News from “Borderlands” indicates a significant upsurge in diesel prices, which has impacted current import rates between the US and Mexico. Borderlands is a weekly source of news and analysis of events that affect the cross-border trade between the two neighbors. This week it was revealed that the price of fuel has gone to an all-time high in the US at $5.55 per gallon (Update as of 6/8/2022 $5.703 per gallon) This represents an increase of nearly 20 cents compared to the previous week. Indeed, the current prices are 51 cents higher (Update as of 6/8/2022 $.62 cents higher) than those recorded in April. This problem will be acutely faced in the US, where market forces determine prices rather than any state subsidization.
Many owner-operators and carriers based in the US face significant challenges due to the rising prices. This is in addition to the cost of diesel, whose rise also impacts trucking capacity and freight rates in Mexico. Some of the larger trucking companies based in Mexico have responded by increasing their rates by between 3-5%. Diesel remains one of the critical components of the land freight rates and accounts for up to one-third of the total pricing package. The responses and experiences of carriers will be a crucial factor.
Carriers are taking on the cost of diesel price increments
Before shipping, carriers must consider the price of their inputs, including fuel costs. Once upon a time, the US-Mexico rates were relatively low. However, the tightness of capacity made that a temporary calm before the storm. The Southbound rates are rising so much so they are now getting close to the level reported for export costs. According to Torres, the increase in import rates is not merely an offshoot of the fuel price rises but can be better explained by the shortage of qualified drivers and the severely limited capacity. This is just one of the other issues with which the industry must negotiate and deal.
Other factors may impact freight rates, including the waiting times for the trips, the effect of market-based trading, and the stays or delays that indirectly affect rates. From such reasoning, analysts cannot be entirely sure that the diesel price increments are the sole determinant of the rate fluctuations in the US-Mexico trade. Laredo in Texas is a cross-border market that currently ranks as the topmost port of entry for Mexican imports, including fresh/frozen produce, electronics, machinery, automotive products, and vehicles. According to the Outbound Tender Volume Index, markets continue experiencing prolonged volume growth or contraction, with Laredo facing a volume fall of nearly 6% this week. The effects of these trends may be felt differently across the countries, but there is always disruption.
Fleet operators in Mexico and the US are feeling the squeeze
The market structure creates certain vulnerabilities that have impacted how this fuel price rise impacts logistics. For example, eight out of every ten fleets are either owner-operators or small trucking companies. These smaller operators have less clout as individual entities and are therefore vulnerable to price fluctuations. Yet, Mexico imports 80% of its fuel from the US. However, the Mexican government has offered subsidies to local trucking companies to help them offset certain operating expenses. This means that diesel and gas continue to cost less in Mexico than in the US in real terms.
Even then, there is a noticeable price increase. For example, in 2021, the diesel price in Mexico was $4 per gallon, but this year, it has risen as far as $4.31 per gallon (updated on 6/8/2022 $4.49 per gallon). Whereas this increase is not as considerable as it is in the neighboring US due to Mexican government subsidies, it is still a trend that is detrimental to trade due to any fuel price increase implying rate increases. It could lead to a host of other operational challenges, such as reduced capacity and overall inflexibility. These are issues analysts think about and make certain projections in preparation for any eventualities.
Anticipating some problematic responses from the logistics industry
Fortunately, the application of fuel surcharges has not yet caught on in Mexico. However, since it is a widespread practice in the US, there is every chance of it crossing borders. That means that shippers could be caught off-guard and alter some of their operational practices in response. Customers are often extremely sensitive to rate increases and prefer to engage with cheap, safe, and dependable transporters. Customers will continue to be attracted by low rates. However, it is not clear how long this trend can be maintained.
Shippers are concerned about price uncertainty, and this could become a real problem if Mexican companies start applying fuel surcharges. A significant increase in fuel prices typically translates into an increase in the purchase price that the consumer must pay for the good. Fixed rates can herald certain financial losses for companies, and surcharges may be used as a mitigating factor. The impact of these will be felt throughout the supply chain.
Market forces will soon find a way of correcting any imbalances between the fuel prices in Mexico and the US. So far, there have been no reports of smuggling and other illegal activities in response to fuel increases. However, that does not mean this is impossible. The Mexican authorities have not indicated if they will alter the subsidies they pay to local companies. Meanwhile, the US will continue along the capitalist route of letting the market decide.
The noticeable increases in diesel prices have impacted on rates between the US and Mexico. Logistics companies are already dealing with issues such as the shortage of qualified drivers and squeezed capacity. Price volatility in diesel is specifically important for rates because it accounts for about 30% of the purchase price that is charged. The subsidies in Mexico have so far not changed the price of fuel and gas as much as in the US. However, there is still an increase which does not herald a lot of stability for the industry in the short run.