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© 2017 IHS Markit. All Rights Reserved.© 2017 IHS Markit. All Rights Reserved.

Market Intelligence Briefing

Maritime & Trade

Mexico | Tuesday 23rd May 2017

© 2017 IHS Markit. All Rights Reserved.

MARITIME

& TRADE

ENGINEERING &

PRODUCT DESIGN

AEROSPACE,

DEFENSE &

SECURITY

CHEMICAL

DIGITAL & WEB

SOLUTIONS

ECONOMICS &

COUNTRY RISKENERGY

FINANCIAL

MARKETS DATA

& SERVICES

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OPERATIONAL RISK

& REGULATORY

COMPLIANCE

TECHNOLOGY,

MEDIA &

TELECOM

Introducing IHS Markit

We are a global

information and

analytics company

addressing strategic

challenges with our

interconnected

capabilities


M&T’s unique data assets provide governments and commercial

customers with access to the most comprehensive insights

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Content

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Customised

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Industry

Events

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Statistics

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Movements

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Lading

Ship Data

MARITIME

& TRADE


Across our business we serve a variety of customers

including:

Fortune Global

500

>85%

Hedge Funds

Global Asset Managers

Investment Banks

50/50

G20

Governments

(20/20)

Largest US

Corporates

(94/100)

Largest

automobile

companies

(10/10)

IHS Markit


Across our business we serve a variety of customers

including:

Largest

Industrial

Conglomerates

Largest Chemicals

Companies

10 /10 14 / 2019 /20

Integrated Oil &

Gas Companies

Maritime & Trade Division

Largest Marine

(Shipping)

Companies

18/ 20

Largest trading

and distribution

companies

8 / 10

Top steel

companies

7 / 10

Fortune Global

500

>85%

Hedge Funds

Global Asset Managers

Investment Banks

50/50

G20

Governments

(20/20)

Largest US

Corporates

(94/100)

Largest

automobile

companies

(10/10)

IHS Markit

MARITIME

& TRADE


Political context and prospects

6


US – Mexico state of play

7


Issues at StakeTrade

• U.S. goods and services trade deficit with Mexico: $49.2 billion in 2015

• 8% of U.S. Trade Deficit

• Mexico exports to US: 81.24% of total exports in 2015.

• U.S. Trade Jobs with Mexico : 700,000 (1973) 4.9 million (2015)

• 2nd largest market for U.S. exports

• 3rd largest market for U.S. Agriculture

• Integration of production lines

• Digitalization and automation

Migration & Security

• 1.1 Million fewer undocumented Mexicans since 2007

• 3.3 million Central American Immigrants reside in the U.S. (2015).

• 165,000 Central American deported at the Mexico Southern Border (2015).

• 2,153 Central Americans deported from the U.S. (2015).

• The Wall: 650 miles built, of the 2,000 mile border.

• Heroin and other drugs

• Guns and money to Mexico; terrorism

8

Source: USTR (2015); United States Census Bureau (2016); American Community Survey (2015); The Pew Research Center (2015); Migration Policy Institute (Sept. 2015); DHS Yearbook of Immigration Statistics (2015); New York Times (Jan. 2017)


Setting the tableTrump

• White House:

> V.P. Mike Pence

> Advisor Jared Kushner

> NTC Peter Navarro

• Agencies:

> State: Rex Tillerson

> Commerce: Wilbur Ross

> USTR: Robert Lighthiser

> Defense: Jim Mattis

> DHS: John Kelly

Peña

• Foreign affairs

> Luis Videgaray

• Economy

> Idelfonso Guajardo

• Interior

> Miguel Angel Osorio

> CISEN: Eugenio Imaz

> Undersecretary of Population, migration and regulation: Humberto Roque

• Defense:

> General Cienfuegos

9


Border adjustment taxation and possible trade policy changes in the US

10


A 2017–18 pickup in US real GDP growth will lead to further declines in the unemployment rate

11


US economic growth by sector

12


US policy assumptions in the IHS Markit’s forecast

• A reduction in the statutory corporate income tax rate from 35% to 20%, partially offset by fewer tax credits, starting in January 2018

> No border adjustments

> No expensing of capital expenditures

> Repatriation of $800 billion of foreign profits at a reduced tax rate of 10% in 2018

• Personal income tax reforms that lower the average effective federal tax rate from 21.0% to 19.5% starting in 2018

• Federal Reserve policy rate increases of 75 basis points in each of the next three years, bringing the rate to a long-term equilibrium of 3%

• An increase in public infrastructure investments totaling $250 billion over 10 years

• No major changes in healthcare or international trade policies

13


US Real GDP growth in alternative scenarios

14

Strained relations with Mexico and China could bring recession in the US


Exports of goods to Mexico as a percent of gross state product: Texas, Arizona, and Michigan led in 2016

15


Imports of goods from Mexico reflect industrial supply chains (Percent of gross state product, 2016)

16


The House Republicans’ plan for US corporate tax reform: A border-adjusted cash-flow tax

• The principal goal of US corporate tax reform is a reduction in the federal corporate tax rate from 35% to 20% to improve international competitiveness.

