Use of Base Oil Brokers Rises in Mexico

Close to two-thirds of base oil sold by United States refiners into Mexico is transacted through brokers, according to five industry insiders, and the number is expected to increase as Mexico struggles to cope with Covid-19 and its ailing economy.

For years Mexico has been a sponge for U.S. base oil, especially API Group I stocks, and U.S. companies have been more than happy to offload it as domestic demand shrinks. However, industry insiders told Lube Report during recent interviews that some U.S. companies have experienced problems collecting payment from buyers across the border.

“Its cash on the barrel now,” said one Mexico City-based trader, using an idiom for payment due immediately. “Within the last few years, I’ve witnessed an increase in business, because of American companies wanting payment at the time of the sale.”

Sources with three U.S.-based suppliers said companies large and small are beginning to use brokers, because of the payment issues. “I’ve heard the best excuses for nonpayment, from the banks are closed to the company ran out of checks to the person writing the check is out for medical reasons,” one base oil executive said. Like others he spoke on condition of anonymity because of the sensitivity of the topic.

The true story, others said, is that some Mexican companies are waiting for that country’s peso to increase in value to the U.S. dollar. Contracts generally require Mexican companies to purchase base oil with U.S. dollars, but they then use it to make products that are sold in pesos. Mexican customers are “delaying as long as possible, praying the peso will increase” in value against the dollar, another insider said, echoing a statement by the Mexico City broker. An official at another U.S base oil supplier said that with Mexico importing more U.S. base oil each year, the need for brokers is also grown.

Two sources said U.S. companies only cut off credit and supply as a last resort, because returns on sales into Mexico are still better than exporting to India or Africa. “Remember when U.S. refineries haven’t been able to find sales in the U.S. market, Mexico is the next best option,” said one U.S.-based insider. Lube Report confirmed that two large U.S.-based companies ended contracts with their Mexican distributor in the first six months of 2020.

Overall, several sources said, the Mexican market is experiencing a prolonged cash flow problem which isn’t forecasted to let up soon. In 2019, the economy contracted slightly. Some blamed the government of President Andres Manuel Lopez Abrador, known as AMLO, for failing to reform state-run oil company, Petroleos Mexicanos, the most indebted oil company on the globe.

“If you reform PEMEX, you can reform not just the base oil markets here, but the entire oil markets in Mexico,” said the Mexico City-based broker. Covid-19 appears to be taking a toll on the country and its economy, although the scale of the disease in Mexico is difficult to assess. The government has admitted to playing hard and lose with the numbers. Officially, in early June approximately 42,000 cases were reported, with 4,000 deaths. Unofficially, doctors, mayors, funeral home directors and former health officials estimate the number is upwards eight times higher.

This has caused the worst economic contraction in the country’s history, with an estimated 5.3 percent drop in economic activity, according to the United Nations. As in other countries, transportation – the largest end-use industry of finished lubricants and base oils, has been hard hit.

The Mexico City broker admits that business had dropped since the pandemic, but he still receives a few phone calls each month wanting to make a deal. “I don’t think the phone is going to stop ringing when this Covid-19 virus is gone. I believe brokers in Mexico are going to be the new way of business for U.S. companies in this market,” he said.

However, one U.S. executive offered a different point of view. Until about 10 years ago, he said, using brokers was the norm for business in Latin America, but around the time of the Great Recession, oil companies started selling to distributors and end users. U.S. companies saw broker’s fees and thought they could sell base oil cheaper directly, he said.