Commodities View: Exports Should Remain Robust Under President Trump

Despite Misplaced Fears On Exports, Mexico Growth To Suffer

There has been a dramatic shift in the nature of US-Mexico relations given the election of President Donald Trump, which market analysts explain has led to concerns about future impediments to US natural gas exports to Mexico. President Trump’s election is thought to threaten US exports to Mexico on two fronts.

First, through an expected slowdown in the Mexican economy which could reduce overall demand for natural gas; Second, through potential changes to the trade relationship between the two nations which could either directly or indirectly affect natural gas exports.

On both fronts, these fears are probably misplaced, or at least overstated, Anthony Yuen, global energy strategist with Citi said. “With respect to the first, while true that expectations for Mexican economic growth have been revised significantly lower (Citi economists are now forecasting only 1.2 percent growth in Mexican GDP in 2017 versus 2.3 percent pre-election), we expect the key drivers of growth in US exports to Mexico to prevail.”

Four Factors

Four key factors are expected to keep growth in US natural gas exports to Mexico robust in the coming years: (1) growth in electricity demand and generation capacity; (2) a massive expansion of the pipeline network; (3) a reduction in LNG imports; and (4) domestic production declines. Citi views these drivers largely remaining intact in a slower economic growth environment.

Growth in demand for natural gas could slow with weaker GDP growth, but fuel switching to still add demand

Though Citi sees slightly slower growth in baseload demand going forward, its global energy team continues to see room for meaningful growth in power demand for natural gas in Mexico. As detailed in a recent report (November 2016), several new gas-fired generation plants planned for in-service through 2020 should come online over the next few years, adding a total of nearly 20 GW of capacity which could boost gas demand by 1-2-Bcf/d depending on utilization rates.

This capacity is expected to see strong utilization rates since (1) these new plants should sit below both fuel oil and coal in the power stack and the expanding pipeline network within Mexico (as discussed below) will facilitate the delivery of gas to regions previously reliant on these more expensive fuels.

“We estimate that through 2022, switching to gas from fuel oil and coal generation could add ~0.3-Bcf/d of additional gas demand,” Yuen said. 

Already, fuel oil generation has declined from 1.2-Bcf/d (gas-equivalent) to 0.7-Bcf/d in 2016 and this trend should continue as more areas of the country get access to low-cost piped gas. “Switching from coal-fired generation could further boost demand, particularly by displacing generation at coal-fired power plants near the US border,” he added.

Combined with growth in baseload demand which we expect to continue at a slightly slower pace of ~0.2-Bcf/d per annum on the back of slower economic growth, Citi expects total power generation demand for natural gas could rise by a cumulative 1.6-Bcf/d through 2022 versus 2016.

Potential risks to this outlook include the growth of renewable generation and a more severe slowdown in economic growth in Mexico. Though gas-fired generation capacity is growing, renewable generation is also expected to grow which could cut into gas demand. Though not Citi’s base case, a more severe slowdown or even recession in Mexico could more severely dampen baseload demand growth.

Pipeline build-out is well underway and should continue.

Several key cross border pipeline projects are expected to come online this year. Several more are expected through the end of the decade. These projects are largely already under construction or have firm commitments in place. “We do not expect these projects to be threatened by the new US administration,” said Yuen.

Mexico cross-border and pipeline extensions. Image: Platts

This is the third in our series on emerging markets under the new US administration.