• The House Republicans’ plan would transform the corporate income tax into a destination-based cash-flow tax that exempts the full value of exports but includes the full value of imports in the tax base.

• This is essentially a tax on domestic consumption. It differs from a value-added tax (VAT) by allowing a deduction for domestic wages and salaries—resulting in a smaller tax base.

• Proponents claim that border adjustment would raise tax revenues (about $100 billion per year), helping to finance a reduction in the corporate tax rate.

• Opponents claim that it would raise prices of many consumer goods (food, gasoline, and clothing) that have a large import content.

• A major uncertainty is the extent to which the dollar would appreciate to offset the price effects from border adjustment.

• Bottom line: BAT most likely not to pass in its current form due to strong opposition.

17


The US president has broad powers to regulate international trade under existing statutes

• NAFTA Implementation Act of 1993: Withdrawal with six months notice, return to Most Favored Nation (MFN) tariffs, additional duties after consultations with Congress

• Trade Expansion Act of 1962: Impose tariffs or quotas after finding that imports have an adverse impact on national security

• Trade Act of 1974: Impose tariffs up to 15% and/or quantitative restrictions for up to 150 days against countries with large balance of payments surpluses; broad discretion if a country carries out practices that are unjustifiable, unreasonable, or discriminatory

• Trading with the Enemy Act of 1917: In time of war, powers to regulate international commerce, freeze/seize foreign-owned assets

• International Emergency Economic Powers Act of 1977: In a national emergency, powers similar to 1917 act

18

Source: Peterson Institute for International Economics


US/Mexico relations: why should you care?

• Mexico is linked to the US economy through trade, capital inflows, and remittances. About 80% of exports go to the United States.

• Near-term uncertainty will delay capital spending in Mexico.

• A major increase in trade restrictions would send Mexico into recession in 2018.

• The Bank of Mexico is raising interest rates to stabilize the peso and restrain consumer price inflation, which climbed to 4.9% year on year in February.

• Global automotive and chemical companies are investing in new capacity in Mexico. Light vehicle production is projected to increase from 3.5 million units in 2016 to 4.1 million units in 2017 and a peak of 4.8 million units in 2020.

• President Enrique Peña Nieto’s popularity has plummeted, hurting the ruling PRI’s prospects in the July 2018 presidential election.

19

US policies will shape Mexico’s economic outlook


US-Mexico trade at a glance

20


A significant trade deficit for the US, indeed

-63.2-100

-50

0

50

100

150

200

250

300

350

Billions o

f U

SD

US – Mexico Trade in Goods

Trade balance US Imports US Exports

Source: IHS Markit Global Trade Atlas

21

However, since 1993 US exports to Mexico grew faster than to any other market


US-Mexico containerized trade on the riseUS TEU imports from Mexico growing faster than exports

• Most of the trade is cross border (rail and truck) but maritime trade has increased at a respectable pace

• Over the last 5 years, US TEU imports from Mexico grew at a CAGR of 18%

• Heavy investments in Mexican port infrastructure

22

0

20

40

60

80

100

120

140

2012 2013 2014 2015 2016

US-Mexico TEU Trade

(In thousands)

US Imports US Exports

Source: IHS Markit PIERS


Trade is substantial in the transportation, auto sectorMotor vehicles and parts account for 30% of the Mexico-to-US trade

0 100

TransportationEquipment and Parts

Computers, Office,Communications,…

Motor Vehicles

Machinery andElectrical Equipment

Parts of MotorVehicles

Billions of real USD

Top US imports from

Mexico, 2016

- 40



Telephones,Microphones, Etc.

Aircraft and Parts

Chemicals andRelated Products


Top US exports to Mexico,

2016

23

Source: IHS Markit World Trade Service


Challenges to the automotive industry

• 1. US economic outlook and its impact on the Light Vehicle market

> Sustainability of 17 Million units

> Tax policy (Corporate and Income) changes

> Oil prices/interest rates

> Trade and/or Legislative changes

• 2. Impact to automotive trade flow if changes to NAFTA take place

> Vehicles

> Components

> OEM and Supply Chain

> Who really wins / loses

• 3. Light vehicle NAFTA production to grow 6% from 2016 to 2023. Mexico production to grow 31% and total 4.6M units by 2023

24


Mexico Production as % of US Sales: Who is Exposed?

25


Trade milestones for NAFTA (Automotive)

• US has officially approached Mexico, stating a need to review NAFTA.

