Mexico’s manufacturers to gain cost advantage from low US gas prices

The weakest manufacturing growth for 27 months on sluggish sales to the US and other key markets. That was the conclusion from the HSBC Mexico Manufacturing Purchasing Managers’ Index (PMI) which fell to 51.3 in June, still expanding but the weakest growth since HSBC/Markit began collecting data.

Not much evidence of a manufacturing rebound there, yet there are a number of factors which which could propel much stronger growth in Mexico’s manufacturing sector.

According to The Boston Consulting Group “A tipping point was reached in 2012, when average manufacturing costs in Mexico, adjusted for productivity, dropped below those of China.”

However this may be just the start. Thanks to the NAFTA free trade agreement and geography, it’s much cheaper to export American natural gas to Mexico than to ship it to Asia through LNG ports. So right now “electricity costs are around 4% lower in Mexico than in China, for example, while the average price of industrial natural gas is 63% lower.”

By 2015, BCG projects, average total manufacturing costs in Mexico are likely to be around 6% lower than in China and around 20% to 30% lower than in Japan, Germany, Italy, and Belgium “adding $20 billion to $60 billion in output to Mexico’s economy annually.”

As the charts show US exports of natural gas to Mexico hit the highest level for five years during the first half of 2013 with pipeline capacity forecast to double between 2012 and 2014 according to Credit Suisse.

US gas exports to Mexico

Related article: Signs low US natural gas prices are spurring industrial activity

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