Chemical Distribution in Mexico: The ‘super peso’ complicates margins

Chemical Distribution in Mexico

April 16, 2024

Image courtesy of Pochteca


2023 was a year of contraction in the industry after several previous years in which distributors raked in profits due to supply bottlenecks and high prices. Due to oversupply, prices dropped in 2023, and distributors experienced significantly lower demand. Overstocking created a downward pressure on pricing. “There has been some erosion of margins across the industry,” explained Sergio Chiñas, CEO of specialty chemicals distributor First Quality Chemicals, adding, “However, the reduction in demand is worldwide, not specific to Mexico, and I expect it to be temporary.”

The situation caused by tighter margins was not helped by a challenging exchange rate, with an overpowered peso putting pressure on companies. Distribution companies often import materials in dollars but sell them in pesos. Miguel Ruiseñor, managing director for Mexico at global distributor IMCD, stated: “The exchange rate in Mexico has created a complicated situation. The ‘Super Peso’ has impacted the distribution industry as every day, we see the value of the dollar decreasing.”

This was an issue for the populace as much as it was for the industry. Mexico receives US$60 billion annually in remittances, largely from the US, so remittances are a crucial part of household spending. By July 2023, the peso had increased by 14% against the dollar, reducing the value of those dollars. “Unusual economic situations with remittances, high inflation, and the exchange rate all occurred in conjunction, generating uncertainty,” said Adriana Ramírez, commercial director at Helm de México. “We were unsure month to month what would happen, if prices would rise or decrease.”

Several factors have contributed to the super peso: First, the Mexican economy’s exports rose by 17% in 2022, increasing the dollars entering the country; second, the autonomy of the Bank of Mexico has enabled it to take steps to preserve the peso’s purchasing power regardless of political pressures; third, there has been an increasing difference across the border in terms of interest rates, with interest rates staying much higher in the US over 2023, incentivizing international investors to buy more profitable government bonds in Mexico; and fourth, nearshoring has driven FDI to Mexico, particularly in a landscape of greater risk appetite on the part of investors.

The fluctuations in the exchange rate were not uniformly bad news. Miguel Valdivia, CEO of Trade Chemicals, said: “We were able to resolve the debts we have in dollars at a lower exchange rate, and that allowed us to have greater competitiveness in price for imported products, providing a benefit to our client.”

Low demand for chemical products, meanwhile, has been driven not just by slower demand in the US and globally, but also by Mexico-specific factors. In 2023, access to qualified labor was an issue for chemical companies, constraining their ability to keep plants running at full capacity. “Finding qualified workers to operate the plants has been challenging, and many of our clients can’t operate two or three shifts a day because they simply do not have the people,” said Arturo Hoyo Vargas, vice president product line management North America at Nexeo Plastics, adding, “This has contributed to low demand.”

Indeed, there is a shortage of labor at all levels of the industry. A scarcity of truck drivers has been a challenge for distributors, and there is no end in sight. Truck drivers can do the same job for better pay in the United States, and the country continues to bleed drivers. Humberto Elizalde Mendoza, CEO of organic peroxide distributor ICS Group, said: “We have taken steps to mitigate this issue by investing in our human capital; due to the nature of their cargo, we offer our drivers specialty training and competitive salaries. Unlike Canada and the US, there is not an abundance of people in this country that are trained to handle such specialty products, so retaining staff is very important for us.” 

The challenges are myriad, but for distributors, a return to better days is expected. Pricing is expected to stabilize in 2024 after the extreme drop over 2023, providing opportunity for growth. Mayra d’Artigues, President of Mexican distribution company Naseda, said: “2024 should be a more stable year for the industry, as inflation and costs have somewhat normalized, and consumer confidence is pretty strong due to factors such as salary increases.” 

Nearshoring is driving growth for the chemical industry, but it is not an unlimited positive. “While everybody mentions the upsides of nearshoring, there will also be an increase in competition as more foreign companies enter the market. Some companies are coming in from markets with high production but relatively low domestic consumption, driving them to seek markets like Mexico to dump their goods in,” explained Luis Urquijo, sales director at Disan, a distributor of solutions for the home and personal goods, industrial goods, pharmaceuticals, and human nutrition sectors.

