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Insight

The Role of Energy Prices in the Mexican Mining Industry

Mon, 10/21/2013 - 17:28

The mining industry is the third largest energy consumer in Mexico, and energy use reportedly represents 30% of a mine’s operating expenses. Like other industries established in the country, the Mexican mining sector must pay an electricity price that is around 8% higher than household prices. This is not a common situation since most countries have higher electricity prices household than industry, only Costa Rica (where industrial electricity users pay 1% more than households) and Mexico impose the opposite. According to the International Energy Agency, liquid fuel prices for Mexico’s industrial sector increased 58% in 2012. Moreover, the increase in hydrocarbon prices has naturally impacted electricity bills. Bank of America Merril Lynch Global Research’s report affirms that industrial electricity tariffs doubled between 2003 and 2013. There is only one hydrocarbon whose price has fallen in recent years: natural gas. The US shale gas boom pushed gas prices down. Between 2008 and 2013, natural gas prices fell 70% in North America. Demand for natural gas in Mexico doubled between 2009 and 2012. However, Mexico’s gas supply infrastructure is underdeveloped and it has proven to be increasingly ineffective at meeting demand for natural gas. During 2012 alone, Pemex issued 109 critical alerts, forcing the interruption of productive activities in many industrial complexes across the country. These alerts caused a loss of more than US$16.35 billion throughout the year.

The combination of high electricity prices and insufficient supply of cheaper energy sources has encouraged Mexican mining companies to look for alternative sources of energy. In 2012, mining companies affiliated to the Mexican Mining Chamber (Camimex) spent over MX$32,578 million (about US$2.59 billion) on energy services. These expenses were mainly directed at the purchase of diesel fuel (66.9%), electricity (23%), natural and liquid gas (2.4%) and other petroleum products (1%). But there was another important allocation of resources: the self-generation of electricity, which accounted for 5.6% of total energy expenses in 2012. Mining companies have opted to develop their own wind, hydroelectric, and solar energy generation facilities as well as combined cycle power plants. For example, Grupo Mexico is building two combined cycle projects in Sonora, close to its Buenavista del Cobre and La Caridad mines. Sonora’s natural exposure to sunlight also makes it an ideal location for the development of photovoltaic projects, an opportunity that is already being addressed by Camimex and its members. The chamber is also actively fostering renewable energy projects in Mexico, such as wind farms in Oaxaca.

The Mexican government plans to increase the availability of natural gas by developing the country’s pipeline infrastructure and increasing access to cheap gas stemming from the US. In addition, the proposed reforms to the energy sector will enable Pemex to produce more hydrocarbons and supply cheap shale gas. However, the elimination of subsidies and the general macroeconomic environment keep increasing energy costs for the mining industry. The sector is also betting on renewable energy generation as a viable alleviator for its energy costs, as well as a token of the industry’s focus on sustainability and corporate responsibility.