vendors or logistics providers, as our suppliers and contractors face similar challenges related to pandemics or global health crises. Because global health crises, such as the COVID-19 pandemic, are unpredictable, we cannot predict the full extent to which our businesses, results of operations, financial condition or liquidity will ultimately be impacted by a public health emergency. Global health crises could exacerbate many of the other risks described in Item 3.D. “Risk Factors”, any of which could have material adverse effect on us. 

Implementing our growth strategy, which may include additional acquisitions, may adversely affect our operations.

As part of our growth strategy, we may seek to expand our existing facilities, build additional plants, acquire additional steel production assets, enter into joint ventures or form strategic alliances that we expect will expand or complement our existing business. If we undertake any of these transactions, they will likely involve some or all of the following risks:

We will require significant capital for acquisitions and other strategic plans, as well as for the maintenance of our facilities and compliance with environmental regulations. We may not be able to fund our capital requirements from operating cash flow and we may be required to issue additional equity or debt securities or obtain additional credit resources, which could result in additional dilution to our shareholders. We cannot assure you that adequate equity or debt financing would be available to us on favorable terms or at all. If we are unable to fund our capital requirements, we may not be able to implement our growth strategy.

We intend to continue to pursue a growth strategy, the success of which will depend in part on our ability to acquire and integrate additional facilities. Some of these acquisitions may be outside of Mexico, the United States, Canada and Brazil. Acquisitions involve special risks, in addition to those described above, that could adversely affect our business, financial condition and results of operations, including the assumption of legacy liabilities and the potential loss of key employees. We cannot assure you that any acquisition we make will not materially and adversely affect us or that any such acquisition will enhance our business. We are unable to predict the likelihood of any additional acquisitions being proposed or completed in the near future or the terms of any such acquisitions.

Disruptions to our manufacturing operations caused, for example, by equipment failures, natural disasters, accidents, explosions, epidemics or pandemics, geopolitical conflicts or extreme weather events could adversely affect our business, results of operations, financial condition and cash flows.

Steel manufacturing processes are dependent on critical steel-making equipment, such as furnaces, continuous casters, rolling mills and electrical equipment (such as transformers), and such equipment may incur downtime as a result of unanticipated failures or other events, such as fires, explosions, furnace breakdowns or as a result of natural disasters, accidents, epidemics or pandemics or severe weather conditions. Our manufacturing facilities have experienced, and may in the future experience, plant shutdowns or periods of reduced production as a result of such events.

Natural disasters and severe weather conditions could lead to significant damage at our production facilities and general infrastructure or cause shutdowns. Severe weather conditions can also affect our operations due to the long supply chain for certain of the raw materials we use in our processes. Water in particular is crucial to the steelmaking process, and the risk that the authorities may restrict license to withdraw water as a result of chronic drought could increase operating costs and reduce production capacity. Damage to our production facilities due to natural disasters and severe weather conditions could, to the extent that lost production cannot be compensated for by unaffected facilities, adversely affect our business, results of operations or financial condition. More generally, these severe weather conditions could increase in frequency and severity due to climate change.

We do not maintain insurance covering losses resulting from catastrophes or business interruptions. In the event we are not able to remedy any significant interruption of our manufacturing capabilities in a prompt or cost-effective manner, our operations could be adversely affected. In addition, if any of our plants are severely damaged or their production capabilities is otherwise significantly affected, we would likely incur suffer significant losses and capital investments necessary to repair any destroyed or damaged facilities or machinery would adversely affect our profitability, liquidity and financial condition.

Failure to obtain or maintain quality and environmental management certifications may put us at a competitive disadvantage or reduce demand for our products.

Automotive parts customers in Mexico and the United States require us to obtain and maintain certifications regarding certain quality and environmental compliance standards, such as ISO 9001, TS 16949 and ISO 14001. While all of our facilities serving such customers comply with such certifications, any failure by us to maintain or renew such certifications, or any failure by us to obtain or comply with any new certifications that may be required by our customers or market practice from time to time, could adversely affect our ability to serve our target market, retain our client base or attract new customers. We cannot provide any assurance that we will be able to maintain these certifications in a timely or cost efficient manner, or at all.

Participants in the SBQ steel market must also maintain “approved supplier” certifications such as IATF 16949 (International Automotive Task Force) and ISO 9001 (International Organization for Standardization), which are required by the automotive industry to ensure vehicle quality and safety. While we are an “approved supplier” of steel products for our automotive parts customers, any failure by us to maintain or renew such certifications, including as a result of any future modifications to the requirements necessary to renew or maintain such certifications, could adversely affect our ability to serve our target market, retain our client base, or attract new customers. Maintaining these certifications is key to preserving our market share. We cannot provide any assurance that we will be able to maintain these certifications in a timely or cost-efficient manner, or at all.

Any legal proceedings, investigations or claims against us could be costly and time-consuming to defend, and, if adversely decided or settled, could materially and adversely affect our business, financial condition and results of operations and could harm our reputation regardless of the outcome.

We are and may in the future become subject to legal proceedings, investigations, such as the SEC investigation described under “Item 8—Financial Information—Legal Proceedings” and claims, including claims that arise in the ordinary course of business. Any litigation, investigation or claim, whether meritorious or not, could harm our reputation, increase our costs and divert management’s attention, time and resources, which may in turn harm our business, financial condition and results of operations. Insurance might not cover such claims, might not provide sufficient payments to cover all the costs to resolve one or more such claims and might not continue to be available on terms acceptable to us. Further, our share price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any proceedings, investigations and claims.

Greenhouse gas policies and regulations, particularly any binding restriction on emissions of greenhouse gases such as carbon dioxide, could negatively impact our steelmaking operations.

Our steel making operations in the United States, Brazil and Mexico use electric arc furnaces where carbon dioxide generation is primarily linked to energy use. In the United States, the Environmental Protection Agency has issued rules imposing inventory and reporting obligations to which some of our facilities are subject, and has also issued rules that will affect preconstruction permits for our facilities where increases in greenhouse gas pollutants are contemplated. The U.S. Congress has debated various measures for regulating greenhouse gas emission (such as carbon dioxide) and may enact them in the future. Such laws and regulations may also result in higher costs for coking coal, natural gas and electricity generated by carbon-based systems (such as coal-fired electric generating facilities). Such future laws and regulations, whether in the form of a cap-and-trade emissions permit system, a carbon tax or other regulatory regime may have a negative effect on our operations. Climate change policy is evolving at regional, national and international levels, and political and economic events may significantly affect the scope and timing of climate change measures that are ultimately put in place. As a signatory to the United Nations Framework Convention on Climate Change (the “UNFCCC”), Mexico became subject to the Paris Agreement to fight climate change, which was approved at the 21th session of the UNFCCC conference in 2015. The United States and Brazil are also members of the Paris Agreement.

We depend on our senior management and their unique knowledge of our business and of the SBQ steel industry, and we may not be able to replace key executives if they leave.

We depend on the performance of our executive officers and key employees. Our senior management has significant experience in the steel industry, and the loss of any member of senior management or our inability to attract and retain additional senior management could materially and adversely affect our business, results of operations, prospects and financial condition. We believe that the SBQ steel market is a niche market where specific industry experience is key to success. We depend on the knowledge of our business and the SBQ steel industry of our senior management team. In addition, we attribute much of the success of our growth strategy to our ability to retain most of the key senior management personnel of the companies and businesses that we have acquired. Competition for qualified personnel is significant, and we may not be able to find replacements with sufficient knowledge of, and experience in, the SBQ steel industry for our existing senior management or any of these individuals if their services are no longer available. Our business could be adversely affected if we cannot attract or retain senior management or other necessary personnel.

Our tax liability may increase if the tax laws and regulations in countries in which we operate change or become subject to adverse interpretations.

Taxes payable by companies in the countries in which we operate are substantial and include income tax, value-added tax, excise duties, profit taxes, payroll related taxes, property taxes and other taxes. Tax laws and regulations in some of these countries may be subject to change, varying interpretation and inconsistent enforcement. Ineffective tax collection systems and continuing budget requirements may increase the likelihood of the imposition of onerous taxes and penalties which could have a material adverse effect on our financial condition and results of operations. In addition to the usual tax burden imposed on taxpayers, these conditions create uncertainty as to the tax implications of various business decisions. This uncertainty could expose us to significant fines and penalties and to enforcement measures despite our best efforts at compliance, and could result in a greater than expected tax burden. In addition, many of the jurisdictions in which we operate, including Mexico, have adopted transfer pricing legislation. If tax authorities impose significant additional tax liabilities as a result of transfer pricing adjustments, it could have a material adverse effect on our financial condition and results of operations. It is possible that tax authorities in the countries in which we operate will introduce additional tax raising measures. The introduction of any such provisions may affect our overall tax efficiency and may result in significant additional taxes becoming payable. Any such additional tax exposure could have a material adverse effect on our financial condition and results of operations.

We are subject to information technology and cyber-security threats which could have an adverse effect on our business and results of operations.

We utilize various information technology systems to efficiently address business functions ranging from the operation of our production equipment to administrative computation to the storage of data such as intellectual property and proprietary business information. We also utilize third-party service providers for certain information technology services that are important to our operations. We continuously evaluate our cyber-security systems and practices, assess potential threats, and improve our information technology networks, policies and procedures to address potential vulnerabilities. Despite efforts to assure secure and uninterrupted operations, in 2021, one of the Company’s plants was the target of a cyberattack. Although the Company did not experience a material impact to its operations in this instance, threats from increasingly sophisticated cyber-attacks or system failures could result in materially adverse operational disruptions or security breaches of our systems or those of our third-party service providers. These risks could result in disclosure or destruction of key proprietary information or personal data or reputational damage, theft of assets or trade secrets, or could adversely affect our ability to physically produce or transport steel, resulting in lost revenues, as well as delays in reporting our financial results. We also could be required to spend significant financial and other resources to remedy the damage caused by a cyber-security breach, including to repair or replace networks and information technology systems. We may also contend with potential liability for stolen information, increased cyber-security protection costs and litigation expenses.

Our financial statements are prepared in accordance with IFRS and therefore are not directly comparable to financial statements of other companies prepared under U.S. GAAP or other accounting principles.

We are listed on the Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A.B. de C.V.), which requires us to prepare our financial statements in accordance with International Financial Reporting Standards (“IFRS”). IFRS significantly differs from U.S. GAAP in certain respects and items on the financial statements of a company prepared in accordance with IFRS may not reflect its financial position or results of operations in the same way they would had such financial statements been prepared in accordance with U.S. GAAP. Accordingly, our financial statements and reported earnings may not be directly comparable companies in our business that prepare financial statements in accordance with U.S. GAAP.

An increase in interest rates in the United States could adversely impact the Mexican economy and may have a negative effect on our financial condition or performance.

