The outlook for the container shipping industry in Mexico is much like that of the country itself: rising growth dogged by deep challenges with new ones on the horizon. There are signs, however, that the industry will soon break through to its full potential.
The advancing peak season, with imports from Asia up 11 percent, will test Mexican ports, marine terminals, and inland networks, just as the government is working to position Mexico as a leading logistical player able to leverage its role as manufacturing supplier to the hemisphere. And the challenge will likely serve as a warning of tightening truck capacity, forcing Mexican shippers to work more closely with their carriers, improve their treatment of drivers, prepare for higher rates, and seek alternative plans in case their existing plans go awry.
As noted, the stakes are higher in mid-2018 for Mexico, as opposed to 20 or even 10 years ago. It’s $1 trillion economy now has developed businesses and capital that can meet rising emerging market demand for its goods, both in the Americas and in other world regions. Further, perhaps nowhere in the world, save India, is a critical mass of business knowledge, resources, and demand coming together to produce a more-promising trade future than in Mexico, if it can overcome its infrastructure and other internal challenges.
Surging trade volume, but longstanding social issues persist
Mexican shippers and transportation providers yearn for a reduction of the country’s deadly violence and rampant cargo theft. Yet with only modest hope that President-elect Andrés Manuel López Obrador — who takes office Dec. 1 — will be able to succeed on that score where his successors fell short, the responsibility for reducing cargo theft from trains, trucks, and warehouses will likely fall in large part on the growing use of supply chain technology, not to improve visibility for efficiency reasons but to help head off robberies.
Frustratingly, the shortcomings of the Mexican logistics sector are coming to the fore just as some of the shipping industry’s potential is being realized. Port cargo volumes were up 11.8 percent year over year in 2017, faster growth than the rest of North America. The country is positioned to consolidate its hold as the continent’s manufacturing floor, fueled by trade agreements with 45 countries around the world, a fast-growing manufacturing sector, and a host of investments in ports and highways that will soon come to fruition.
Yet the country also is dogged with questions as to whether it is ready to take that next step forward. While Mexico pursues a major upgrade in its port system — with the first phase of a marquee project to quadruple the size of the port of Veracruz soon to open — an imbalance in cargo flow means some ports have plenty of excess capacity while others — including Veracruz and Manzanillo, the largest in the nation — are struggling with truck or ship congestion and/or delays from overuse.
Security continues to dominate any discussion of cargo transportation in Mexico. Cargo theft totaled approximately $4.6 billion in 2017, according to the National Chamber of Cargo Transportation, or CANACAR, and robberies on trains and trucks rose in the first quarter of 2018.
Mexico — a potential ‘perfect storm of uncertainty’
That sense of uncertainty is compounded by the lack of policy detail from López Obrador, the country’s first leftist chief executive in decades, and the lack of clarity on the potential impact of maneuvers by US President Donald Trump, especially on the unresolved negotiations over the North American Free Trade Agreement (NAFTA) and whatever tariffs he imposes.
Speaking at JOC’s Mexico Trade Forum on Aug. 1, Carlos Pascual, a former US ambassador to Mexico and now senior vice president of global energy, at IHS Markit, parent company of JOC.com, called Mexico’s political situation a potential “perfect storm of uncertainty.” Without too much of a stretch, that description could apply to the country’s trade and cargo picture, too.
Yet, the country has not seen the kind of foreign business flight that analysts feared when the Trump administration began its threats to renegotiate or pull out of NAFTA, speakers told the JOC forum, some of whom believe the worst-case scenarios are now unlikely to happen.
“We get asked by investors, how much business would you lose if NAFTA went away?” Patrick Ottensmeyer, president and CEO of Kansas City Southern Railway, told the conference. “And are you seeing people pull out of Mexico because of the concern about NAFTA?”
“We haven't seen companies pull out of NAFTA,” he said, adding that foreign direct investment is up in Mexico, and KCS’s revenue from cross-border business grew 19 percent year over year in the second quarter.
Cargo volumes through Mexican ports increased 11.8 percent year over year in 2017, to 4.6 million loaded TEU, according to the Mexican Secretariat of Communications and Transportation (SCT). That outpaced the 4.2 percent increase in loaded TEU handled by US ports, according to PIERS, a sister product of JOC.com, and a 10.3 percent increase in cargo, both laden and empty containers, handled by the four biggest Canadian reports, according to figures from the ports.
Loaded TEU handled by Mexico rose 7.1 percent in the first five months of 2018, SCT figures show. And SeaLand estimates that imports from Asia are up 11 percent this year from 2017.
Veracruz expansion — 5 million-TEU capacity by 2030
A $5 billion upgrade of the country’s port system, the majority of it privately funded, is designed to meet future need. The Veracruz expansion, which will increase the port’s container capacity from roughly 900,000 TEU to 5 million TEU by 2030, will make it larger than the country’s current top two ports — Manzanillo and Lazaro Cardenas — combined.
Other, recent projects that have improved efficiency at the ports include a new semi-automated container terminal in Tuxpan, the semi-automated APM Terminal in Lazaro Cardenas, and a new rail tunnel in and out of the port of Manzanillo, which opened in June and allows for 24-hour rail use in the port.
Those improvements, and others in the pipeline, have alleviated just some concerns among shippers, truckers, and logistics providers over Mexico’s tightening trucking capacity, and the ability of ports to handle growing cargo volumes.
“There is a shortage of transport capacity in Mexico,” said Reto Malfatti, managing director for Kuehne + Nagel SA de CV, Mexico, adding that past experiences of lengthy delays for ships waiting to get into Mexico’s west coast ports have diminished.
