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Lloyd Mexico Economic Report September 2002

Table of Contents

RETHINKING AIRPORT LOCATION
FLORIDA-YUCATAN CARR FERRY
AUTOMOTIVE FACTORY FOR THE WORLD?
WORLD BANK CREDITS
RECYCLING OPPORTUNITY
THE MOVIE INDUSTRY
HOTEL CHAINS EXPAND
FAST FOOD COMPETITION
NATURAL GAS FOR VERACRUZ
BLEAK FUTURE FOR COPPER?
CROSS-BORDER RAILROAD ALLIANCE
AEROMEXICO RENEWING FLEET
LAZARO CARDENAS PORT UPGRADES
TESTING HYBRID VEHICLES

RETHINKING AIRPORT LOCATION

After pressure from local land-owners and environmentalists, the government has announced that it will not proceed with Texcoco as the site for a second Mexico City airport. Transportation and Communications Secretary Pedro Cerisola said that the government is now actively studying several other options.

One respected expert in major infrastructure projects, Manuel Frias Alcaraz, is suggesting that the best technical alternative for the new airport is a site 16 kilometers (10 miles) east of Calpulalpan in the state of Tlaxcala, about 120 kilometers (75 miles) from the center of Mexico City. A new airport at this location could connect via highways and high-speed trains to the existing one in less than 30 minutes, and would ensure ample room for supporting infrastructure, such as parking lots, shopping malls and hotels.


FLORIDA-YUCATAN CAR FERRY

Starting in November, a new option will become available for Yucatan-bound travelers. Scotia Prince Cruises, a Canadian company with 33 years of experience providing summer-season ferry service between Maine and Nova Scotia, has announced that its luxury cruise boat M/S Scotia Prince will spend the winter ferrying passengers and vehicles between Florida and the Yucatan Peninsula. The "Yucatan Express" ferry will be based in Tampa, Florida, and will make two round trips to the Yucatan each week: one to Punta Venado, near Cancún, and the other to Progreso, near Merida. The sailing time will be 36 hours each way. The new routes should bring a big boost to tourism in the region, saving motorists a distance of up to 8,000 kilometers (5,000 miles) round-trip. The M/S Scotia Prince has sleeping accommodations for 1,100 passengers and can carry up to 220 vehicles.


AUTOMOTIVE FACTORY FOR THE WORLD?

The government's new program, "El Programa de Competitividad para la Industria Automotriz", for the automotive industry aims to double vehicle production by 2010 to 4 million vehicles a year and transform Mexico into the world's fifth largest vehicle producer. The program calls for the investment of 500 million dollars a year in order to develop additional assembly and components plants.

The installed capacity of the vehicle industry is 2.3 million finished units a year with production currently running at 80% of that figure. Success will depend on strengthening the internal market, updating technical norms, developing further suppliers and promoting research and development centers.


WORLD BANK CREDITS

The World Bank has approved credits for 800 million dollars to Mexico during the next twelve months for infrastructure and energy projects, with an additional line of credit for micro-business development. The projects that will benefit include highways, water, drainage, rural electricity and the improvement of marginal urban areas.


RECYCLING OPPORTUNITY

According to the general director of the Private Sector Center for Sustainable Development Studies, Gabriel Quadri de la Torre, only about 10% of the nation's domestic waste material is currently recycled. This compares poorly with the equivalent figure of 20% for the U.S. One lucrative opportunity for enterprising entrepreneurs is the recycling of containers made of polyethylene terephthalate or PET, the clear, rigid, plastic resin used as an alternative to glass for soft drink and water bottles. About 500,000 metric tons of PET are produced each year in Mexico, of which 200,000 are exported. At present, only 15% of the annual production is recycled.

The potential market for recycled PET, which can be transformed into textile fibers, carpets, fiberfill for sleeping bags, autoparts and new PET containers, is worth up to 700 million dollars a year and could reduce raw material costs by 25%. In Mexico City alone, more than 14 tons of PET is recovered for recycling every day. What's needed for more recycling to become a reality? A more comprehensive network of collection centers is essential, along with educational programs and some incentives to stimulate the industrial demand for using recycled materials in manufacturing processes.


