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Analysis

How the Elections Will Shape Mexico’s Productive Industries

By Cas Biekmann | Thu, 06/10/2021 - 09:56

Even though President López Obrador’s name was not on the ballot, the June 6 midterm elections in many ways served as a referendum on his policy direction. After he took office in 2018, Mexico’s productive industries found themselves in a shifting environment. Halfway through his six-year term, the elections set the stage for what is to come in energy, mining and oil and gas. Without a qualified majority needed to make constitutional changes, the landscape has shifted for the better.

With a participation rate above 52 percent, the highest for a midterm election since 2000, the election was one of the largest ever held as more than 20,000 public posts were contested from the lower chamber of Congress and 15 governorships. The preliminary results give López Obrador’s coalition 279 seats divided among MORENA (197), PVEM (44) and PT (38). This is 53 seats short of a qualified majority in Congress that would have allowed the administration to fast-track initiatives like amending the Constitution.

 

Golden Age for Mining?

López Obrador’s tenure has been received with mixed feelings by Mexico’s mining industry. Positive notes include the government not raising taxes and maintaining regulations. A recent plan floating around to nationalize the production of valuable lithium was axed as well, with the government now looking to enlist the help of private companies. But the outlook is not entirely rosy, despite a global boom in prices for precious metals. Industry insiders showed concern about the president’s rhetoric, as well as his freeze on new concessions and general difficulties to obtain environmental permits. “Mining investment has been declining in recent months not only due to the pandemic but also due to a series of bad decisions made by the federal government,” said Jose Luis Castro, President of the Sinaloa Mining Cluster (CLUMISIN).

But with the results of the elections bringing a greater deal of balance in the chamber, mining companies can benefit from greater stability and thus a better platform to attract investments. “These results give us the confidence that it will no longer be so easy to make decisions without analyzing all the factors and actors involved and I believe that this will give investors more confidence,” said Ana Muñoz, Secretary of Women in Mining Mexico.

The government’s attitude toward other sectors has been further reason for concern. “As a foreign investor, we were very concerned about some of President Lopez Obrador’s proposals, not the least of which is his push to return the petroleum sector to state control,” said Bradford Cooke, Founder and CEO of Endeavour Silver. “If a government can unilaterally break existing contracts and nationalize an industry, foreign investors will generally reduce or avoid investing in all sectors of the Mexican economy.”

 

Relief for a Beleaguered Energy Industry

In recent years, Mexico’s energy sector has been marked by the efforts of the López Obrador administration to roll back the 2014 Energy Reform. This reform welcomed private companies and boosted both foreign investment and private renewable energy development. Seeking to bolster state-owned utility CFE, the government worked to reshuffle the energy sector to favor CFE over independent power producers. For private investors, this reshuffle was more than just problematic. After several measures and a congressional change to the Electricity Industry Law (LIE) stranded with suspensions from federal judges, López Obrador hinted at a potential change in the constitution to undo Peña Nieto’s liberal reforms.

Such sweeping changes are now unlikely, unless the ruling coalition finds a route supported by a broad consensus, said Edmond Grieger, Partner at Von Wobeser y Sierra. “Any future initiative intended to reform the Constitution will require the consensus of not only one party and its allies but of the majority of the parties in the house, plus the approval of the majority of the 32 state legislatures.” With the risk of sweeping change minimized, Grieger expects to see some positive impact in the energy investment climate, “mainly in generation, transmission and infrastructure projects.”

The proposed changes to the LIE are still under revision at the Supreme Court. One industry leader, who spoke to MBN on the condition of anonymity, said that elections’ results might very well influence the final decision regarding these reforms. “There is a higher probability that the Court confirms the cancellation of these initiatives after these elections left the government in a weakened state,” the CEO said, adding that the government would still be able to delay permits, allowing it to effectively delay projects and investments. “I think we will still see a struggle between two very opposite ideological views. I do not see many of the core issues being completely resolved, so growth perspectives may continue to be challenged,” said Salomon Amkie, Director at Citibanamex. “However, given the fundamental need for infrastructure development in Mexico, the recent outcome of the election should provide greater comfort for the long-term view of investments,” he continued.

Grieger concurs that the energy sector should continue to pay close attention to legislative decisions but sees plenty of room for positivity going forward. “This new panorama should bring some confidence back to investors regarding the present and future of the energy sector in Mexico,” he said. With the country’s rock-solid fundamentals still in place, there is great opportunity from a long-term perspective.

 

Calming Nerves in Oil and Gas

Like those active in the energy sector, companies involved in the oil and gas value chain also experienced widespread uncertainty because of the government’s measures to save Mexico’s massively indebted state-owned PEMEX. Several of these governmental efforts dominated the discussion in the oil and gas sector, such as a recent congressional overturning of the Energy Reform’s Hydrocarbons Law. This allowed PEMEX to set wholesale refined products prices and established a higher number of requirements for private companies that import and export refined products. These measures have also been suspended, awaiting a final decision from the Supreme Court.

More balance in the lower house is a positive development here as well, industry experts agree. “I believe that the result of the opposition majority in Congress will be a counterweight in the decisions of the executive, which will calm investors' nervousness,” said Alfredo Garcia, Executive Managing Director of Siete Energy. But many factors that caused concern are not going anywhere. New auctions or oil rounds, for example, remain unlikely. Ruling parties retain their control over regulatory entities such as CRE, as well.

For Rodolfo Esquivel, Director of Grupo Roales, much work remains to be done for both the public and private sectors to rescue Mexico’s oil and gas industry. “There is much work ahead. Through an alliance with the government and the private sector, it will become possible to reach PEMEX’s goals regarding profitability, production and debt reduction. This is not only a challenge for the government but also for companies and the wider society,” Esquivel said.

By seeing governmental support as a business rather than a political issue, Mexico can accelerate post-pandemic economic recovery. If entrepreneurs in turn support the public sector, true growth can be achieved in any sector, Esquivel added.

Photo by:   Pat Pilon on Flickr
Cas Biekmann Cas Biekmann Journalist and Industry Analyst