Railroads are reaping the benefits from Mexico’s emergence as an automobile exporter as they haul Ford Motor Co. (F) sedans and Nissan Motor Co. (7201) compacts from deep in the country’s interior to the U.S. border and beyond.
Ferrocarril Mexicano SA, Mexico’s largest carrier, projects that annual auto revenue will rise at least 10 percent in each of the next three years. Autos are the fastest-growing segment by sales at No. 2 Kansas City Southern de Mexico SA.
Sixteen years after privatization of the national railroad, record numbers of vehicles are moving by train to the U.S., the destination for 64 percent of Mexican auto exports in 2012. That’s boosting sales at each carrier’s parent: Grupo Mexico SAB (GMEXICOB), which owns a majority of Ferromex, as the Mexican railroad is known, and Kansas City Southern.
“All the automakers have been reinforcing their presence in Mexico, and rail access is one of the ‘musts’ for the auto industry,” Ferromex Chief Executive Officer Rogelio Velez said in a telephone interview from Mexico City. Without the rail investments that followed the first privatization in 1997, “We wouldn’t have the auto industry we have now.”
Railroads’ fuel efficiency has long given them an edge in winning long-haul business from trucks. Now, upgrades in locomotives and rolling stock are allowing the Mexican carriers to handle the increasing volumes of light vehicles pouring from factories in cities such as Aguascalientes, Puebla and Toluca.
The Mexican Automobile Industry Association projects annual output will reach 4 million vehicles in 2017, a gain of more than 35 percent from last year’s record. Mexico ranked eighth in global production in 2012, up from 12th in 2005, according to the International Organization of Motor Vehicle Manufacturers.
Ford relies on railroads to move U.S.-bound Fusions and Lincoln MKZs from its factory in Hermosillo, said Gabriel Lopez, CEO of the Dearborn, Michigan-based automaker’s Mexican unit.
“We’ve maximized the use of the railroad because it has important cost advantages,” Lopez said in an interview at the factory. “At this plant, 85 percent of capacity is for export and everything that goes to the U.S., Canada and the ports goes by railroad.”
Ferromex had 1.62 billion pesos ($124 million) in automotive segment revenue last year, up 10 percent from 2011. Its top customers are General Motors Co. (GM), Ford, Chrysler Group LLC and Nissan, the Yokohama, Japan-based automaker that is Mexico’s biggest producer.
That growth was a bright spot for parent Grupo Mexico, whose 2012 revenue dropped 2.5 percent as global metals prices slumped. Chief Financial Officer Daniel Muniz said in March the company was studying an initial public offering for the rail unit, which may occur this year, as well as IPOs for its Americas mining and infrastructure businesses.
Grupo Mexico rose 3 percent, the most in five weeks, to 39.28 pesos at the close today in Mexico City, paring its year-to-date decline to 16 percent. The benchmark IPC index is down 6.6 percent in 2013. Kansas City Southern (KSU) was little changed in New York at $109.97, with a 32 percent advance this year outpacing the 13 percent gain by the Standard & Poor’s 500 Index.
With three new automobile plants set to begin production in the next 12 months, Kansas City Southern is poised to win business after investing $300 million between 2007 and 2009 in track upgrades to central Mexico from Houston, said William Galligan, vice president of investor relations at the Kansas City, Missouri-based company.
“Given what we’ve been able to do in terms of gaining market share, it would be logical to think that we would be able to handle about half of that increase” in auto output, Galligan said in a telephone interview.
With production gains in central Mexico outpacing domestic sales growth, one challenge for railroads is that railcars full of autos going north to the U.S. are often vacant for the return trip, according to Michael Robinet, managing director of consultant IHS Automotive in Northville, Michigan.
“There’s not enough rail cars for demand out of Mexico, especially when they’re going down there empty,” Robinet said in a telephone interview. “The railroads essentially have to cover the cost with one leg.”
Mexico’s rising auto output may worsen that imbalance, and some carmakers already are shipping by sea to the eastern U.S. from Veracruz on the Gulf of Mexico or to California from the country’s Pacific ports, Robinet said.
Mexican railroads still usually haul cars to ports, and U.S. carriers gain whether vehicles arrive by rail or sea.
Burlington Northern Santa Fe, the carrier owned by Warren Buffett’s Berkshire Hathaway Inc., is boosting its Mexican and U.S. auto business, said John Ambler, a spokesman. Union Pacific Corp. (UNP), the largest U.S. railroad and owner of a minority stake in Ferromex, handles about 90 percent of autos crossing the border by rail, said Tom Lange, a spokesman.
Mexico’s auto exports reached a record 2.36 million vehicles last year, twice the level of 2003, according to the Mexican Auto Industry Association. A wave of automobile plants opening their doors starting at the end of this year probably heralds additional traffic, said Anthony Hatch, an independent rail analyst based in New York.
Ford’s Hermosillo plant is running round-the-clock shifts as it expands capacity 15 percent from 2011 to about 380,000, part of a three-year, $1.3 billion investment announced in 2012.
Nissan, Honda Motor Co. (7267) and Mazda Motor Corp. (7261) are set to open central Mexico factories with a combined capacity of more than 600,000 autos, and may eventually raise that tally. Audi AG broke ground last month on a $1.3 billion plant able to build 150,000 Q5 sport-utility vehicles a year starting in 2016.
“We know it’s sustainable for the interim because we have plants that are being built but they have yet to roll out vehicles,” Hatch said. “We’ve got a clear line of sight to an additional million cars made in Mexico.”
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