THE MOVIE INDUSTRY

Mexican film-making is gradually recovering its former glory. A movie trade show, Expo Locaciones México 2002, was recently held in the Churubusco Studios, uniting production companies with experts in logistics, lighting and special effects. State governments showcased their attractions and incentives for film-makers. According to the National Film Commission, the audiovisual industry (films, shorts, television movies, commercials, publicity and music videos) generated net revenues of around 413 million dollars in 2001. This sum included 200 million dollars from T.V. soap operas.

And where are these movies shot? Over the years, several states have vied for top spot, but the "in" state for movie-makers right now is Baja California with its predictable climate, diverse scenery and excellent tourist infrastructure.


HOTEL CHAINS EXPAND

One of Spain's leading hotel chains, NH (2001 revenues: 650.5 million dollars) is the new owner of the Krystal chain in Mexico. The purchase of the 14 Krystal properties means that NH now owns 238 hotels in 18 countries. The company is reported to be considering building new hotels in Guadalajara and Monterrey with local capital.

The luxury Camino Real chain was recently bought by Grupo Empresarial Angeles, which also has business interests in hospitals, airports and retail stores. There are 14 Camino Reals in Mexico and 1 in El Paso, Texas. The new owners intend to double the number of hotels in the chain by 2004. First up are new Camino Real hotels in the state of Mexico (scheduled for October next year), Guadalajara and Torreón, probably followed by Saltillo and León.

In related news, the Tourism Development Fund (Fondo Nacional de Fomento al Turismo) has begun work on the 600 million dollar Puerto Cancún tourist complex, which features a 300-berth marina, hotels, beach club and golf course.


FAST FOOD COMPETITION

Several major fast food franchise operators have expansion plans. Since opening its first branch in Mexico City 17 years ago, the sector leader, McDonald's, has established a presence in 50 cities in 30 states and is now adding new restaurants at the rate of 30 a year. Its 250th outlet was opened last month in Cancún, and additional McDonald's will open shortly in Tlaxcala, Los Cabos, Nuevo Laredo, Uruapan, Mexico City and Chetumal.

Meanwhile, rival fast food company, Wendy's, will have 20 outlets operating by the end of this year and plans to open 100 additional restaurants within 7 years. Wendy's has slashed its reliance on imported supplies from 90% of its requirements last year to 45% this year and is aiming to further reduce this figure to 10%.

Applebee's, another U.S.-based franchise, is adding 5 new restaurants this year to its existing chain of 11, mainly in northern Mexico. Like Wendy's, Applebee's is now working its way south and looking for potential investors for restaurants in Guadalajara, Mexico City, and the south of the country.


NATURAL GAS FOR VERACRUZ

Later this month, bids will be submitted for the concession to distribute natural gas in the Veracruz region on the Gulf coast. The concession is for 30 years and will involve investments of around 20 million dollars. Four companies have registered to submit bids: Gas Natural de México, Delta Gas del Sureste, Corporación Marítima Mexicana and Fondo de Inversión Veracruz. The concession holder will be obliged to reach at least 20,000 clients during the first 5 years of operations.

In northern Mexico, Ecogas Chihuahua, the winner of one of the first concessions to be awarded, has successfully met its initial target of reaching 50,000 customers, investing some 50 million dollars in the process. Ecogas Chihuahua is a joint venture between Próxima Gas and U.S.-based Sempra Energy.


BLEAK FUTURE FOR COPPER?

Mexico is a leading producer of numerous precious and non-precious minerals including gold, silver, lead, zinc, fluorite, coal, iron-ore, gypsum and copper. The mining sector as a whole is doing well, but copper mining has fared badly in recent years as world prices have fallen to about 70 cents U.S. per pound, 30% below their historic average of about a dollar a pound. Prices are so low that all major copper mining companies have reduced production.

