Image by Logan at Adobe Stock

August 2023 was the first month in which Mexico was the main exporting commercial partner of the United States, representing a major victory over China for Mexico. Commerce between the US and Mexico is currently valued at US$779 billion/y. Since 2018, nearshoring has been the word on everybody’s lips, and as it continues to take off, it will carry the Mexican chemical industry with it.

According to World Bank data, the value of FDI investment in Mexico has not changed dramatically since 2018. However, in 2023 more of that FDI profit has been reinvested. Interestingly, the sources of the FDI are diversifying, demonstrating a recognition of Mexico’s benefits at a global level. In 2018, almost 53% of FDI in Mexico came from the United States, while in 2022, that percentage was only 43%, although the amount of investment in dollars remained similar.

Mexico is expected to attracted US$40 billion in FDI in 2024.One factor is the comparatively low cost of labor. In 2023, the average US salary was US$28/h, while Mexico’s average salary was only US$12/h. That status quo has, however, changed. On January 1, 2024, the national minimum wage was raised by 20% to US$14.50. Miguel Valdivia, Commercial Director of Trade Chemicals, commented: “Political issues in Mexico have six-year time frames, and in the previous term, we were worried about gasoline and supplies, but in this six-year term, I think labor is the most relevant.”

According to the Mexican Institute for Competitiveness (IMCO), out of 43 economies studied, Mexico is currently ranked at 37th in competitiveness. This is the lowest the country has ever been ranked, following a decline in results since 2018. Mexico ranked well for labor and employment, but low rankings in health, quality of education, and the state of law, among other factors, weakened the country’s position.

Mexico compensates for these challenges with a favorable geographic and trade relation to the United States. The United States-Mexico-Canada Agreement (USMCA) is a driver of the Mexican economy. Despite the impending renogiation of the agreement in 2026, the trade relationship between the US and Mexico is secure, bolstered by logistics crises that have driven companies to secure their supply chains to the US by basing themselves in Mexico.

The US is not, however, the only core player when it comes to nearshoring. Leschaco, the global logistics provider, has observed an increase in the Asia-Mexico chemical trade. Francisco Gálvez, managing director of Leschaco, said, “Historically, northern Europe was the global hub of chemical production, but Asia is becoming the new core of this market, and companies from that region are establishing operations in Mexico.”

For the chemical industry, which is extremely capital-intensive, the establishment of new operating units is difficult, with companies entrenched in other locations. The choice for a major chemical producer to enter Mexico can only be made with a long-term supply chain strategy in mind. Jose Luis Urrutia Segura, president of the industry association CANACINTRA, said, “One of the greatest challenges for the chemical industry in Mexico is how to insert itself into these positive nearshoring trends as a capital-intensive industry.”

Foreign investment is already transforming the country. Salvador Soria, president Mexico, Central America, and the Andean region at Arkema, said, “The nearshoring trend has opened doors for greater collaboration and synergy within regional markets, fostering quicker responses to market demands and reducing logistical complexities.”
 

Energy in the eye of the electorate

Globally and nationally, the coming years will be years of political change and electoral uncertainty, which will shape the economic situation and investment climate nationally and regionally. The United States, for example, will have a pivotal presidential election in 2024 with ramifications for the Mexican economy. Esteban Guáqueta, LATAM marketing director for Nalco Water, an Ecolab subsidiary, noted, “Globally, approximately 50 countries will have elections. That will impact the industrial sector.”

Mexico will be among them. Mexicans will head to the polls on the 2nd of June 2024 to elect a new President. The incumbent, President Andrés Manuel López Obrador (AMLO), is barred from a second six-year term due to a one-term constitutional limit. The upcoming election has two frontrunners: the governing, left-wing party Morena’s candidate, Claudia Sheinbaum, a former scientist and mayor of Mexico City widely touted as the current President’s prodigy, and opposition candidate Xóchitl Gálvez, a self-made businesswoman and politician with indigenous roots who will represent the National Action Party (PAN). Polling data suggest that the Morena coalition will retain the presidency in 2024.

Since the nationalization of Mexico’s energy sector in 1938 and the creation of the state-owned oil giant PEMEX,  energy policy has been a political battleground.  right and left. The Mexican state relies on PEMEX, championed by resource nationalist AMLO, to generate billions of dollars in revenue annually. However, a US$100 billion debt pile and chronic underinvestment in PEMEX facilities, where refinery utilization rates have declined yearly, has left the chemical industry in a challenging position. Given the energy-intensive chemical industry’s need for low energy prices and dependence on petrochemical feedstocks supplied by PEMEX, the industry’s fortunes are tied to political developments in energy policy.

Structural inefficiencies in the energy market extend beyond PEMEX. The electricity market is dominated by the Federal Commission of Electricity (CFE), which generates most of the electricity for the country and is reliant on natural gas imports from the US. This presents a “core challenge” to the industry’s competitiveness according to Miguel Benedetto, managing director of ANIQ: “When looking at natural gas, we are competitive, with much the same price that Houston has, plus distribution costs. When looking at electricity, however, we have a huge differential. Electricity costs are between 25% to 30% higher compared to the Houston area.”

These elections could define the chemical industry’s future. Gálvez’s energy policies are reminiscent of the Nieto era: Reforming PEMEX, encouraging private energy sector investments, and promoting green energy investments in hydrogen and solar power capacity. She has proposed creating a new state energy company, Energías Mexicanas, which would focus its operations on renewable energies.

By contrast, Sheinbaum’s statements suggest an approach similar to AMLO’s, stressing energy sovereignty and the role of PEMEX. Both candidates have highlighted the importance of green energy and the transition towards renewable energy sources. However, the candidates differ in the methods. One favors private investment, while the other supports state intervention.

These elections will impact the future of renewable energy in Mexico. The country has incredible renewable energy resources, but the current government, to protect PEMEX, has not provided support or approvals for a significant investment in renewable energy. Of the lack of renewable energy policy, Dieter Femfert, commercial director of Cryoinfra, said, “In the long-term, this will disadvantage us in front of other countries.”

Hugo Villareal, VP of energy and engineering at Linde, described decarbonizing industrial processes as Mexico’s most pressing political challenge. “The government has to promote this wind and solar power industry,” he said, adding, “Regulators have to catch up.”

Government investment in energy will be critical to making Mexico attractive for nearshoring. “Electricity prices are relatively high in Mexico compared to the US,” said Patricio Gutiérrez, chairman of the board of Grupo Idesa. “If we cannot lower these energy costs and promote a renewable energy matrix, there is a risk that our industry will become uncompetitive and unable to meet the environmental demands of clients.”