• US Priorities

– Potentially raise regional content (presently 62.5%)

– Inclusion of some duty/border tax for components (industrial and manufactured)

– Remove legal clause that allows investors/companies in MEX/CAN to sue US investors/companies

> Mexican Priorities

– Improve/ease trade flow from Mexico to US/CAN

– Remove imports of used cars

• If negotiation fails then US/Mexico could go to MFN/NTR status 180 days after US notifies Mexico of its intent to leave NAFTA. US/Mexico can use a national security threat clause to terminate NAFTA immediately.

• Automotive industry is rattled by the possibility of even further steps by the US such as a 35% duty on CBUs and/or 20% BAT (Border Adjustment Tax).

26


US-Mexico strained relations scenario: challenges and opportunities

27


How could US-Mexico trade relations get strained?

• The construction of a border wall

• Border adjustment tax

• Tariffs

• US withdrawal from NAFTA

• What to do to minimize risk?

> Market diversification

28


There is no replacement for US demand at sight

United States

81%

Canada

3%

China

1%

Germany

1%

Japan

1%Others

13%

Top markets for Mexican goods, 2016


29

US market size is substantial at 81%, not easy to replace by any other market


Opportunities for Mexican exporters: ChinaMining, chemicals, and transportation present most opportunities

0 400

Energy and Mining


Crude Petroleum



Electronic Valves,Tubes,…

Metals and MetalProducts



Top China Imports, 2016

0 2,000 4,000

Energy and Mining


Motor Vehicles

Ores, Non-Ferrous,excl. Manganese




Millions of real USD

Top Mexican Exports to

China, 2016

30



Avocados: China is a market ripe for growthChina’s avocado imports on the rise

31

0

2

4

6

8

10

12

14

16

2014 2015 2016

Millions o

f kilogra

ms

China’s avocado imports

by sourcing country, 2016

Mexico Chile Peru

• China’s avocado imports by volume increased six-fold in only the last 2 years

• Mexico’s avocado exports to China have substantially increased in recent years.

• Mexican exporters now facing strong competition from Chile and Peru

• In 2016, Chile was the top supplier of avocados, accounting for 46% of all China’s avocados imports, whereas Mexico and Peru took 40 and 14% of the import trade, respectively

• China’s population: +1 billion. Mexican exporters should focus on expanding this market



Mexico heavily exposed to US corn supply

32

0

2000

4000

6000

8000

10000

12000

14000

16000

2014 2015 2016

Millions o

f Kilogra

ms

Mexico’s corn imports by

sourcing country

US Argentina Brazil

• More than 98% of all Mexico’s corn imports are supplied by the US

• Mexico’s demand for Argentina’s corn increased significantly in the last 2 years

• Mexico will likely import a record amount of yellow corn from Brazil this year

• Chile could also be another good source of corn


Pacific Alliance: Mexico, Colombia, Peru, ChileTrade growing at respectable pace

• Alliance members account for nearly 36% of Latin America GDP.

• In May 2016, the Pacific Alliance removed 92% of tariffs on goods traded between members. Based on a 2013 agreement, the rest of the tariffs will be removed by 2020

• Panama and Costa Rica are in the process of becoming full members.

• Mexico goods exports to the Alliance members will have grown at a CAGR of 4% between 2012 and 2017.

33

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2013 2014 2015 2016 2017F

Billions o

f re

al U

SD

Mexico goods exports to

Pacific Alliance, 2013-17F



The Pacific Alliance (PA): OpportunitiesChemicals, transportation equipment and parts pose greatest opportunities

0.00 20.00


Energy and Mining

TransportationEquipment and…

Miscellaneous

Machinery andElectrical…

Goods not classifiedby kind



Top PA (exc. MX) Imports,

2016

0 2


Motor Vehicles



Radio and TV




Top Mexican Exports to

PA, 2016

34



Key Takeaways• US/Mexico trade war unlikely as both nations have a lot to lose

• Border adjustment tax unlikely to pass in its current form due to strong opposition

• New Trump administration is looking to renegotiate NAFTA deal, and Mexican exporters/importers should prepare by diversifying markets

• In the long run, China can pick up some of the slack: very large population

35


How do we define Mexico Auto Market

36


How has NAFTA Impacted Mexico Auto Exports

37


What is 20% of Mexico Exports to the US is Representing of the Total Market

38


Increased Costs for Seaborne Trade?

39


How has NAFTA Impacted US Imports of PVs

40


BREXIT

Britain + EU27 Trade ImbalanceBeef SituationMutton Quotas

41


Britain to EU27 Total Trade vs Share of Global Trade

42


UK Global Exports of Beef Products

43


Where does the EU27 source their beef from?

44


TPP

Regional Market Share, Top Commodities, Impact of US Exit

45


46


47


US Polypropylene Exports 2005-2016

Emerging markets in a declining market

48


The declining US Polypropylene Market

49


Decreased volumes for Gulf and PSW Ocean Carriers

50

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