APLA ’23: Reshoring to drive Mexico, LatAm economic growth, chemicals demand

SAO PAULO, Brazil (ICIS)–Reshoring or ‘friend-shoring’ will be a key driver of economic and chemicals demand growth in Mexico and the rest of Latin America.

“We are witnessing record levels of foreign direct investment (FDI) in Mexico that is expected to surpass $40bn this year,” said Eugenio Manzano, executive director of Mexico-based chemical distributor Grupo Pochteca.

“A substantial portion of these investments are coming from Asia as companies from China, South Korea, Japan and other countries are looking to manufacture in Mexico for export to the US and other regions with which Mexico has free trade agreements,” he added.

Manzano spoke to ICIS on the sidelines of the 43rd Annual Meeting of the Latin America Petrochemical and Chemical Association (APLA).

SURGE IN ASIA INVESTMENT IN MEXICO
When it comes to foreign direct investment in Mexico, more than half is now coming from outside the US. Asian companies, in particular, are setting up joint ventures, making acquisitions and building new facilities from scratch. Key areas include automotive, aerospace, general manufacturing and food processing, he pointed out.

“In Mexico, builders of industrial infrastructure – industrial parks, warehouses and manufacturing plants cannot keep up with demand. Nearshoring and ‘friend-shoring’ will not only positively impact Mexico but also other Latin American countries where we are seeing foreign investment and trade increase as well,” said Manzano.

In Latin America, Mexico stands to benefit the most from reshoring because of its proximity to the US, Martin Redrado, chairman of Fundacion Capital and former president of Argentina’s central bank, told delegates at the APLA Annual Meeting.

“The most activity is in industrial and corporate real estate where US and other companies are looking for premises to buy and establish themselves,” said Redrado.

Unsurprisingly, most of this is taking place in northern Mexico where real estate prices have skyrocketed, noted Bernardo Alvarez Certucha, president of APLA.

“We see real estate activity all over the place with people especially buying land in northern Mexico. In many places [in the north], there is nothing now, but we hope to have industries and infrastructure,” said Alvarez.

US INVESTMENT CONTINUES TO FLOW
US investment will continue to flow. Investment bank Morgan Stanley sees Mexico in particular as a major beneficiary of what it calls a shift to ‘slowbalization’.

“The US is likely to look to allies that are geographically close and politically aligned as trade tensions, supply chain difficulties and geopolitical concerns push the US further from China,” it said in a June 2023 research paper.

“If US manufacturing is to be less dependent on China, we think the path will be via Mexico. Nearshoring is expected to be a long and sustained race that could help build new ecosystems in Mexico’s existing manufacturing hubs,” said Morgan Stanley LatAm equity strategist Nikolaj Lippmann.

This could boost Mexico’s manufacturing exports to the US from $455bn today to around $609bn in the next five years, according to the report.

GROWING ROLE FOR LATIN AMERICA
Manzano sees Mexico and the rest of Latin America playing a much more important role in the global economy in the coming years, and thus Pochteca continues to invest and grow in the 10 Latin American countries where it has operations.

Pochteca has operations in Brazil, Chile, Colombia, Peru, Ecuador, Argentina and other countries, including in Central America. Over half its sales are now outside Mexico.

In 2022, Grupo Pochteca posted sales of Mexican pesos (Ps) 10.44bn ($590m), up 17% versus 2021. However, year-to-date sales through Q3 2023 were down 16% to Ps6.70bn in a more challenging market for both chemical distributors and producers.

Mexico’s GDP is expected to grow around 3% in 2023 and likely remain around the same level in 2024 which is quite positive given global economic challenges, said Manzano. In the next five years, nearshoring could add as much as 2-3 percentage points to Mexico’s GDP growth, he added.

“Industrial activity is strong, inflation is coming down, investment continues to pour in, trade with the US is growing – Mexico now being #1 trading partner with the US – and domestic consumption has proven to be resilient,” said Manzano.

“2024 is also an election year for Mexico and the government approved the largest budget in recent years. This will certainly be positive for many segments, including chemical distribution which serves over 40 different industries,” he added.

PROJECT TO RIVAL PANAMA CANAL
In the longer term, Mexico’s planned rival to the Panama Canal – the Interoceanic Corridor of the Isthmus of Tehuantepec (CIIT) – which would connect the east and west coasts via railway to the ports of Coatzacoalcos in the east and Salina Cruz in the west – could provide another big lift for its economy.

“Besides being an option to the Panama Canal, it can generate jobs and become a competitive place to manufacture products closer to the US and Canada, taking advantage of the nearshoring trend. Segments of the railway are near completion and industrial parks are in the making,” said Manzano.

“The challenge continues to be the competitive supply of raw materials, gas and energy to this part of Mexico but through collaboration between the Mexican Government, Pemex and private industry, we can succeed in overcoming this challenge and turn this important infrastructure project into a successful reality,” he added.

DEMOGRAPHICS AND RESOURCES
Notwithstanding Latin America’s own unique challenges, including political and social turmoil, high inflation and a morass of red tape in doing business in certain countries, the region has unique advantages.

Along with nearshoring and friend-shoring, key advantages for Mexico and Latin America include a young population and labour force, a growing middle class and plentiful natural resources – not just in oil and gas, and agriculture but also in critical minerals such as lithium and copper for the electric vehicle (EV) transition, Manzano said.

INVESTMENTS IN EV, AUTOMOTIVE
Investment in EV and battery manufacturing in Mexico is growing. US-based Tesla plans to build a major EV production site in Nuevo Leon state in northern Mexico that could represent investment of $10bn.

The automotive sector overall is “definitely very strong and getting back to normal operating conditions after the supply chain disruptions of COVID and post-COVID,” said Manzano.

He sees Mexico’s automotive industry growing more than 6% in 2023, representing around 18% of GDP. A significant amount of production is exported, mainly to the US, but also to other regions such as Asia.

“OEMs and their Tier 1, 2 and 3 suppliers are attracted by Mexico´s competitive and high-quality labour force as well as its privileged geographical location and free trade agreements with more than 40 countries,” said Manzano.

Other automakers planning EV investments in Mexico include Germany-based BMW, Netherlands-based Stellantis, China-based Jetour, US-based GM and South Korea-based Kia.

LACK OF COMMODITY CHEMICALS
One concern in Latin America is that several countries lack sufficient petrochemicals production because of oil and gas feedstock, said Manzano.

Brazil is an exception and may have access to additional major reserves offshore in the Northeast in an area called the Equatorial Margin, although environmental concerns may hinder full-scale development. Argentina also has an opportunity to develop its petrochemicals sector with additional natural gas liquids (NGL) production.

However, even in resource-rich Brazil, partly because of lack of local investment through the decades, chemical imports are flooding the country, representing as much as 50% of the market today, one chemical company executive said at APLA.

“Many downstream chemical companies in Latin America have to manufacture with basic chemicals from abroad,” said Manzano.

However, sourcing these commodity chemicals from the US and other countries is not a major issue and availability should continue, he added.

The 43rd APLA annual meeting takes place 11-14 November in Sao Paulo, Brazil.

Focus article by Joseph Chang

Thumbnail shows a map of Latin America. Image by Jessee33.