A Major Price Risk Just Surfaced in Mexico: Why Unilever, Other Procurement Orgs Are Taking Note

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Very recently — and rather quietly, overshadowed by talk of walls and deportations — the Mexican government made a major move that could upend North American supply chains for years to come.

On Feb. 17, the Finance Secretariat announced that fuel prices in each of the country’s 90 regions would change on Saturday, Feb. 18, with daily price changes coming into place from that point forward, according to a report from Breakthrough Fuel, a global transportation energy management and advisory firm.

From a lay consumer’s perspective, you may ask, what’s the big deal? My prices at the pump go up and down every day.

But from a commercial perspective, this deregulatory move almost instantaneously introduced a new era of commodity price volatility concerns for multinational procurement organizations and their supply chains operating in or through Mexico.

That’s because the Mexican fuel market, which has been subject to a state-run monopoly since 1938, has not seen prices change more than once per month in decades.

‘Fuel Price Liberalization’: Will Anyone Be More Free?

The Finance Ministry is already setting the price of each of Mexico’s 90 fuel regions on a daily basis, with the intent to gradually create a free market — the process of ‘price liberalization’ — by the end of 2017.

All dates in 2017. Courtesy of Breakthrough Fuel.

This new policy era spurred street protests throughout Mexico, when an initial 20% gas price hike as of Jan. 1 — after promises of prices going down — created long lines at gas pumps across the nation.

As my colleague Nick Heinzmann reported back in January, rolling back these energy reforms is unlikely, as it would undermine investor confidence in Mexico and indicate that street action is capable of drastically altering policy.

But raising prices any further, an option still on the table, will likely infuriate protesters even more and put the ruling Institutional Revolutionary Party at serious risk of losing power in 2018, he wrote.

So what will this mean for procurement and supply chain organizations? We caught up with Heather Mueller, vice president at Breakthrough Fuel, for a brief Q&A.

For the uninitiated, does this move to daily fuel price changes in Mexico differ from what’s happening in the commercial fuel market in the rest of North America?

When prices in Mexico are fully liberalized, we ultimately anticipate that daily fuel pricing in Mexico will be similar to what we are familiar with in the United States. In the current phase of deregulation, the Mexican government is setting a price for each of the 90 regions daily which is different than how pricing looks in the U.S. The current methodology that is in place will hold until March 30, 2017. After that date, regions starting in the North of Mexico will experience price liberalization where the price will be set by the market and change daily. This will likely resemble how pricing acts in the United States today.

Describe the current impact of this deregulation in practical terms, for companies shipping both in and out of Mexico.

Until Jan. 1, 2017, fuel was a very predictable component of transportation costs in Mexico. Now that prices are changing daily and there is uncertainty about how pricing policy will evolve, shippers have new challenges and new opportunities. Many shippers note that they are now spending a majority of their time working with carriers to establish a mechanism that is reflective of the market. This is a challenge for productivity of procurement and operations teams because it requires a new level of knowledge surrounding fuel management, energy market behavior, and current knowledge of the evolution of policy as it is published in Mexico.

Additionally, in January, we saw prices move up with initial price adjustments and come down just slightly this week with the daily price announcements. Understanding the true cost of fuel will ensure that shippers are not being overcharged and carriers are not being under-reimbursed for changing fuel prices.

How big of a long-term impact do you see this having on suppliers?

Gaining an understanding of the energy market in Mexico will create opportunities for better procurement practices, fuel consumption optimization, and the exploration of alternative fuel strategies that will create a competitive advantage for shippers in Mexico. Achieving transparency into fuel consumed at the individual shipment level has the ability to create a sustainable economic advantage for shippers that implement an effective strategy for measuring and ultimately managing fuel costs.

How does this Mexico diesel-price deregulation compare with other instances of commodity price risk / volatility that procurement organizations are dealing with these days?

Mexico published their pricing equation last week and with it came two parts to this answer. First, the overall goal of price liberalization would be to tie the fuel market in Mexico to the global fuel market price behavior overall. The first part of their pricing methodology does tie the price set for fuel to a US Gulf Coast benchmark. From there, Mexico has implemented an additional measure to insulate the market from volatility — essentially, this measure reduces the drastic up-and-down movements that happen every day to deliver a more consistent price to the market. As prices are fully liberalized, we anticipate this muting factor will be removed and the Mexican fuel market will follow the same patterns that we see in global fuel prices.

Your firm is working with Unilever to help them understand and minimize the effects of this type of deregulation. How would you distill the two or three most important tips you’d give to multinationals that are worried about mitigating these risks?

It will be important to separate the cost of fuel from an overall freight costs. Once fuel is separated, understanding how it is consumed is the next step in ensuring fuel reimbursement is fair and accurate for both shippers and carriers. Consumption will be impacted by overall distance traveled and fuel efficiency, which is driven by factors like type of equipment, road and traffic conditions, and weight of the freight movement. Finally, choosing a methodology that captures the true cost of fuel for the 90 different pricing regions in Mexico and reflects the change in price that is occurring daily allows for a transparent view into fuel costs, enabling fair reimbursement and resulting in data that will enable shippers and carriers in Mexico to make wise decisions about the cost, consumption, and emissions related to transportation fuel in their supply chains.

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