Stronger Mexican peso could pose challenges for US-Mexico Logistics Industry

Trade experts said any appreciation in the peso’s value against the dollar could affect everything from trucking freight rates to the cost of exports from Mexico. (Photo: Jim Allen/FreightWaves)

Mexico’s nearshoring wave has helped the manufacturing industry boom across the country, but a strengthening peso and tightening trucking capacity could create challenges for cross-border trade with the U.S., experts said.

Matt Silver, vice president of cross-border solutions at Arrive Logistics, said the peso’s appreciation against the dollar could impact U.S. shippers and carriers running cross-border freight working with trucking companies in Mexico.

“The biggest impact that we’re seeing from the peso’s change is on purchasing transportation,” Silver told FreightWaves. “With carriers in Mexico, they do business in pesos, they pay their expenses in pesos, their employees are paid in pesos. But if the trucking company is moving cross-border shipments, there’s a very good chance that they’re getting paid in U.S. dollars.”

Although the peso’s value has depreciated slightly in recent days to about $17.33 per dollar, Mexico’s currency has been on an eight-month resurgence. Around July 28, it reached its highest value against the dollar since late 2015 when it sat at $16.63 per dollar.

The peso’s rally has been supported by the rise of nearshoring — when a manufacturer moves its production operations closer to the product’s end market, along with investors that have been lured into Mexican assets by higher-yielding interest rates from the country’s central bank.

Silver and Arrive Logistics research analyst Aryan Shah recently wrote a blog post about the potential impact the rising peso could have on cross-border freight rates and U.S.-Mexico trade.

Austin, Texas-based Arrive Logistics is a multimodal transportation and technology company providing solutions for both shippers and carriers. The company has offices in Columbus, Ohio, Tampa, Florida, and San Antonio, as well as Guadalajara, Mexico.

“If a Mexican carrier is getting paid 1,000 U.S. dollars a year ago for a shipment, that might have been worth 20,000 pesos to them,” Silver said. “Today, that shipment might only be worth 17,000 pesos. So they’re getting shorted, about 3,000 pesos, roughly.”

Like any business, Mexican trucking companies have monthly fixed costs, which could be anything from lease payments on equipment to insurance payments.

“The carriers’ response ultimately will be: ‘As long as I’ve got my fixed cost, I’m not going to just eat that change in the value of the peso,’” Silver said. “So carriers are going to start asking for rate increases from shippers.”

Silver said shipments from factories and suppliers from central and southern Mexico to the U.S. could be the most affected by rate increases caused by the peso’s appreciation against the dollar.

“The further south, the longer miles, the longer cost, the bigger impact you’ll see from that impact on the exchange rate,” Silver said. “Something shipping out of Monterrey, Mexico, has a short transit, less fuel costs, the cost is lower to operate, you just don’t feel the impact as much as you do from southern Mexico, and there’s a lot more that’s getting produced in southern Mexico right now.”

The U.S. imports everything from fresh produce, home appliances, computers, electronic components, medical equipment, furniture, auto parts, vehicles, and more from Mexico.

The United States’ land borders with Mexico and Canada include some of the busiest and most economically vital supply chains in North American supply chains. Southern border ports of entry such as El Paso, Pharr, and Laredo, Texas, as well as Otay Mesa, California, handle billions in daily cross-border trade.

Jorge Canavati, principal at J. Canavati & Co. LLC, said when the peso rises too high in value against the dollar, it makes exports from Mexico to the U.S. more expensive.

“The peso has to find a balance. It is overvalued right now, and this is causing exports to become very expensive,” Canavati said. “Exports are losing competitiveness.”

Source.- Freight Waves

The Chihuahua Post