Mexico has long been a focus for refiners looking to grow their downstream footprint. But how will the country’s liberalizing markets fare as demand falls and margins tighten?
Argus VP of North America Refined Products, John Demopoulos, Editor of Mexico Fuel Markets, Carla Bass and Senior Correspondent in Mexico City bureau, Sergio Meana discuss COVID-19 impacts to fuel flows in Mexico.
John: Hello and welcome to "Driving Discussions." In this series, we'll discuss the forces that affect road fuels globally. And in this episode, we're going to be discussing the impacts of the coronavirus on Mexico's fuel markets. "Driving Discussions" is brought to you by Argus Media, which is a leading independent provider of energy and commodity pricing information. My name is John Demopoulos and I'm the vice president for North American refined products here at Argus. And with me here today, Carla Bass, editor of Argus Mexico fuels markets and Sergio Meana, senior correspondent in Argus' Mexico City bureau. Welcome to both of you.
Now, first of all, I think coronavirus and COVID are obviously front of mind for all of us and for everybody listening to us at the moment. And I wonder, Carla, if you could give us the sort of broad-brush introduction to what the key impacts we're seeing on Mexico are right now. I understand that Mexico is a little way behind the USA in terms of some of those impacts.
Carla: Mexico has actually received some criticism for a delayed response to the coronavirus. Social distancing is not the president's style. He's very much a man of the people. He's posted videos recently of him hugging retail fuel station operators. So they're definitely probably about two weeks back. Private businesses began working from home, taking some additional measures before federal government agencies did. So we're just now starting to see a little bit of a drop in demand.
John: And Sergio, what does that mean at the resale level, the level of the wholesalers? How are they reacting to all of this?
Sergio: Well, John, they are trying to keep up with the preventive measures to start off with the population, that's one thing that they are trying to take a lot of caring, making sure they're... We don't have self-service here in the retail fuel stations. So they're taking a lot of measures with the people that pump the cars. But also in terms of the market, retailers are indeed trying to see the edge of the discounts from the U.S. Gulf Coast and the lower prices from the U.S. Gulf Coast. So they are trying to fill their inventories with these cheaper batches of gasoline.
Carla: Yeah. And I think demand, as they told you, demand has gone down by about 20%, I think, Sergio.
John: 20%, that's a big number. I mean, that almost replicate some of the demand losses that we're seeing in the U.S. road fuels markets.Sergio, what does that mean on the ground in terms of the retailers and the wholesalers? How are they reacting to this?
Sergio: Well, for retailers, this is like a two way street in terms of the prices scheming from the U.S. Gulf Coast. They are quite cheap as you know. So some of them have reacted by buying a lot more in initial point but Mexico has a problem of storage. We have a pretty limited infrastructure to store fuels here in Mexico. But on the other side, we do have to stop limiting our imports from the U.S. Gulf Coast as the demand is clearly dropping.
John: And of course, we were seeing big volumes of fuel being trucked and railed overland from the U.S. into Northern Mexico as liberalization took off. Is that where we're seeing these extra volumes being pulled in by the resalers? Is that what they're doing or they're taking cargos too?
Carla: It seems like it's been a bit across the board. We saw a little bit of a pause in tanker fixtures a few weeks back and then they resumed. As you know, Mexico buys, you know, well above 90% of its gasoline and its diesel from the U.S. and the U.S., in turn, sell 60% of its gasoline exports and 30% of its diesel exports go to Mexico. So the markets are just really, you know, connected with each other. And, you know, as increasing volumes has started to come over by rail and truck in recent years since Mexico's energy reform in 2014 and then removing fuel price caps in 2017, more small and medium-size and independent fuel suppliers became involved in the market.
John: And I think you said that we've started to see a few more cargos coming into Mexico from Asia as prices have dropped. Is that right?
Carla: That's right. This actually began especially under the administration of the new president who would really love for the refined products markets to be a little less connected. Mexico would like to end its dependence in that area on the U.S. So there's been some volumes from Asia. The volume actually increased about 50% in 2019 from 2018, although total volumes are still around 50,000 barrels a day. And then in recent weeks, we've seen several fixtures from Asia as demand dropped there because of the coronavirus. So it's been kind of...one of Mexico's first coronavirus responses was buying more gasoline and diesel from China.
John: Now, what about the broader impacts on Pemex? Obviously, low oil prices do generally spell good news for Pemex. How does this affect some of the infrastructure plans?
Sergio: So Pemex, as a state-owned company it has a lot of the responsibility in the energy sector here in Mexico. Some introduction I can say it's not as in the U.S. or that there are tons of companies working in the different industries. I mean, we come from a big monopoly and it was broken as Carla said, a few years back in 2014. So for the company, what this means in terms of their biggest business, which is selling crude in international markets, well, this is quite bad news as for every international company. So in crude right now their prices are quite low. We do have an insurance Pemex and the government hatch the crude price for Pemex as an insurance. Because a big chunk of Mexican finances depend on this price. So that's...having these prices it's quite a risk for Mexico and for Pemex.
And then on the refined product sector, well, the government says this is an advantage in terms of them being able to buy at really cheaper prices from the U.S. Gulf Coast and from other countries. So that's the advantage that they see. But I guess in terms of margins and what it is this for Pemex, this isn't really good news because they are also selling gasoline at really much more cheaper prices. The retailer margins and the wholesale margins at which they sell to retailers are quite lower and also their retail margins are in the lower. That's what I would initially say. But I know Carla may have another perspective on the implications for Pemex.
Carla: Yeah, I was going to add that, you know, Pemex had a really ambitious business plan outlined under President Andres Manuel Lopez Obrador. He wants Pemex and all the state energy companies to come back to the center to either continue or really come back to focus on them being the main protagonist. Several rating agencies and other analysts have, you know, said, this plan was ambitious, to begin with, and now almost impossible. They really need to rethink it. The Pemex president has said they will make some adjustments but we don't have any specifics. And the government has said they want to go ahead with building a proposed new refinery Dos Bocas refinery, which would be a big investment.
John: Carla, how do you see the impact on Dos Bocas? Is that refinery now underway in terms of construction and is this gonna delay it, do you expect?
Carla: The government continues to level the ground at this refinery site. They've had a really ambitious plan to begin with. They said, "We are gonna build it for $8 billion in 3 years," which is regarded as extremely optimistic and now they have even less financial or economic reasons to do so. Even if it was always somewhat of a political project, it's just gonna be really difficult.
John: Yep. Seems like the worst time imaginable to start building refineries in the Gulf Coast but let's see. So the message seems to be Mexico has been picking up some cheap fuel...Mexican resalers have been picking up some cheap fuel from the U.S. as prices have dropped but we shouldn't really expect that to last for too long. Is that the right way to think about this?
Carla: Exactly. They don't have any place to put too much extra gasoline and diesel. It's a very constrained storage. Mexico now has about five days' worth of demand on hand. That's an improvement compared to three days a few years ago, but still very low by many standards. So at some point, they're just gonna run out of places to put this cheaper product and people will likely be driving less if coronavirus mitigation efforts really take off and are really enforced.
John: Well, let's keep our fingers crossed for Mexico. Carla and Sergio, thank you. And if you enjoyed this podcast, please be sure to tune in for the other episodes in our series, "Driving Discussions." For further information about Mexico's fuel markets and U.S. refined products markets, please check out www.argusmedia.com. Thank you for listening.