Last week I joined over 230 industry professionals in Houston for the Argus Mexican Refined Products Markets Conference. As always, Argus put on a terrific event, and I left feeling as bullish as ever about the opportunities presented by the opening of Mexican energy markets. It seems like every week we’re seeing new assets brought online and new infrastructure projects begin to take shape. All the while, the U.S. continues to supply huge volumes of physical product to the country. Indeed, the door is just barely open, but it swings further and further every day.
In this issue of Market Update we’ll look at how logistics continue to shape the Mexican fuels market, as well as the future of the country’s blending capabilities and the IEPS excise tax.
It’s not supply, it’s logistics
In the past four months, Mexico has suffered several hurricanes, an earthquake, a refinery fire and a host of other disruptions. Despite this, the country has not experienced any serious supply shortfalls. Why not? The answer is simple: Logistics. The United States (mostly the USGC) is more than equipped to respond to occasional disruptions in the supply chain, but in order to do so, logistics are crucial. Indeed, success in Mexico will be achieved by those who can construct the most cost-effective means of getting product from the source to the end consumer.
The good news is that Mexico has a wide range of markets that will require a wide range of solutions. The major population center in central Mexico will receive large volumes delivered by ship into Tuxpan, Veracruz and Pajaritos and by rail into secure locations in San Luis Potosi, Aguascalientes and San Jose Iturbide. The west coast will be supplied via pipeline and water by the U.S. west coast refining system. Northern Mexico will be a bit of a hybrid, with product arriving from the Gulf of Mexico by rail, pipeline, and truck.
With a wide range of products headed from various sources to various destinations, the logistics answer is not a singular instrument. Flows will not be driven by the one who owns the product, but rather, by the one who controls the most cost-effective route to delivery.
Flexibility and blending
As described above, getting supply into Mexico has not been a prohibitive obstacle. As the supply chain gets built out in the coming years, the industry will need to install a modern, flexible infrastructure that will truly enable the marketplace to deliver and appropriately price products. Several of the proposed merchant terminals planned for central Mexico will have the flexibility to receive ULSD, jet and gasoline. These facilities will have storage and blending capabilities to customize gasoline with specific quantities of ethanol, MTBE and fuel additives. All of this will be priced according to the component delivery cost as well as the developed asset cost. In a fully liberalized price environment, this modern system and cost-based approach will dictate regional prices at the pump.
IEPS, they did it again
Discussed in depth at last week’s conference, Mexico’s IEPS excise tax continues to be a complicating factor in the economics of exporting to Mexico. Designed to generate tax revenues and stabilize market prices for consumers, the tax features an adjustment mechanism that gives the Mexican Finance Ministry the ability to modify the rate on a weekly basis. In recent months, this has been good for U.S exporters: The tax rate on gasoline has fallen by almost one peso per liter, and the tax rate on diesel has shrunk by 0.35. pesos per liter. With that said, the potential for a rate hike exists—and it continues to give marketers pause on the Mexico play.
In addition to the general risk posed by a fluctuating tax rate, IEPS presents a second layer of risk. In a stable tax environment, the tax burden flows through the chain of custody from the importer/marketer all the way down to the end consumer. The IEPS is assessed on a bulk cargo of product at the time of import. So what happens if enough time passes and the IEPS is revised before the product is actually sold to the consumer? You guessed it: The marketer is now forced to price under the new rate. This discrepancy may equate to fractions of a penny (or peso), but in a market where millions of gallons are changing hands, the risk does need to be understood.
In order to secure the country’s long-term access to fuel, Mexican officials need to assure exporters of the country’s commitment to a free market. To that end, Mexico should see to it that future modifications are less frequent and disruptive to trade. With price liberalization set to continue through the remainder of 2017, my suspicion is that the Finance Ministry will look to “stabilize pricing” during the first quarter of 2018 and then move toward a more consistent IEPS policy.
Interested in breaking into Mexico’s retail fuels market? With established relationships on both sides of the border, our international markets team is here to answer your questions. Give us a call today.
Senior Vice President of Terminal Operations