Mexico’s decision to phase out fuel subsidies could compel carriers to turn to surcharges
U.S. shippers that move freight in and out of Mexico will soon pay more for truck transportation as fuel prices rise following recent deregulation of the gasoline and diesel market, according to logistics industry managers.
Motor carriers are expected to pass on cost increases to customers, most likely through fuel surcharges, they say.
In 2015, the Mexican government decided to move from a nationwide, fixed system of gasoline pricing to a regional, open market system in which the price floats up to a pre-set maximum level. The move is part of an effort to reform the domestic energy market by opening up downstream exploration and upstream distribution to foreign competition after decades of monopoly control by state-run oil company PEMEX.
Oil proceeds, which cover a major share of the budget, have been declining in recent years along with the fall of global oil prices and the continuing devaluation of the Mexican peso against the dollar. Although Mexico is a major oil producer, it has limited refining capacity, so much of the oil is exported to facilities along the U.S. Gulf Coast to be transformed into useful products and is then imported back into the nation.
The extra leg of transportation contributes to PEMEX’s expenses, as does the increase in dollar-based refining costs (since the election of President Donald Trump on Nov. 8, the peso has weakened 11 percent). As such, the government determined it could no longer afford to subsidize the cost of fuel and needed outside expertise and capital to develop new offshore oil fields.
Jan. 1 marked the beginning of controlled price increases. The transition to daily market maximum pricing will continue with price hikes on Feb. 3 and again on Feb. 18. Prices during the first few weeks of the year have increased 14.2 percent for regular gasoline, 20 percent for premium gasoline and 16.5 percent for diesel, according to the Ministry of Finance. By the third week of February, authorities plan to periodically review prices and make adjustments on a daily basis for the remainder of the year.
The regional difference in price will reflect the logistical costs for PEMEX to deliver refined products to fuel stations, the available infrastructure and whether regions require the use of higher quality fuels.
The national average price of fuel is 17.05 pesos per liter, or roughly $3.20 per gallon.
A gallon of fuel in Mexico is roughly 50 percent more expensive than across the border in Texas. The spike in prices led some truckers, bus drivers and motorists to stage blockades on main highways and at border crossings in protest. Some gas stations and convenience markets were robbed and vandalized. The protests have tailed off in recent weeks, in part because of government warnings that commercial drivers could be at risk of losing their license.
The Mexican trucking sector, led by trade association CANACA, is analyzing what recourse it has to recoup the higher costs of fuel, including adopting fuel surcharges, raising rates and lobbying the Ministry of Treasury for tax credits, said Martin Rojas, senior adviser for the Americas at the International Road Transport Union. Motor carriers are being mindful to keep discussions on a general level so as not to run afoul of competition authorities for collusion, he added.
Trucking companies have informed Scarbrough International, a third-party logistics provider based in Kansas City, Mo., to expect some sort of undetermined price increases come February, Rita Gonzalez, the company’s operations manager for the southern border, said. Initially, she added, base freight rates will be increased by a flat amount. The exchange rate advantage gives carriers with international customers, who likely pay in dollars, a little more breathing room and the ability to hold the line a bit longer on prices increases.
Logistics professionals said that Mexican truckers eventually will have to develop a permanent mechanism to deal with fluctuations in fuel price.
Alan Russell, the president of TECMA, a turnkey maquiladora services provider, said gasoline increases have increased transportation costs for his employees about 3 pesos per person, or $1.50 per week, which is significant for a typical factory worker. The cost falls back on the manufacturing company if it offers employees a transportation subsidy, he added.
TECMA, which has its own in-house trucking company for shuttling imported supplies and outbound finished products across the border, has largely avoided a direct impact from the rise in Mexican fuel prices because the proximity of its plants to the border allows its fleet to refuel on the U.S. side of the border, Russell said.
But logistics professionals said that Mexican truckers eventually will have to develop a permanent mechanism to deal with fluctuations in fuel price.
To this point, the fuel surcharge concept has never taken hold in Mexico as it has in the United States.
A fuel surcharge allows carriers with long-term contracts to adjust the amount charged to move freight by taking into account significant price fluctuations in fuel. It’s a method for sharing or transferring risk. Each carrier develops its own surcharge formula, which kicks in whenever the price of fuel goes above a certain base price for an extended period.
“These companies are going to have to accept a fuel surcharge program or separate fuel out from the base rates, otherwise they are going to face constantly changing rates,” Troy Ryley, senior vice president for Transplace Mexico, said. “The best thing for the market is to implement a Mexican fuel surcharge that’s congruent with today’s market conditions.”
Dallas-based Transplace is a non-asset based provider of transportation management services and software for truck, intermodal and cross-border moves.
Most Mexican motor carriers and truck brokers do not have automated systems for calculating and invoicing fuel surcharges.
“I think that automation process will take six months to a year for someone to build modules that will help truckers, shippers and brokers,” Ryley said. “Transplace is fortunate that we are one of a few that has fuel indexes built into our technology, so it’s easy for us to build in a Mexican fuel surcharge.
“The rest of the market will initially have to create a manual solution, which is going to have a higher probability of invoicing error, and then work toward automation.”
Customers are going to have the same issue in reverse – namely creating an automated product to audit fuel surcharges and verify that invoices are correct, he said.
Ryley said he hopes the Mexican trucking industry comes up with uniform processes for factoring out fuel from rates so it is easy for shippers to compare cost between service providers.