Mexico’s health emergency declaration could slash energy demand

Angeles Rodriguez Claudia Espinosa

01-Apr-2020

Government suspends non-essential activities through 30 April

Energy-intensive industries to halt operations

Market participants weigh force majeure to cope with impact

MEXICO CITY (ICIS)–The national health emergency Mexico’s federal government declared 30 March in response to coronavirus could significantly reduce local energy demand due to its likely impact on the industrial sector.

The emergency was declared as the number of confirmed infections in the country reached 1,094 with 28 related deaths. The declaration measures became effective following publication in the federal official gazette on 31 March and are currently set to last until 30 April.

One of the measures restricts all non-essential activities within the private, public and social sectors, to help reduce the spread of coronavirus.

Activities declared as essential include those related to the health sector, public safety and justice provision, as well as those performed by state and federal legislatures.

Financial and tax-collection services, the sale and distribution of energy products, the food and beverage industry and their respective supply chains, supermarkets and groceries stores, transport services and agricultural production and the chemical industry, among others, were also declared as essential.

The maintenance of oil, gas and power infrastructure was also included in the list.

Those who fail to comply with the suspension of activities could be subject to fines or even criminal penalties, the government announced.

Authorities have not confirmed if the emergency period could be extended, but they did say activities would resume in stages and by regions once the suspension is lifted.

Impact

The activities of some industries with heavy energy consumption, such as steelmakers, automotive plants, construction and the export manufacturing sectors, were not included in the essential list.

The restriction of these activities could represent a total power demand reduction of 30-40%, according to Paul Alejandro Sanchez, director of Ombudsman Energia, a Mexico City-based nonprofit consulting group.

Although some analysts expect domestic power consumption will grow as people confine themselves to their homes, Sanchez said this potential increase will not enough to offset demand lost from commercial and industrial sectors.

“Even if most of the country experiences very high temperatures and everybody at home had their air conditioning on, total power consumption would only reach medium levels…Consumption would be similar to that experienced on any Good Friday during Easter,” Sanchez said.

Malls and department stores, also heavy power users, will also close during the period.

Although the reduction in demand is expected to last for the duration of the emergency declaration, Sanchez said the longer term effects would depend on federal government actions after Mexico enters phase three of the spread -which when cases will be estimated in thousands.

“April will definitely see a reduction in demand. If similar actions are implemented in phase three, weakened demand could last through this year’s second quarter.”

Natural gas demand could experience a similar scenario. Although it initially could reduce by around 20%, the real impact will show up with time, according to a gas marketer.

The industrial sector is the country’s second largest energy consumer. Its 2018 consumption accounted for 32% of total demand, according to latest available data from 2018 from energy ministry SENER.

The steel and iron industry is the most energy-intensive within the sector, with its energy requirements accounting for 14% of total 2018 industrial demand.

Reactions

Market sources polled were divided between those caught off guard by the declaration and others that were already preparing.

Some companies are expecting to declare force majeure amid the emergency to be relieved from power purchase obligations as their consumption will fall after their activities are halted. End users with less-sophisticated contracts, however, may face problems.

Federico Mucino, founding partner of Monterrey-based energy procurement firm EPSCON, said some consumers in sectors with already-reduced activities are having problems with take-or-pay contract requirements, and he expects the situation to exacerbate after the declaration.

He said EPSCON is helping their customers implement force majeure clauses to mitigate the potential economic impact of the emergency measures.

A source in the cement industry consulted shortly before the measures were announced said he was unsure if force majeure could be invoked based on this declaration or if they would have to wait until the country enters phase three of the pandemic. He said his company had already carried out analysis of different scenarios, including temporary plant shut downs.

A supplier of industrial gases said that his company had been preparing for this type of scenario. They talked to their clients about their options and were confident they could control their losses during the suspension. However, they did not think such a declaration would happen “this soon.”

READ MORE

Global News + ICIS Chemical Business (ICB)

See the full picture, with unlimited access to ICIS chemicals news across all markets and regions, plus ICB, the industry-leading magazine for the chemicals industry.

Contact us

Now, more than ever, dynamic insights are key to navigating complex, volatile commodity markets. Access to expert insights on the latest industry developments and tracking market changes are vital in making sustainable business decisions.

Want to learn about how we can work together to bring you actionable insight and support your business decisions?

Need Help?

Need Help?