By Thomas Black
Feb. 16 (Bloomberg) -- Mexico’s industrial output probably fell the most in almost seven years in December as a U.S. recession curbed demand for exports, slowing sales at auto-parts maker Sanluis Corp. and plastic tube manufacturer Mexichem SAB.
Industrial production may have declined 5.7 percent from a year ago, the eighth consecutive decrease, according to the median estimate of eight analysts surveyed by Bloomberg. The government will report production, which includes manufacturing, construction, mining, electricity, water and gas, tomorrow.
Mexican companies and foreign factories that export to the U.S. are scaling back production and trimming payrolls amid a recession that began more than a year ago in the U.S., which bought 80 percent of Mexico’s $291.8 billion in exports in 2008. December exports to the U.S. dropped 19 percent from a year ago.
“It’s a crisis of great proportion,” said Edgar Franco, corporate treasurer for Sanluis, the largest maker of auto leaf springs in North America. “We still don’t know how deep it will be.”
The drop in demand from the U.S. will get worse before it improves, Franco said in a telephone interview. The Mexico City- based company expects sales and production volume to plummet 30 percent to 40 percent in 2009 from last year and is in a process of “re-sizing” to cope with the drop. Franco declined to give details about worker and production adjustments.
The economy will be weighed down by the auto and auto-parts industry, which makes up about 20 percent of Mexico’s industrial production and is tied mostly to the U.S. and Canadian markets. U.S. auto sales dropped to an annual rate of 9.6 million in January compared with an average for this decade of 16 million vehicles per year.
Auto Output
In December, Mexico’s auto production fell 3.5 percent to 122,753 cars and light trucks as exports, which make up 89 percent of output, fell 10 percent. The slide grew worse in January, with production plunging 51 percent to 81,533 vehicles, the nation’s Automobile Industry Association said.
The rapid deterioration of U.S. demand makes it difficult to forecast industrial production for 2009, Salvador Moreno, chief economist at ING Groep NV’s Mexican unit, said in an interview from Mexico City. His forecast of a 1.4 percent contraction in Mexico’s economy this year will probably have to be adjusted down, he said.
“There’s a manufacturing recession, and the auto industry is beat up quite a bit,” Moreno said. “There’s not a lot of surprise in all this. Mexico isn’t going to change substantially until the U.S. begins to give signals of stabilization.”
An accelerating decline in crude oil production, which is measured under the mining industry, continues to drag on industrial output. Petroleos Mexicanos, the Mexico City-based state-run oil monopoly, produced 2.72 million barrels a day in December, an 8 percent drop from a year ago, as it struggles to offset declines at its giant offshore field, Cantarell.
Infrastructure Spending
Mexichem Chief Executive Officer Ricardo Gutierrez said the last half of 2008 and the first half of 2009 will be a “lost year” for Mexican industrial companies.
Still, Mexichem and other companies that sell to the construction industry may get a boost from a pledge by President Felipe Calderon to spend a record 570 billion pesos ($40 billion) this year on roads, bridges, rail and other infrastructure.
“I am starting to feel very confident that the second half of the year will be as strong as the first of last year,” Gutierrez said in an interview Feb.13. The Mexico City-based company is the largest maker of plastic pipes in Latin America.
Mexichem’s sales may grow by at least 20 percent this year as demand picks up in the second half of the year, Gutierrez said.
The company doesn’t plan any production or employment cutbacks and may spend $400 million on acquisitions, almost double what it spent last year, even with a global credit crunch, Gutierrez said.
The past economic crises that Mexican companies endured in 1995 and 1982 were characterized by peso devaluations and plunging internal demand, allowing exporters to thrive by selling abroad. Companies such as Sanluis have few options for relief in this crisis because the global downturn has dried up export demand, Franco said.
Along with weakening demand, Mexican companies are battling a global credit crunch. Sanluis’s bankers are asking for guarantees from Mexico’s development bank on a $30 million revolving line of credit it uses for working capital, Franco said. Sanluis had sales of $503.4 million for the first nine months last year, a 7 percent decline from the same period in 2007.
“In the U.S., measures of support have been taken to reactivate, not only the automobile industry, but all consumption with credit and financing,” Franco said. “We’re hoping that here in Mexico the same will happen.”
Peso, Stocks, Bonds
Last week, Mexico’s benchmark Bolsa index fell 0.2 percent to 19368.10. Telefonos de Mexico SAB, the country’s largest fixed-line telephone company, declined 9.3 percent during the week after reporting on Feb. 9 that fourth-quarter net income fell 64 percent to 2.98 billion pesos. Wal-Mart de Mexico SAB, the country’s largest retailer, gained 2.2 percent after a 4.5 percent gain in fourth-quarter net income beat analysts’ estimates.
Yields on Mexico’s benchmark bond due December 2024 rose 12 basis points, or 0.12 percentage point, to 8.23 percent. The bond’s price fell 1.16 centavos from the previous week to 115.58 centavos per peso, according to Banco Santander.
The peso weakened 2.5 percent to 14.5585 per U.S. dollar, compared with 14.1986 on Feb. 6. The currency closed at a record low of 14.5708 on Feb. 3.
The following is a list of events in Mexico next week:
Event Date Forecast Industrial production for December Feb. 17 -5.7% Central Bank overnight rate Feb. 20 7.25% GDP for fourth quarter Feb. 20 -1.5% Oil production for January Feb. 20 --
To contact the reporter on this story: Thomas Black in Monterrey, Mexico, at tblack@bloomberg.net.
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