A decision by the U.S. Federal Reserve to increase interest rates on banks’ reserves may lead to a general increase in interest rates in the United States. This, in turn, may redirect the flow of capital away from emerging markets and into the United States, because investors may be able to obtain greater risk-adjusted returns in larger or more developed economies rather than in Mexico. Thus, companies in emerging market economies such as Mexico could find it more difficult and expensive to borrow capital and refinance existing debt. This may negatively affect our potential for economic growth and could have a material adverse effect on our business and financial condition.

Our controlling shareholder is able to exert significant influence on our business and policies and its interests may differ from those of other shareholders.

Industrias CH, S.A.B. de C.V. (“Industrias CH”), which is controlled by the chairman of our board of directors, Rufino Vigil González, owns approximately 76.19% of our shares as of December 31, 2023. Industrias CH nominated all current members of our board of directors and can exercise substantial influence and control over our business and policies, including the timing and payment of dividends. Industrias CH’s interests may differ significantly from those of other shareholders. Furthermore, as a result of Industrias CH’s significant equity position, there is currently limited liquidity in our series B shares and the American Depositary Shares (“ADSs”).

Mr. Sergio Vigil González is the Chief Executive Officer of Industrias CH and has in previous years exercised a senior role in our management despite having no formal role in our Company. Since July 2024, he is the Chief Executive Officer of our Company. In this function, Mr. Vigil continues to direct our business strategies, negotiates potential acquisitions and directs intercompany loans, among other things. Mr. Vigil is the brother of our controlling shareholder and Chairman of our board of directors, Rufino Vigil González. 

We have in the past and may in the future engage in related party transactions with our affiliates.

Historically, we have engaged in a number and variety of transactions with our affiliates, including entities that Industrias CH owns or controls. While we believe that these transactions were made on terms that were not less favorable to us than those obtainable on an arm’s-length basis, there was no independent determination of that fact. We expect that in the future we will continue to enter into transactions with our affiliates, and some of these transactions may be significant. See Item 7.B “Related Party Transactions.”

Risks Related to Internal Controls and Financial Reporting

We are under investigation by the SEC and may face litigation and other risks as a result of the prior material weaknesses in our internal control over financial reporting.

In connection with the preparation of our financial statements as of and for each of the years ended December 31, 2021 and 2020, we and our auditors identified material weaknesses (as defined under standards established by the U.S. Public Company Accounting Oversight Board) in our internal controls over financial reporting. The SEC is currently conducting an investigation focused on the Company’s internal controls over financial reporting, including any material weaknesses in those controls in prior and subsequent years. A material weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis.

As a result of material weaknesses in our internal controls over financial reporting, and other matters raised or that may in the future be raised by the SEC, we may be exposed to a number of additional risks and uncertainties, including (i) potential litigation or other disputes or investigations that may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the material weaknesses in our internal control over financial reporting and preparation and of our financial statements for certain periods; (ii) significant costs for accounting, advisory, compliance remediation and legal fees in connection with or related to such matters which may be difficult to forecast appropriately; (iii) diversion of the efforts and attention of management and other personnel from our business operations; and (iv) fines, penalties or other actions required as the outcome of government investigations, all of which could result in a potential loss of investor confidence and/or a negative impact on the price of our securities.

Although we are fully cooperating with the SEC’s ongoing investigation and continue to respond to requests related to this matter, we cannot predict whether or when such matters will be completed or the outcome or impact this matter could have on our business, investor confidence or the price of our securities. Any remedial measures, sanctions, fines or penalties, including, but not limited to, financial penalties and awards, injunctive relief and compliance conditions, which may be imposed on us in connection with this matter could have a material adverse effect on our business, financial condition and results of operations. Additionally, the investigation has resulted in substantial costs and we are likely to continue to incur substantial costs, regardless of the outcome of the investigation.

If we are unable to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and materially and adversely affect our business and operating results.

In connection with the preparation of our financial statements as of and for each of the years ended in December 31, 2021, and December 31, 2020, we and our auditors identified material weaknesses in our internal controls over financial reporting in our Mexico, Brazil and United States segments including in relation to inadequate control monitoring, identified control deficiencies not being resolved in a timely manner, lack of an appropriate disaster recovery plan, and lack of a documented plan with respect to the continuity of operations in the event of a disruption of the information technology environment. For more information on country segment specific deficiencies, see “Item 15—Controls and Procedures” in our Form 20-F for the year-ended December 31, 2021, filed with the SEC on May 24, 2022.

Effective internal controls are necessary for us to provide reliable financial reports. We have taken a number of measures to remediate the past material weaknesses and to continue to evaluate steps to enhance our internal controls. However, these remediation measures have been and may continue to be time consuming and costly and we cannot be certain that these initiatives will ultimately have the intended effects. If we identify additional material weaknesses, we may be unable to provide required financial information in a timely and reliable manner and may incorrectly report financial information. If our financial statements continue to not be filed on a timely basis, we could be subject to sanctions or additional investigations by the SEC or other regulatory authorities.

In addition, the existence of material weaknesses in our internal controls over financial reporting could adversely affect our reputation or investor perceptions of us, which could have a negative effect on the price of our securities.

We cannot assure you that the measures we have taken and plan to take in the future will prevent the identification of any additional material weaknesses or that restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal controls over financial reporting. Even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.

For details about our internal control deficiencies and remediation, see Items 15.B. “Controls and Procedures—Management’s Annual Report on Internal Control Over Financial Reporting – Material Weaknesses,” 15.C. “Attestation Report of the Independent Registered Public Accounting Firms,” 15.D. “Changes in Internal Control over Financial Reporting,” and 8 “Financial Information-Legal Proceedings.”

Risks Related to the Automotive Industry

Sales volume in the automotive industry is volatile and could decline if there is a financial crisis, recession, public health emergency, or significant geopolitical event. A reduction in automotive industry sales could adversely affect vehicle manufacturing, which could in turn have an adverse effect on our business and results of operations.

The automotive market accounted for approximately 15% of our net sales of SBQ products in 2023. Vehicle sales are affected by overall economic and market conditions, consumer behavior, and developing trends such as shared vehicle ownership and ridesharing services. A slowdown in automotive industry sales due to any of these factors could reduce the amount of vehicles manufactured, which could materially affect demand for the steel products we produce and sell. Any reduction in vehicles manufactured, including as a result of weaker demand, has had and could in the future have an adverse effect on our business and results of operations.

Our customers in the automotive industry continually seek to obtain price reductions from us, which may adversely affect our results of operations.

A challenge that we and other suppliers of intermediary products used in the manufacture of automobiles face is continued price reduction pressure from our customers in the automobile manufacturing business. Downward pricing pressure has been a characteristic of the automotive industry in recent years and it is migrating to all our vehicular markets. Virtually all automobile manufacturers have aggressive price reduction initiatives that they impose upon their suppliers, and such actions are expected to continue in the future. In the face of lower prices to customers, we must continue to reduce our operating costs in order to maintain profitability. We have taken and continue to take steps to reduce our operating costs to offset customer price reductions; however, price reductions are adversely affecting our profit margins and are expected to do so in the future. If we are unable to offset customer price reductions through improved operating efficiencies, new manufacturing processes, sourcing alternatives, technology enhancements and other cost reduction initiatives, or if we are unable to avoid price reductions from our customers, our results of operations could be adversely affected.

Risks Related to Mexico

Adverse economic conditions in Mexico may adversely affect our financial performance.

A substantial portion of our operations are conducted in Mexico and our business is affected by the performance of the Mexican economy. Mexico has historically experienced prolonged periods of economic crises, caused by internal and external factors over which we have no control. Such periods have been characterized by exchange rate instability, high inflation, high domestic interest rates, changes in oil prices, economic contraction, a reduction of international capital flows, balance of payment deficits, a reduction of liquidity in the banking sector and high unemployment rates. Decreases in the growth rate of the Mexican economy, periods of negative growth, or increases in inflation in Mexico could result in lower demand for our products. In recent years, the federal government of Mexico (the “Mexican Government”) cut spending in response to downward trends in international crude oil prices and it may do so again in the future. These cuts could adversely affect the Mexican economy and, consequently, our business, financial condition, operating results and prospects. We cannot assure you that economic conditions in Mexico will not worsen, or that those conditions will not have an adverse effect on our financial performance.

Political, social and other developments in Mexico could adversely affect our business and operations.

Political, social and other developments in Mexico may adversely affect our business. Social unrest, such as strikes, suspension of labor, demonstrations, acts of violence and terrorism in the Mexican states in which we operate could disrupt the operations of our facilities, which could have an adverse impact on our financial performance. The Mexican Government has exercised, and continues to exercise, significant influence over the Mexican economy. Accordingly, Mexican federal governmental actions and policies concerning the economy, the regulatory framework, the social or political context, and state-owned and stated controlled entities or industries could have a significant impact on private sector companies and on market conditions, prices and returns of Mexican securities. In the past, governmental actions have involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency devaluations, capital controls and limits on imports.

The recent change in Mexican Government administrations from president Andrés Manuel López Obrador to president Claudia Sheinbaum may result in political, social and other developments in Mexico that we cannot control. We cannot predict the impact that political developments in Mexico may have on the Mexican economy or in our industry, nor can we provide any assurances that these events, over which we have no control, will not have a material adverse effect on our business, results of operations and financial condition.

The Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy.

The Mexican Government has exercised, and continues to exercise, significant influence over the Mexican economy. Accordingly, Mexican Government actions and policies concerning the economy, state-owned enterprises and state controlled, funded or influenced financial institutions could have a significant impact on private sector entities in general and on us in particular, and on market conditions, prices and returns on securities of Mexican companies. The Mexican Government occasionally makes significant changes in policies and regulations, and may do so again in the future. Actions to control inflation and other regulations and policies have involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency devaluations, capital controls and limits on imports. Tax legislation in Mexico is subject to continuous change and we cannot assure you whether the Mexican government may maintain existing political, social, economic or other policies, or whether changes may have a material adverse effect on our financial performance.

Mexico has experienced a period of heightened criminal activity, which could affect our operations.

In recent years, Mexico has experienced a period of heightened criminal activity, primarily due to the activities of drug cartels and related criminal organizations. Such criminal activity has at times been directed at private companies and their employees, including companies’ industrial properties, including through extortion, theft from trucks or industrial sites, kidnapping and other forms of crime and violence. Criminal activity can lead to increased insurance and security costs, and higher losses stemming from theft and extortion. Furthermore, corruption and links between criminal organizations and authorities could affect our business operations. Criminal activity continues to exist in Mexico and is likely to continue. We cannot assure you that the levels of violent crime in Mexico, over which we have no control, will not have an adverse effect on Mexico’s economy and, as a result, on our operations and financial performance.

Exchange rate fluctuations could adversely affect our financial performance.

