Mexico's industry growth is maintained in face of challenges

Performance in Mexican industry is heavily dependent on the particular segment in question and its current economic position. The automotive and aeronautics manufacturing sectors, concentrated mostly in the Bajío region of Mexico in the states of Querétaro and Guanajuato, are driving demand for inputs like light-weight polymers, while strong growth in agro-industry across different regions of Mexico is pushing up demand for petrochemicals and chemical fertiliser products. Export growth and the domestic market consolidation of the beer industry is pushing production of barley and malts upwards, contributing to more efficient farming practices and greater agricultural yields (see analysis). While the mining industry has been suffering from low worldwide commodities prices for over five years, the sector’s growth potential is expected to make a rebound in the coming years.

Challenges

Other industrial segments, however, have been met with their fair share of issues. The metals industry is facing added difficulties as import tariffs imposed by the US on Mexican aluminium and steel have increased the costs of cross-border trade, leading local firms to consider the possible scenario that one of their biggest markets might close an important export pipeline. The petrochemicals industry, meanwhile, is running into shortages in supply as general budgets remain low at stateowned oil firm Petróleos Mexicanos (Pemex), leading to a drop in production despite the inauguration of the Etileno XXI, a 1.05m-tonne-per-annum ethylene cracker, in 2016. There have also been signs that the current labour force may come up short in the future as manufacturing operations start to scale up the complexity of their operations.

It remains to be seen if traditional Mexican manufacturing industries such as mining and petrochemicals can rebound in the long term. Meanwhile, those industries surging ahead will still need adopt more innovative methods and improve technology in the face of increased global competition.

Mining

Mining is one of the oldest industries in Mexico, extending back almost 500 years. The country is one of the world’s largest metal producers, remaining the top producer of silver, one of the top producers of gold, and responsible for 1.7% of the world’s output of mineral ores in 2017. In 2016 mining was the fifth-largest generator of foreign currency reserves. The sector generated around 1% of Mexico’s GDP, with this figure rising to 4% when all processing and extraction industries are included. As a truly global industry, there are 271 companies operating 942 projects in Mexico’s mining sector, led by mostly US, Chinese and Canadian firms. Indeed, 40% of the value of Canadian investment in Mexico is related to the mining sector.

There were 29 new projects launched between 2014 and 2017, with 24 new projects in the prelaunch phase, their futures dependent on both the economic outlook and initial exploration results. The states with the highest level of production are Sonora with 11 projects and Guerrero with four. There are also a number of notable expansions being carried out across the country. The Buenavista del Cobre mine project in Sonrora, operated by local firm Grupo México, will position the quarry as the world’s third-largest copper mine, behind the Escondida mine in northern Chile and the Grasberg mine in Indonesia. Meanwhile, Torex Gold Resources spent the second half of 2016 and most of 2017 ramping up production at its Limón-Guajes mine in Guerrero.

The fall in global commodities prices beginning in 2012 was a blow to the industry. Mexican miners have also had to contend with tougher fiscal conditions. In 2014 the Mexican government introduced a 7.5% royalty fee on all metals, with an additional 0.5% levy on precious metals. The move went far beyond the anticipated 3-4% royalty and, given that the price of gold fell from an average of around $2000 per oz in the second half of 2012 to under around $1060 per oz by the end of 2015, the new tax hurt miners already operating at much thinner margins.

This situation caused a drop in new mining exploration. In 2016 the industry invested $428m in such activities. This is compared to $1.16bn invested in 2012, according to figures from the Mining Chamber of Mexico (Cámara Minera de México, Camimex), leading Mexico to slip from the number one mining country in Latin America in regards to investment levels to third, behind Chile and Peru.

“Given the tepid investment outlook for new exploration, the mining industry is trying to maintain gradual growth through the expansion of its existing mines or by opening already pre-approved projects,” Sergio Almazán, director-general of Camimex, told OBG. “The current focus is on strategic mining clusters, a concept the government has been working on developing for quite some time,” he added.

Despite some challenging years, a rebound may be on the cards for the near to medium term. Pointing to a jump in gold, silver, lead, zinc and copper prices, Camimex expects production values to rise from $13.4bn in 2017 to $13.5bn-14bn in 2018, Almazán told OBG. Meanwhile, according to a report by BMI Research in February 2018, the mining industry is expected to experience a quick recovery on the back of rising prices among its key commodities. The report also cited rising global demand for zinc and copper, various projects in the pipeline, low operating costs, and a stable and supportive government as factors that bode well for the sector. In addition, Mexico has ramped up mining and production of much sought-after lithium ore, which is a key ingredient of batteries for the fast-growing hybrid and electric vehicles segment. Late 2018 will see the construction of the $420m Sonora Lithium Project by Canadian firm Bacanora Minerals (see analysis).

