Trading and logistics for Mexico’s fuel supply

Mexico

Rajan Vig, CEO of Indimex Marketing and Trading, talks to The Energy Year about Mexico’s fuel trade and transport infrastructure and how the company is looking to further serve the country’s energy demand. Indimex procures, markets, trades and optimises refined products as well as LPG and LNG in Mexico and other regions of Latin America, as well as investing in and operating physical assets in Mexico and the USA.

What micro and macro challenges do traders have to consider when improving their value proposition?
As a trading company, we are always going to be exposed to energy index prices in the US. Mexico is a US-driven market with respect to natural gas, electricity production and also refined products. There are six refineries in Mexico, and these operate at 30-40% capacity. It is here where large-scale traders like ourselves gain a position by enabling the import of more refined fuels for national use. In addition, we recently witnessed the USD 600-million purchase of the Deer Park refinery, which in theory will provide Pemex with sufficient refined products to supply the country.
The trading business is facing a series of challenges. When we look at the last five years, the Platts ULSD [ultra-low sulphur diesel] index price has not been as high as it is today. Likewise, the preferential treatment of [crude import-export manager] PMI Comercio Internacional and Pemex has made it very difficult to compete in this market. Business becomes even more difficult when permits are restricted.
Moreover, the fact that the Mexican government is still deregulating the energy market has left the country with weak infrastructure. One must also consider other macroeconomic factors such as inflation, which stood at 7.4% at the end of 2021, and the gradual devaluation of the Mexican peso, which also has an indirect impact on trading.
All of this has given way to a scenario where private traders have to look for ways to be more competitive. In response, we have focused on enhancing the ways in which we deliver our product. Firstly, we have to maintain transparency with our clients and perform effectively, as we have always done, and be one step ahead. In this quest, hedging strategies, buying in bulk and streamlining our logistics and supply chain are key areas we are now focusing on to be more competitive and to ensure we deliver the product efficiently to our end users in Mexico.

What is Indimex’s business set-up and what operational model does it use in Mexico?
Indimex’s first transaction was made in late 2018, but we officially announced the company’s formation at the beginning of 2019, which coincided with the swearing in of AMLO [President Andrés Manuel López Obrador]. The ethos we have is simple: we build infrastructure that provides a cleaner and better molecule than what Mexicans have received up until today. We want to expand in different areas of the country to more efficiently supply our customers. This means we want to invest intensively in Mexico given its potential.
As of today, we are only moving gasoline and middle distillates, with the exception of liquified gas. We are probably one of the largest importers of these products. Technically, we are not importers because our clients import the fuel. However, we have one of the largest independent fleets of railcars coming into Mexico right now. Despite the fact that 95% of permits have been revoked, our clients all have the permits required to import product. We leave the business of importing product in the hands of locals that are more aligned with the government.
We focus on what we know how to do best: trading and logistics. Here, we manage the fleet, purchase fuel, bring the product into Mexico and align ourselves with the different transloading terminals via contracts so that the product can then be transloaded from railcar to trucks or even tankers. From there it is supplied to the end user.

How important are hedging and risk management services in the current scenario?
They are crucial if you want to limit your losses. It is important to understand that companies don’t hedge to make money; they hedge to limit their losses. If profit is made, it’s a bonus. Fuel hedging is a mechanism used by traders, refiners and anyone exposed to the fluctuation of crude prices to reduce losses.
With the economics of importing fuel, one always has to have a safety net. And that safety net exists due to hedging structures that we implement by importing the fuel from the US into Mexico. Along these lines, we purchase certain volumes of product already stored in the US, as there is not enough storage infrastructure in Mexico.
Regarding risk management, Indimex is focused on making sure companies take sensible and calculated decisions in a volatile commodities market by considering the status quo of the market itself and credit and operational risk. Risk management in times of crisis has moreover become a crucial service for companies’ financial health and stability.

What interest does Indimex have in developing transloading infrastructure?
Our intention is to develop infrastructure such as transloading terminals. These facilities transfer a commodity from one type of vehicle to another. We would be looking at receiving barges or railcars coming into Mexico to then transload the product onto trucks. We are currently working with transloading terminals in Mexico, but in the future, we would like to develop this infrastructure and own and operate it under the Indimex brand. At present, there are only a handful of transloading terminals that we can actually utilise on the Kansas City-Southern Mexico line. We understand the situation is not the best when it comes to permitting.

Are you considering a regional expansion for transloading?
Indeed, our vision goes beyond our position in Mexico. We are currently looking at some niche opportunities in Central America – El Salvador and Guatemala. These countries are experiencing a quick modernisation process, and we want to take advantage of that.
We also have an interest in Trinidad and Tobago and Guyana, the latter of which seems to be the next big thing. There, we would be looking at developing infrastructure, as they don’t have any, and being a distributor. We would also like to be present in countries such as Argentina and Brazil. We believe in diversification, and diversifying in Latin America will make us even stronger in the Mexican market in the long term.

To what extent has the energy reform triggered a deregulation process?
No energy reform was ever implemented perfectly. And the one passed in 2013 was a gargantuan one. Its objective was to deregulate the market. One must understand that there is a difference between a privatised market and a deregulated market. In a sense, the former implies the conception of private companies coming in and taking over. By contrast, a deregulated energy market creates a landscape where you have optionality. That was the case here in Mexico.
A scenario where the NOC has the monopoly and the sole control over the market doesn’t give optionality to the client nor does it create the required competitive environment that pushes the industry to improve its offering and performance. The energy reform had the aim of solving this issue by setting the bar higher in competitive terms. One thing is certain: Pemex alone cannot exploit all of Mexico’s hydrocarbons potential, and therefore the presence of private actors is crucial.
This can be clearly seen in the retail landscape. There are probably more bandera blanca stations [petrol stations operating without fixed contracts with distributors] in big cities than there are Pemex stations. One now has the option of either buying from Pemex or from third-party retailers.
However, it is true that, although many stations are branded under a different name, they are still buying their product from Pemex. This suggests that the retail sector is still very much a Pemex-driven sector. Nevertheless, we have seen a proliferation of private actors in the retail sector in Mexico despite the fact that, over the last couple of years, permits for establishing private retail stations have become harder to obtain.

What is Indimex’s growth and corporate strategy?
This year we will continue to work with the government to find solutions to develop infrastructure in Mexico. In the next five years, we want to own and operate infrastructure such as transloading terminals. Furthermore, we would happily own and operate transloading terminals with the government and other private suppliers and distributors. We aim to be one of the principal distributors in Mexico. But our ambitions go beyond that, as we want to be a pioneer in the LNG and hydrogen spaces as well.
As for our strategy for 2022-2023, we are determined to manage our economic positions in a smart way so that we are not exposed to external factors that will inevitably affect us. For example, we need to limit our losses when it comes to inflation and the increase in the WTI index. Trading is all about instincts, regarding which, we have to try to understand how the socioeconomic dynamics work and how markets react. How people perceive the market, market fluctuations and possible and probable risks will define our approach this year.

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