Robert W. Gilmer

English

Research Papers in Economics

Houston Business
A Perspective on the Houston Economy
The politics of Mexican
oil seems to have
brought privatization to
an impasse that is likely
to leave the country with
an unhealthy mix of
private and public
chemical production.
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Petrochemical Privatization
Stalls in Mexico
P rivatization of Mexican business has been a
dominant trend in the 1990s, as ports, steel, rail-
roads, telephones, satellites and other industries
have moved steadily from the public to the private
sector. Privatization of Mexico’s energy industries
has proved difficult, however, with mixed results
for natural gas, electric power and petrochemicals.
Since the government’s expropriation of foreign
oil companies in 1938, oil has been a political
lightning rod for strong national feelings. Mexican
control of Mexican oil is embedded in the nation’s
constitution, and the state oil company, Pemex,
has been an important symbol of Mexico’s ability
to keep its oil resources out of foreign hands. For
the Mexican petrochemical industry, these nation-
alistic feelings, and the oil politics they breed,
have been a significant barrier to privatization.
Liberalization of petrochemicals began with
Mexico’s entry into GATT in 1985, which was fol-
lowed by a shortening of the list of petrochemical
products that could only be produced by Pemex.
The Salinas administration (1989–94) first pro-
posed the outright sale of Pemex petrochemical
facilities, and the Zedillo administration has seri-
ously pursued sale of or private investment in
Pemex plants since 1995. Recently, however, the
politics of Mexican oil seems to have brought pri-
vatization to an impasse that is likely to leave the
country with an unhealthy mix of private and
public chemical production. This article looks at
how this impasse came about and why it is a bar-
rier to development of a vertically integrated Mex-
ican chemical industry.THE MEXICAN PETROCHEMICAL INDUSTRY
The Mexican and American petrochemical
industries face each other across the Gulf of
Mexico. The Mexican industry stretches south
from Tampico around the Bay of Campeche,
with many facilities concentrated at Veracruz.
Only 700 miles away is Houston, centerpiece
of a Texas–Louisiana petrochemical belt that is
the largest, most modern and most successful
collection of chemical plants in the world. For
a basic building block such as ethylene, for
example, Texas and Louisiana have nameplate
capacity of 25.9 billion tons per year, a figure
that dwarfs that of the world’s second-largest
producer, Japan, with 6.9 billion tons per year.
Mexico also has the key ingredients for a
successful petrochemical industry: a large and
rapidly growing internal market, access to U.S.
and other Latin American markets and a rich
supply of ethane feedstocks from oil and gas
production. Ethane and ethylene kick off a
petrochemical chain that leads to production of
four of the world’s most widely used plastics—
polyethylene, polyvinyl chloride, polyethylene
terephthalate and polystyrene.
Despite its advantages, the Mexican petro-
chemical industry remains relatively small,
ranking 14th in the world in ethylene produc-
tion, for example, with 1.3 billion tons per year
of capacity. There are four complexes in the
Houston metropolitan area alone that have
more ethylene capacity. Only about half the
ethane currently produced in Mexico is used as
feedstock; the rest is returned to the natural gas
stream to be burned.
Pemex’s petrochemical subsidiary owns 70
plants in 10 complexes that produce a wide
array of base and intermediate products for
plastics and synthetic fibers and rubber. Most
of these plants were built in the mid-1980s or
earlier, with the notable exception of those in
the large Morelos complex, where production
started between 1988 and 1994. A recent
assessment of these plants by the Mexican Sec-
retary of Energy found them small by current
world standards, employing obsolete technolo-
gies and needing improvements to enhance
performance, safety and environmental con-
trols. The report estimated that if these plants
were located in Texas or Louisiana, less than
half their combined capacity would be eco-
nomically viable.
Complementing Pemex operations are a
large and growing number of private Mexican
and foreign petrochemical operations with suc-
cessful niches in the Mexican market. Leader-
ship among the Mexican companies belongs to
Alpek, a subsidiary of Monterrey-based con-
glomerate Grupo Alfa. Along with Shell and
BASF, Alpek has spearheaded development of
the private petrochemical complex at Altamira,
near Tampico. The most aggressive of the for-
eign companies is BASF, which operates nine
facilities with 2,000 employees in Mexico. Its
largest investments are in styrene and copoly-
mers at Altamira.
PRIVATIZING PETROCHEMICALS
Opening petrochemicals to private Mexi-