“We have seen in the last few years that the waterside part in Mexico has actually improved a lot,” he said. “The challenges and the bottlenecks are on the inland. And that is an inherited situation for many, many years of not enough capacity available in trucking, with also railroad capacity being at the limit, at least when it comes to and from the ports.”
Mexico truck sector — soon to have driver hours maximum
Mexican trucks, in large part small operators, carry 80 to 85 percent of the cargo going through the country, and trucking companies struggle to find drivers. The pressure on the trucking capacity ticked up in June when a new federal government rule took effect requiring double-tractor trailers — known as “fulles” in Mexico — go through a certification process that some trucking groups said would be expensive and onerous, and would result in some companies taking trailers off the road, at least in the short term.
Under the new rules, truck owners must submit paperwork to the government that demonstrates tractor trailers used in a double-trailer formation are fitted with certain features, including anti-lock brakes, a global positioning satellite system, a regulator that restricts the vehicles to 80 kilometers per hour (about 50 mph) and low emission levels.
A second test of the industry comes at the end of August when a new regulation restricting driver hours kicks in. Truck drivers are required to take a 30-minute break every five hours, and the law limits them to driving no more than 14 hours, after which they must take an eight-hour break. Drivers also must keep a logbook documenting their driving hours.
The requirement — unlike a US rule introduced in December — required truckers to document their driving time with a paper logbook rather than an electronic logbook, and so gives Mexican drivers more wiggle room in documenting their hours than does the US law.
The US law has triggered double-digit, year-over-year increases in spot and contract trucking rates, and widespread concern about a chronic driver shortage, with trucking companies refusing work because they have plenty already. The inclement trucking terrain is expected to last for another 18 months, without a dramatic fall in demand.
The Mexican law has nevertheless stoked concerns that the limits on driver hours will further crimp the sector’s ability to meet shipper needs. So far, it is not clear how vigorously the law will be enforced. Other concerns about the law include where the drivers will rest and whether the stationary cargo will be more vulnerable to theft and attacks while the driver is stopped.
Transplace senior vice president for Mexican customs, Jose Minarro, and others said the country has too few rest areas for truckers to comply with the law.
“They're still dealing with secure places where drivers are going to be able to park,” Minarro said. “I drive a lot around Mexico and I don't see many of those around.”
One transportation director who oversees Mexican operations for a big, US-based third-party logistics provider said the industry has yet to fully focus on the impact of the new driving-hour limitations, he said. “It’s almost like it’s not here until it’s here,” he said. “When it’s here we will figure out how to deal with it.”
Warning from the border
The biggest challenge to trucking capacity at present, he said, comes from the dramatic imbalance in trucks going north across the US-Mexico border over far fewer trucks going south — estimated at three-to-one by some analysts. He said that can leave Mexican truckers hanging around the border for days, having taken a load from the Mexican interior, while they look for one to go back, reluctant to make the trip without a load.
Still, Minarro said, there are signs that in the long term the sector will adjust to the capacity constraints. “I do see investment. I do see fleet sizes increasing.”
In the shorter term, Mauricio Rojas, vice president for international trade compliance at Grupo Prodensa, said the new law would mean that trips longer than the 14 hours a driver can legally do in one day under the new rules would translate into diminished trucking capacity. He cited the example of a truck move from the Port of Lazaro Cardenas to Laredo, a destination 24 driving hours away.
“So that's going to create a constraint on truck drivers who will either take more time to get to the border and you will need more truck drivers,” he said. “And eventually that's going to rise up the cost of transportation and companies are going to start looking into the railroad.” Another challenge that the cargo transportation industry faces is a lack of sufficient intermodal infrastructure, which would allow the easy transfer of containers from road to rail, he said.
The railroads say they have plenty of available capacity to handle additional volume. Ferromex, a subsidiary of Grupo México Transportes, said it operates at 60 percent capacity, even after rail has increased its share from 5 percent of cargo movements in the country to the current figure, around 20 percent.
Continuing that growth, however, will require Ferromex in part to overcome shipper doubts about the safety of moving cargo by rail, said Luis Olivera, executive vice president of sales for Ferromex. Although rail has in the past been considered safer than sending goods by truck, it has in recent years suffered a rising level of attacks and theft.
"The challenge is to convince the market that they will be safe, and it’s something we can do with a lower cost,” Olivera said.
On the ports side, the challenge is more related to the varying ability of different ports — and even terminals — to handle the work facing them.
Rafael Lopez, material planning and logistics director for Ford Motor Co. Mexico, said the fluidity at Mexican ports varies a lot from port to port, with a dramatic imbalance between ports stressed to their capacity, and others that are vastly underused.
“Manzanillo from our point of view is already full, saturated,” he said, of Mexico’s largest port, which sits on the Pacific Coast. “For instance, we export engines through Manzanillo, and these containers cannot go into the port. Since the very beginning, we have required additional handling movements due to capacity constraints in the port.”
In an unrelated incident, truck lines more than a mile long stretched from the entrance to Manzanillo recently after Maersk Line switched from one terminal in the port to another, which wasn’t prepared for the large volume, according to one Mexican trade publication.
Likewise, Veracruz, on the Gulf Coast, has the same problem, he said. But a few hundred miles down the coast, the Port of Tuxpan - which opened in 2016 with modern maneuvers equipment is vastly underused, but we generally don’t use Tuxpan as it has no rail link, he said. Nevertheless, when Veracruz is congested with ships – which can take from seven to 10 days to get in the port – some go to Tuxpan and unload there, Lopez said.
“I believe there should be more coordination between ports”, he said.
Contact Hugh R. Morley at email@example.com and follow him on Twitter: @HughRMorley1.