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Mexico is particularly well placed to benefit from companies
relocating their operations closer to their main destination
markets (nearshoring), a response to recent supply chain shocks
from the Russia-Ukraine conflict to China's dynamic COVID
containment policy. Given Mexico's strong interdependence with the
US economy, materialization of the nearshoring potential across key
sectors including semiconductor manufacturing and advanced
packaging, critical minerals and pharmaceuticals, would have
sizeable impacts and significantly improve Mexico's economic
standing beyond the five-year outlook.
The development of integrated supply chains between Mexico and
the US, which cover diverse economic sectors such as manufacturing,
automotive, aerospace, agriculture, and textiles, have contributed
to Mexico retaining its place as the second largest US trade
partner in 2021 (USD661.2 billion) behind Canada's USD664.8 billion
and ahead of China's USD657.4 billion. As the two countries share a
land border, this has allowed bilateral trade to avoid dislocation
from the container and port-related disruptions that have affected
global seaborne trade over the past year as almost 88% of US-bound
Mexican exports are currently transported by road to the US.
Companies relocating to Mexico in the five-year outlook,
however, are still likely to face security-related risks,
particularly road cargo theft and extortion. Reported cases of
extortion rose by 28% year on year (y/y) nationwide during the
first half of 2022, with manufacturing hubs Guanajuato and Nuevo
León reporting the greatest increase in incidence. The states of
Mexico and Puebla, both part of the Central/Bajío region, account
for roughly 70% of all incidents of road cargo theft, whereas
automotive components account for more than one-third of all stolen
rail cargo. Although criminal hotspots are likely to vary during
the next decade in response to security force deployments and
regional criminal dynamics, national levels of criminal activity
are likely to remain elevated.
Balancing Mexico's strengths and its inherent operational risks,
the incentives for nearshoring to Mexico are likely to remain high
for companies serving the US market, reflecting US President Joe
Biden's supply chain resilience strategy, which aims at securing
reliable suppliers in four strategic sectors: 1) semiconductor
manufacturing and advanced packaging; 2) high-capacity batteries;
3) critical minerals and rare earth elements; and 4)
pharmaceuticals and active pharmaceutical ingredients (API).
Besides Mexico, the US has considered more than a dozen
countries, including Canada, India, and the UK as strategic
partners for supply chain resilience. Out of those, Mexico is one
of only two countries in located in the Western hemisphere
(alongside Canada) and its geographical advantage should become
increasingly relevant if US security concerns in the East and
Southeast Asian Pacific rim deteriorate over the next decade.
Snapshot - Critical minerals
As of 2020, the US Department of Defense identified 58 strategic
and critical minerals for which the country was import-reliant.
Mexico has opportunities to carve out a bigger, and more
profitable, role for itself as the US seeks to shore up its
supplies of these minerals:
Mexico is among the top three suppliers for 14 of these
minerals - and its largest supplier for fluorspar, strontium, and
gold.
Mexican production of most of these minerals has risen in the
past five years. That gives Mexico the ability to increase its
market share of US imports, particularly for minerals for which the
US relies on mainland China, such as graphite, lead and
selenium.
Mexican production of some of these minerals can be integrated
into other critical supply chains: examples of where this applies
include bismuth for pharmaceutical ingredients and graphite for
semiconductor manufacturing.
Potential headwinds include:
The mining sector faces threats including organized criminal
activity, civil unrest, and contract risks. Of these, only contract
risks are likely to diminish in the five-year outlook, once current
Mexican president Andres Manuel Lopez Obrador (AMLO) leaves office
in 2024.
Out of the four critical minerals - nickel, cobalt, lithium,
and manganese - that the Biden administration's resilience strategy
lists for the high-capacity battery sector, Mexico only produces
manganese, and its current output is modest compared to major
global producers.
Mexico's exploitation of its lithium reserves is underdeveloped
versus other Latin American peers like Argentina or Chile. In April
2022, Mexico approved legislation to ban private lithium mining and
processing activities and reserve such activity for the state. AMLO
has pledged to honor lithium concessions granted before the passage
of this legislation. The government's strategy so far is limited to
the creation of a state-owned firm.
If AMLO's MORENA party retains power beyond 2024, the policy
direction for lithium will almost certainly remain on its current
state-oriented path. Although opportunities for international
companies directly to mine lithium in Mexico would remain closed,
there are still lithium-related opportunities at other stages of
the high-capacity batteries supply chain. Roughly, this supply
chain has five stages:
raw material production
refinement
battery cell manufacturing
pack and end-use product manufacturing
end of battery life and recycling
Beyond the five-year outlook, as Mexico becomes a lithium
producer (even if a state-owned company mines and refines the
metal), incentives for high-capacity battery manufacturers and
end-use product manufacturers to build a domestic supply chain to
source the US market are highly likely to increase.
Posted 26 July 2022 by Emily Crowley, Associate Director, Pricing and Purchasing, S&P Global Market Intelligence and
Jose Sevilla-Macip, Senior Research Analyst, Latin America Country Risk, S&P Global Market Intelligence and
Rafael Amiel, Director, Latin America & Caribbean Economics, S&P Global Market Intelligence
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
