Mexico on Verge of Change

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JERSEY CITY, New Jersey – Mexico is undergoing crucial changes, with a new president just sworn in, and a revised Free Trade Agreement with the United States and Canada expected to be ratified by the U.S. Congress in coming months, Lina Suarez, commercial director for base oil and lubricant distributor Quimica Delta, noted during a presentation at the ICIS Pan American Base Oils and Lubricants Conference held here Nov. 28-30.

Mexican president Andres Manuel Lopez Obrador took office on Dec. 1, and while Lopez Obradors anti-establishment and leftist message won over popular support during his campaign, it raised concerns that market-friendly policies and economic relationships across the border would suffer.

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The United States-Mexico-Canada Agreement was signed as a replacement to NAFTA on Nov. 30 at the G20 summit in Buenos Aires, Argentina. While it still needs to be ratified by the U.S. Congress, some parts of the pact will kick in immediately, such as a deal exempting Canada and Mexico from U.S. automotive tariffs.

Together with all these changes come many uncertainties which are likely to shape Mexicos economic prospects and ultimately impact the automotive, energy and lubricants markets, Suarez explained.

Mexicos economy has slowed down over the last couple of years. The countrys gross domestic product, which had registered healthy growth in 2016 – reflecting an annual rate of 2.9 percent – was expected to stay at around 2 percent in 2018, unchanged from 2017.

By comparison, the U.S. GDP registered 1.6 percent in 2016, but grew steadily to 2.2 percent in 2017 and was anticipated to reach 2.9 percent in 2018, according to data from the Organization for Economic Co-operation and Development. Another indicator of the economic slowdown in Mexico is the manufacturing index, which had shown an upward trend in previous years, but is now in the contraction area, after being in the expansion zone for 16 straight months, Suarez said.

The exchange rate between the local currency – the Mexican peso – and the U.S. dollar has also been highly volatile in recent months, mainly due to the new NAFTA negotiations, and the political and economic upheaval.

Talk about the cancellation of a new Mexico City airport project has also caused the pesos devaluation to jump in the fourth quarter of 2018.

Mexicos base oil market is deeply affected by currency fluctuations because a majority of the countrys requirements are fulfilled by imports, with a large portion originating in the U.S.

The total market demand for base oils in Mexico in 2018 is estimated at 5.49 million barrels per year, Suarez noted.

Mexicos national refiner and base oil producer Petroleos Mexicanos supplies 13 percent of the countrys requirements, while the remaining 87 percent comes from imports.

Imports total approximately 4.77 million barrels, with paraffinic base oils making up 86 percent of the imported volumes, naphthenics 10 percent and other oils about 3 to 4 percent.

Pemexs base oil production decreased over the last couple of years due to plant outages, with estimates pointing to 729,000 barrels in 2018. But, the company lost market share compared to previous years, according to Suarez.

In 2015, per each metric ton of base oils produced by Pemex, 4.3 tons were imported. During 2018, the average ratio has been around 6.5 tons of import material per each one produced by Pemex, she said.

The surplus of API Group II base stocks in the U.S. prompted lower pricing, which made these products more attractive in the Mexican market, especially in relation to Group I oils, and has led to climbing demand for these cuts.

Group I base oils continue to be the workhorse of the industry in Mexico, with this category representing 49 percent of all demand. This is not likely to change drastically over the next few years, as formulations of some finished lubricants still need certain key performance features that only Group I base oils can provide.

However, the share of Group I oils has been going down, while Group II has been going up, because the market now requests lower viscosity engine oils and new formulations for cost optimization, Suarez noted.

Naphthenic base oil imports have lost territory over the last three years, and demand levels have gone back to those seen in 2015.

New government regulations for the automotive industry regarding fuel economy and emissions standards are also impacting original manufacturers requirements, which in turn will affect base oil and lubricants demand.

For passenger car motor oils and gasoline motor oils the requirements of ILSAC and API categories have been the same since the end of 2010. Diesel motor oils have a new category since 2017, the American Petroleum Institutes CK-4, Suarez explained.

According to industry figures, demand for the oldest API categories diminished over the past few years, but the change is not happening as fast as the market was expecting. The final impact of the new OEM requirements on the base oil market has, therefore, not been as significant as previously anticipated.

The age of the Mexican car parc is also a factor that will impact lubricant demand moving forward. Older cars continue to circulate in Mexico, and the types of lubes required are different. As a result, older lubes and obsolete lubes share the market with updated lubes.

An estimated 40 percent of the Mexican commercial vehicle lubricant market remains at API CF-4 and lower – an obsolete specification that is unsuitable for most diesel-powered engines built after 2009, and even less appropriate for vehicles introduced in 2018 and beyond, additive and specialty chemicals producer Lubrizol noted on its website.

In 2014, the average age of Mexican heavy duty fleets was 16 years, and in 2018, it went up to around 17 years. Conversely, the age of Mexican light passenger cars decreased from 18 years in 2014 to 15 years in 2018.

The speed of the change has not been as high as expected, and this has had a direct impact on the demand of finished lubes, Suarez emphasized.

Looking ahead, Suarez predicted that the economic uncertainty brought about by a new government and political platform will linger until changes are finally implemented and results become evident.

In terms of the refining segment and base oil production in particular, Suarez envisioned that Pemex will remain a key player in the paraffinic segment in Mexico. Its success will largely depend on the strategic actions taken by the government in relation to energy reform and new infrastructure projects.

Implementing changes might not be easy, but Suarez remained optimistic that the transformation would be accompanied by industry advancements and fresh opportunities for every segment.

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