Lloyd Mexico Economic Report May 2005
Table of Contents
Wine consumption
Tortillas in China
Can anyone counter Wal-Mart?
IMF praise
Duty-free tequila
...and nopales
Electronic receipts
Mining speculators
Nokia in Tamaulipas
Low-cost airlines
Punta Mita development
Pemex discoveries in 2004
Aircraft investments
Wireless frequencies
Wine consumption
The Mexican Viticulturalists Association (MVA) is confident that the wine sector will grow by more than 10% this year, just as it has for several years. The association represents producers such as Domecq, Santo Tomás, L.A. Cetto, Valle Redondo and Casa Madero.
Casa Madero, founded in 1597 in Parras de la Fuente, is actually the oldest winery in the western hemisphere. Despite the long history, per capita consumption of wine in Mexico is very low, averaging less than a bottle per person per year, compared with 17 liters per head in Chile or more than about 50 liters in Spain, France and Italy.
Tortillas in China
The increasing popularity of Mexican food in Asia has prompted Gruma (2004 sales: 2.24 billion dollars), the multinational tortilla producer, to build a 15-million-dollar tortilla-making plant in Shanghai. Due to open later this year, the company's first factory in Asia will supply an anticipated 30 million dollars worth of tortillas and chips to restaurants and stores each year. Gruma is also considering opening tortilla factories in Brazil and Australia.
Can anyone counter Wal-Mart?
Wal-Mart de México's first quarter profits (of 166 million dollars) were up 35% compared with a year ago, as Mexicans, finding consumer credit more available than ever, enjoy their biggest spending splurge for several years. The company's 2004 sales totaled 12.5 billion dollars, more than its three largest rivals combined.
Wal-Mart is investing 700 million dollars this year to add 70 new locations to its chain of 696 stores, and claims to have identified 200 cities suitable for future expansion.
It seems improbable that Wal-Mart can maintain its current growth rate for many more years, especially with many independent retailers and community leaders voicing opposition to the principle of big box stores. In addition, analysts doubt that any growth through acquisitions would be approved by the federal antitrust regulator.
IMF praise
A recent report entitled "Global Financial Stability" from the International Monetary Fund says that Mexico has paved the way for other emerging markets to develop strong financial markets. The report says that the strategies used by Mexico, such as the emission of debt issues containing Collective Action Clauses, and the renovation of the banking system are a sound model for any emerging economy.
At the end of February, foreign investment in the Mexican Stock Market totaled 78.894 billion dollars, equivalent to about 43% of the total market.
Duty-free tequila
Japan, the world's second largest economy, has to import 50 billion dollars worth of food products each year. At present, less than 0.5% of this figure originates from Mexico, so there are promising opportunities for Mexican growers and food firms.
At a recent trade fair, Japanese wholesalers signed contracts worth 390 million dollars for products such as blue fin tuna, avocados, cantaloupe, pork, chicken, citrus fruits and table grapes.
Trade will be further boosted by the free trade agreement between Mexico and Japan, which took effect April 1. For instance, the treaty eliminated duty (previously 17.5%) on tequila, leading the Tequila Regulatory Council to claim that tequila exports to Japan may double within a few years. Tequila sales in Europe shot up 90% one year after Mexico's free trade agreement with the European Union.
...and nopales
Among the companies eyeing the Japanese market is Nopalitoz, a firm specializing in the export of nopales, the edible leaves of prickly pear cacti. This September the firm is involved in a "Nopal Fair" in Tokyo, Japan, supported by the federal Economy and Agriculture Secretariats.
Nopalitoz offers a range of products ranging from young, tender nopal "pads" to powdered nopal and dehydrated nopal in tablets, satisfying not only gourmet clients, but also the health food sector. It already exports to the U.S. and Germany.
Electronic receipts
The Electronic Signature Law now in force has resulted in electronic receipts being used by many companies. The receipts carry the same information as their printed counterparts, and have the same legal value.
The benefits of electronic receipts are reduced costs, fewer errors, faster transfers, more efficient storage and retrieval, and increased security. The costs issue is perhaps the most significant since some firms spend as much as 120 pesos to issue and process each printed receipt.
Mining speculators
The outlook for mining is encouraging. Figures from the National Statistics Institute (INEGI) show that the mining sector grew 8.8% in January compared to the same month a year ago. Among the minerals doing well were fluorite, gold, coking coal, iron ore, copper, zinc and sulfur, while both silver and lead declined slightly.