Polymers

The electric and hybrid vehicles boom is also pushing demand for lighter and stronger polymers products. In both the aeronautics and automotive industries growth is being driven by fuel economy goals, as well as so-called green tyre technology used to prevent excess heat in tyres while driving. The construction industry is also pushing demand for more integrated polymer products, such as expanded polystyrene, to make lighter and stronger walls and structural components.

“The polymers sector in Mexico has been growing in the strong double-digits. This should continue in 2018 due to the increased demands to substitute traditional products like wood, metal and glass,” Miguel Delgado, business director for Evonik High Performance Polymers, told OBG. Other notable drivers include the manufacturing of medical devices. Polymers are entering as substitutes for metals in permanent implants and in 3D printing.

However, in these high-growth industries, manufacturing is quickly becoming more advanced, requiring highly skilled human resources. This situation has lead to concerns over potential labour shortages. “In the area of Bajío, the automotive and aerospace industries are encountering significant competition for workers. They are starting to have problems finding a sufficient number of specialised technical workers for scaled up projects that the industry will require,” Delgado said.

Petrochemicals

Oil and gas are the feedstock of the petrochemicals industry, which produces plastics, industrial chemicals and other derived products. In regards to raw materials for the petrochemicals industry, Mexico is currently in a complex situation. While the country remains a large producer of oil and gas, due to declining production, Mexico has become a net importer of gas and oil derivatives like diesel and gasoline. This lack of raw materials has impacted the main branches of the petrochemicals industry, resulting in shortages.

An important milestone project in this regard was the Etileno XXI plant, built in Veracruz state by a consortium led by the Brazilian firm Braskem in partnership with Mexico’s Idesa Group. This $5.2bn project to supply more than 1.1m tonnes of polyethylene per year to the local market was the first major private sector petrochemicals investment since the 1990s and, according to the International Finance Corporation, which part-financed the plant, Etileno is the petrochemical industry’s largest ever project-financing transaction in the Americas. However, over 2017 the plant was operating below capacity due to the raw material shortage. While materials can be imported, this will likely impact profits.

While the 2013 energy reforms encouraged much-needed private investment and helped boost refining and exploration, low global oil prices have negatively impacted Pemex’s budget. The oil company’s last reported full-year figures in 2016 showed a decrease in domestic oil sales by 4.9% and a 13% drop in export sales due to the fall in international crude oil prices and lower volumes of fuel and petrochemicals production. The price of Mexican crude oil mix also fell by $14.37 per barrel during this period.

“Unfortunately, Pemex does not have budget priority, and oil production has been falling over the last eight to 10 years. This has resulted in a shortage of raw materials for new petrochemicals growth,” Cleantho Leite, director of business development, institutional relations and external communication at Braskem Idesa, told OBG. “While the ideas, technology and investors are available for petrochemicals development, if there are no raw materials, these points are moot,” he added.

Still, other industry players are banking on the possibility of a quick recovery for the petrochemical sector if Pemex can continue to reform its inner-workings. “Although the sourcing of raw material still remains a problem in the chemical industry, within five years the situation should be very different,” Martin Toscano, managing director of Evonik México, told OBG. “Pemex, as a leading local supplier within the petrochemicals industry, is on the path to becoming a solid partner; however, for the industry, this still needs to translate into a better and more sustainable availability of raw materials.”

Plastics

Despite the lack of raw materials, the plastics industry has seen major regional growth in the Bajío manufacturing region, due in part to the increased demand from the automotive manufacturing clusters in the states of Querétaro and Guanajuato. In some months states in this region have seen plastics production increasing by upwards of 9% year-on-year between 2015 and 2016, according to the National Institute of Statistics and Geography (Instituto Nacional de Estadística, Geografía e Informática, INEGI). INEGI indicators show that in the state of Querétaro, plastics production grew by around 50% from 2011 to 2015, benefitting from the rise of automotive manufacturing.

A significant portion of this growth has been in Tier-2 and Tier-3 plastics manufacturing firms, leading to fears of over-saturation of the market. However, local industry stakeholders told OBG that as long as companies adhere to efficient practices, issues with local companies competing in these spheres will be kept to a minimum. “The fact that 70% of parts in the automotive industry are imported demonstrates that there is an urgent need for capacity development in the Tier-2 and Tier-3 companies along the value chain,” Gunther Barajas, vice-president of aviation systems firm Dassault Systèmes, told OBG.

