Rafael Llamas
Director General
Cargotecnia
/
View from the Top

COVID-19, Oil Price Crises Take a Toll

By Pedro Alcalá | Thu, 05/28/2020 - 14:24

Q: How are you maintaining operational volumes during COVID-19?

A: To be honest, we have been heavily impacted by the pandemic. The limitations on meetings and gatherings have had an effect on the essential needs of our business. Fortunately, our multi-industry project portfolio includes the agribusiness sector, which includes cargo assets that serve the poultry market. This has allowed us to continue operating in that segment. CFE and maintenance contracts also have continued through the crisis. However, the core areas of our business have definitely seen a significant reduction in activity. Buyers are fearful of investing and logistics capabilities are very limited. The economy has slowed down, affecting our operational volumes.

Before the crises began a number of construction projects were leading our operations. There was a significant degree of oil and gas activity as well, along with ongoing projects in the mining sector. We were already perceiving a reduction in the volume of activity since last year. A number of public projects set to launch last year unfortunately did not reach their expected development phase, given the regulatory and policy revisions that followed the entrance of a new federal government. Its agenda was full of reassignments and reorienting the previous administration’s plans. We were already off to a slow start and now the dual situations of COVID-19 and the fall in oil prices have definitely taken an additional toll.   

Q: How has the oil and gas industry changed in your overall portfolio?

A: Its role has been decreasing for the past 18 to 24 months. We began witnessing a significant decrease in the sector’s overall project investment. Those projects did not launch with the momentum that was expected. This means that the increase in oil production did not quite happen as planned. Nevertheless, production did increase by the end of 2019, but a lot of that increase represented just the minimum that was required from these companies to avoid paying penalty, as outlined in their contracts. Growth expectations have not been met as of yet, or at least have not been met as quickly as expected.

Currently, 80 percent of our project portfolio is in the private sector, while 15 to 20 percent is with the public sector. This means that the government has been reluctant to deploy money and resources like it used to. As a result, there less economic spillover that the sector could take advantage of. This practice was already halting many operations, and now with these crises, the uncertainty to invest has extended into the large private corporations as well. They are now also cutting back on their investments. This has put companies like ours in standby mode, as both public and private sector investment is drying up. Despite all of this, Mexico’s economic position is strong and resilient. It is not about to experience anything catastrophic. However, this crisis is having a great impact on project development. For example, we manufacture concrete mixers. We went down between 75 percent to 80 percent on sales volume per month. In that regard, it has helped us that concrete production was reactivated for certain projects after it was temporarily shut down, but even with this activation, there is a significant decrease in available projects. Meanwhile, we cannot expect oil prices to recover without a proportional recovery in demand. 

Q: How are you restructuring your lines of business between product distribution and specialized projects?

A: We have a strong commercial division and we have the daily output of construction equipment from our manufacturing plant in Puebla. That plant has provided enormous support for us. In our commercial division, we are focusing more on equipment rentals through special financing plans that provide our customers more flexibility to keep or return equipment. This has also helped us significantly. We rely on financial support. We acknowledge that Mexico’s financial services sector has greatly improved. International best practices have been adopted and an understanding of the country’s needs has been successfully implemented into their operations. Mexico has made great strides; our financial institutions are now a lot more agile and ready to provide services that support service providers. This has allowed the market to grow in a healthy fashion in various categories. 

Q: How are you planning to position yourself for a potential market rebound?

A: We can expect the private sector to make a comeback in the near future in an effort to keep unemployment numbers under control and dissipate the economic uncertainties dominating the market. Large public projects also need to be launched as soon as possible. This is particularly true for ambitious infrastructure projects, such as the transisthmic corridor. These types of projects can have positive effects that extend into the oil and gas sector and beyond, especially once they begin to create synergies with Mexico’s free trade agreements with the US, Canada, Europe and Eastern markets.    

The refinery of Dos Bocas in the city of Paraiso will have a significant impact on economic activity, as well as the transferring of PEMEX personnel to Tabasco. This will require the construction of an entire second city and the highway connectivity and infrastructure between Paraiso and Villahermosa. All of this represents extremely interesting developments and projects for us. These areas also share significant proximity with the port of Coatzacoalcos, which is one end of the transisthmic corridor. The potential for great synergies here is enormous because the other end of the corridor is the port of Salina Cruz, which is already the country’s main export hub for oil and gas products to Eastern markets. The port has access to its own refinery, which is being modernized.

 

Cargotecnia is a Mexican supplier of specialized industrial lift products and technologies, among them several categories of Cargotec brand products. It is involved in a wide range of industries that include mining, energy, construction and oil and gas. 

Pedro Alcalá Pedro Alcalá Journalist and Industry Analyst