APLA ’18: Mexico infrastructure spending bodes well for Pochteca

CANCUN, Mexico (ICIS)–As one of the major chemical distributors in Mexico, Pochteca has an excellent vantage point of the trends affecting the nation.

Eugenio Manzano, executive director and one of the founders of Pochteca, shared his insights about Mexico’s chemical industry and provided an update about the company.

Can you provide any updates about Pochteca as far as performance, acquisitions and new projects?

Our sales growth through the third quarter of 2018 has been 1.4 times accumulated GDP growth over the same period, all organic. We are staying the course, focusing on value-added sales and services to our customer base in the more than 40 industrial branches that we serve in the five countries where we operate. The investment that we made last year in the acquisition of Conjunto Lar, a specialty household and personal care distribution company, is going well. We’ve successfully implemented SAP and have started the roll-out of the portfolio to several of our other branches.

Food and human nutrition, feed, water-treatment specialties and HPC are growing significantly in our company, thanks to the continued investment in application labs and dedicated technical teams. Solvent recycling and general manufacturing are also doing well. Some basic industries like oil and gas, mining and coatings have been less dynamic due to demand and market conditions.

Our focus on value-added products and services and continuous improvement initiatives have resulted in an EBITDA growth of 13.8% through the third quarter versus the same period of 2017. We continue with healthy financials and conservative leverage ratios.

What is the demand outlook in Mexico?

This year Mexico’s GDP will grow between 2.5-3%, which means that demand for our products will continue to grow through the end of the year.

We are optimistic about the outlook for 2019. Despite the cancellation of the new Mexico City airport in Texcoco, the incoming government has announced significant investments in infrastructure. This, together with the positive impact of the new trade agreement with the US and Canada and a change for the better in the oil and gas sector, will drive growth in most of the industries that we serve. My guess is that GDP growth will be around 3% per year in 2019 and 2020.

The recent decline in methane and ethane production has caused downstream petrochemical production to decline. Will this trend continue or could it reverse?

It’s true. There’s a consistent decline in available volumes of methane and ethane from local sources and a negative impact to the downstream petrochemical industry.

Over the last four years, natural gas production has decreased by 1,556 million cubic feet (mcf)/day, which represents more than a 30% contraction; therefore, ethane average production has moved from 110,000 bbl/day in 2014 to an average of 88,000 bbl/day in 2018.

Before we can see a reverse trend in downstream petrochemical production, we must experience a change in upstream activity. The recent positive trend of oil prices, the evolution of an already four-year-old energy reform and the incoming government’s commitment to support the Mexican energy industry will most likely result in increased oil and gas production, but it will take a few years before we get up to the required production to meet demand. This year we have noticed a steady increase of active-rigs per month and expect the trend to continue.

Pemex’s 2019 budget for exploration and production is around peso (Ps)140bn ($6.85bn), which  represents an increase of 64% in comparison to the one available in 2017 and an increase of 72% in comparison to the current one. With this level of investment and proper action plans, we expect the declining trend in petrochemical production to reverse in the next few years.

Will Pemex be able to repair its refineries so they can run at higher production rates?

Repairs and maintenance to some or all six Mexican refineries is contingent on funding and budget allocation and conditioned by the effectiveness of its implementation. A positive step in the right direction is the announcement made by Rocio Nahle – the incoming energy minister – of about Ps25bn in rehabilitation funds to be invested in the existing refining infrastructure.  If the right teams are empowered and given the resources for implementation, the rehabilitation of the refineries has a good chance of succeeding. It is important to mention that the upgraded refineries will need feedstock, which is currently in short supply from domestic sources.

What are your thoughts on the updates to NAFTA?

There were sighs of relief when the negotiations of the US-Mexico-Canada Agreement (USMCA) concluded successfully just hours before the deadline of 1 October after tense negotiations and threats.

The new agreement will certainly restore investor confidence and bring benefits to the three countries. While preserving the same structure and trilateral nature of NAFTA, it incorporates new provisions that make it more modern.

We now have to wait for the approval process by the legislatures of the three countries, which will certainly take all of next year. There will certainly be important discussions and disagreements between the various parties and stakeholders, but I’m confident that it will pass and be ready for implementation in 2020.

I share the optimism of most business sectors regarding the positive impact that the new agreement will have on GDP growth and the overall well-being of the three countries.

Are there any updates that will improve the trade agreement?

There are several updates and additions that improve the agreement, such as the provisions that address currency manipulation and the need for transparency regarding foreign exchange activity; more modern and streamlined customs procedures that will save time; restrictions in case one of the countries wants to sign a free-trade deal with non-market economies; provisions on digital commerce; increased market access rules for certain products; and enhanced labour practices.

For the chemical industry there is also good news because the new rules of origin will make it easier to qualify for duty-free treatment. The paperwork and cumbersome requirements of the current agreement limited a large amount of chemical products from qualifying.

Are there any updates that weakened it?

I can’t think of much, other than the changes related to the auto industry, where the new agreement requires 75% of regional content (up from 62.5%) and that 40-45% of parts need to be made by workers that make $16 per hour or more. Even though this will negatively impact the overall competitiveness of the North American auto industry, it will not deter investment in Mexico because of its many free-trade agreements with other countries. Cars made in Mexico, even if not compliant with the new rules, will still be very competitive and exported to any of the other 40 or so countries with which Mexico has free-trade agreements.

Mexico’s new  president, Andres Manuel Lopez Obrador (AMLO) has focused a lot of his attention on energy production. What is your opinion about his policy proposals for oil and gas production?

The incoming president has consistently sent two messages. First, his willingness to allocate larger amounts of money from the government’s budget to develop and secure national energy production. The key success factors will be to make sure that these public resources are allocated effectively and that they provide the expected return on investment and second, that the energy reform will continue and that private investment/co-investment will be welcomed and needed in future projects. If the two messages become a reality and result in more abundant and competitive oil, gas and petrochemical products, the country as a whole will benefit greatly. This would be great news for chemical manufacturers and for distributors like Pochteca.

In general, is AMLO proposing policies that should increase GDP growth, maintain it or cause it to slow? Or is it too early to tell what kind of effect AMLO will have on the nation’s economy?

We all want the incoming president to succeed. I’m sure that the intentions behind the various policy proposals are well meant and have the goal of fostering growth and diminishing poverty, corruption and crime. I believe that it’s too early to tell what the end result will be on the various fronts. Time will tell.

($1 = Ps20.43)

Interview article by Al Greenwood