Mexico Battles Black Market in Derivatives

The Mexican government’s battle against the black market in fuel and other petroleum derivatives is putting pressure on the nation’s paint and coatings producers, according to the Asociación Nacional de Fabricantes de Pinturas y Tintas (Anafapyt), the national coatings trade association.

The government effort to control the black market took the form of a declaration by the Secretaría de Energía en México (SENER), the energy ministry, on October 23 that includes a requirement for petroleum product importation approval and usage follow-up reports for domestic manufacturers. Reports suggest that 68 individual petrochemicals will fall under
these rules.

SENER is seeking to document import volumes, destinations and end use in such a way that the paint and coatings industry would be harmed, Anafapyt said in a statement on October 27.

“This would cause a disruption in the supply of inputs for companies that use chemicals and lubricants for their operations, such as those dedicated to the manufacture of paints, inks and coatings, which use petrochemical products that are not supplied sufficiently, or that are not produced in the country, such as synthetic fibers and resins, which have always been imported in a traditional way,” Anafapyt said.

U.S. observers also point out the potentially broad impact of the SENER decree. “While the Decree aims to regulate the importation of certain products to combat the illegal market of adulterated petroleum products and the environmental consequences they generate, it may also harm various legitimate participants in the hydrocarbon industry or in companies that, despite not being related to that sector, depend on the importation of the products included in the Single Annex of the Decree,” attorneys at White & Case LLP opined on November 1.

Others agree. ”No one wants to have unfair markets, but what they fear is the issue of implementation; that instead of becoming a regulation to prevent smuggling, it becomes another burden for the people who do import legally,” Alejandra León, associate director of S&P Global Commodity Insights, told Reuters on October 27.

Logistics, Storage Facilities Affected

The government measures will not only affect end users of petroleum-based imports, but also the logistics and storage network in the country, Anafapyt warned.

“Likewise, the investments made in the terminals to import certain products would be put at risk, which would destabilize the market and leave private companies without the ability to operate correctly in the country. In addition, the activities established in the decree require planning in ordering the goods and, in some cases, they are already in transit, so a reasonable time is required to obtain said permits from the agency,” the association said.

The control measures may be excessive and still result in little improvement in the black market, Anafapyt said.

“It also establishes non-tariff measures that could be disproportionate for international trade in such materials, since they could damage the integration of value chains, in addition to excessive times for the review and authorization of applications and notices. In contrast, the restrictions on the international market that have been imposed in the past have had limited results in terms of controlling and reducing the illicit entry of substances,” the association said.

One troubling result of the control measures could be a curtailment of foreign investment in the industry, Anafapyt noted.

“We consider that this resolution sends a negative message to the investment of global companies that seek to relocate their operations in Mexico, since the determination establishes restrictions on the supply of raw materials essential for production and puts legal certainty and regional supply at risk. Furthermore, this places it in an unfavorable condition to attract foreign investments, since it discourages their realization, which reduces the country’s economic growth, its global position and the boost to competitiveness,” the
association stated.

Pipeline Damages By ‘Huachicoleros’

SENER may have been motivated, in part, to pursue the controls following a March explosion of a pipeline containing hydrocarbon gas in Atlacomulco, near the Mexico state capital of Toluca.

“Authorities [were] quick to blame huachicoleros – black market fuel thieves,” reported Mexico News Daily (MND). “Officials…said the explosion was caused by illegal extraction from the nearby Petróleos Mexicanos (Pemex) pipeline,” the news agency said. “Reports from the scene suggest that six 1000-liter drums were recovered near the pipeline,” MND reported.

“Pipeline explosions from people stealing petroleum and gas are nothing new in Mexico. The worst incident in recent years was a horrific explosion in 2019 in which at least 66 people were killed and 76 injured near Pachuca, Hidalgo,” MND said.

Government control over private petroleum derivatives import facilities are also a contentious issue. In May, Bloomberg reported that Pemex is in talks to buy KKR & Co.’s Monterra Energy fuel-storage terminal in Tuxpan, Veracruz for $320 million.

In February 2022, Monterra Energy said it planned to pursue legal action against Mexico and seek damages of about $667 million for the “unlawful” closure of its Tuxpan fuel imports terminal in the Mexican state of Veracruz for five months, Reuters reported.

“The Houston, Texas-based private oil company filed a ‘notice of intent to submit a claim of arbitration,’ alleging the closure of its Gulf port was unlawful and discriminatory, and the Mexican government violated provisions of the North American Free Trade Agreement (NAFTA),” Reuters said.

Pressure on Resins, Solvents, Other Components

The SENER measures could affect the coatings industry’s demand for resins, solvents and other raw materials. Mexico’s overall consumption of imported petroleum derivatives has increased dramatically over the past few years.

Total petroleum product imports were up to $74 billion last year, more than double the 2020 level.

Much of the cost of paint and coatings is based on petrochemicals. ChemQuest estimated that resins represent 49% and that solvents represent 12% of the total cost of raw materials used in coatings, based on 2017 data.

“Oxygenated solvents comprise over 60% of demand within coatings formulations, and include chemical components such as alcohols, ketones, esters, glycols and glycol ethers. Hydrocarbon solvents are either aliphatic or aromatic and comprise less than 40% of total usage within coatings formulations,” the American Coatings Association (ACA) noted.

Other common petroleum-based chemicals include ethylene, propylene, benzene, toluene, xylene, and styrene, which are used to produce a wide range of products, such as plastics, synthetic fibers, adhesives, solvents, and resins, according to Wikipedia.

U.S.-Mexico Logistics Already Affected

Because of the problem of illegal pipeline taps, the government hopes to shift more the transportation of petrochemical products to truck and rail.

However, the new ruling has already affected the flow of petrochemicals into Mexico.

“Rail company Canadian Pacific Kansas City (CPKC) has temporarily held back rail cars containing fuel and petrochemicals bound from Texas to Mexico following Mexico’s restrictions for oil imports in a move to fight smuggling, according to a note sent to clients and seen by Reuters,” the agency reported on October 27.