The Mexican peso has been subject to significant devaluations against the U.S. dollar in the past and may be subject to significant fluctuations in the future. Depreciations of the Mexican peso relative to the U.S. dollar decreases a portion of our revenues in U.S. dollar terms, as well as increases the cost of the raw materials we require for production and any debt obligations denominated in U.S. dollars. The Mexican Government does not currently restrict the ability of Mexican companies or individuals to convert Mexican pesos into U.S. dollars (except for certain restrictions related to cash transactions involving a U.S. dollar payment to a Mexican bank) or other currencies. However, severe devaluations or depreciations of the Mexican peso may result in governmental intervention to institute restrictive exchange control policies, as has occurred before in Mexico and other countries in Latin America. Accordingly, fluctuations in the value of the Mexican peso against other currencies, particularly the U.S. dollar, could have a material adverse effect on our business and financial condition. Currency fluctuations or restrictions on transfer of funds outside Mexico may also have an adverse effect on our financial performance, and could adversely affect the U.S. dollar value of the price of our Series B shares and the corresponding ADSs.

High interest rates in Mexico may increase our financing costs and negatively affect our business and operations.

Mexico has experienced, and may again experience, high real and nominal interest rates. Mexico also has, and is expected to continue to have, high real and nominal interest rates relative to the United States. Future changes by the Mexican Central Bank (Banco de México) may negatively impact the Mexican economy or the value of securities issued by Mexican companies, including as a result of any precipitous unwinding of investments in emerging markets, depreciations and increased volatility in the value of their currency and higher interest rates. In addition, if we incur peso-denominated debt in the future, it could be at high interest rates, which could increase our financing costs and adversely affect our business, financial condition and results of operations.

High inflation rates in Mexico may affect demand for our products and result in cost increases.

Mexico has in the past and may in the future experienced high annual rates of inflation. High inflation rates could adversely affect our business and results of operations by reducing consumer purchasing power, thereby adversely affecting demand for our products, increasing certain costs beyond levels that we could pass on our customers, and by decreasing the benefit to us of revenues earned if the inflation rate exceeds the growth in our pricing levels.

Economic and political developments in the United States and elsewhere may adversely affect Mexican economic policy and, in turn, our operations.

Economic conditions in Mexico are highly correlated with economic conditions in the United States due to the physical proximity and the high degree of economic activity between the two countries. As a result, political developments in the United States, including changes in the American administration and governmental policies, can also have an impact on the exchange rate between the U.S. dollar and the Mexican peso, economic conditions in Mexico and the global capital markets. In addition, because the Mexican economy is heavily influenced by the U.S. economy, policies that may be adopted by the U.S. government that are unfavorable to Mexico may adversely affect economic conditions in Mexico. The macroeconomic environment in which we operate is beyond our control and the future economic environment may be less favorable than in recent years. The risks associated with current and potential changes in the Mexican and United States political environment and economies are significant and could have an adverse effect on our financial condition and results of operations.

We are subject to Mexican and international anti-corruption, anti-bribery and anti-money laundering laws. Our failure to comply with these laws could result in penalties, which could harm our reputation and have an adverse effect on our business, results of operations and financial condition. 

Our business encompasses multiple jurisdictions and complex regulatory frameworks, including in relation to economic sanctions, anti-corruption and anti-money laundering matters. Laws and regulations in these areas are complex and constantly evolving and enforcement of them continues to increase. We are subject to the risk that our management, employees, contractors or any person doing business with us may (i) engage in fraudulent activity, corruption or bribery, (ii) circumvent or override our internal controls and procedures or (iii) misappropriate or manipulate our assets to our detriment. Further, we cannot ensure that these compliance policies and processes will prevent intentional, reckless or negligent acts committed by our management, employees, contractors or anyone doing business with us. Any failure—real or perceived—to comply with applicable governance or regulatory obligations by our management, employees, contractors or any person doing business could harm our reputation, limit our ability to obtain financing and otherwise have a material adverse effect on our business, financial condition and results of operations.

If we fail to comply with any applicable anti-corruption, anti-bribery or anti-money laundering laws, we and our management, employees, contractors or any person doing business with us may be subject to criminal, administrative or civil penalties and other measures, which could in turn have material adverse effects on our reputation, business, financial condition and results of operations. Any investigation of potential violations of anti-corruption, anti-bribery or anti-money laundering laws by governmental authorities in Mexico or other jurisdictions could result in an inability to prepare our consolidated financial statements in a timely manner and could adversely impact our reputation, limit our ability to access financial markets and adversely affect our ability to obtain contracts, assignments, permits and other government authorizations necessary to participate in our industry, which, in turn, could have adverse effects on our business, results of operations and financial condition.

Mexico has different corporate disclosure and accounting standards than those in the United States and other countries.

A principal objective of the securities laws of the United States, Mexico and other countries is to promote full and fair disclosure of all material corporate information, including accounting information. However, there may be different or less publicly available information about issuers of securities in Mexico than is regularly made available by public companies in countries with more highly developed capital markets, including the United States. The disclosure standards imposed by the Mexican Stock Exchange may be different than those imposed by securities exchanges in other countries or regions such as the United States. As a foreign private issuer, we are not subject to U.S. proxy rules and are exempt from certain reports under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”), as we are not required to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic reporting companies whose securities are registered under the Exchange Act. These exemptions and leniencies will reduce the frequency and scope of information and protections available to you in comparison to those applicable to a U.S. domestic reporting company.

Risks Related to Brazil

Brazilian political and economic conditions, and the Brazilian government’s economic and other policies, may negatively affect our business, operations and financial condition.

The Brazilian federal government’s economic policies may have important effects on companies that operate in Brazil, including us. The Brazilian government has often changed monetary, taxation, credit, tariff and other policies to influence the course of Brazil’s economy. The Brazilian government’s actions to control inflation and implement other policies have at times involved wage and price controls, blocking access to bank accounts, imposing capital controls and limiting imports into Brazil. Our results of operations and financial condition may be adversely affected by factors such as:

Risks Related to Ownership of our ADSs

We are a foreign private issuer under the rules and regulations of the SEC and are therefore exempt from a number of rules under the Exchange Act and are permitted to file less information with the SEC than a domestic U.S. reporting company, which reduces the level and amount of disclosure that you receive.

We are a foreign private issuer under the rules and regulations of the SEC and are therefore exempt from a number of rules under the Exchange Act and are permitted to file less information with the SEC than a domestic U.S. reporting company, which reduces the level and amount of disclosure that you receive.

As a foreign private issuer whose ADSs are listed on the NYSE American we are permitted to follow certain home country corporate governance practices instead of certain requirements of the NYSE American. Among other things, as a foreign private issuer we may also follow home country practice with regard to, the composition of the board of directors, director nomination procedure, compensation of officers and quorum at shareholders’ meetings. See Item 10.B “Memorandum and Articles of Association.

The market price of our ADSs has been, and may continue to be, highly volatile, and such volatility could cause the market price of our ADSs to decrease and could cause you to lose some or all of your investment in our ADSs.

The stock market in general and the market prices of the ADSs on NYSE American, in particular, are or will be subject to fluctuation, and changes in these prices may be unrelated to our operating performance. During the third quarter of 2024, the market price of our ADSs fluctuated from a high of $30.47 per ADS to a low of $26.00 per ADS, and the price of our ADSs continues to fluctuate. We anticipate that the market prices of our securities will continue to be subject to wide fluctuations. The market price of our securities may be subject to a number of factors, including:

These factors may materially and adversely affect the market price of our securities and result in substantial losses by our investors.

We cannot assure you that the ADSs will not be delisted from the NYSE American, which could negatively impact the price of the ADSs and our ability to access the capital markets.

We cannot assure you that the ADSs will not be delisted from the NYSE American, which could negatively impact the price of the ADSs and our ability to access capital markets.

The listing standards of the NYSE American provide that a company, in order to qualify for continued listing, must maintain a minimum share price of $1.00 and satisfy standards relative to minimum shareholders’ equity, minimum market value of publicly held shares and various additional requirements. If we fail to comply with all listing standards applicable to issuers listed on the NYSE American, the ADSs may be delisted. If the ADSs are delisted, it could reduce the price of the ADSs and the levels of liquidity available to our shareholders. In addition, the delisting of the ADSs could materially and adversely affect our access to the capital markets and any limitation on liquidity or reduction in the price of the ADSs could materially and adversely affect our ability to raise capital. Delisting from the NYSE American could also result in other negative consequences, including the potential loss of confidence by suppliers, customers and employees, the loss of institutional investor interest and fewer business development opportunities.

There can be no assurance that we will not be classified as a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes, which could result in adverse U.S. federal income tax consequences to U.S. investors in shares of our common stock or ADSs.

We will be classified as a PFIC in a particular taxable year if, after applying certain look-through rules, either (i) 75 percent or more of our gross income for the taxable year is passive income; or (ii) the average percentage of the value of our assets that produce or are held for the production of passive income is at least 50 percent. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from certain commodities transactions. Cash is generally considered a passive asset for these purposes. Goodwill is an active asset under the PFIC rules to the extent attributable to activities that produce active income.

Based on our audited financial statements and relevant market and shareholder data, we believe that we were not a PFIC for U.S. federal income tax purposes with respect to our 2022 and 2023 taxable years, and we do not expect to be a PFIC in the current taxable year or in the foreseeable future. However, whether we are a PFIC is a factual determination made annually after the close of the taxable year, and therefore may be subject to change depending, among other things, upon changes in the composition of our gross income and the relative quarterly average value of our assets. Because we hold a substantial amount of cash, we may be or become a PFIC for any taxable year if the value of our goodwill and other intangible assets that we believe should be treated as active assets are determined by reference to our market capitalization and our market capitalization fluctuates or declines considerably. Accordingly, there can be no assurance that we will not be a PFIC for any year in which a U.S. Holder, as defined in “Item 10.E. Additional Information—Taxation—Passive Foreign Investment Company Status,” holds series B shares or ADSs.

If we were to be or become classified as a PFIC for any taxable year during which a U.S. Holder owns the ADSs or series B shares, certain adverse U.S. federal income tax could apply to such U.S. Holder, including increased tax on disposition gains and certain excess distributions and additional reporting requirements. See “Item 10.E. Additional Information— Taxation— Passive Foreign Investment Company Status”.

Item 4. Information on the Company

A. History and Development of the Company

Overview

Our legal name is Grupo Simec, S.A.B. de C.V. and our commercial name for advertising and publicity purposes is Simec. We are a sociedad anónima bursátil de capital variable, organized under the laws of Mexico. We are domiciled in the city of Guadalajara, Jalisco, and our principal administrative office is located at Calzada Lázaro Cárdenas 601, Guadalajara, Jalisco, Mexico 44440. Our telephone number is +52-33-3770-6700 and our website is www.gsimec.com.mx. 

We are a diversified manufacturer, processor and distributor of SBQ steel and structural steel products with production and commercial operations in the United States, Mexico and Brazil. We believe that, in 2023, 2022 and 2021 we were an important producer of SBQ products in both the United States and Mexico, in each case in terms of shipped volume. We also believe that in 2023, 2022 and 2021, we were an important producer of structural and light structural steel products in Mexico in terms of shipped volume.

Our SBQ products are used across a broad range of highly-engineered end-user applications, including axles, hubs and crankshafts for automobiles and light trucks, machine tools and off-highway equipment. Our structural steel products are mainly used in the non-residential construction market and other construction applications.

