Production Slowdown As Regional Trade Agreements Bite
Vehicle production in Mexico increased 1.6% year-on-year (y-o-y) in February, to 246,197 units. Over the first two months of the year, production levels have increased 9.9% y-o-y, to 489,052 units. BMI maintains a bullish view on the auto production industry in the country, forecasting 8.3% growth in 2013.
This outlook is predicated on low labour costs ( see our online service, October 11 2012, 'Stronger Growth Ahead, But Reforms Still Needed'), relative weakness in the peso which will serve to make exports more competitive ( see 'MXN Correction To Continue For Now', October 31 2012), and comparative weakness in the productive capacity of Mexico's regional competitors ( see 'BMI Forecasts Playing Out As Production Slide Continues', February 6).
We believe that much of the slowdown in production is on the back of a decline in export volumes. Indeed, Mexico's auto exports declined 11.3% y-o-y in February, to 175,338 units, as import quotas from Brazil and Argentina came into effect. Over the first two months of the year, export levels stayed broadly flat, at 353,900 units. We expect to see export volumes increase over the year, despite the decrease in February, due to relative weakness in the currency and a pickup in demand from US and Latin American Markets.
|Set To Increase Over The Year Despite Initial Slowdown|
|Mexico- Monthly Autos Exports, CBUs|
Light vehicle exports to Brazil declined 72% y-o-y in February, and exports to Argentina declined 37% y-o-y. Total exports to the Latin America region, Mexico's second largest trading partner after the US, declined 50% y-o-y. Despite the implementation of new trade agreements, we do not expect export volumes to achieve similar levels of decline over the entire year.
In 2012, Mexico agreed a three-year quota system for autos imports to Brazil after the trade deficit reached US$1.55bn in 2011. By September 2012, sales of Mexican-produced cars in Brazil increased 130% y-o-y, exceeding the cap set by the Brazilian government ( see 'Imports From Mexico Exceed Quota Limit', September 18 2012).
In an announcement on September 20 2012, Mexico's President-elect Enrique Peña Nieto said that the country should endeavour to expand trade flows with Brazil in the autos sector, rather than curbing them ( see 'Solution Sought To Long-Running Trade Dispute', September 21 2012).
Argentina has long been concerned that its autos market is being flooded with cheap Mexican imports, and its domestic producers are unable to compete. In June 2012, Argentina pulled out of the auto trade pact with Mexico over a disagreement on the conditions of the deal ( see 'Negotiation Over Trade Pact Sought', June 26 2012). A quota, similar to Brazil's, was agreed in December 2012.
Autos exports to the US declined 5.3% in February, but rose 11% over the first two months of the year due to a jump in January. Additional gains are likely in the coming months, and we maintain a bullish outlook. Exports to the US account for some 67% of Mexico's total exports.
Sales in Mexico increased 7.3% y-o-y in February, to 80,193 units, and 9.6% y-o-y over the first two months of the year, to 164,462 units. BMI forecasts Mexico's passenger car sales to increase 6.6% in 2013. This is predicated on our belief in a continuation of the moderation in total private consumption seen in 2012, at least for the first half of the year ( see 'Sales Continue To Grow', February 12).