Traders Ditch Mexico Chemical Bonds as Crude's Drop Is No Savior

  • Alpek, Idesa, Mexichem bonds are lagging behind EM average
  • Companies also hurt by slump in Latin American currencies

For bond investors in Mexico’s petrochemical companies, the collapse of oil is proving to be a source of pain rather than relief.

At first glance, the plunge should mean a significant drop in the cost of derivatives like ethylene and naphtha, which is used by Alpek SAB, Grupo Idesa SA and Mexichem SAB to make everything from plastic pipes to asthma inhalers and the polyester in clothes. But the decline in oil prices also means the companies’ sales are likely to suffer as customers put off petrochemical purchases to lock in lower prices, Fitch Ratings said.

That concern is being reflected in the bond market, where $3.15 billion of debt from the three producers has lost 1.8 percent this month even as the price of oil sinks to a 12-year low. That’s more than the 1.2 percent average loss on emerging-market company bonds.

“They’re in a tight spot,” said Michael Roche, a strategist at Seaport Global Holdings LLC in New York. “Their input prices may be falling, but there’s deflation in that sector.”

Among the three, Idesa may be the most vulnerable to the vagaries of oil prices. Its main products are priced relative to the oil derivative naphtha, but its cost base is ethane gas, according to Gilberto Gonzalez, an analyst at Fitch. The price of ethane has fallen 25 percent since the end of September, while oil has dropped 35 percent.

Making matters worse, those costs are in dollars while about 90 percent of Idesa’s revenue comes from Mexico, where the peso has tumbled 21 in the past 12 months and reached a record low on Jan. 21. The currency slipped 0.1 percent Wednesday to 18.4768 per dollar as of 10:02 a.m. in New York.

Mexico City-based Idesa didn’t respond to an e-mailed request to comment on its bonds during office hours on Tuesday.

Alpek, a unit of San Pedro Garza Garcia, Mexico-based Alfa SAB, said in October that its sales fell 18 percent in the third quarter from a year earlier as customers put off buying decisions until prices fell enough to reflect the decline in oil.

An investor relations official at Alfa didn’t respond to a request to comment on Alpek’s bond performance during office hours on Tuesday.

Tlalnepantla, Mexico-based Mexichem also has costs in dollars and sells to countries where the exchange-rate has weakened. Latin America, where currencies from the Colombian peso to the Brazilian real have plunged, account for about 45 percent of the company’s revenue, according to Fitch’s Gonzalez. Mexichem is the region’s largest maker of plastic pipes.

Mexichem’s “plastic pipe business is mostly local currency,” Gonzalez said. “So for them, a strong dollar isn’t so good.”

Mexichem didn’t respond to an e-mailed request for comment on its bonds.

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