Will nearshoring prospects bring more opportunities for the Mexican paper packaging industry?

The real impact will lie in the number of investments that take place, said Fastmarkets’ economist

Mexico expects to receive $13 billion in foreign direct investment (FDI) from 20 different companies in the coming years in moves related to the nearshoring trend that is prompting optimism in several local industries, including packaging paper producers.

The estimate, which includes announcements made in the first semester of 2023, was shared during a public meeting on June 6 by Rogelio Ramírez de la O, Mexico’s secretary of Treasury and Public Credits. According to him, the continuous growth of industrial and business interest in the country, especially in its northern region, has supported an increase in Mexico’s forecast for exports and consequent economic growth.

Of these new investments, 54% will be destined for the automotive and auto parts sector and come from companies such as Tesla and BMW, among others – all interested in installing production in the country’s industrial parks that are close to the US border.

Preference for nearshoring after the pandemic

Nearshoring emerged as a reaction to the logistics crisis seen during the pandemic, according to Rafael Barisauskas, Fastmarkets’ economist for Latin America. “With the Covid-19 pandemic, the market realized that the offshoring production system had two bottlenecks: transport and people,” he said.

“Offshoring works when the world works 24/7, but when it stopped and we had countries reducing production while others closed shipments, processes got desynchronized,” he added, noting that the stoppage of the global economic cycle that occurred in 2020 created a systemic disruption across multiple supply chains “for the first time in 40 years”.

This has resulted in production and capital losses, which in turn have made production processes more expensive. “It’s like a big wave of inflation that hasn’t been solved yet – and won’t. Then, nearshoring emerges,” Barisauskas said.

Mexico holds a strategic geographical position in this scenario, with free access to both the Pacific and Atlantic oceans, direct access to Central America and proximity to South America, as well as a common border of around 2,000 miles with the United States including 54 border crossings.

With the global need to bring production lines closer to the major consumption centers – namely, the United States, Canada and Europe – Mexico has seen a wide range of opportunities arise.

Nearshoring potential in Mexico

In 2022, Mexico was considered the 10th most attractive country for FDI by the UN Conference on Trade and Development’s World Investment Report. In the same year, the country broke ground on 47 new industrial parks and nearshoring was reported to have added approximately $30 billion to the local economy.

The data, shared by the Mexican Association of Industrial Parks (AMPIP), also shows that, during 2022, 45% of the investments in Mexico industrial parks came from US businesses.

“Nearshoring has been real since 2022 as a result of supply chain problems. The conflict between US and China made it hard to supply American companies, which led Mexico to create a good base of investors interested in local production,” said Sergio Argüelles González, president of AMPIP.

FDI in Mexico rose by 30% in 2022 compared with the previous year. Nearly 70% of the companies that came to establish themselves in the country went to its northern region, causing the occupancy rate to rise to a historical record of 97%.

“The regions that are still the most attractive for nearshoring today are the strip on the northern border, with all of [the companies located there] dedicated to serving the US market,” González said, adding that 50% of all FDI in industrial parks was directed to the city of Monterrey, followed by Saltillo with 11%.

“We are also seeing the emergence of new investment poles in other locations, such as Bajío, in central Mexico, which is also very solid in terms of logistics,” González said.

According to AMPIP, there were 40 confirmed foreign investment projects in the two first quarters of 2023, which translates into a potential demand of 1.8 million square meters of industrial parks, with the greatest interest now coming from Asian companies.

Unlike in 2022, when capital came mostly from the US, more than half of the FDI in new industrial spaces in 2023 comes from Chinese companies (52%). Other 13% come from Italy, 8% from Germany, 7% from Taiwan, 6% from South Korea, 3% from Japan, and estimated 4-5% from Canada.

Positive for paper packaging but some hurdles to overcome

The nearshoring trend is very positive for the Mexican paper and packaging industry regarding long-term demand, but the sector hasn’t directly benefited from it yet, Fastmarkets’ economist Barisauskas said.

The country’s containerboard apparent consumption has been accommodating since 2022 after surging during the pandemic and reaching 5.3 million tonnes in 2021, according to Fastmarkets data, and it is set to drop in 2023 by 13.5% to 4.3 million tonnes, recovering in 2024 to pre-pandemic levels of around 4.8 million tonnes.

Sustained demand growth is expected for the coming years, Barisauskas said, and the impact from nearshoring could benefit local companies depending on how many investments actually take place.

“The country still has no infrastructure to embrace all promises that have been made. It is necessary to improve roads, energy, ports, railways, fuel lines, hydraulics, sanitation and other basic structures that still don’t exist in many municipalities. If all expectations are met, we can really see a boom in the future for packaging demand, but there is still a lot to be done,” he said.

But there is a potential downside for Mexico. A stronger dependency on exports to the US can be worrying, according to Barisauskas. “The Mexican economy is very dependent on the US, with 80% of the industrial production already established in the country focused on meeting American demand. If the US has a slight recession, the Mexican economy suffers. Nearshoring will increase this exposure,” he said.

This article was taken from PPI Latin America, our newsletter for pulp, paper and packaging market news and prices for Latin America. Speak to our team to learn about our news and market analysis, prices, forecast and more.

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Learn how to monitor packaging prices using cost and price indices and understand the underlying cost drivers, from material cost to labor, energy and more. Examples include cartonboard, liquid container and paper bag.

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