AMLO Announces New State EnterpriseBy Cinthya Alaniz Salazar | Fri, 07/09/2021 - 12:14
In an effort to provide better gas prices to the Mexican population, President López Obrador announced the creation of a new state-owned enterprise called “Gas Bienestar”, aimed to sell liquified petroleum (LP) containers between 20 and 30 kilos at what the president describes it as a “justifiable” rate.
The president explained that the creation of the company was in direct response to mitigate LP prices that have skyrocketed in the last few months and failure to stop price increases. This initiative comes when only two months have gone by since the Federal Economic Competition Commission (COFECE) placed court summons on suspected economic agents after an investigation found indications of possible monopolistic practices in the LP gas distribution and commercialization of the market.
López Obrador assured there are five big distributing companies that are gaining high profit margins whilst also distributing close to 50 percent of LP gas in the country. He made a point of assuring that the nascent company is scheduled to be inaugurated in approximately three months and that it would not produce supply beyond inflation." Thereby signaling to private companies that the creation of the state enterprise is not to reduce market competition, but rather to encourage it.
This move will place a soft inadvertent price ceiling on the product which AMLO hopes will incentivize private companies to reduce production costs and increase gross production capabilities to keep up with the price set by the government. This would allow the industry to adjust and meet the markets current and growing demand. This means the public enterprise aims to reduce demand-pull inflation by subsidizing the cost of LP by running a break-even business model for consumers until private companies can offer a more competitive price. Nonetheless, the president warn that the next market adjustment measure would be with teeth stating explicit price ceilings, specifically in spaces that have seen the highest price hikes.
Considering the three-month deadline, the state is hardly giving itself sufficient time to buy the fixed capital needed such as cylinders, transportation vehicles and gas stations to develop the logistics, nor does it account for the time required to hire qualified human capital for various positions needed. It remains to be seen if the government will be able to meet its deadline, but given the urgency of the matter the government must act quickly.
Liquidized petroleum which is used by seven out of every ten households, coupled with a growing population are the main driving forces behind recent price hikes. This is why state operations will begin in Mexico City, specifically in the areas of Azcapotzalco and Iztapalapa, where population density is between 12,000 and 16,000/km². To put it in perspective, in 2020 LP imports by Mexico reached a historical peak of 671,910 metric tons in August, thereby making it the 5th largest consumer according to Iberoamerican Association of Liquefied Petroleum Gas (AIGLP). As Mexican LP industries bridge the gap between production and demand we can assume a decrease in LP imports in the future.
This revelation can help explain some companies’ reluctance to move away from diesel fuels such as Generac, a US manufacturer of backup power generation products, who saw an opportunity in growing consumer demands in independent power production after recurring blackouts last year. In an interview for MBN with the commercial director for Latin America, Norma Almanza, she notes that LP is a better fuel source because of their lower carbon emissions and the fact that diesel is not reliable for round-the-clock power production. However, the company has not moved away from diesel not only because it remains widely accessible, but an understanding of inflated LP costs.
Ultimately, Mexico´s government has responded swiftly after a report by the Federal Economic Competition Commission found indications of monopolistic practices in the production and distribution of liquified petroleum earlier this year. The immediate federal response is justified and has sent industry leaders a clear message regarding its position on the issue. It appears that the administration has opted for a carrot approach and yet has expressed its willingness to pivot to a stick approach, especially if five of the largest distributers fail to increase production capabilities and expand distribution. It remains to be seen how long the market adjustment will take, but its clear that consumers stand to benefit.