We focus on the Mexican steel markets by providing high value-added products and services from our strategically-located plants. The quality of our products and services, together with cost benefits generated by our facility locations, has allowed us to develop long standing relationships with many of our SBQ clients, which include Mexico and U.S.-based automotive and industrial equipment manufacturers and their suppliers. In addition, our facilities located in the northwest and central parts of Mexico allow us to serve the structural steel and construction markets in those regions and southern California with an advantage in the cost of freight over competitors which do not have production facilities in such regions.

History

Our steel operations commenced in 1969 when a group of families from Guadalajara, Jalisco, formed Compañía Siderúrgica de Guadalajara, S.A. de C.V. (“CSG”), a mini-mill steel company. In 1980, Grupo Sidek, S.A. de C.V. (“Sidek”), our former parent company, was incorporated and became the holding company of CSG. In 1990, Sidek consolidated its steel and aluminum operations into a separate subsidiary, Grupo Simec, S.A. de C.V., a Mexican corporation with limited liability, organized under the laws of Mexico.

In March 2001, Sidek consummated the sale of its entire approximate 62% controlling interest in our company to Industrias CH. Industrias CH subsequently increased its equity position in us through various conversions of debt to equity and capital contributions and currently holds, together with its direct, wholly-owned subsidiaries, approximately 82.5% of our series B shares.

In August 2004, we acquired the Mexican steel-making facilities of Industrias Ferricas del Norte S.A. (Corporación Sidenor of Spain, or “Grupo Sidenor”) located in Apizaco, Tlaxcala and Cholula, Puebla. We refer to this acquisition as the “Atlax Acquisition.”

In July 2005, we and Industrias CH acquired 100% of the capital stock of Republic Steel (“Republic Steel” or “Republic”) a U.S. producer of SBQ steel. We acquired 50.2% of Republic’s stock through our majority owned subsidiary, SimRep, and Industrias CH purchased the remaining 49.8% through SimRep. Industrias CH currently owns 0.59% of the capital stock, and Grupo Simec the remaining 99.41%.

On May 30, 2008, we acquired Aceros DM and certain affiliated companies (“Grupo San”), a long products rebar, wire rod and wire products steel mini-mill and the second-largest corrugated rebar producer in Mexico. Grupo San’s operations are based in San Luis Potosí, Mexico.

On September 3, 2010, we formed a Brazilian entity denominated GV do Brazil Indústria e Comércio de Aço Ltda. On August 5, 2011, we acquired 1,300,000 square meters of land on Pindamonhangaba, São Paulo State, Brazil, for the construction of a new steel facility, which started operations in 2015.

On January 16, 2015, we entered into a cooperation agreement with the government of the state of Tlaxcala, Mexico, to build a new steel facility on land adjacent to our existing plant in Tlaxcala with a production capacity of 600,000 tons of bar quality steel (SBQ). We started steelmaking operations at this facility in July 2018.

On May 1, 2018, Grupo Simec, S.A.B de C.V. entered into a contract with Arcelor Mittal Brasil, S.A. for the acquisition of the steel products plants of Cariacica, in Espíritu Santo, and the transfer of the lease contract and subsequent purchase for the plant in Itauna, in Minas Gerais, both in Brazil. The production capacity of the Cariacica plant is 600,000 tons of liquid steel per year and 348,000 tons of rolled steel products per year and the production capacity of the Itauna plant is 120,000 tons of rolled steel products per year.

On January 1, 2019, Grupo Simec, S.A.B. de C.V. increased its equity position to 99.41% in SimRep Corporation, by acquiring 83,862 ordinary shares, priced at U.S.$3.454 each, as repayment of outstanding debt, for a total subscription of U.S.$290 million.

On June 11, 2021, CHQ Wire México, S.A. de C.V. (formerly Malla San 1, S.A. de C.V.) purchased the fixed assets of a wire production plant in Silao, Guanajuato.

In 2021, Republic signed a turnkey contract with GV Do Brasil for the construction of a plant in Pindamonhangaba. In June 2021, Republic also signed a turnkey contract with Companhia Siderúrgica do Espírito Santo for the construction of a rolling mill.

In August 2023, Republic Steel announced the closure of its steelmaking operations in Canton, Solon, Massillon Ohio and Lackawanna, New York effective September 2023, indefinitely due to various economic factors, including deteriorating market conditions and operational costs. Republic Steel will continue servicing its customers from its plant in Tlaxcala, Mexico. For this reason, management has determined that its long-lived assets at such facilities may not be fully recoverable. SIMEC’s management performed an analysis of the fair value of the four facilities with the assistance of an independent valuation firm and determined the net book value exceeded the fair value by approximately U.S.$130.7 million (Ps. 2,701 million) and as such recognized an asset impairment of this amount during the year ended December 31, 2015.

On October 30, 2024, fatalities occurred at one of our steel plants located in Apizaco, Tlaxcala, in connection with a liquid steel spill at the plant. Immediate actions were taken to contain the situation and ensure the safety of our employees and surrounding areas. As of the date of this filing, we remain in constant communication with the families of the deceased employees and are actively working to reach fair and timely compensation. The investigation into the incident is ongoing, and due to the recent nature of the event, we are unable to determine at this time the extent of potential exposure to governmental sanctions or whether such sanctions, if any, would be material. Additionally, we are assessing the extent of the damage caused by the incident, as well as the necessary work and investments required to restore the affected assets to full operational functionality. 

Principal Capital Expenditures

We continually seek to improve our operating efficiency and increase sales of our products through capital investments in new equipment and technology. These capital expenditures are financed primarily with funds that we segregate monthly from the results of operations generated by each facility.

We currently estimate capital expenditures for the year 2024 will be approximately Ps. 4,512 million (U.S.$ 267.1 million), which consists of Ps. 477.8 million (U.S.$ 28.3 million) of estimated capital expenditures in our facilities in Mexico and Ps. 4,034.2 million (U.S.$238.8 million) consisting of capital expenditures in our facilities in Brazil. This estimate is subject to uncertainty and actual capital expenditures in 2024 may differ significantly from such estimate.

In 2023, our capital expenditures amounted to approximately Ps. 2,851.7 million (U.S.$158.4 million), which consisted of Ps. 799.7 million (U.S.$44.4 million) of estimated capital expenditures in our facilities in Mexico and Ps. 2,052.0 million (U.S.$114.0 million) consisting of capital expenditures in our facilities in Brazil.

In 2022, our capital expenditures amounted to approximately Ps. 1,591.3 million (U.S.$ 82.2 million), which consisted of Ps. 187.2 million (U.S.$9.7 million) on capital improvements at our facilities in Mexico and Ps. 1,404.1 million (U.S.$72.5 million) on capital investments at our steel facilities in Brazil.

In 2021, our capital expenditures amounted to approximately Ps. 1,198.7 million (U.S.$ 58.14 million), which consisted of Ps. 1,079.6 million (U.S.$52.6 million) on capital improvements at our facilities in Mexico and Ps. 119.1 million (U.S.$5.54 million) on capital investments at our steel facilities in the United States.

B. Business Overview

Prior to our United States steel facility closures in August 2023, we owned and operated 19 state-of-the-art steelmaking, processing and/or finishing facilities in the United States, Mexico, and Brazil. Although we continue to own all of our plants, including those in the United States, we no longer operate our United States facilities and currently operate 12 steelmaking, processing, and finishing facilities with a combined annual crude steel installed production capacity of 4.2 million tons and a combined annual installed rolling capacity of 4.6 million tons. We own both mini-mill and integrated steelmaking facilities, allowing us to optimize production and reduce costs based on the relative prices of raw materials (e.g., scrap for mini-mills and iron ore for blast furnaces). 

We currently own and operate:

We report results in three segments: Mexico, United States and Brazil. In light of the closure of our Republic Steel plants, our reporting in future years may exclude operations in the United States.

Business Strategy

We seek to further consolidate our position as a leading producer, processor and distributor of SBQ steel in North America, structural steel and rebar in Mexico and rebar in Brazil. We also seek to expand our presence in the steel industry by identifying and pursuing growth opportunities and value enhancing initiatives. Our strategy includes:

Improving our cost structure.

We are continually working to reduce our operating costs and non-operating expenses and plan to continue to do so by reducing overhead expenses and operating costs through sharing best practices among our operating facilities and maintaining a conservative capital structure.

Focusing on high margin and value-added products.

We prioritize the production of high margin steel products over volume and utilization levels. We plan to continue to base our production decisions on achieving relatively high margins.

Building on our strong customer relationships.

We intend to strengthen our long-standing customer relationships by maintaining strong customer service and proactively responding to changing customer needs.

Pursuing strategic growth opportunities.

We have successfully grown our business by acquiring, integrating and improving under-performing operations. In addition, we intend to continue to pursue acquisition opportunities that will allow for disciplined growth of our business and value creation for our shareholders. We also intend to pursue organic growth by reinvesting the cash generated by our operating activities to expand the capacity and increase the efficiency of our existing facilities.

Our Products

We produce a wide range of value-added SBQ steel, long-steel and medium-sized structural steel products. In our Mexican facilities, we produce I-beams, channels, structural and commercial angles, hot rolled bars (round, square and hexagonals), flat bars, rebars, cold finished bars, wire rods and wire products. In our U.S. facilities, we produced hot rolled bars, cold finished bars, and other semi-finished trade products. In our Brazil facilities, we produce rebars, I-beams, channels, structural and commercial angles. The following is a description of these products and their main uses:

The following table sets forth, for the periods indicated, our sales volume for basic steel products.

Sales Volume by Steel Product

Sales and Distribution

We sell and distribute our steel products in Mexico, the United States, Brazil and Canada. We also export steel products from Mexico to Central and South America and Europe. In 2023, approximately 15% of our steel product sales in tons represented SBQ steel products, of which we sold 56% to the auto part industry, 29% to service centers and the remaining 15% to other industries.

In 2023, direct sales in tons to the automotive industry decreased by 12% compared to 2022. In 2022, direct sales in tons to the automotive industry decreased by 13% compared to 2021.

The following table sets forth, for the periods indicated, our product sales as a percentage of our total product sales in tons to Mexico, and to the U.S., Canada, and Brazil and other countries.

Steel Product Sales By Region

During 2023, approximately 55.3% of our sales volume came from the Mexico segment, approximately 40.9% came from the Brazil segment and approximately 3.8% came from the U.S. segment. In 2023, SBQ products represented 28.0%, 0% and 100% of the Mexico, Brazil and U.S. segments, respectively.

We sell to the Mexican market through a group of approximately 100 independent distributors, who also carry other steel companies’ product lines, and through our wholly-owned distribution center in Guadalajara. Our sales force and distribution center are an important source of information concerning customer needs and market developments. By working through our distributors, we believe that we have established and can maintain market leadership with small-and mid-market end-users throughout Mexico. We believe that our domestic customers are highly service-conscious.

