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Mexican industrial production falls across all sectors

Mexican Industrial Production by Sector 2013-02-26Enlarge GraphThe Mexican industrial production fell across all sectors during December 2012. Industrial activity indices are key in identifying the momentum and trend of the industrial segment of an economy. For countries like Mexico, the industry sector is driven by international trade for manufacturing companies and global commodity prices for mining companies. Other sectors that fall within the industrial activity include construction, which is driven by credit availability and the real estate market, as well as utilities, which are partly driven by regulation and partly by commodity prices (e.g. coal, gas, etc.)

The chart above shows the growth in industrial activity for each of the main sectors, comparing December 2012 values versus both December 2011 and November 2012. The drop versus last year was negative overall, with only mining showing an increase; this was driven mainly by commodity prices and less so by the contribution of oil production.

The drop versus November is more surprising given the steep drop over just one month, with no sector posting a positive gain. The biggest loser was the construction sector, whose loss was the result of a slowdown in residential construction and other non-residential areas such as industrial plants and heavy engineering projects. This was reflected by the strong reduction in demand for construction materials such as electric cables, cement, gravel, asphalt and piping, among others.

The information is relevant beyond the industrial sector since a softening in the construction sector, partly driven by residential projects, implies a soft consumer demand for housing, possibly driven by lower consumer confidence. This may be the result of a worsened perception of the current situation and/or future expectations, which may be caused by limited credit availability or lower real wages due to inflation, among other factors.

Investors in Mexican ETFs, such a EWW or NAFTRAC, as well as closed end funds such as MXF, may interpret this result as negative, but should look for further clues in other macroeconomic indicators to draw a solid conclusion. Nonetheless, the result is only short term given the indicators, volatility and Mexico’s industrial sector heavy dependence on the U.S. economy. Investors in other Latam ETFs with heavy Mexican exposure (e.g. ILF, GML) should also take note.