Proco Global recently spoke with a number of industry experts about concurrent supply chain struggles in Mexico and the wider LATAM region. We’d like to thank the following people for their input:
Guillermo Francos, Sourcing and Procurement Senior Executive
Jorge Deza, Head of Procurement at AB Mauri Mexico, Central America and the Caribbean
Leonardo Paparoni, North LATAM Purchasing Director at Cargill
Recent political and humanitarian strife in Ukraine has magnified a number of stark realizations about the global supply chain, even more so than the COVID-19 pandemic. The ensuing effects of the Ukraine crisis have made one thing abundantly clear: just because you may be physically far away from a geopolitical conflict, doesn’t mean you’re immune to its effects, particularly when it comes to supply chain.
This is especially true for Mexico; despite the physical distance, the country is currently feeling the effects of supply chain inflation and is experiencing rising commodity prices, especially for energy and agricultural products. While the country was just starting to recover from the inflation caused by the pandemic, the Russian invasion of Ukraine is continuing to exacerbate some of these issues. Banks in Mexico are trying to focus on ensuring price stability through the implementation of monetary policy, but even then, there is the expectation that the end of 2022 could see a rise in inflation of a staggering 10%.
A number of sectors in Mexico are feeling the effects of a strangled supply chain:
According to Francos, the effect on agricultural commodities is particularly worrying. “While most of this year’s crop prices are set, we should expect them to rise after the harvest season in August/September, especially in regards to the winter crops that are priced and sown during the fall season.” With Russia and Ukraine having firmly established themselves as significant global producers of agricultural commodities, the lack of supply available to the rest of the world is sudden and deeply felt. Francos goes on to explain that it’s not just a question of what crops are available now as a result of the conflict, but when will they be available, and at what price? Therefore, we can expect to see bullish prices in Mexico – “the imbalance of wheat and corn supplies in the world (due to Russia and Ukraine’s position as main producers of these commodities) means that inflation is expected to continue rising,” according to Deza.
It doesn’t just stop at crops either; Russia is one of the globe’s main producers of fertilizer. The increase in price of fertilizer due to the conflict will likely have strong consequences on the Mexican farmer, as it has led to an increase in production costs. Deza went on to explain that this would eventually impact basic food availability due to decreases in local production capabilities.
Despite this, the country is clearly not immune to global events. I’ve recently spoken with a number of individuals who wrongly assumed that crises in Europe would have a negligible effect on supply chains in Mexico and are now experiencing a rude awakening, in reference to the soaring commodity prices previously mentioned. According to Paparoni: “The relatively small trade relations between Mexico and both Russia and Ukraine would suggest a limited direct impact on Mexico when the invasion occurred. However, ongoing conflict between Russia and Ukraine is producing negative effects on a global level that are indirectly impacting not only Mexico, but other LATAM countries as well.”
Energy and Packaging
Paparoni went on to explain that in the energy sector, for example, “international markets are demonstrating increased demand, leading to rising prices and a subsequent lack of fuel; uncertainty and volatility are high, with even analysts unsure of how and when things will unravel.” He also mentioned that while the Mexican government still maintains a cap on liquefied petroleum gas (LPG) prices, the costs of some suppliers are currently exceeding this cap, which could potentially lead to “unnecessary shortages in the near future.”
Finally, Paparoni shared his thoughts on the packaging sector, a critical category for manufacturing finished goods: “This sector is experiencing increases in packaging resin prices due to effects on supplies in Europe, ranging from five to twenty percent. This is starting to affect the Mexican market, but it is fair to say that no major supply disruptions are projected at this moment. Given this situation and the fact that the global supply chain is still suffering from disruptions over the past several months, companies should monitor their supply chains closely and take precautionary action to better navigate such risks and mitigate any adverse, oncoming conditions. For example, they should be looking into increasing inventory levels of critical materials and parts, invest in accurate predictive and planning technology, and develop relationships with alternative suppliers.”
The Silver Lining
New data suggests that suppliers in Mexico are gaining ground because of the unreliability of global supply chains headquartered elsewhere. As the country’s economy grows steadily, investments are being made locally and Mexico is establishing itself as an important hotbed of manufacturing. For companies that are looking to expand out of labour processes in Asia, Mexico is a favourable location. For manufacturers with target demographics in the US, a supply chain based in Mexico poses far fewer risks compared to ones located overseas. Companies are resetting their supply chains, as well as adding, diversifying, and onshoring them – all in attempts to bolster resilience and reliability post-COVID. This trend could see Mexico reap the benefits.
According to the software company Jaggaer, Mexico saw an increase of over 500% in suppliers receiving bids from sizeable U.S. buyers, as well as a 15% increase in Latin American suppliers receiving bids for the same time frame – from 2020 to 2021. Banks in Mexico are also preparing to finance new projects to usher in this new golden age in the country, supported by huge investments from well-established companies.
Hiring trends in Mexico are expected to continue as they are currently but at an accelerated pace. With large companies establishing their plants in this region, the need for a skilled workforce will increase multi-fold. Mexico is not only an attractive country for it’s location, as mentioned before, but also has great benefits that include free-trade agreements and good talent.
There is a lesson to be learned here that most in supply chains are catching on to now: that preparation for volatile stock prices, inflation, and supply chain fragility is of utmost importance, because even events taking place across the world can trigger a butterfly effect that causes issues thousands of miles away.
Be sure to follow us on LinkedIn to stay up-to-date with all the latest trends and developments taking place across the end-to-end supply chain. Proco Global remains available to discuss any of the market conditions mentioned above and how we can help your business navigate the future through finding the best talent for your workforce. For more insights, visit https://www.procoglobal.com/insights
Published June 2022.