Grupo México, the world's third largest producer, has temporarily shut down its mine in Cananea (Sonora), thereby reducing output by 151,000 tons. The oversupply of copper dates back to 1995 and, globally, more than 1 million metric tons is now stockpiled. The outlook for copper looks to be tarnished, given its partial substitution in recent years by aluminum (automotive industry), PVC and plastics (construction sector) and fiber optics (telecommunications). Mining companies hope that reducing annual production will stimulate a price recovery.


CROSS-BORDER RAILROAD ALLIANCE

Mexican railroad operator Transportación Ferroviaria Mexicana (TFM) is teaming up with a U.S. counterpart, Union Pacific, to provide a new cross-border freight service called MexDirect. Using the border crossings of Nuevo Laredo-Laredo and Matamoros-Brownsville, MexDirect will handle all documentation requirements, coordinate requests for box cars and warehousing, and provide door-to-door tracking. It should prove to be very competitive with highway-based alternatives.

TFM is also developing a 32-hectare complex in Toluca (Mexico state) to service the major automotive manufactures like Chrysler, General Motors and Nissan. The first phase of the project, scheduled to open later this year, provides parking areas, an intermodal terminal, integrated logistics center and warehousing space. TFM's main routes link Nuevo Laredo to Monterrey, San Luis Potosí, Guadalajara, Querétaro and Mexico City.


AEROMEXICO RENEWING FLEET

Aeroméxico, which flies to 33 Mexican cities, 33 U.S. destinations, Europe and South America, is replacing the older DC9s in its 70-plane fleet with 15 Boeing 737-700 aircraft. Each 737-700 has a capacity of 124 passengers and is considerably quicker, quieter and more fuel-efficient than its main competitors. The contract for the new planes is worth about 500 million dollars. Lowering the average age of the fleet from its current 12 years to 5 years is part of Aeroméxico's strategic 5-year plan.

Aeroméxico's passenger movements are down slightly this year compared with last, due mainly to a reduction in business traffic which represents about 55% of the airline's revenues. The airline, currently owned by the government as part of Cintra, is scheduled to be sold off sometime next year.


LAZARO CARDENAS PORT UPGRADES

The Integrated Port Administration of Lázaro Cárdenas hopes to turn the port into the Pacific coast's premier export route for vehicles. An area of 120 hectares has been set aside for holding vehicles prior to loading. The API is confident that the port can handle up to 1 million vehicles a year. The completion of the last 25 kilometers of the Morelia-Lázaro Cárdenas highway will ensure very easy access for car manufacturers with plants located in central Mexico. Excellent railroad links are already in place.

Lázaro Cárdenas can accommodate larger vessels than any other port in the nation, with adequate depth for vessels drawing up to 16.5 meters (54 feet). The port is also developing a 500-million-dollar storage plant for natural gas and a specialist container terminal, scheduled to open next year, with the capacity to handle up to a million movements a year within 5 years.


TESTING HYBRID VEHICLES

Toyota, the Japanese automaker, has loaned 10 "hybrid" Prius vehicles to the Environment Secretariat for a one-year evaluation study to see how they perform in Mexico City. Hybrid vehicles have conventional internal combustion engines working in conjunction with non-polluting electric motors. The electric motor never needs plugging in for recharging. The result is excellent fuel efficiency combined with ultra-low emissions.

Of the estimated 2.5 million metric tons of contaminants emitted into Mexico City's atmosphere each year, studies have shown that 84% originate from the city's estimated 3.5 million vehicles, with almost two-thirds of this figure coming from taxis and microbuses. The city's vehicle pool is expected to rise to 4.5 million by 2006 and 5.4 million by 2010. If the Prius trials are a success, expect to see many more on the road in the next few years.




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.

2002 Operadora de Fondos Lloyd, S.A.
© 2002 Allen W. Lloyd, S.A. de C.V.

Published or Updated on: July 20, 2002
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