Grupo México, the world's third-largest copper producer, is investing 450 million dollars over two years to boost output from its Cananea mine in Sonora, and is confident that demand from China and the U.S. will keep copper prices high for some time. The company's net income last year was a record 782 million dollars.
Many investors speculating on metal prices were not so lucky. As Federico Rangel, who helps manage 1.1 billion dollars worth of Mexican stocks and bonds for Operadora de Fondos Lloyd (publisher of this Economic Report), said in a recent interview, "Mining shares are very speculative. We don't like to bring this kind of volatility to our funds."
Nokia in Tamaulipas
Nokia, the Finnish cell phone manufacturer, is investing 20 million dollars in Tamaulipas to double the floor area of its Reynosa plant, originally opened in 1996. The expansion adds 80,000 square feet of floor space, and should be completed by the end of the year. Only 22% of the plant's production is sold on the domestic market; 41% is exported to Latin America and 37% to the U.S., with occasional shipments to Europe and Asia.
Low-cost airlines
Mexico may soon have four low-cost airlines competing for traffic on shorter, regional routes. The Communications and Transportation Secretariat (SCT) has given permission for two services - A Volar and Click - and is still reviewing another two requests - from Protego and Aerolíneas Mesoamericanas.
Click is being started by Cintra, the holding company for Mexicana and Aeroméxico, and will replace the regional carrier Aerocaribe.
Over the past decade, low-cost airlines have had a great impact elsewhere in North America, and in Europe. Fares for "no-frills" services are expected to be about 30% cheaper than those charged by major carriers.
Punta Mita development
According to the Tourism Secretariat (Sectur), an estimated one billion dollars will be invested over the next decade on further developing the Punta Mita peninsula, north of Puerto Vallarta, for tourism, with 90% of the investment coming from abroad.
The plans, covering an area of 700 hectares with 14 kilometers of coastline, call for five additional hotels, 1,200 residential lots, three more golf courses, a marina and five yacht clubs. The construction of several exclusive resorts could generate up to 5,000 permanent jobs.
Sectur officials believe that Mexico has the potential to attract twice as many tourists as present by the year 2025.
Pemex discoveries in 2004
Following the discovery last year of nine new crude oil and 18 gas fields, the state oil giant Petroleos Mexicanos (Pemex) says that total hydrocarbon reserves (proven, probable and possible) stand at the equivalent of 46.91 billion barrels of crude. Of this total, 38% (17.65 billion barrels) is proven, 34% probable and 28% possible.
Proven crude oil reserves will last another 11 years at current rates of extraction, while gas reserves will last far longer.
Pemex produced 3.38 million barrels of crude oil a day during 2004, from 5,217 wells. About half of this volume came from fields developed since the year 2000, showing the importance of new discoveries.
Aircraft investments
According to the Economy Secretariat light aircraft will be assembled commercially in Mexico next year, for the first time since 1935. The news is not particularly surprising given that there are now more than 50 firms making aircraft components somewhere in the country. They include a subsidiary of French firm Labinal, Aerotech, which is making major electrical components in Chihuahua for the Airbus 380, soon to be the world's largest passenger plane.
Mexico may have a bright future in the manufacture of aircraft parts, given not only its tremendous success with autoparts, but also its skilled workforce, well-qualified engineers, proximity to the U.S., and its numerous free trade agreements.
Wireless frequencies
In the latest auction of cell phone frequency permits by the Federal Telecommunications Commission, the three established leaders in cell phone provision - Telcel, Telefónica and Iusacell - have consolidated their positions.
The three companies bid a total of 16.9 million dollars for the 20-year permits. The new frequencies will enable the companies to offer new services and increase competition.
The text of this report was not submitted to any Federal Mexican Authorities or approved by them prior to publication. In preparing it, we have done our own research, using sources we believe to be reliable. However, we do not guarantee its accuracy. Neither the information contained herein nor the opinions expressed, constitute a solicitation by us of the purchase of any security.
Mirrored with permission from Lloyd S.A. de C.V.
See their Page on Mexico Connect.
2005 Operadora de Fondos Lloyd, S.A.
© 2005 Allen W. Lloyd, S.A. de C.V.