Alejandro Aguirre, General Manager of Vinmar Plastichem Mexico, a plastic resins distributor, elaborated on Mexico’s strengths: “A comprehensive trade agreement like the USCMA is a great advantage for us. Our country stands to benefit as global supply chains become more regionalized to insulate them from exogenous shocks.” 

PEMEX underproduction is a challenge and an opportunity 

Lack of productivity at PEMEX has had a knock-on effect all the way to the distribution section. Miguel Ruiseñor, MD of IMCD, called for investment in improving efficiencies at the state-owned company, citing knock-on impacts of the companies’ operational inefficiencies. Recently, the company has failed to pay suppliers on time. Ruiseñor said: “If they do not pay the companies serving them, those services cannot move. If the service providers cannot move, the distribution companies selling to these actors are also at a standstill.”

With PEMEX underproducing, distributors play a crucial role in providing the industry with raw materials. To ensure this can continue at the pace and quantity necessary, the distribution sector must work with the government to ensure a more efficient customs and regulatory process. Access to materials is a political and economic issue for the entire industrial sector. Mendoza of ICS Group explained: “We have had issues with the flow of raw materials needed for the chemical industry; increasing demand in Asia and Europe has diverted some flows that traditionally came to Mexico and driven up costs. That is why we need to develop these capabilities locally.” 

Helm de México is a global distributor that specialized in moving large volumes, bringing raw materials into Mexico to supply the industrial sector. Adriana Ramírez, commercial director of Helm de México, said: “We are seeing some challenges in regulatory restrictions and tariffs, and the country must be focused on ensuring continued access to goods.” 

Nonetheless, with logistics smoother than in previous years and more supply available, petrochemical feedstocks will continue to flow into the country. There is more access to supply for products such as polyethylene, polypropylene and polystyrene. According to Ruben Ilitzky, CFO of Telch, supply availability should continue to improve, with good material availability if the US economy does not start growing significantly faster: “A new Shell facility in the Northeast and investments in capacity at existing plants will secure supply for the future, and demand is growing but at a stable pace. There are also plants in Asia offering material.”

Although this glut in supply has depressed prices, not all the petrochemical sector has been such a challenge for distributors. Growth in the automotive sector over the course of 2023 is expected to continue in 2024, increasing demand for plastics, paints and coatings, lubricants, and other products. Alfredo Ison, president of Química Delta, stated: “Lubricants are growing at the same pace as the Mexican economy, which has been growing in recent years.”

2023 was more challenging than the preceding boom year. Alejandro Iniestra, director of Kigo Chemical said “Attending the multifaceted challenges confronting the chemical industry requires a proactive approach, strategic planning, and collaboration across the industry,” said Alejandro Iniestra, director of Kigo Chemical. “Chemical distribution companies should consider diversifying their supply chains, embracing sustainable practices, integrating digital technologies, and fostering a culture of innovation to efficiently navigate the growing landscape and preserve a competitive position in the market.”

INTERVIEWS MORE INTERVIEWS

"By investing in smart technologies and systems, Henkel Thailand is leveraging digitalization and Industry 4.0 technologies to strengthen its manufacturing excellence."
"We want to invest in infrastructure and local talent, making sure that the resources bring real benefits to the local communities."
"Leading mining companies are transitioning from trucks to conveyor belt systems that are managed remotely from control centers, requiring minimal human oversight."
"Our new biannual mandate starts with a focus on maximizing the opportunities related to the energy transition, as well as leveraging the professional development and technologies that will shape the mining industry."

RECENT PUBLICATIONS

Southeast Asia Chemicals 2024

In an era of low-priced commodities and an uncertain geopolitical landscape, logistics companies are prioritizing the long-haul business, not just because it is probably the most profitable, but also because their customers are searching for new markets out to sea.

MORE PREVIOUSLY PUBLISHED

MACIG

"We plan to double our copper production by the end of the decade. There remains significant upside potential in the gold industry, and the copper operations are strategic and additive to that."

SUBSCRIBE TO OUR NEWSLETTER