Mexico Outlook 2013 - Growth Potential Very Positive Looking Past Global Headwinds

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--The Mexican steel industry has a $15 billion steel project pipeline, which could add 6 million tons annually in production over the next few years, and the conditions are in place for investments in that capacity. Steel demand is set to grow 5.5% to 6% in 2012, but expectations are "rather high," according to industry sources. In 2011, the country's steel output grew 9% to 18 million tons, and the forecast production for 2012 is 18.5 million tons.

But caution in the steel value chain has characterized the past year, according to Guillermo Moreno, the general secretary of the regional Latin American steel association Alacero. "The global context is still perceived as unstable, and a number of our countries have been through or are going through election years and political changes," he said. The potential for steel consumption within the region was strong and local producers were well-positioned to cash in, he added.

As a major steel consumer and general economic bellwether sector, the Mexican auto industry has production targets that could increase the gap between consumption and production in the short to medium term. Mexico's investment promotion agency says that the country will boost automotive production by 1 million units in three years' time. This would represent an increase of 38% compared to the 2011 production figure, which was 2.6 million units. In 2013, sales of cars and light trucks could reach 1.12 million units.

The country's auto dealership association (AMDA) said earlier this year that sales in 2013 may rise 13% year-on-year (YoY), from a 2012 forecast of 1.12 million domestic sales. These figures and the export forecasts may be crimped by about 5% as they react to the subdued world markets. About one in every 10 new cars purchased in the U.S. this year was made in Mexico. The longer term for domestic sales and exports remains very positive.

Mexico is currently the world's fourth-largest auto exporter, and overall exports will rise to $400 billion in 2012 from $350 billion in 2011, due to surging car and aerospace sales. Automakers already invested $5.3 billion in the January-April period of 2012, and $2.8 billion in 2011. Automakers, such as Mazda, Nissan and Audi, have announced plans to build new plants in the country, which will help Mexico to close the gap with South Korea, which claims third place as the largest exporter after Germany and Japan. Mexican auto exports are expected to grow at a vigorous pace over the next five to seven years.

In a refrain that is heard among all countries relying on, or looking to, develop the potential of their mineral resource through the mining sector, access to competitive energy prices will be a key challenge for those countries' mining sectors next year, according to comments made to BNamericas by Sergio Alamazan, director general of Mexico's mining chamber.

Energy costs are a fundamental factor that companies and investors must consider when looking to develop mines. When investing at a mine, said Almazan, three fundamentals need to be taken into account: the possibility of success in terms of geological potential, which Mexico has; a clear tax regime; and competitive energy prices.

"We are in open international competition, and we need to make sure we have access to energy at the same prices as our competitors," he said.

As other challenges for the mining industry loom, such as security, water supply and human resources, a number of mining and industrial groups are planning their own dedicated captive power plants.

Mexico's established high electricity tariffs and lack of feed-in tariffs (FiTs) put wind power development on an even playing field with fossil fuel-derived power. The country is looking to add 12,000 megawatts (MW) from the current base of 1,000 MW of wind power by 2020. Mexico has double the amount of electricity tariffs compared to Texas. This overcomes any other considerations when international companies consider a windfarm site.

The reliance of Mexico's economy on hydrocarbons and its geographical closeness and relationship with the U.S. is changing. Average growth from 2005 to 2010 was a minimal 1%. The medium-term forecasts for Mexico are now about 4% to 5%. The incoming president Enrique Pena Nieto has said that future growth will be in the range of 6%.

Driving the growth is a growing middle class, but there is still a huge gap between them and the millions of poor people. To tackle poverty, the Mexican government requested the World Bank to help more than 5 million low-income families, representing 25 million people, or 25% of the population, by increasing financing for the support of Oportunidades program, which has become one of the World Bank's most successful initiatives in Mexico.

In Mexico, wages are roughly comparable to those in China, but Mexico does not have the vicious rate of wage inflation that China is experiencing. This has made Mexico a prime choice for manufacturing geared toward the North American market. Mexico is also leading the move to a major free trade zone in Latin America. The country is also now on near-equal terms with Brazil. Mexico could eventually overtake Brazil as Latin America's largest economy before the end of the decade.

Although Mexico cannot escape the headwinds in the global economy, the country's industrial output rose 1.3% in May to June this year, and mining and the utilities sector became less important sheet anchors to the economy. Construction and retail were up from the previous year. All these positive indicators could take a knock from world conditions. But if the U.S. economy's direction is upward, the potential ebullience of the Mexican outlook could drive vigorous growth.

In 2009, the World Bank reported that Mexico's gross domestic product (GDP) fell by 6.1%, but recovered and grew 5.4% in 2010. In 2011, growth steadied to 3.9% and is expected to stay at 3.3% in 2012. The Mexican government has based its medium-term fiscal outlook on an annual economic growth of 3.9% for the 2013-17 time period. The International Monetary Fund's October forecast for Mexico's GDP was 3.8% for 2012 and 3.5% for 2013.

To mix a physical metaphor, Mexico is often seen in a two-dimensional way through the prism of crime and drugs. Massive efforts are being made to fight this scourge, which is backed strongly by public opinion. Good, sustained economic growth and the escape from poverty (for a major section of the population) through positive employment opportunities is the way to go. The outlook and drive behind the economy makes this a possibility.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.