Mexico’s economy is struggling, and consumer demand is weakening as the peak season for Asian imports is expected to be significantly softer than it has been before. This very soft Mexican peak season is an assessment echoed by ocean carrier executives who anticipate between 1% and 3% growth leading up to the holidays this winter. Mexican businesses and consumers alike are spending less, which is reducing the need for imports. This decreased need is causing importers to reduce the amount of inbound cargo to Mexico. This cargo would otherwise sit in a warehouse taking up room as inventory. This very soft peak season, stretching between June and potentially October, is going to be one of the worst peak seasons between the Mexican and Asian import industries over the last four years.
Mexico’s Struggling Economy
Mexico’s struggling economy plays a big part in this. In recent quarters, one of the biggest drivers of growth has been that of private consumption. Private consumption is set to slow down in 2019 as high inflation reduces the spending power of individual consumers. Low confidence in the latest Mexican president has also impacted significantly on financial institutions, which are starting implementing stricter credit standards, and this is going to cut into credit growth as well. By the end of 2019, Mexico’s GDP is expected to grow by only 1.1% indicative of the industrial sector face an even bigger recession. Actions such as reduced purchasing power for consumers and businesses alongside reduced access to credit are not subject to Mexico alone. Recent economic data reveals that this is soon to be a worldwide trend, one that has been anticipated for years but is just now rearing its powerful and potentially detrimental head. Still, as all of these economic forces are colliding with the current political landscape in Mexico, it seems that the Mexican peak season has set itself up for the perfect storm of very soft demand and subsequent import decline.
Adding to the issues are the increasing rates. One company created an index based on spot prices, and short-term contract prices by ocean carriers for all of the Hong Kong-based freight handled by said businesses on an annual basis. This index covers the amount of activity going from Asia to Latin America, and specifically going from Asia to Mexico. The figures tracking shipments to the West Coast of Mexico and this information went public in July through a period of volatility that has been seen in the data dating back to February.
The rates for shipping, one TEU from Asia to Mexico average around $1,236 back in July. At one point the prices hit as high as $1,800. In February, the first month this data was available, the rates hovered around $1,281, and March showed the lowest monthly figure of $762.
It is said that this volatility is the result of many things one of which is the changing capacity that is now available among ocean carriers and inbound lanes which are merely trying to increase the rates they charge but are hitting a wall in terms of shippers who won’t pay the increased prices. This refusal to pay elevator prices has forced the ocean carriers to retreat. The carriers can try all they like to increase the rates, but if their ships aren’t full, they can’t bill their desired prices.
Imports in Mexican ports have increased over the last few years, and the total loaded TEU imports have risen approximately 10.6%. This brought the figure to 3.04 million loaded TEU as of 2018. But the gross or cargo has slowed in 2019, and the loaded import TEU has only risen 5.1% with the overall cargo hovering at 2.8%.
The index for Mexico is currently the only way to track carrier prices for cargo that moves from Asia to Mexico. This index is a crucial yet minimal step toward achieving logistics transparency. Right now, logistics in Mexico are mostly opaque, and this index provides more clarity into the Mexican market. This index gives carriers the ability to track prices for moving their cargo and to understand better how the market is fluctuating. There remains a lot of work to be done to achieve full logistics transparency to the satisfaction of all carriers and everyone involved in the logistics field. As more measures are implemented toward achieving transparency, it might also shed light on the changes within the marketplace from season to season. This data includes what factors are impacting increasing or decreasing rates, what factors might be setting up for higher levels of imports vs. lower levels of imports between Asia and Mexico, and beyond.
Given the lack of transparency within the logistics industry in Mexico, it is a wonder that this much is known about the very soft Mexican peak season. Still, there are many political and economic factors that stand to influence the demand for Western Mexican ports. While the data is showing that this demand is slowing down and will continue to slow, it’s essential to look ahead to verify just how long this decline will remain in effect and whether any of those political or economic factors might change course allowing for better credit access, a different political market friendliness, or better purchasing power for consumers and businesses on the ground.