Steely Determination

Demand for steel keeps pushing upward. According to a report from the World Steel Association (WSA), Mexico’s projected demand for 2018 is estimated at 27.6m tonnes, meaning that since 2007 demand for steel has risen by 161.6%, placing the country ninth worldwide behind Vietnam with 27m tonnes and Turkey at 35.5 tonnes. The two biggest consumers of steel were the construction industry, accounting for 61.5% of overall demand in 2017, followed by automotive manufacturing and assembly at 10%.

According to the WSA, Mexico ranked as the 14th-highest producer of steel in 2017 with 19.9m tonnes, a rise of nearly 6% on 18.8m tonnes in 2016. Still, imports of steel into the country hit 13.9m tonnes, leaving it as a net importer of 8.6m tonnes.

Globally, demand for steel is expected to grow by 1.8% in 2018 followed by 0.7% in 2019, according to the WSA; however, it is unclear how much Mexican steel producers will benefit. Industry figures are concerned about unfair trade practices, with the National Chamber of Mexican Iron and Steel Industries (Cámara Nacional de la Industria del Hierro y del Acero, Canacero) putting out a report in April 2018 highlighting tariffs levied by major steel industry producers China and Russia, which were above 20% in certain cases. According to Canacero, over 50% of worldwide steel production comes out of China and this level of production is only maintained by high subsidies from the Chinese government. This is in addition to 25% US steel tariffs implemented in mid-2018, which are expected to cost the country some $2bn and leave the industry open to dumping.

“The key to success for Mexico’s steel industry will be its flexibility in terms of products and delivery,” Vanessa Bautista, administrative director at steel provider Mabasa, told OBG. “As global steel prices continue to fall and tariffs threaten exports, providers need to satisfy domestic customer demands. Otherwise they risk losing current and potential clients who may start to look abroad for their steel.”

Human Capital

Mexico has a long history of investing in human capital. Under former President Felipe Calderón, who envisaged Mexico as a country of engineers, the number of engineering graduates tripled to 71,300 between 2008 and 2012, during which time 120 higher education institutions dedicated to science and engineering were inaugurated, according to a September 2016 report by industry media. This growth in engineering graduates was the highest registered across OECD countries during the period and placed Mexico among the top-five major economies by percentage of total university students studying engineering at 26%, according to the Royal Academy of Engineering.

“The quality of chemical engineers has improved markedly over the last 20 years. It’s now one of the best paid technical jobs in the country and benefits from a strong collaboration between the private sector and universities,” Alejandra Torijano, country manager at health care research, development and manufacturing firm Agilent Technologies, told OBG.

Even though the quality of engineering has improved, there is still potential for a local labour shortage. “Overall, local companies provide high-quality goods and services,” Rolando Zárate Rocha, CEO at electromechanical engineering company Hubard y Bourlon, told OBG. “However, in order to increase Mexican content in a number of products, it’s important that local providers perform better on high-spec engineering projects that, in combination with stable market conditions, will allow them to grow and become highly specialised to remain competitive in both the domestic and international marketplace.”

Innovation

Mexico has continued to increase human capital capabilities by investing in innovation. According to sources at the National Chamber of Industry (Cámara Nacional de la Industria de Transformación, CANACINTRA) in 2018 there were 72 national research labs across the country, up from just 11 in 2013. This is in addition to 100 labs dedicated to leading innovation in a wide range of areas – from coffee production to advanced industry.

The federal and state governments have also implemented stimulus initiatives in tandem with large-scale tech investment over the past three years, providing investment opportunities for the private sector. The Ministry of Economy (MoE), for example, is opening research centres within key industry sectors under a public-private partnership (PPP) framework. One such project is the Regional Centre for Productivity and Innovation 4.0 ( Centro Regional de Productividad e Innovación 4.0, CEPRODI 4.0), which opened in the first quarter of 2018 in the state of Querétaro. The centre assists private firms working in the automotive, household appliances, plastics and metalworking manufacturing segments in incorporating digital tools and technological advances to boost operations. Investments totalling MXN15m ($810,600) were provided to CEPRODI by the MoE, the Program for the Development of the Software Industry, the Ministry of Sustainable Development in Querétaro and the Mexico-US Foundation for Science.

One of the primary goals for the MoE is to fully embrace technology in industry. “The MoE just launched the first forum on Industry 4.0 in February 2018 to establish an agenda and look at success cases already being implemented. The Industry 4.0 revolution is just starting and Mexico is preparing itself,” Rodrigo Castañeda Miranda, vice-president of innovation at CANACINTRA, told OBG.