can and foreign investment has been a pro-
longed process of defining and redefining
what is “oil”—national patrimony reserved to
Pemex—and what is simply value-added in a
production chain that begins with oil and nat-
ural gas liquids. In Mexican terminology, prod-
ucts reserved to Pemex are “basic,” and other,
“secondary” petrochemicals may be privately
produced, in some cases with a permit from
the federal government.
Pemex domination of Mexican petrochem-
icals peaked in 1986, when the number of
basic petrochemicals was reduced from 70 to
34 and a 40-percent limit on foreign participa-
tion in secondary petrochemicals was dropped.
The list of basic petrochemicals was shortened
again in 1989, 1991 and 1992, and in 1996 all
restrictions on secondary petrochemicals were
eliminated. As recently as 1989 the basic list
included such important commodity chemicals
as ethylene, propylene, methanol, benzene
and toluene. However, the restricted list today
is confined to carbon black and naphthas, plus
the natural gas liquid feedstocks: ethane, pro-
pane, butane, pentane, hexane and heptane. In
principle, the petrochemical industry is open to
Mexican and foreign capital alike, apart from a
Pemex monopoly on feedstocks.
It is important to distinguish Mexico’s basic/
secondary terminology from the industry’s def-
inition of base or commodity chemicals thatappear early in chemical commodity chains. The
petrochemical industry is sometimes divided
into four parts, according to where products
appear on the production chain. Feedstocks
are the energy product input: naphtha, methane,
ethane, propane and so on. The first stage of
processing produces high-volume commodity
base petrochemicals, with methanol, ammonia,
ethylene, propylene and toluene among them.
A large number of intermediate products
appear between the base chemicals and final
products: formaldehyde, nitric acid and ethyl-
ene dioxide, for example. Final products
would include resins, fertilizer, polyester, syn-
thetic fibers and polyurethane foam. From this
perspective the Mexican basic petrochemicals
are simply the feedstocks, and privatized, sec-
ondary petrochemicals are the base, intermedi-
ate and final products.
This structure can also be used to describe
the ownership pattern of Mexican petrochemi-
cals, beginning with the Pemex monopoly on
feedstocks. Base petrochemicals and most
early intermediates (such as ethylene oxide or
ethylene dichloride) remain dominated by
Pemex, which held 74.6 percent of this base
and intermediate market in 1995. Private Mex-
ican and foreign firms generally operate further
downstream, well into the intermediates (for-
maldehyde or phenol) or producing final plas-
tic, resin or synthetic rubber. In 1995 non-
Pemex production was about one-third of
Mexican petrochemical output, most of it con-
centrated well downstream.
PRIVATIZATION STALLS
In January 1995 the Zedillo administration
announced its intent to sell all Pemex petro-
chemical complexes, with the Cosoleacaque
ammonia plant the first to go on the block.
Pemex would remain as a minority partner
with a 20-percent participation, and the oil
union contract would be transferred to the new
owner. Companies in Mexico, the United States
and Norway expressed interest in purchasing
the complex. But political opposition, led by
the oil workers union, ultimately killed the
deal in the summer of 1996. The transfer of
Pemex property to private or foreign hands
simply proved impossible.
This was the point at which the opportu-
nity was lost to move the bulk of the existing
Mexican petrochemical industry into private
hands. Further efforts have been made to attract
private capital to Pemex plants, but to no
effect. The modern Morelos complex was
recently marketed under a cumbersome bid-
ding process. Unable to sell the complex out-
right, the Secretary of Energy sought private
Mexican and foreign partners for Pemex that
might be willing to invest in modernizing the
plant and share in the ownership of Morelos in
proportion to the capital brought to the table.
However, Pemex would remain majority owner,
the oil union workers contract would remain in
place and foreign ownership would be even
further restricted to 24 percent or less of the
complex. Despite some initial interest, this
restrictive scheme ultimately drew no formal
bids.
The Secretary of Energy is again studying
the future of Mexican petrochemicals, but the
dilemma is clear. The country has higher prior-
ities for its public investment than petrochemi-
cals and has not invested much more than
routine maintenance in its plants since the
early 1990s. Two-thirds of Mexican chemical
production is in the hands of an increasingly
unreliable supplier. Attracting foreign invest-
ment to the commodity petrochemical niche
Pemex now occupies is problematic at best
(such investment has been rare outside of
Canada and Saudi Arabia), and it is compli-
