2013-12-04 11:28:20 - Recently published research from Business Monitor International, "Mexico Power Report Q1 2014", is now available at Fast Market Research
We have largely maintained our forecasts for Mexico's power sector this quarter, and continue to hold the view that numerous industry-specific and macroeconomic fundamentals will converge to drive long-term growth in the power sector - particularly the country's efforts to access greater volumes of cheap US gas.
To this end, ambitious plans to ramp up gas-fired generation capacity could help Mexico benefit from cheaper electricity prices and position the country as a manufacturing hub over a longer timeframe. That said, we have grown more cautious with regards to the country's near-term economic trajectory, and also reiterate that the main risks to our forecasts stem from delays to bringing critical midstream infrastructure online, as well as uncertainty with regards to energy sector
reform - although we have adopted an optimistic view with regards to electricity market liberalisation which could create upside to our forecasts.
Full Report Details at
Despite the fact our Country Risk team has revised its real GDP growth forecasts for Mexico to 2.3% and 3.5% for 2013 and 2014 respectively (from 3.0% and 3.9%) we have largely maintained our positive forecasts for Mexico's power sector this quarter.
The recent slowdown has been attributed to weaker-than-anticipated growth in the country's manufacturing sector, and delays to public spending (brought about by the arrival of President Pena Nieto's administration in December 2012, which disrupted the execution of budget matters in H113). However, we reiterate that Mexico's still-relatively strong manufacturing sector, increasingly strong private consumption and favourable demographics will continue to drive power sector growth - as will efforts to access and utilise cheap US gas.
As such, while we will remain cognisant of the risks such a slowdown poses to our near-term outlook for electricity generation and consumption, we still expect power generation to grow at an annual average of 4.5% between 2014 and 2022 to reach 416TWh - based on the country's ambitious capacity expansion plans and strong demand growth. We also continue to forecast that gas-fired electricity generation will grow at an annual average rate of just under 6.4% between 2013 and 2022, accounting for over 60% of generation capacity at the end of our forecast period and driving our forecasts for growth in electricity generation.
That said, we also highlight that the future health of the power sector will depend on the Mexico's ability to establish the mid-stream infrastructure necessary to source a stable gas supply from the US. It will also rely on the government's willingness to tackle the thorny issue of energy sector reform, which could have huge implications for private sector involvement in the electricity market - and ultimately domestic electricity prices - if it proves successful.
Key developments this quarter include:
* Exports of natural gas from the US grew by a huge 24% in 2012, according to Energy Information Administration (EIA) data. The surge in demand was driven by growth in industrial production, with imports hitting the highest level since records began in 1973. The EIA estimates that despite Mexican gas consumption having grown by an average of 4% per year between 2007 and 2011, annual average gas production has only grown at 1.2% over the same period - highlighting Mexico's reliance on imported US gas.
* While work on a host of gas pipeline projects is progressing, with the first phase of the 1,200km Los Ramones pipeline under construction, and due to become operational by end-2014, we note that considerable risks to the second phase of the project have materialised this quarter - creating risks to our outlook for growth in gas-fired electricity generation. In October 2013, Pemex voided the results of a public auction, stating that the sole bid for the 740km pipeline did not comply with its required technical and economic specifications. While Pemex subsidiaries will now take on the project, we believe delays to the 2015 completion date are a threat - particularly if Pemex struggles to raise the necessary financing quickly. If these delays materialise, they could create downside risks to our gas-fired generation forecasts and also our US Henry Hub gas price forecasts, which currently factor in rising gas exports to Mexico as a support for an uptrend in prices.
* Meanwhile, although debate over broader energy sector reform has grabbed the headlines (and we emphasise that the reform of the oil and gas sector would likely have a major bearing on electricity generation and electricity prices), we believe plans to liberalise the electricity market have a far better chance of being approved and implemented, and are therefore more likely to have a direct and more immediate impact on investment. To this end, we believe that the most likely modification following energy sector reform in Mexico will be the introduction of competition into the electricity generation segment. Both the ruling Partido Revolucionario Institucional (PRI) and opposition Partido Accion Nacional (PAN) have put forward proposals to establish a secondary market for electricity - requiring the amendment of the existing law surrounding private participation in the electricity sector.
* With this in mind, we highlight that a failure to pass substantive reform of the broader energy sector would pose significant downside risks to our forecasts for real GDP growth, exchange rate and balance of payments positions. Indeed, under such a scenario, trade and investment flows, as well as sentiment, would deteriorate significant, with a highly detrimental impact on macroeconomic dynamics.
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