A significant portion of our sales in the United States and Canada markets came from contractual long-term agreements that establish minimum quantities and prices, which are adjustable based on fluctuations of prices of key production materials. The remainder of our sales in the United States and Canada markets were spot sales either directly to end customers through our sales force or through independent distributors. We sell to customers in the United States and Canada markets through a staff of professional sales representatives and sales technicians located in the major manufacturing centers of the Great Lakes region of the United States.

We distribute our exports outside North America primarily through independent distributors who also carry other product lines.

During 2023 and 2022, we received orders for our products in our Mexican facilities on average approximately two weeks before producing those products. We generally filled orders for our U.S. and Canada SBQ steel products within one to 12 weeks of the order depending on the product, customer needs and other production requirements. Customer orders are generally cancelable without penalty prior to finishing size rolling and depending on customers’ changing production schedules. Accordingly, we do not believe that backlog is a significant factor in our business. A substantial portion of our production is ordered by our customers prior to production.

In our Republic Steel plants, we had long-term relationships with most of our major customers, in some cases lasting 10 to 20 years or more. Our major direct and indirect customers spanned numerous market sectors, including automotive, manufacturing, industrial equipment, and defense.

Our U.S. facilities were strategically located to serve the majority of consumers of SBQ products in the United States. These facilities shipped products between mills and delivered finished goods to customers by rail and truck. Customer needs and location determined the type of transportation used for deliveries. The proximity of our rolling mills and cold finishing plants to our U.S. customers allowed us to offer competitive rail and truck freight rates and flexible deliveries to meet just-in-time and other customer manufacturing requirements.

We believed that meeting our customers’ product delivery requirements in a timely and flexible manner was key to attracting and retaining them, especially as more SBQ product consumers reduced their in-plant raw material inventory. We optimized freight costs by leveraging our greater operational scale to maintain favorable transportation arrangements, combining orders in shipments whenever possible, and “backhauling” scrap and other raw materials.

Our first plant in Brazil began production in June 2015 with 30,000 tons and 4,000 tons sold in the same year, all of which correspond to rebar. Sales have increased since 2015, and by consolidating the expansion within the Brazilian territory, we have reached sales of approximately 890,000 tons for 2023, increasing the variety of products offered in the market. Our main objective is to sell our products through independent distributors, aimed at the construction market by providing the highest quality service and products, a key factor in attracting and retaining customers. Our sales policy in Brazil has been well accepted by our customers, and our sales increased steadily, creating an opportunity in the Brazilian steel market. Our steel production increased 7% in 2023 compared with 2022.

Our major customers in 2023 include: Pires Do Rio Cibraco Comercio e Industria de Ferro e Aco, Ltda, Marson Distribuicao, Ltda, Aco e Aco Vergalhoes Ltda, Udiaco Comercio e Industria de Ferro e Aco Ltda, Aco Fera Com Ferro e Aco Ltda, Cedisa Central de Aco, S.A., Menetoni Distribuidora de Productos Siderurgicos Importacao e Exportacao, LTDA., Ferragens Santa Monica, LTDA., Brametal, S.A., Automolas Equipamentos, LTDA., Fachchini, S.A., VK Industria de Molas e Grampos, LTDA.,Mattheis Borg Adm Part Com Ind, LTDA., Konesul Ind Com, LTDA., RDG Acos Do Brasil, S.A., Aam North America Inc., Mahle Componentes de Motor de Mexico, S. de R.L. de C.V., Rassini Suspensiones, S.A. de C.V. Weg Mexico, S.A. de C.V., Thyssenkrupp Presta de Mexico, S.A. de C.V., Thyssenkrupp Metalurgica de Mexico, S.A. de C.V., Hendrickson Spring Mexico, S.A. de C.V. and Dana Automotive Manufacturing Inc.

Competition

Competition in the steel industry is significant. Competition in the steel industry also exerts a downward pressure on prices, and, due to high start-up costs, the economics of operating a steel mill on a continuous basis may encourage mill operators to establish and maintain high levels of output even in times of low demand, which further decreases prices and profit margins. The recent trend of consolidation in the global steel industry may further increase competitive pressures on independent producers of our size, particularly if large steel producers formed through consolidations, which have access to greater resources than us, adopt predatory pricing strategies that decrease prices and profit margins. If we are unable to remain competitive with these producers, our profitability and market share would likely be materially and adversely affected.

A number of our competitors in the Mexico, Brazil and the United States have undertaken modernization and expansion plans, including the installation of production facilities and manufacturing capacity for certain products that compete with our products. As these producers become more efficient, we will face increased competition from them and may experience a loss of market share. In each of Mexico, Brazil and the United States we also face competition from international steel producers. Increased international competition, especially when combined with excess production capacity, would likely force us to lower our prices or to offer increased services at a higher cost to us, which could materially reduce our profit margins.

Mexico

We compete in the Mexican domestic market and in its export markets for long steel products primarily on the basis of price and product quality. In addition, we compete in the domestic market based upon our responsiveness to customer delivery requirements. The flexibility of our production facilities allows us to respond quickly to the demand for our products. We also believe that the geographic locations of our various facilities throughout Mexico and variety of products help us maintain our competitive market position in Mexico and in the southwestern United States. We believe that our Mexicali mini-mill, one of the closest mini-mills to the southern California market, is competitive in terms of production and transportation costs in northwestern Mexico and southern California.

We believe that our competitors’ closest plants to the southern California market are: Nucor Corporation, located in Plymouth, Utah; Commercial Metals Company, located in Meza, Arizona; Thyssenkrupp Steel North America, Inc., located in Santa Fe Springs, California; Deacero, S.A. de C.V. (“Deacero”), located in Saltillo, Coahuila, México and Gerdau Corsa, S.A.P.I. de C.V. (“Gerdau Corsa”), located in Tijuana, Baja California, Mexico. We believe that we have an advantage over certain competitors due to the labor cost in our Mexican operations.

In 2023, we sold approximately 267,778 tons of I-beams, channels and angles at least three inches in width, which represented approximately 12.3% of our total finished product sales for the year. In 2022, we sold approximately 266,840 tons of I-beams, channels and angles at least three inches in width, which represented approximately 11.8% of our total finished product sales for the year. In 2021, we sold approximately 275,545 tons of I-beams, channels and angles at least three inches in width which represented approximately 11% of our total finished product sales for the year.

We believe that the domestic competitors in the Mexican market for structural steel are Gerdau Corsa, Deacero, Grupo Acerero, S.A. de C.V., Grupo Collado, S.A. de C.V. and Siderúrgica del Golfo, S.A. de C.V. (a wholly-owned subsidiary of Industrias CH). We estimate that our share of Mexican production of structural steel was 14.8% in 2021, 12.7% in 2022 and 11.0% in 2023, according to information provided by Mexico’s Cámara Nacional de la Industria del Hierro y del Acero (CANACERO).

In 2023, we sold approximately 498,959 tons of hot rolled and cold finished steel bars compared to 626,864 tons in 2022. Our other major product lines are rebar and light structural steel (angles less than three inches in width and flat bar), for which our share of domestic production was 15.0% and 13.0%, respectively, in 2023 and 12.8% and 16.6%, respectively, in 2022 and 14.3% and 16.1%, respectively, in 2021.

Rebar and light structural steel together accounted for approximately 1,397,000 tons, or 64.19%, of our total production of finished steel products in Mexico, Brazil and the United States in 2023.

We compete in the Mexican market with a number of producers of these products, including Deacero, Talleres y Aceros, S.A., Grupo Acerero, S.A. de C.V., ArcelorMittal Lázaro Cárdenas, S.A. de C.V., Ternium Mexico, S.A. de C.V., Grupo Acerero Fonderia, Suacero, S.A. de C.V. and Gerdau Corsa., and CMC Metals.

We believe that we have been able to maintain our domestic market share and profitable pricing levels in Mexico in part because the central Mexico sites of the Guadalajara, Apizaco, Cholula and San Luis facilities afford us cost advantages relative to certain U.S. producers when shipping to customers in central and southern Mexico. Furthermore, our flexible production facility has given us the ability to ship specialty products in relatively small quantities with short lead times. The Mexicali mini-mill has helped to increase sales in northwestern Mexico and the southwestern United States because its proximity to these areas reduces our freight costs.

United States

In the United States, we compete primarily with both domestic SBQ steel producers and importers. Our U.S. domestic competition for hot-rolled engineered bar products is both large U.S. domestic steelmakers and specialized mini-mills. Non-U.S. competition may impact segments of the SBQ market, particularly where certifications are not required, and during periods when the U.S. dollar is strong compared with foreign currencies.

The principal areas of competition in our markets are product quality and range, delivery reliability, service and price. Special chemistry and precise processing requirements characterize SBQ steel products. Maintaining high standards of product quality, while keeping production costs low, is essential to our ability to compete in our markets. The ability of a manufacturer to respond quickly to customer orders currently is, and is expected to remain, important as customers continue to reduce their in-plant raw material inventory.

We believe our principal competitors in the United States, depending on the product, include Nucor, Corporation, Charter Steel, Steel Dynamics, Cascade Rolling Mills, Commercial Metals Company, Vinton Steel and Gerdau.

In August 2023, Republic Steel announced the closure of its steelmaking operations in Canton, Solon, Massillon Ohio and Lackawanna, New York effective September 2023, indefinitely due to various economic factors, including deteriorating market conditions and operational costs.

Republic Steel’s operations accounted for approximately 15% of our total revenues in 2021, 11% in 2022 and 6% in 2023. Republic Steel’s steel production accounted for approximately 11% of our total steel production in 2021, 8% in 2022 and 3% in 2023.

Brazil

The Brazilian steel industry is comprised of 12 business groups operating 31 mills in 10 Brazilian states, making Brazil the 9th largest producer in the world.

Our main competitors in the Brazilian market are ArcelorMittal Brazil, CSN, Gerdau, Sinobras, Usiminas, Ternium Do Brasil, Vallourec and Villares Metals.

We compete in the Brazilian domestic market for long steel products primarily based on price and product quality. Additionally, we differentiate ourselves through our ability to meet customer delivery requirements. The flexibility of our production facilities enables us to quickly respond to fluctuations in product demand. The growing needs of Brazil, along with our diverse product range, help us maintain a strong competitive position in the Brazilian market.

Certifications

ISO is a worldwide federation of national standards bodies which have united to develop internationally accepted standards so that customers and manufacturers have a system in place to provide a product of known quality and standards. The standards set by ISO cover every aspect of quality from management responsibility to service and delivery. We believe that adhering to the stringent ISO procedures not only creates efficiency in manufacturing operations, but also positions us to meet the strict standards that our customers require. We are engaged in a total quality program designed to improve customer service, overall personnel qualifications and team work. The facilities at Apizaco and Cholula have received ISO/TS 16949:2009 certification from International Quality Certifications, effective until September, 2024.

