Chip Drought Hits Mexico Hard as Auto-Parts Bonds Take a Beating
(Bloomberg) -- As semiconductor shortages roil global supply chains, few auto-parts suppliers have been as hard hit as those in Mexico.
Nemak SAB and Metalsa SA -- makers of engine blocks, transmission cases, bumpers and fuel tanks that make their way into automobiles assembled around the world -- have seen their bonds post the worst returns among emerging-market peers over the past six weeks.
The companies are suffering more than rivals because while the chip shortage has hampered car production globally, some of the hardest hit assembly lines are in the U.S., Canada and Mexico, where the bulk of Nemak’s and Metalsa’s parts are used. The dropoff in demand is so severe -- and the auto-parts industry such a big part of the economy -- that the central bank says it may shave as much as a percentage point off of growth this year.
“If you look at the global chip shortage, the region that has been hit the most has been North America,” said Guido Vildozo, a senior automotive analyst at IHS Markit in Boston. “We’re in for a rough ride.”
The issues in Mexico are a window into shortages that have buffeted supply chains across the world and may end up costing automakers as much as $210 billion in sales. Just last week, General Motors Co. said chip shortages would crimp performance into next year as it reported a 25% drop in revenue. Ford Motor Co. said its factories won’t run at full tilt until the end of next year and the chip crisis could extend into 2023.
Both Nemak and Metalsa bonds began falling in mid- to late-September as the effects of the chip shortage on automakers were becoming clearer, according to Sebastian Hofmeister, a strategist at Lucror Analytics who changed his recommendation for Nemak’s 2031 bonds to hold from buy last week.
Over the past six weeks, Nemak bonds have lost 5%, with the notes maturing in 2031 sliding 7.4 cents from a September high to 93.3 on the dollar. Metalsa’s 2.2% loss wasn’t as sharp as its 10-year notes slipped 4.8 cents to 93.9 cents, but the losses were still well ahead of the average retreat of 1% for Mexican corporates.
“The supply chain issues and especially the semiconductor shortage is now starting to spread across credits in Latin America,” said Roger Horn, a senior strategist at SMBC Nikko Securities America in New York. “It’s really hard to know how long this will last, but some bondholders are thinking of at least a year.”
That could be a serious drag on Mexico’s economy, where vehicles and parts represent almost 25% of exports, totaling more than $120 billion in 2019 before the pandemic curbed output. Mexico is also a key link in the global auto supply chain as the fourth-largest exporter of vehicles and parts overall, according to the International Trade Centre.
Nemak’s production volume dropped 23% last quarter, with executives blaming a dropoff in light-vehicle output because of the chip shortage. The company is focusing on improving efficiency and believes the fundamentals of the industry remain strong, a spokesperson said.
Metalsa, which hasn’t reported third-quarter earnings, declined to comment.
“Every day that goes by and they can’t deliver, it’s less revenue they’re going to have,” said Luis Maizel, co-founder of LM Capital Management in San Diego. “And unfortunately there’s nothing they can do. They’re just one little cog in the big story.”
Elsewhere in Mexican markets, peso-denominated sovereign bonds rose last week, joining gains in their dollar-denominated counterparts. TIIE swap rates climbed across the board, with one- and two-year tenors rising for a ninth straight week. Mexican peso depreciation put heavy upward pressure on the front end of the swap curve, even as U.S. yields moved lower and third-quarter Mexican gross domestic product contracted, disappointing expectations.
The TIIE curve now prices almost 100 basis points of hikes before year-end. The peso exchange rate and U.S. Treasury moves remain the biggest factors for Mexican swap rates.
This week will be light on data releases, with Mexico expected to report slightly less remittances in September than the previous month and Markit Mexico PMI figures due. The nation will also release the IMEF manufacturing index for October, international reserves, and domestic vehicle sales for October.
WHAT TO WATCH:
- Nov. 1: Remittances, IMEF manufacturing index
- Nov. 2: Markit Mexico PM
- Nov. 3: Leading indicators, international reserves
- Nov. 4: Domestic vehicle sales
- Nov. 5: Consumer confidence
- Grupo GICSA establishes 20b-peso debt shelf ahead of eventual bond sale
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