cated further by the Pemex monopoly on feed-
stocks. Ironclad guarantees of globally com-
petitive feedstock prices would be imperative.
Mexico’s National Association of Industrial
Chemists recently described the emerging 
future as one of a maquiladora chemical in-
dustry—one in which basic feedstocks are
purchased abroad and the potential for domes-
tic value-added is limited to less capital-inten-
sive downstream processes. Given Mexico’s
rich resource base, this is a high price to pay
for not bringing its energy institutions into line
with the global market.
— Robert W. Gilmer
Joan E. WilliamsH
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For more information, contact Bill Gilmer at (713) 652-1546 or bill.gilmer@dal.frb.org.
For a copy of this publication, write to Bill Gilmer, Houston Branch, 
Federal Reserve Bank of Dallas, P.O. Box 2578, Houston, TX 77252.
This publication is available on the Internet at www.dallasfed.org.
The views expressed are those of the authors and do not necessarily reflect the positions
of the Federal Reserve Bank of Dallas or the Federal Reserve System.
Houston purchasing managers reported
a nice increase in their March index of the
local economy, perhaps an early indication
mining and manufacturing are bottoming out.
The rig count has been stable for the past
month, although at very low levels. The
recent increase in oil prices could slowly
improve conditions in the oil patch by sum-
mer or fall. Any improvement would probably
come too late to help Houston’s job growth
this year, but it could point to a much better
2000 for the local economy.
RETAIL SALES
For the first time since the oil market
soured early last year, retailers reported sales
had softened, although not by much and from
high levels of performance. Appliance and
furniture stores performed below what were
very high expectations, and department store
sales were weaker. However, discount and
specialty stores continued to perform well.
CRUDE OIL AND PRODUCT PRICES
A surprise agreement to cut oil production
sent crude prices soaring, from $12.23 on
March 1 to $16.73 by March 31. Prices have
since moved close to $18 per barrel. The mar-
ket has pushed futures prices upward along
with spot prices, indicating confidence that
OPEC cuts will occur and be maintained. Re-
spondents, however, expressed concern that
it was only this one fundamental piece of
news that nudged up prices, and if OPEC dis-
appoints the market, prices will fall as fast as
they rose.
Gasoline prices soared along with crude,
with wholesale spot prices rising from 34
cents to 54 cents during March. Planned and
unplanned refinery outages, strong demand
and inventory restocking seemed to play a
role. The sharp rise in product prices was 
a bonus for refiners, who enjoyed a nice in-
crease in profit margins.
Natural gas prices also followed crude
prices upward, rising from $1.65 in early
March to $2 or more. Natural gas liquids per-
formed even better, giving processors a
needed boost in margins.
OIL SERVICES AND MACHINERY
Oil service and machinery companies
unanimously agreed that the increase in oil
prices had yet to boost business. If oil prices
hold, however, the outlook will brighten sub-
stantially. Producers need to pay down debt
and improve their balance sheets before
beginning new drilling programs, and respon-
dents pointed to summer or fall as the time
this might begin. Meanwhile, the Baker
Hughes U.S. rig count slipped under 500 for
the first time ever and has hovered at that
level for the past several weeks.
PETROCHEMICALS
Too much capacity and weak pricing
remain the norm for the industry and the
likely outlook for some time. Domestic
demand is extremely strong but not enough
to tighten supplies at a time many new plants
are coming on line. The important exceptions
to stable or falling prices are ethylene and
polyethylene, whose prices increased 5 cents
or more per pound in recent weeks. A com-
bination of unanticipated and planned out-
ages left customers scrambling for supplies.
Stocks were already low, as customers were
unwilling to carry inventories while prices fell,
and the outages pulled these inventories even
lower. The price increases are expected to
reverse as capacity returns to production.
FINANCIAL INSTITUTIONS
Financial institutions experienced an
excellent first quarter. All loan categories
report strong gains, except for commercial
and energy lending. Consumer lending is par-
ticularly strong, with two respondents report-
ing record auto loans. Deposit growth has not
weakened, and respondents were generally
pleased with their deposit positions. They
report ample funds in investments to support
further loan growth.

Petrochemical privatization stalls in Mexico

http://www.dallasfed.org/assets/documents/research/houston/1999/hb9903.pdf

Petrochemical privatization stalls in Mexico

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