All of Republic Steel’s plants are certified to ISO9001:2015 and IATF16949:2016. Our plants in Canton, Ohio, Lackawanna, New York, and Massillon, Ohio, are certified to IATF16949, effective until January 2024. The plant in Solon, Ohio, is certified to ISO 9001:2015, and the current certification is effective until January 2024. The IATF 16949:2016 standard, developed by the International Automotive Task Force, is the result of the harmonization of the supplier quality requirements of vehicle manufacturers worldwide and provides for a single quality management system of continuous improvement, defect prevention and reduction of variation and waste in the supply chain. It places greater emphasis on management’s commitment to quality and customer focus. ISO 9001 is a set of international quality control standards for management and practices.

Prior to the Republic Steel plant closures, Republic’s Environmental, Health & Safety Management System was structured upon training, communication, employee participation, document control, objective and target setting, and management’s periodic reviews to implement our commitments to environmental protection and providing a safe and clean workplace.

Raw Materials

Prices for raw materials necessary for production of our steel products have fluctuated significantly in the past and significant increases in raw material prices could adversely affect our profit margins. During periods when prices for scrap metal, iron ore, ferroalloys, coking coal and other raw materials have increased, our industry has historically sought to maintain profit margins by passing along increased raw materials costs to customers by means of price increases. For example, prices of scrap metal increased 62% in 2021, increased 0.5% in 2022 and decreased by 19.6% in 2023, and prices of ferroalloys increased 32.9% in 2021, increased 36.4% in 2022 and decreased 30.8% in 2023. We may not be able to pass along these and other cost increases in the future and even when we can successfully increase our prices, interim reductions in profit margins frequently occur due to a time lag between the increase in raw material prices and the market acceptance of higher selling prices for finished steel products.

We purchase our raw material requirements either in the open market or from certain key suppliers. If any of our key suppliers fails to deliver or we fail to renew our supply contracts, we could face limited access to some raw materials, or higher costs and delays resulting from the need to obtain our raw materials requirements from other suppliers.

In 2023, our cost of sales in Mexico, as a percentage of sales in Mexico, was 72%, compared to 141% in the U.S. and 70% in Brazil. Our consolidated cost of sales, as a percentage of consolidated sales, was 76%. The higher cost of sales of facilities is mainly a result of higher labor costs prevailing in our U.S. operations, and the higher costs of the raw materials that our U.S. operations use in the production of SBQ steel.

Scrap metal, electricity, ferroalloys, electrodes and refractory products are the principal materials that we use to manufacture our steel products.

Scrap metal. Scrap metal is among the most important components for our steel production and accounted for approximately 61.0% of our consolidated manufacturing conversion cost in 2023 (60% of the manufacturing conversion cost in our Mexico operations, 34% of the manufacturing conversion cost in our U.S. operations and 63% in our Brazil operations). Scrap metal accounted for 60.5% of our consolidated manufacturing conversion cost in 2022 (62% of the manufacturing conversion cost in our Mexico operations, 31% of the manufacturing conversion cost in our U.S. operations and 66% in our Brazil operations), compared to 70% of our consolidated manufacturing conversion cost in 2021 (67% of the manufacturing conversion cost in our Mexico operations, 43% of the manufacturing conversion cost in our U.S. operations and 72% in our Brazil operations). Scrap metal is principally generated from automobile, industrial, naval and railroad industries. The market for scrap metal is influenced by availability, freight costs, speculation by scrap brokers and other conditions largely beyond our control. Fluctuations in scrap costs directly influence the cost of sales of finished goods.

We purchase raw scrap from dealers in Mexico and the San Diego area, and we process the raw scrap into refined scrap metal at our Guadalajara, San Luis, Mexicali and Apizaco facilities. We meet our refined scrap metal requirements through: (i) our wholly-owned scrap processing facilities, which in the aggregate provided us with approximately 13.8% and 11.5% of our refined scrap tonnage in 2023 and 2022, respectively, and (ii) purchases from third party scrap processors in Mexico and the southwestern United States, which, in the aggregate, provided us with approximately 85.1% and 1.2 of our refined scrap tonnage, respectively, in 2023 and approximately 87.3% and 1.2%, respectively, in 2022. We are a large scrap collector in the Mexicali, Tijuana and Hermosillo regions, and, by primarily dealing directly with small Mexican scrap collectors, we believe we have been able to purchase scrap at prices lower than those in the international and Mexican markets. We purchase scrap on the open market through a number of brokers or directly from scrap dealers for our U.S. facilities. We purchase scrap on the open market through a number of brokers or directly from scrap dealers for our Brazil facilities. We do not depend on any single scrap supplier to meet our scrap requirements.

Ferroalloys, Electrodes and Refractory Products.

Ferroalloys, electrodes and refractory products collectively accounted for i) approximately 13% of our manufacturing conversion cost in 2023 in our Mexican operations, compared to 14% in 2022, ii) 25% of our manufacturing conversion cost in 2023, compared to 19% in 2022 for our U.S. and Canada operations and iii) 10% of our manufacturing conversion cost in 2023 compared to 9% in 2022 in our Brazil facilities.

Ferroalloys are essential for the production of steel and are added to the steel during manufacturing process to reduce undesirable elements and to enhance its hardness, durability and resistance to friction and abrasion. For our Mexican operations, we buy most of our manganese ferroalloys from Compañía Minera Autlán, S.A., Autlán Metal Services, S.A. de C.V., Elmet, S.A. de C.V., Marco Metales de Mexico, S. de R.L. de C.V., Metaloides, S.A. de C.V., Micro Abrasivos, S.A. de C.V.and Distribuidora de Aleaciones y Metales, S.A. de C.V. Our U.S. facilities purchase most of their ferroalloys from Affival Inc., Kennecott Molybdenum Company, Vale Americas Inc., Minerais U.S. LLC, Greenwich Metals Inc. and BPI Inc. Our Brazil facilities purchase most of their ferroalloys from Multiligas Eireli. Ltda, Comercial Cometa Industria y Comercio Ltda., Fertileg Ferro Liga Ltda, Granha Ligas Ltda., and Cia de Ferro Ligas de Bahia Ferbasa.

For our Mexican operations, we obtain electrodes used to melt raw materials (scrap metal) from Jilin Carbon Co. Ltd., Interfer Edelsthal H. Mbh, Duracarbon Latinoamerica LCC, FRC Global Inc, CNBM International Corp, Dalian Xihua Refractories Materials Co., and HEG Limited. Our U.S. facilities purchase most of their electrodes from Sangraf International and Starex Inc. Our Brazil facilities purchase most of their electrodes from Jilin Carbon Import Cimm Group Co. Ltd and Export Company and Dura Carbon Singapur.

Refractory products include firebricks, which line and insulate furnaces, ladles and other transfer vessels. We purchase our refractory products for our Mexican operations from Vesuvius de México, S.A. de C.V., Magnesita Refractories México, S.A. de C.V., Magna Refractarios México, S.A. de C.V., FRC Global Inc, Puyang Refractories group Co. Ltd. Kumas, Manyezit Sanayi A.S., Calderys France S.A.S., and Rectix Materiales Refractarios, S.A. de C.V.. Our U.S. facilities purchase most of their refractory products from RHI US, Inc., Vesuvius USA, Corp., Magna a Division of Timab, Vibrantz Minerias LLC, Harbison-Walker Refractories Company and FRC Global Inc. Our Brazil facilities purchase most of their refractory products from Magnesitas Navarrasm S.A., Vesivius and Magnesita Refractaries Mexico S.A. de C.V.

Electricity. In 2023, 2022 and 2021, electricity accounted for approximately 9%, 8% and 7% of our consolidated manufacturing conversion cost, respectively. Electricity accounted for 9%, 7% and 7% in 2023, 2022 and 2021, respectively, of our manufacturing conversion in our Mexico facilities and is supplied by CFE for basic service and Iberdrola for qualified service. Electricity also accounted for 11%, 9% and 4% of the manufacturing conversion cost in our U.S. operations in 2023, 2022, and 2021, respectively, and is supplied by American Electric Power Company, Archer Energy, National Grid, The Illumination Company, New York Power and Ohio Edison. It accounted for 7%, 5% and 8% in 2023, 2022 and 2021, respectively, of the manufacturing conversion cost in our Brazil operations, where it is supplied by Ecom Energia Ltda., Comercializadora de Energiaeletrica Ltda. and Comerc Ltda. We, like most high-volume users of electricity in Mexico, pay special rates to CFE for electricity. Energy prices in Mexico have historically been very volatile and subject to dramatic price increases in short periods of time. In the late 1990s, the CFE began to charge for electricity usage based on the time of use during the day and the season (summer or winter). As a result, we have modified our production schedule in order to reduce electricity costs by limiting production during periods when peak rates are in effect. We cannot assure that any future cost increases will not have a material adverse effect on our business.

Natural Gas. Natural gas (including “combustoleo” fuel oil which is an oil derivative that is less refined than gasoline and diesel fuel oil that can be used instead of gasoline in our Mexicali plant) consisted of approximately 3% of our consolidated manufacturing conversion cost (2% of the manufacturing conversion cost of our Mexican operations, 3% of the manufacturing conversion cost of our U.S. operations and 4% of our Brazil operations) in 2023 and approximately 5% of our consolidated manufacturing conversion cost (3% of the manufacturing conversion cost of our Mexican operations, 6% of the manufacturing conversion cost of our U.S. operations and 4% of our Brazil operations) in 2022. In previous years we have entered into natural gas cash-flow exchange contracts or swaps where we receive a floating price and pay a fixed price to hedge our risk of from fluctuations in natural gas prices. Fluctuations in natural gas prices from volume consumed are recognized as part of our operating costs. As applicable, we recognized the fair value of instruments either as liabilities or assets. We periodically evaluated the changes in the cash flows of derivative instruments to analyze if the swaps are highly effective for mitigating the exposure to natural gas price fluctuations. At December 31, 2023, 2022 and 2021, we did not have natural gas cash-flow exchange contracts or swaps. For the derivatives that qualified for hedge accounting, their fair value was adjusted through the stockholders’ equity under the caption fair value of derivative financial instruments until such time as the related item in the derivative hedges is recognized as income.

We do not enter into contracts for speculation purposes.

Regulation

Mexican Operations

We are subject to Mexican federal, state and municipal laws, administrative regulations and Mexican Official Rules (Normas Oficiales Mexicanas) relating to a variety of environmental matters, anti-trust matters, trade regulations, and tax and employee matters.

Among other matters, Mexican tax returns are open for review generally for a period of five years, and, according to Mexican tax law, the purchaser of a business may become jointly and severally liable for unpaid tax liabilities of the business prior to its acquisition, which may have an impact on the liabilities and contingencies derived from any such acquisitions. Although we believe that we are in compliance with all material Mexican federal, state and municipal laws, administrative regulations and Mexican Official Rules, we cannot assure you that the interpretation of the Mexican authorities of the laws and regulations affecting our business or the enforcement thereof will not change in a manner that could increase our costs of doing business or could have a material adverse effect on our business, results of operations, financial condition or prospects.

