Mexico’s economy stands to gain from lower costs from importing natural gas from north of its border. Cheap US energy is benefiting Mexican manufacturing particularly, which depends heavily on energy cost efficiency for assuring its profitability and competitiveness.
Impact of cheap US energy prices is benefiting Mexican manufacturing sector and increasing its competiveness
In February, 2015, a working paper by researchers, Jorge Alvarez and Fabian Valencia, entitled: Made in Mexico: Energy Reform and Manufacturing Growth, analyzed the impact of recent energy reform measures on manufacturing output through changes in energy prices. The report concluded that the reduction in energy rates has already significantly impacted the Mexican economy in general, and the manufacturing sector in particular. The report includes the finding that lowered electricity cost has the largest quantitative impact on manufacturing output with just one standard-deviation reduction in electricity prices correlating with a 2.8% increase in manufacturing output. Furthermore, the report emphasized the further profitability that might be attained by further reliance on natural gas for electricity generation. Mexico’s industrial sector accounts for over half of electricity usage, thus making it the single greatest benefactor of more readily available, affordable
natural gas. It is eminently clear that cheap US energy is benefiting Mexican manufacturing.
Finding More Affordable Natural Gas
Having established the need for affordable natural gas for manufacturing profitability and growth, the country has not relied only on expanding domestic production, but has also turned to the US for sourcing the vital fuel. The US has recently experienced a glut in the natural gas market, and prices for the commodity continue to drop. Rather than continue to import liquefied gas, Mexico is now turning to pipelines to import natural gas directly from the US border region. Piping gas in will cost approximately one third of shipping liquefied gas, meaning significant savings for Mexican energy.
As part of the energy reform, Mexico is currently implementing or planning 14 projects for connecting the country directly to cheap US energy is sources. This represents over 2,300 miles of pipeline being laid, as well as approximately $7.4 billion in combined investment from both public and private sources. Carlos Capistran, an analyst for Bank of America/Merrill Lynch, sums up the outlook for Mexican manufacturing and the Mexican economy going forward:
“Lower electricity costs and cheaper natural gas represent an upside risk for growth and a downside risk for inflation in 2016. Lower electricity costs and cheaper natural gas also support our views that the manufacturing sector will continue to be the engine of growth, that inflation will remain under control and that the central bank has room to hike less than the Fed in 2016.”
Present circumstances leave no doubt that cheap US energy is benefiting Mexican manufacturing. Those interested in learning more about Mexican manufacturing should make it point to contact the professionals at the Tecma Group of Companies.