Fuel hikes set to consolidate Mexican trucking sector

William B. Cassidy, Senior Editor | Jan 18, 2017 5:39PM EST
A double-digit increase in fuel costs will drive smaller Mexican trucking companies off the road, pushing freight rates higher, the head of one of Mexico’s larger trucking firms said. The 17 percent spike in diesel fuel prices in Mexico Jan. 1 is just one of several factors he said will lead to consolidation, tighter capacity and higher costs for shippers doing business in Mexico.

As fuel costs rise, “there will be a lot of companies that won’t survive,” said Miguel Gomez Tapia, co-CEO of Fletes Mexico Carga Express, with headquarters in Ciudad Juarez. “The big companies will keep growing, maybe with small margins, but the mid-sized companies with less infrastructure and equipment, we don’t believe they will survive in the long run,” he said.

Gomez Tapia’s company, among Mexico's 10 largest trucking firms, according to SJ Consulting Group, intends to keep growing. Last week the carrier opened a new terminal in Tijuana, Mexico, across the border from San Diego. That gives the less-than-truckload carrier terminals at three US-Mexico border crossings, including Ciudad Juarez-El Paso and Nuevo Laredo-Laredo in addition to Tijuana.

“The key to our success for now and for the future is to keep investing in getting better people, better equipment, more terminals, and the best technology available,” Gomez Tapia said. Expanding along the border, and offering new routes to Mexico’s interior for US shippers, is one way to at least try to keep on top of fuel and operating costs he expects will keep rising.

“We expect not a tough quarter but a tough 24 months,” Gomez Tapia said.

The immediate cause of concern for Fletes Mexico and its competitors is a nationwide 13 to 20 percent hike in gasoline and diesel prices by the Mexican government on Jan. 1, part of Mexico’s plan to liberalize fuel pricing and allow foreign companies access to energy markets. The fuel price hikes, popularly known as the gasolinazo, are sending shockwaves through Mexico.

In the first few weeks of January, protesters have blocked highways and roads, looted stores and gasoline stations, even forcing the temporary closure of some border entry points. Protests continue, as fuel prices are scheduled to go up again in February. Mexico plans a year-long rollout of its price liberalization plan, which gradually will replace government-set prices.

As fuel prices soared, Mexican carriers and logistics operators scrambled to either put fuel surcharges, rare in a country where fuel prices were kept low by government subsidy, in place or raise rates. "We have put our customers on notice to expect rate increases, over time,” Jordan Dewart, president of Yusen Logistics Mexico, told JOC.com in an e-mail.

“Probably one-fourth of our customers accept fuel surcharges,” Gomez Tapia said. “Everybody is approaching their customers for at least a raise today for fuel. Some companies will be more aggressive than others, but at the end of the day, fuel touches everybody. That’s easy for customers to understand,” he said. “For most people, fuel is like blood and oxygen.”

The gasolinazo may be the biggest hammer pounding Mexico at the moment, but it’s not the only one. The value of the Mexican peso against the US dollar has dropped from an already weak position since the election of Donald Trump as the next US president. That’s pushing up the cost of US imports in Mexico and raising operating costs for Mexican trucking firms.

Many Mexican trucking companies, especially larger carriers, pay for equipment such as tractors, trailers and even tires in US dollars, Gomez Tapia said. That means the cost of new equipment is shooting up as the US dollar grows stronger. A $120,000 Class 8 tractor that would have cost about 2,200,000 pesos last October would now cost more than 2,600,000 pesos.

“That’s because last fall the exchange rate was 18.5 pesos for one dollar, and now it’s 22 pesos,” he said. As long as the currency gap widens, smaller, less well-capitalized companies “will stop growing and let equipment get older,” Gomez Tapia said. Over time, that will reduce Mexican truck capacity, utilization efficiency and drive up maintenance costs for truckers.

In addition to rising fuel and equipment costs, Mexican trucking companies are being hit by insurance hikes, rising labor costs and higher road tolls. The fuel spike alone, Gomez Tapia calculates, is the equivalent of 6.9 percentage point hit to a company’s net profit margin. If a carrier’s operating ratio was 90 percent Dec. 31, on Jan. 1 it suddenly rose to 96.9 percent.

“When you add all these costs together, the impact on your net margin is around 4.5 percent, in addition to the 6.9 percent impact from fuel. So you are talking about almost 12 percent,” he said. That would push a carrier with a 90 percent operating ratio into the red at 102 percent. These cost increases are coming so quickly that carriers have had little time to prepare or adjust operating strategies.

Fortunately for Fletes Express, about one-third of its total revenue comes from companies that pay in US dollars. "That helps to handle some of the exchange rate differences," Gomez Tapia said.

Add to higher fuel prices, operating costs and a weaker peso uncertainty about the future of the North American Free Trade Agreement and the cross-border auto trade under President Trump. Ford Motor dropped plans to build a $1.6 billion plant in Mexico, and the head of Fiat Chrysler has said higher tariffs or taxes on imports from Mexico might make its plants there untenable.

A border adjustment tax proposed by congressional Republicans, though not supported by Trump, could have an even broader impact on foreign direct investment in Mexico and cross-border supply chains by raising the cost of imported goods in the US.

About 40 percent of Fletes Mexico’s revenue comes from hauling freight to and from the US border, though not beyond the limited commercial zone on the US side of the border.

The company has approximately 1,200 trucks and 19 terminals throughout Mexico, and Gomez Tapia says he plans to look for new intra-Mexico business as well as US customers.

“We have a big dependency, both as a company and as a country, on the US, but there is a lot of need for better carriers in the intra-Mexico freight business. Even if NAFTA is adjusted, there will be opportunities (for Fletes Mexico) in the intra-Mexico market,” he said. “And will need to have better relations with the big US carriers, to have win-win relationships with them.”

He hopes higher costs will draw more US shippers to Tijuana as an entry point into Mexico. “It’s more expensive to bring all freight all the way from Los Angeles to Laredo and then down into Mexico,” he said. “You can save 20 percent on your costs if you do California to Tijuana to Mexico City. We’re trying to fulfill a need for those shippers. Time will tell if we’re right.”

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