Environmental Matters

We are subject to various Mexican federal, state and municipal laws, administrative regulations and Mexican Official Rules relating to the protection of human health, the environment and natural resources.

The major federal environmental laws applicable to our operations, among others, are

The General Law on Environmental Protection, the General Law on Waste Management and the Federal Law on Environmental Responsibility are administered by the Ministry of the Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales or the “Ministry of the Environment”) and enforced by the Federal Attorney’s Office for the Protection of the Environment (Procuraduría Federal de Protección al Ambiente or “PROFEPA”). The National Waters law is also administered by the Ministry of the Environment and is enforced by the National Waters Commission (Comisión Nacional de Agua or “CONAGUA”).

In addition to the foregoing, Mexican Official Rules, which are technical standards issued by applicable regulatory authorities pursuant to the General Normalization Law (Ley General de Metrología y Normalización) and to other laws that include the environmental laws described above, establish standards relating to air emissions, waste water discharges, the generation, handling and disposal of hazardous wastes and noise control, among others. Mexican Official Rules regarding soil contamination and waste management were enacted in order to protect these potential contingencies. Although not enforceable, the internal administrative criteria on soil contamination established by PROFEPA is widely used as guidance in cases where soil remediation, restoration or clean-up is required.

The General Law on Environmental Protection sets forth the legal framework applicable to the generation and handling of hazardous wastes and materials, the release of contaminants into the air, soil and water, as well as the environmental impact assessment of the construction, development and operation of different projects, sites, facilities and industrial plants similar to the ones owned and/or operated by us and our subsidiaries. In addition, the General Law on Waste Management regulates the generation, handling, transportation, storage and final disposal of hazardous waste.

The General Law on Environmental Protection also mandates that companies that contaminate soil be responsible for the clean-up. Furthermore, the General Law on Waste Management provides that owners and lessors of real property with soil contamination are jointly and severally liable for the remediation of such contaminated sites, irrespective of any recourse or other actions such owners and lessors may have against the contaminating party, and aside from the criminal or administrative liability to which the contaminating party may be subject. The General Law on Waste Management also restricts the transfer of contaminated sites.

PROFEPA can bring administrative, civil and criminal proceedings against companies that violate environmental laws, regulations and Mexican Official Rules, and has the power to impose a variety of sanctions. These sanctions may include, among others, monetary fines, revocation of authorizations, concessions, licenses, permits or registries, administrative arrests, seizure of contaminating equipment, and in certain cases, temporary or permanent closure of facilities.

Additionally, as part of its inspection authority, PROFEPA is entitled to periodically visit the facilities of companies whose activities are regulated by Mexican environmental legislation, and verify compliance. Similar rights are granted to state environmental authorities pursuant to applicable state environmental laws.

Companies in Mexico are required to obtain proper authorizations, concessions, licenses, permits and registrations from competent environmental authorities for the performance of activities that may have an impact on the environment or may constitute a source of contamination. Such companies in Mexico are also required to comply with a variety of reporting obligations that include, among others, providing PROFEPA and the Ministry of the Environment with periodic reports regarding compliance with various environmental laws. Among other permits, the operations and related activities of the steel industry are subject to the prior obtainment of an environmental impact authorization granted by the Ministry of the Environment.

We believe that we have obtained all the necessary authorizations, concessions, general operating licenses, permits and registries from the applicable environmental authorities to duly operate our facilities, plants and sites, and sell our products and that we are in material compliance with applicable environmental legislation. We, through our subsidiaries, have made significant capital investments to assure our production and operation facilities comply with requirements of federal, state and municipal law and administrative regulation, and to remain in compliance with our current authorizations, concessions, licenses, permits and registries.

Mexican environmental laws and administrative regulations have become increasingly stringent over the last decade, and this trend is likely to continue, influenced recently by the North American Agreement on Environmental Cooperation entered into by Mexico, the United States and Canada in connection with the USMCA. In this regard, any obligation to remedy environmental damages caused by us or any contaminated sites owned or leased by us could require significant unplanned capital expenditures and be materially adverse to our financial condition and results of operations.

Water

The National Waters Law regulates water resources in Mexico. In addition, the Mexican Official Rules govern water quality standards. A concession granted by CONAGUA is required for the use and exploitation of national waters. Some of our facilities in Mexico have renewable concessions to use and exploit underground waters from wells in order to meet the water requirements of our production processes. We pay CONAGUA duties per cubic meter of water extracted under our concessions. We believe we are in substantial compliance with all the requirements imposed by each of the concessions we have obtained.

Pursuant to the National Waters Law, companies that discharge waste into national water bodies must comply with certain requirements, including maximum permissible contamination or pollution levels. Periodic reports on water quality must be provided by dischargers to applicable authorities. Liability may result from the contamination of underground waters or recipient water bodies. We believe that we are in substantial compliance with all water and waste water legislation applicable to us.

Antitrust Matters

We are also subject to the Mexican Antitrust Law (Ley Federal de Competencia Económica), which regulates monopolies and monopolistic practices in Mexico and requires Mexican Government approval of certain mergers, acquisitions and joint ventures. We believe that we are currently in material compliance with the Mexican Antitrust Law. However, due to our growth strategy of acquiring new businesses and assets and because we are a large manufacturer with a significant share of the markets in Mexico with respect to certain of our products, we may be subject to greater regulatory scrutiny in the future.

Measurements Law

Mexico’s Ministry of the Economy (Secretaría de Economía), through the General Rules Department (Dirección General de Normas or “DGN”), promulgates regulations regarding many products that we manufacture. Specifically, pursuant to the Measurements Law (Ley Federal sobre Metrología y Normalización), the DGN issues specifications on the quality and safety standards for our product lines. We believe that all our products are in material compliance with all applicable DGN regulations.

United States

Our operations in the United States are subject to U.S. federal, state and local environmental laws and administrative regulations concerning, among other things, the management of hazardous materials and the discharge of pollutants to the atmosphere and to surface waters. Our U.S. operations have been the subject of administrative action by federal, state (or provincial) and local environmental authorities. The resolution of any of these claims may result in significant liabilities. See “Item 3—Key Information—Risk Factors—Risks Related to the Global Economy and Our Business—In the event of environmental violations at our facilities we may incur significant liabilities” and “Item 8—Financial Information—Legal Proceedings.”

Environmental Matters

We are subject to a broad range of environmental laws and regulations, including those governing the following:

We monitor our compliance with these laws and regulations through our environmental management system, and believe that we currently are in substantial compliance with them, although we cannot assure you that we will always operate in compliance with all such laws and regulations. If we fail to comply with these laws and regulations, we may be assessed fines or penalties or be subject to injunctive relief which could have a material adverse effect on us.

Future changes in the applicable environmental laws and regulations, or changes in the regulating agencies’ approach to enforcement or interpretation of their regulations, could cause us to make additional capital expenditures beyond what we currently anticipate.

Our Lorain and Canton, Ohio plants (which are not currently in operation) are subject to the Maximum Achievable Control Technology (“MACT”) standard for Electric Arc Furnaces as an “area source.” Revisions of this standard are under development and, when promulgated, may impose additional restrictions on our Lorain and Canton operations including those relating to mercury emissions and control.

Our steelmaking operations in the United States, Brazil and in Mexico use electric arc furnaces where carbon dioxide generation is primarily linked to energy use. In the United States, the Environmental Protection Agency has issued rules imposing inventory and reporting obligations to which some of our facilities are subject, and has also issued rules that will affect preconstruction permits for our facilities where increases in greenhouse gas pollutants are contemplated. The U.S. Congress has debated various measures for regulating greenhouse gas emission (such as carbon dioxide) and may enact them in the future. Such laws and regulations may also result in higher costs for coking coal, natural gas and electricity generated by carbon-based systems (such as coal-fired electric generating facilities). Such future laws and regulations, whether in the form of cap-and-trade emissions permit system, a carbon tax or other regulatory regime may have a negative effect on our operations. Climate change policy is evolving at regional, national and international levels, and political and economic events may significantly affect the scope and timing of climate change measures that are ultimately put in place. As a signatory to the UNFCCC, Mexico became subject to the Paris Agreement to fight climate change, which was taken by the parties at the 21th session of the UNFCCC conference of the Parties in 2015. In August 2017, the U.S. State Department officially informed the United Nations of the United States withdrawal from the Paris Agreement. Following the 2020 U.S. presidential election, the U.S. formally rejoined the Paris Agreement in February 2021. As a result, some of our significant facilities may ultimately be subject to future regional, provincial and/or federal climate change regulations to manage greenhouse emissions. More stringent greenhouse policies and regulations could adversely affect our business and results of operations.

Various federal, state (or provincial) and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos-containing materials (“ACMs”). These laws, regulations and ordinances may impose liability for the release of ACMs and may permit third parties to seek recovery from owners or operators of facilities at which ACMs were or are located for personal injury associated with exposure to ACMs. We are aware of the presence of ACMs at our facilities, but we currently believe that such materials are being managed in accordance with applicable law.

In the United States, the federal Environmental Protection Agency has in the past introduced regulation regarding the phasing out of polychlorinated biphenyl (“PCB”) containing fluid in equipment that we currently use at many of our U.S. facilities. If any such rules are enacted, our facilities may be required to reduce the levels of PCBs in our equipment, which will in turn may require us to incur costs for the removal and disposal of PCB containing oils, sampling and possible replacement of equipment in the event PCB levels cannot be reduced to acceptable levels.

Also in the United States, more stringent standards for particulate matter were promulgated in 2012. As these new more stringent standards were implemented through the different state programs, we experienced higher costs associated with any preconstruction permitting of new or modified sources at our U.S. facilities in 2014 and subsequent years. These costs were related to extensive dispersion modeling and/or pre-construction monitoring not previously required.

Brazil operations

We produce according to technical specifications of the Brazilian standard ABNT NBR 7480:2007 for steel bars and wires designed for the reinforcement for concrete structures. Our products are also registered with the Brazilian National Institute of Metrology, Quality and Technology (INMETRO), in accordance with Resolution CONMETRO No. 05, dated May 6, 2008, and comply with conformity assessment regulations, including Ordinance No. 73, dated March 17, 2010, and with compulsory product certification regulations.

We have received environmental permits from the Sao Paulo State, for which hydrological studies and feasibility of groundwater have been conducted, such permits include a license granted by the Ministry of Environment of Sao Paulo and an operations license granted by the Ministry of Environment CETESBE Sao Paulo State Companhia.

Trade Regulation

We have experienced significant competition from imports into Mexico in the past as a result of excess worldwide steel production capacity, particularly in periods of economic slowdown, and as a consequence of the peso’s appreciation relative to other currencies, making imports cheaper and more competitive in peso terms. Recently, the Mexican government, at the request of CANACERO, has taken several measures to prevent unfair trade practices such as dumping in the steel import market. The overall climate for imports in Mexico is influenced by the free trade agreements that Mexico has entered with other countries, as well as the level of tariffs and anti-dumping duties.