Bumps in the Road

Still, developing an environment conducive to innovation and creativity has been a challenge. Since 2012 the administration of President Enrique Peña Nieto has moved to establish agencies responsible for fostering innovation and investment. These included the National Institute of the Entrepreneur, designed to provide financing to start-ups, in 2012, and the Special Programme for Science, Technology and Innovation in 2014, which set the goal of directing at least 1% of GDP to research and development (R&D) by 2018, in line with UNESCO recommendations. Although both public and private investment in innovation is rising, Mexico still has not reached this goal, with analysts at CANACINTRA telling OBG that around 0.7% of GDP was being invested in this area in 2018. The latest data from UNESCO shows that state spending on R&D hovered at 0.6% of GDP in 2017.

“Innovation must be driven not only by companies, but by improvements in regulation,” Roberto González, CEO at high-tech paint company ScanPaint, told OBG. “The government is responsible for creating the conditions for the innovative and transformative processes to flourish. Ultimately, this should create ecosystems of innovation and knowledge-sharing on a larger scale.”

Another challenge lies with integrating the national R&D system with the private sector. Leading innovative institutions such as the National Autonomous University of Mexico often have complicated and sometimes overly ambitious intellectual property regulations, which can hinder progress (see Health chapter). There is also no mechanism for the sharing of technological discoveries made at research labs and universities with private industry. “National polytechnic institutes are very active in R&D; however, it is essential that this information is shared externally. This, combined with a greater focus on the skill sets of engineers, are crucial factors in enabling private sector-led innovation to drive the economy forward,” Barajas told OBG.

Commenting on the need for greater collaboration between academia and business, René Gronau, CEO of industrial manufacturing firm Komet, told OBG, “Because private companies and public institutions rarely work together, R&D levels in Mexico remain low. Addressing this would place Mexico as a more reliable destination for R&D projects. The growing presence of innovative companies in the Bajío region, however, is unveiling Mexico’s potential.”

Infrastructure

Investment in major manufacturing and industrial operations has long been a major concern for industry stakeholders. However, infrastructure appears to be on the rise, even though there is still room for improvement. “Sometimes business leaders take for granted that Mexico’s infrastructure is superior to the rest of Latin America. The country has great airports, roads and a comprehensive railway network – although it does require more port development,” Luis Jorba Servitje, CEO of storage firm Frialsa Frigoríficos, told OBG.

Several industry players, however, do have concerns about the total interconnectivity of major infrastructure improvement projects. One concern is that although capacity may be raised at a certain entry point for goods, the interconnectivity between the entry points and internal markets and production centres is still in need of major upgrades.

“In the Port of Veracruz, for example, there was major investment in expanding the port’s capacity to receive more products, but what was not considered was the internal infrastructure required to move the products to markets in the interior of the country,” Delgado told OBG.

Security

Security also remains a major concern for logistics in particular. In Mexico the problem has always been somewhat manageable, however, a number of high-profile cases have highlighted the gaps in security and local law enforcement. In late May 2018, for example, Canada’s Pan American Silver decided to cut back operations in its Dolores mine in Chihuahua due to a number of security issues. According to the company, freight robbery had doubled in the first quarter of 2018, in addition to an uptick in railway thefts. By early June 2018, following increased local law enforcement of surrounding infrastructure, the firm had resumed all activities.

Although such major incidents are rare, it highlights the importance of a comprehensive security strategy for remote economic activities in some of the more isolated and insecure regions. “Security remains a principle issue. A radical overhaul of the way illegal activity is tackled is needed; otherwise, robberies will hurt logistics and its associated sectors over the long term,” Servitje told OBG.

Commenting on the situation Jorge Escarcega, general manager at measurement solutions company, Mahr, told OBG, “Security is a major challenge preventing the country from improving its overall business environment. Changes in transparency that encourage more detailed control and measures need to be enforced, allowing Mexican companies to expand internally before expanding internationally.”

Indeed, a number of companies have resorted to hiring external security solutions; however, some stakeholders feel security would best be provided with the help of local experts.

“A number of international security companies operating in the country are contracted on a global basis by multinational corporations. However, given the highly dynamic and complex security situation in Mexico, in-depth local knowledge is required and international providers often find providing security in Mexico more difficult,” Armando Zúñiga, CEO at security company Grupo IPS, told OBG.

Outlook

The Mexican industrial sector as a whole is making gains in a number of areas, while widespread investments in infrastructure, innovation and modernisation are contributing to strong performance in the automotive and aeronautics sectors, among others. Sustainable development efforts, both in environmental and economic terms, are driving growth upwards in almost every industrial sector. Still, rising tariffs between the US and China, as well as the ongoing NAFTA renegotiations, have started to concern several industry stakeholders. Players are now unsure as to what the future paints and if Mexico can maintain its growth if key export markets fall through or become untenable. While the industry’s near-term outlook remains uncertain, its success over the last 20 years demonstrates an ability to navigate the changing tides of global trade.