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Analysis

An Opportunity for those Willing to Take It

Sun, 07/01/2018 - 16:53

The opening of the retail sector in Mexico has brought about one of the most groundbreaking changes in the country. With an average of 10,560 inhabitants per gas station in 2017, Mexico lags behind countries like the US, Italy and Brazil that have 2,677, 2,933 and 5,158 inhabitants per station, respectively. The situation is even more critical in Mexico City, where there are 23,165 inhabitants per gasoline station. This lack of stations in Mexico is an opportunity as both national and international retail players look at ways to improve the country’s fuel reserves and increase the number and quality of service stations, all the while taking a profitable share of the market.

A COUNTRY TO BE FUELED

As of April 2018, CRE reported that there are 2,908 gasoline stations operating under 45 new brands in Mexico. Ixchel Castro, Manager of Oil and Refining Markets for Latin America at Wood Mackenzie, confirms the attractiveness of the market, which is a clear benefit for the final consumers as companies must find ways to become more attractive and therefore comply with the needs of their potential clients. “This has allowed customers to seek products and services that better address the cost-value concerns of the market,” Castro says.

Ángel Sánchez, Business Director Performance Chemicals of BASF, sees an opportunity in the implementation of additives as a differentiating factor for companies, but he recognizes that final users need to be educated. “We need to educate people in Mexico so they can understand and distinguish between the types of gasolines offered by retailers,” he says. In the past there were only two gasolines, and the only difference between them was the octanes. In that previous environment, users did not have to worry about performance, availability or any external cost resulting from the use of either type of gasoline. But he says this is changing with the entry of new players and more products. “For consumers to make more educated decisions they need to understand the pros and cons of each gasoline, and for them to understand these, the proper communication channels must be established,” he says.
Álvaro Granada, General Manager Mexico of BP Downstream, recognizes that the introduction of additives to the local market has been challenging due to their novelty for Mexican consumers. “The additives sector is complicated, mainly since it normally operates at scale,” he says. According to Granada, BP has managed to overcome this challenge by having close talks with CRE. “We have signed agreements with PEMEX to mix our additives before fuels reach our stations and we are confident about the product’s opportunity for growth in Mexico.

EDUCATING A COUNTRY

Novelty is the perfect word to describe the retail market in Mexico. Ruben Cortina, Managing Director of Tarsco México, explains how the novelty is for both the consumers and the regulators. “Most of the players are starting from scratch,” he says. “There was no prior experience during the PEMEX monopoly. Now we have an open market and the regulators, the suppliers and everybody who participates in this industry have had the opportunity to learn.”
In terms of educating the final customer, Juan Gallástegui, President of Gallástegui Armella Franquicias, recognizes CRE’s efforts and congratulates it for the creation of the Gasoapp, which allows the monitoring of gasoline prices among service stations. Meanwhile, Noé Pascacio, Partner and Head of Energy and Infrastructure at BGBG Abogados, finds a great market opportunity in the education of the market players and in helping them become successful under a market with new rules. “Standard law firms assist in complying with the existing regulatory framework, while outstanding law firms provide a clear vision of regulatory changes, such as that resulting from the reform,” Pascacio says.

ENHANCING MEXICO’S FUELS RESERVES

Gasoline stations are the last and most visible piece of the whole value chain of the liberalized fuels market, but this aspect is not the only market opportunity present. “This liberalization caused private players to look at this market and to see the opportunities for new storage facilities,” says Ricardo Diogo, Director of Business Development at Oiltanking. “Since logistics are normally necessary between production and distribution, logistics and storage are required to close the cycle between the imports and the retailers. Definitely, the liberalization sparked huge momentum in the storage and logistics business.”
Increasing the installed capacity for fuel storage goes hand-inhand with having a proper regulatory framework to support these kinds of investments and attract best international practices. “The new regulation determines that by 2020 all companies that distribute fuels in Mexico must have a storage reserve of five days availability,” explains Francisco Soto, President of Bulkmatic de México. “This quantity will gradually increase up to almost 15 days by 2025. The development of all the required terminals cannot be handled entirely by PEMEX due to its limited capacity. This is where private companies come into play.”
Regulation is being rolled out to facilitate investments for storage terminals, but Sánchez still sees bottlenecks that are making it hard for retailers to introduce additives at a faster pace. “There is a regulation that forces us to only mix the gasoline with additives at the point of sale. This is not the best way to work if what we want is to incentivize customer preference for the inclusion of additives. In the long term, it is too expensive to supply the additives to each customer’s dispatching unit. The best way to go would be to have a facility where the products can be mixed and from there the final product dispatched to the point of sale.” But there is a balance. Adrián Bisiacchi, Director General of KDM Fire Systems warns about the need to facilitate investment while ensuring that safety is a priority. “As our local regulation structure becomes more strict, new norms are a very important design criteria that, if not taken into proper consideration before starting a project, can rapidly increase times and costs and even make them unviable.” In that sense, he mentions that spacing between tanks in fuel storage terminals is a clear example of how much an improper design can affect the business model of a company. “If wrongly designed and placed too close to each other for space-saving purposes, tanks will have to be cooled in case of a fire and use four to six times more water than usual to be transported. A higher volume of water means bigger pipes and pumps,” he explains. 

Bisiacchi therefore strongly suggests project developers get to know all of the regulation requirements and stick to the highest possible standards, no matter how new the market is. “Many project developers obtaining permits are bringing designs and engineering from terminals previously built all over the world without observing the local norms. Then, as the project continues to advance in the design and engineering phases, they find out that certain elements were not considered properly in terms of fire safety. This omission could potentially delay the whole project, hence slowing down market entry. In a market like that of fuels transportation, distribution, storage and retail, where first entrants obtain a strong competitive advantage, this aspect can become critical.”


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BUILDING A NATIONAL MARKET

Storage terminals are not the only infrastructure required to bring the market up to the challenge of providing fuels to a growing population. Cortina says many other aspects also need to be addressed. “In my opinion, all the infrastructure that is needed in this industry will be in a consolidation stage for the next 15 years. We need pipelines, docks, jetties, tanks and railroads.” He sees this as a positive development. “This creates an opportunity to develop a wide range of projects.”
For Sánchez, the consolidation of these opportunities will depend on collaboration between all of the players in the market and the regulators. “It is just a matter of time before the infrastructure and the regulation will allow for additive and gasoline mixing in strategically placed storage units prior to distribution to the sale points,” he predicts. “Working together with the pertinent channels, such as industrial associations, to ensure that regulation covers all the important elements of the products we create is a top priority.” Castro, meanwhile, believes that while collaboration is important, the involvement of PEMEX will be key for the development of a successful market.