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Kansas City Southern sees short-term uncertainty in Mexico's fuel import market, but potential remains

Highlights

Smaller fuel importers could leave Mexico: Ottensmeyer

Potential conditions for consolidation: CEO

Government halves number of refined products receiving facilities: CFO

Kansas City Southern sees short-term uncertainty in Mexico's fuel import market as the government tightens its grip on private importers, although the company continues attracted by what it believes are long-term opportunities in the country, KCS executives said Oct. 19.

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In recent months, the administration of President Andres Manuel Lopez Obrador has directed Mexico's regulatory agencies to crack down on administrative requirements for private importers. The move is seen by market sources as a way to allow state-controlled Pemex to regain some of the market share it lost in the refined products import market after its liberalization under the prior administration.

All market participants, including Kansas City Southern, have had to adapt to the new conditions, CEO Pat Ottensmeyer said during the company's Q3 conference call with analysts. The increased regulation may lead to some of the smaller importers to leave the market, which could create conditions for consolidation, but "it's very early to tell," he added.

Mexico's Energy Secretariat in September announced it canceled five permits owned and operated by global commodity trader Trafigura to import 200 million barrels of jet fuel, 320 million barrels of gasoline and 320 million barrels of diesel into the country. The permits were valid until 2038. In July, the government had suspended the three permits owned and operated by Windstar Energy to import 190 million barrels of diesel and 280 million barrels of gasoline, SENER data shows. The permits were valid until 2038 as well. All those permits remain suspended, SENER data shows. Also in September, authorities temporary suspended the operations of a 2 million-barrel storage terminal in the port of Tuxpan in Veracruz state owned by Monterra Energy, which started operations this year and serves several large clients, including Total, Repsol and BP. The coordinated visits also have occurred at other smaller sites with railway spurs, where transloading activities were conducted.

"The number of receiving facilities for refined products has declined by half as a result of the governments actions," said Michael Upchurch, KCS's chief financial officer, during the conference.

Dealing with a smaller number of entities could have operational benefits to KCS, as the company would be able to deliver more quantities into fewer destinations, Upchurch said. However, at the moment the increased supervision is causing disruption to the business. In Q3, KCS reported an 18% drop in volumes of refined products.

Despite this disruptions, the company is confident there will be a rebound in the industry and will continue to grow as the country's production is unable to meet demand, Ottensmeyer said.

Teachers blockade railway line

The Mexican market continues to be supplied with imported fuel, whether it be imported by private companies or by Pemex despite efforts by the current administration to increase production of gasoline. In 2021, total imports of gasoline have been over 60% of total demand, SENER data shows.

The increased supervision to refined product shipments is not the only issue causing disruptions to KCS' operations in Mexico. A protest by a union of teachers in the southern state of Michoacan has blocked the railway line leading to the port of Lazaro Cardenas, where KCS operates, for over 70 days, Upchurch said. Volumes at the route were down 67% in Q3, he said. The company is in constant conversations with the local authorities and it believes the recent political transition in the local government could be a "breakthrough" in the long term.

At the same time, a global shortage of electronic chips has caused disruptions in the supply chain of the auto industry, hurting other industries like plastics, Upchurch said. Because of these three issues, which KCS calls transitory, management decided not to give forward guidance on load expectations.