Mexico is going through unprecedented changes which represent significant opportunities for chemical, metal and mineral companies relating to both production and consuming markets.
High growth consuming markets for chemicals and materials
The implementation of the North American Free Trade Agreement (NAFTA) of 1994 stimulated the growth of plants along the US border and throughout Mexico to manufacture products and semi-finished goods (such as automobile components). However, through the 2000s, many export factories shut down, as China ramped up production. Now the tides of competitiveness are changing in Mexico’s favor, and companies are detaching parts of their operations in China and moving them to North America1. This change is due to several factors, especially changes in labor rates (See Figure 12) and freight costs. Other factors influencing Mexico’s growth are its 12 free trade agreements with 44 countries and its young workforce with a large number of engineering graduates3. In addition, Mexico is moving into more sophisticated, value added products. Some examples of recent manufacturing investment include:
GM, Nissan, Mazda, Audi, Honda either have plans to invest or have recently invested hundreds of millions into Mexican vehicle production.4
White goods, electronics and toy manufacturers are also setting up plants, such as Foxconn, Dell, Whirlpool and Lego.
This industrial growth represents significant opportunities for chemicals (such as urethanes, paints, plastics and adhesives), steel, aluminum and minerals. For more on this, see our study.
On the cusp of a hydrocarbons boom
Mexico has had a storied tension of government control versus encouraging privatization and foreign investment. In 1938, Mexico expropriated foreign oil companies, with PEMEX becoming the only entity allowed to operate in hydrocarbons and base petrochemicals. In more recent memory, attempts in 1996 to privatize petrochemicals failed after the government changed its stance on initially allowing 100% foreign ownership to only allowing a 49% stake in petrochemicals, causing major petrochemical producers to cancel studies on acquiring government assets.
As a result of very little investment by the Mexican government in the energy sector, Mexico incurred a deficit in major classes of hydrocarbons. Currently Mexico’s shortage of natural gas has caused electricity costs to be 70% higher than those in the US5. As a matter of fact, as seen in Figure 26 & 37, Mexico has a deficit of key chemicals, which has affected the competitiveness of its downstream plastics products industry as well.
The prolific Eagle Ford shale formation in Texas extends south across the border into Mexico’s Burgos Basin and accounts for two-thirds of Mexico's shale gas resources, which are estimated to include 545 trillion cubic feet of recoverable shale gas (ranking 6th in the world)8. Mexico is also estimated to have 13 billion barrels of recoverable shale oil resources (8th largest)9. With all the development of Eagle Ford in Texas, it has been speculated that Mexico could replicate the same success, except for Mexico’s debilitating energy laws.
Fortunately things are changing rapidly, starting with the introduction of the National Development Plan for 2007-2012.This led to the announcement of the construction of a new 544 kmpty ethane cracker by Braskem (Brazil) and Idesa (Mexico). However, future development beyond this would be difficult without new sources of feed10.
Then a big change came in December 2013 when Mexico approved constitutional amendments that would allow companies other than PEMEX to produce oil, gas and refined products. This is expected to attract significant investment to Mexico’s under-developed resources, as major oil companies from around the world bring their technology and funds to Mexico.
With resources development, natural gas will likely become more abundant at lower prices, spurring petrochemicals (and perhaps primary metals) investment, as well as increasing the competitiveness of all energy-consuming industries which, in turn, represent growing markets for materials. An added benefit is that oil & gas extraction and chemical products industries have among the highest job multiplies (for instance, in the US, every job added in these sectors creates another 6-7 jobs11 in other sectors, such as services, etc.), again contributing to Mexico’s developing economy.
As a matter of fact, energy reform in Mexico may stem immigration across the US border12 and may slow down the drug trade as shale hydrocarbon developments represent better livelihoods. These factors, in turn, would help draw even more investment.
Integration with the US Gulf Coast
The hydrocarbons industries of Mexico and the US Gulf Coast (USGC) are natural counterparts, sharing a border and coastline that can make this the most active hydrocarbons region globally. Mexico is just south of the largest pool of energy technology, equipment and companies in the world.
Cross investment has already begun in chemicals, from South to North, with Mexichem (Mexico) in a joint venture with OxyChem (US) building a 544 kmtpy ethane cracker in Ingleside, TX. The ethylene will be used to make VCM which will be exported to Mexico to make PVC and PVC pipe13. With these new laws, more North to South investment is expected.
In terms of logistics, the US-Mexico border has experienced double digit intermodal crossing growth, with Kansas City Southern (the only railroad crossing the borders) raising its total cross border year over year revenue by 30% in 4Q13,14 a symptom of a synergetic ecosystem between the two countries.15 However, more investment may be on the way. Secondary legislation to the energy amendment, while still unsettled, is to upgrade infrastructure to open the freight sector, now mostly controlled by two companies with no interconnection between them .16
Currently, rail is an effective option for moving freight between borders, where the customs process is about 30 minutes, while for trucks it takes at least two hours. An additional problem with trucks is that idle freight has a higher risk of being tampered with17. There is a consensus that better intermodal connectivity, roads and ports are needed. However, improvements are on their way, with Mexico’s Investment Program for Infrastructure Transportation and Communications for 2013-2018 initiative—which includes $100 billion in funds—covering highways, ports and railroads.
Finally, the US government is simplifying trade transactions, with a new US executive order signed in February 2014 for the International Trade Data System to be finished by 2017. This will allow documents to be submitted electronically in minutes rather than waiting days, saving time and money18 and effectively shortening supply chains (in terms of timing/working capital).
Integrating for advantage across the Gulf
The Gulf Coast region is set to benefit from resource development and thinking needs to occur now to ensure that investments are made to improve efficiencies throughout the supply chain, rather than expanding existing, less-efficient assets and processes. As mentioned in some of our previous blogs, information technology is increasingly giving economies and industries a new stage of competitive advantage.
Imperatives for companies that would like to participate in the Mexican market can be both structural and digital, including:
Streamlining supply chains to most effectively serving burgeoning, yet advanced, materials-consuming industries of Mexico
Integrating data with suppliers and customers, improving communications
Increasing investment in quality storage and distribution infrastructure; raising visibility in the same.
Dedicating sales and technical support to the Mexican market
Exploring opportunities for production and optimal plant siting along the supply chain
Leveraging the latest information technology in new assets which can enhance efficiency and provide more data security, such as cloud computing and mobility solutions in maintenance.
The NAFTA region will continue to be a global investment hot spot for at least the next decade, and those quickly organizing for the larger picture of Gulf of Mexico integration will stay ahead of the curve.
1 Journal of Commerce, January 24, 2014
2 Accenture Research analysis of © Copyright Oxford Economics Ltd. data
3 Industry Week, December 4, 2013
4 Journal of Commerce, January 29, 2014; Ibid. 3
5 Ibid. 5
6 Accenture Research analysis of Global Trade Information Services
7 ICIS Consulting
8 US Energy Information Administration (EIA), http://www.eia.gov/countries/cab.cfm?fips=MX
9 US EIA, http://www.eia.gov/analysis/studies/worldshalegas/
10 ICIS, “Mexico energy reform to promote industry competition – Pemex CEO”, March 4, 2014
11 US Bureau of Labor Statistics; Contentfirst.com
12 Forbes, “What does Mexico’s Oil Industry Reform Mean For Investors?”, December 16, 2013
14 Ibid. 2
15 Financial Times, “Mexico’s reform train: do not derail,” February 12, 2014.
16 Ibid. 1
17 C.H. Robinson, “US-Mexico Shipping Options”
18 Journal of Commerce, February 20, 2014