We benefit from Mexico’s free trade agreements. Specifically, we have directly benefited from our ability to export finished steel products directly to export markets and compete with similar products manufactured in those markets. We have also indirectly benefited from increased demand from our domestic customers who similarly manufacture their products to foreign markets under free trade agreements. Nevertheless, we cannot assure you that the trade agreements affecting our business or the enforcement thereof will not change in a manner that could have a material adverse effect on our business, results of operations, financial condition or prospects.

United States-Mexico-Canada Agreement (USMCA)

The North American Free Trade Agreement (“NAFTA”) became effective on January 1, 1994. NAFTA provided for the progressive elimination over a period of ten years of the 10% duties formerly in effect on most steel products imported into Mexico from the United States and Canada, including those that competed with our main product lines. After a 13-month negotiation period, on September 30, 2018, the United States, Mexico and Canada signed the United States a-Mexico-Canada Agreement (the “USMCA”), which replaced NAFTA on July 1, 2020. See “Item 3—Key Information—Risk Factors—Risks Related to Mexico—Economic and political developments in the United States and elsewhere may adversely affect Mexican economic policy and, in turn, our operations.” The USMCA has benefits on custom expenses, an orderly economic competition, clear rules for investment and its protection.

Mexican-European Community Free Trade Agreement. The Mexican-European Free Trade Agreement (“MEFTA”) became effective on July 1, 2000, and taxes applying to a large quantity of imported goods were eliminated or reduced. The goal of this trade agreement was to establish a bilateral and preferential, progressive and reciprocal framework to encourage the development of trade in goods and services, taking into account the sensitivity of certain products and services sectors, and in accordance with relevant rules of the World Trade Organization (WTO). The Joint Council is responsible for deciding the arrangements and timetable for the liberalization of duties and non-duty barriers to trade in goods, in accordance with the relevant WTO rules. This agreement was modified in 2018.

Mexico-Japan Economic Association. On January 1, 2004, Japan and the other members of the G-7, agreed to reduce the steel tariffs to zero percent, so Mexico has benefited from this rate since such date. However, Mexico is sensitive to the steel exports coming from Japan, so the Mexico-Japan Economic Association (the “Association”) was negotiated in the following terms: (i) the specialized steel not produced in Mexico used to produce vehicles, spare parts, electronics, machinery and heavy equipment was relieved from any tariffs, (ii) steel products coming from Japan into Mexico are subject to a zero percent rate and (iii) the products to be imported from programs established by the Association pay tariffs pursuant to the fixed rates established in such programs. The electronic and vehicles industries are exempted as of the date of the Association.

Other Trade Agreements. In the last several years, Mexico has signed other free trade agreements, including free trade agreements with Israel (2000), Iceland, Norway, Liechtenstein and Switzerland (2001), and with the following Latin American countries: Chile (1992 and amended in 1999); Venezuela and Colombia (1995); Costa Rica (1995); Bolivia (1995); Nicaragua (1998); Honduras, El Salvador and Guatemala (2001); and Uruguay (2003). We do not anticipate any significant increase in competition in the Mexican steel market as a result of these trade agreements due to their minimal steel production or, in the case of Venezuela and Chile, minimal share of the Mexican market. Venezuela withdrew from the free trade agreement with Mexico and Colombia in 2006.

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). On February 4, 2016, Mexico, along with Australia, Brunei, Canada, Chile, United States, Japan, Malaysia, New Zealand, Peru, Singapore and Vietnam, signed the Transpacific Partnership Trade Agreement, in the City of Auckland, New Zealand, which was intended to grant Mexican products access to six markets (Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam) with approximately 155 million of potential consumers, which were not covered by any other trade agreement. In January 2017, the United States withdrew from the agreement, after which the remaining 11 countries reached a revised agreement and renamed it the CPTPP. On December 30, 2018, it became effective without U.S. participation.

The CPTPP eliminates or reduces tariff and non-tariff barriers across substantially all trade in goods and services and covers the full spectrum of trade, including goods and services trade and investment, so as to create new opportunities and benefits for the businesses, workers, and consumers of the countries’ members. The CPTPP is intended to facilitate the development of production and supply chains, and seamless trade, enhancing efficiency and supporting the goal of creating and supporting jobs, raising living standards, enhancing conservation efforts, and facilitating cross-border integration, as well as opening domestic markets. The CPTPP is intended to promote innovation, productivity, and competitiveness by addressing new issues, including the development of the digital economy, and the role of state-owned enterprises in the global economy. Finally, the CPTPP includes new elements that seek to ensure that economies at all levels of development and businesses of all sizes can benefit from trade. It also includes specific commitments on development and trade capacity building.

Dumping and Countervailing Duties.

We are or have been a party to, or have been affected by, numerous steel dumping and countervailing duty claims. Many of these claims have been brought by Mexican steel producers against international steel companies, while others have been brought against Mexican steel companies. In certain instances, such cases have resulted in duties being imposed on certain imported steel products and, in a few instances, duties have been imposed on Mexican steel exports. In the aggregate, these duties have not had a material impact on our results of operations.

On September 11, 2013, the United States International Trade Commission (the “USITC”) started an official anti-dumping investigation against rebar exports from Mexico and Turkey promoted by Nucor, Gerdau, Commercial Metals, and Cascade Steel Buyer.

On October 14, 2014, the USITC determined that the U.S. steel industry was materially injured by imports of steel concrete reinforcing bar from Mexico that are sold in the United States at less than fair value and from Turkey that are subsidized by the government of Turkey. As a result of the USITC’s affirmative determinations, the U.S. Department of Commerce issued an anti-dumping duty order on imports of this product from Mexico and a countervailing duty order on imports of this product from Turkey. The U.S. government imposed tariffs of 66.7% against imports for rebar from Deacero, S.A.P.I de C.V. and us and tariffs of 20.58% for rebar imports from all other producers in Mexico, which tariffs were rescinded in June 2017.

On January 6, 2021, a preliminary dumping rate of 66.7% was imposed on our exports of rebar to the United States. Such dumping rate was ratified in June 1, 2022. Following the U.S. Department of Commerce’s physical review carried out at our San Luis Potosí plant on February 17, 2020 after we argued that there were deficiencies and adverse facts during the U.S. Department of Commerce’s information process, a preliminary dumping rate of 6.35% was imposed and will be ratified in the first semester of 2023. On August 9, 2023 a dumping rate of 5.93% was published and imposed.

On January 19, 2023, the International Trade Practices Unit (UPCI) published the final resolution of the China wire rod countervailing duty examination, extending the countervailing duty on wire rod imports from China for 5 years. And on February 24, 2023, the UPCI published the final resolution imposing countervailing duties on imports of type I and II steel beams from Spain, Germany and the United Kingdom.

Labor. In July 2017, the Brazilian government issued Law No.13,467 (Labor Reform Law), which resulted in significant changes to labor regulations. This law extends the workday from 8 hours to 12 hours, provided that there is a 36 hour break afterwards. With regard to negotiations with any labor union, Law No. 13,467 provides that certain rights, such as constitutional rights and women’s rights, cannot be part of the negotiations, as the Constitution and existing law prevails over any collective bargaining agreement. In addition, Law No.13,467 allows companies to outsource any activity, including the company’s principal activity and activities that a company’s own employees are carrying out. Furthermore, the law provides that a claimant seeking to enforce his or her rights under this law will have to pay all costs and expenses related to the lawsuit and limits any compensation for moral damages to certain thresholds. We are currently in compliance with these labor regulations.

The chart below sets forth a summary of our corporate structure.

The following table identifies each of our significant operating subsidiaries, including its country of incorporation and our percentage ownership thereof at December 31, 2023 and December 31, 2022:

Our Operations and Production Facilities

As of the date of this annual report, we conduct our operations at 12 facilities throughout North and South America. At December 31, 2023, our crude steel production capacity was 6 million tons, of which 1.2 million tons were based on an integrated blast furnace technology, and 4.8 million were based on electric arc furnace, or mini-mill, technology. Our Mexican facilities have 2.6 million tons of crude steel production capacity, operating six mini-mill facilities. Our U.S. operations have 2.3 million tons of crude steel production capacity and our Brazil operations have 1.1 million tons of crude steel production capacity. In addition, we have 5.6 million tons of rolling and finishing capacity, of which 2.9 million are in Mexico, 1.8 million are in the United States and Canada and 0.9 million are in Brazil.

We operate nine mini-mills, six in Mexico, one in the United States and two in Brazil. The Mexican mini-mills are in: one in Guadalajara, Jalisco; two in Apizaco, Tlaxcala; one in Mexicali, Baja California; as well as two in San Luis Potosí. Our mini-mill in the United States is in Canton, Ohio. Our mini-mills in Brazil are in Pindamonhangaba, São Paulo and Cariacica, Espírito Santo. We also own an integrated blast furnace and an electric arc furnace in Lorain, Ohio and a rolling mill in Lackawanna, New York. Processing mills are located in Massillon, Ohio and Solon, Ohio.

Because we own both mini-mill and integrated blast furnace production facilities, we can allocate production between each type of facility based on efficiency and cost. In addition, as long as our facilities are not operating at full capacity, we can allocate production based on the relative cost of basic inputs (iron ore, coking coal, scrap metal and electricity) to the facility where production costs would be the lowest. Our production facilities are designed to permit the rapid changeover from one product to another. This flexibility permits us to efficiently produce small volume orders to meet customer needs and to produce varying quantities of standard product. Production runs, or campaigns, occur on four to eight weeks cycles, minimizing customer waiting time for both standard and specialized products.

We can use scrap metal or iron ore to produce our finished steel products. We produce liquid steel using an electric arc furnace, alloying elements and carbon are added, and then it is transported to continuous casters for solidification. The continuous casters produce long, square strands of steel that are cut into billet and transferred to the rolling mills for further processing or, in some cases, sold to other steel producers. In the rolling mills, the billet is reheated in a walking beam furnace with preheating burners, passed through a rolling mill for size reduction and conformed into final sections and sizes. The shapes are then cut into a variety of lengths. Our prior facility in Canton, Ohio, is capable of producing billets and blooms.

Our mini-mill plants use an electric arc furnace to melt ferrous scrap and other metallic components, which are then cast into long, square bars called billets in a continuous casting process, all of which occurs in a melt shop. The billet is then transferred to a rolling mill, reheated and rolled into finished product. In contrast, an integrated steel mill heats iron pellets and other primary materials in a blast furnace to first produce pig iron, that must be refined in a basic oxygen furnace to liquid steel, and then cast to billet and finished product. Mini-mill plants typically produce certain steel products more efficiently because of the lower energy requirements resulting from their smaller size and because of their use of ferrous scrap. Mini-mills are designed to provide shorter production runs with relatively fast product changeover times. Integrated steel mills are more efficient in producing longer runs and are able to produce certain steel products that a mini-mill cannot.

The production levels and capacity utilization rates for our melt shops and rolling mills for the periods indicated are presented below.

Production Volume and Capacity Utilization