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Feb.6, 2017

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SURFACE & DOMESTIC TRANSPORTATION TRUCKING | RAIL | INTERMODAL | AIR & EXPEDITED | DISTRIBUTION 54 THE JOURNAL OF COMMERCE www.joc.com FEBRUARY 6.2017 By William B. Cassidy A DOUBLE-DIGIT INCREASE in fuel costs will drive smaller Mexican trucking companies off the road, pushing freight rates higher, the head of one of Mexico's larger truck- ing companies says. The 17 percent spike in diesel fuel prices in Mexico on Jan. 1 is just one of several factors he said will lead to consolidation, tighter capacity, and higher costs for shippers doing business in Mexico. As fuel costs rise, "there will be a lot of companies that won't survive," said Miguel Gomez Tapia, co-CEO of Ciudad Juarez- based Fletes Mexico Carga Express. "The big companies will keep growing, maybe with small margins, but the midsize compa- nies with less infrastructure and equipment, we don't believe they will survive in the long run," he said. G omez Tapi a's compa ny, a mon g Mexico's 10 largest trucking companies, according to SJ Consulting Group, intends to keep growing. The carrier in early Jan- uary opened a new terminal in Tijuana, Mexico, across the border from San Diego. That gives the less-than-truckload car- rier terminals at three US-Mexico border crossings, including Ciudad Juarez-El Paso and Nuevo Laredo-Laredo in addi- tion to Tijuana. "The key to our success for now and for the future is to keep investing in getting better people, better equipment, more ter- minals, and the best technology available," Gomez Tapia said. Expanding along the border, and offering new routes to Mexico's interior for US shippers, is one way to at least try to keep on top of fuel and operating costs he expects will keep rising. "We expect not a tough quarter, but a tough 24 months," Gomez Tapia said. The immediate cause of concern for Fletes Mexico and its competitors is the Jan. 1 nationwide 13 to 20 percent hike in gasoline and diesel prices by the Mexican government, part of Mexico's plan to liberal- ize fuel pricing and allow foreign companies access to energy markets. The fuel price hikes, popularly known as the gasolinazo, are sending shockwaves through Mexico. In the first few weeks of January, pro- testers blocked highways and roads, looted stores and gasoline stations, and even forced the temporary closure of some border entry points. Protests continue, as fuel prices are scheduled to go up again in February. Mexico plans a year-long rollout of its price liberalization plan, which gradually will replace government-set prices. As fuel prices soared, Mexican carriers and logistics operators scrambled to imple- ment fuel surcharges, rare in a country where fuel prices were kept low by gov- ernment subsidy, or raise rates. "We have put our customers on notice to expect rate increases, over time," Jordan Dewart, pres- ident of Yusen Logistics Mexico, told The Journal of Commerce in an email. "Probably one-fourth of our customers accept fuel surcharges," Gomez Tapia said. "Everybody is approaching their custom- ers for at least a raise today for fuel. Some companies will be more aggressive than oth- ers, but at the end of the day, fuel touches everybody. That's easy for customers to understand," he said. "For most people, fuel is like blood and oxygen." The gasolinazo may be the biggest ham- mer pounding Mexico at the moment, but it's not the only one. The value of the Mexican peso against the US dollar has dropped from an already weak position since the election of Donald J. Trump as the US president. That's pushing up the cost of US imports in Mexico and raising operating costs for Mexican trucking firms. Many Mexican trucking companies, especially larger carriers, pay for equipment such as tractors, trailers, and even tires in US dollars, Gomez Tapia said. That means the cost of new equipment is shooting up as the US dollar grows stronger. A $120,000 Class 8 tractor that would have cost about 2.2 mil- lion pesos last October would now cost more than 2.6 million pesos. "That's because last fall the exchange rate was 18.5 pesos for one dollar, and now it's 22 pesos," he said. As long as the currency gap widens, smaller, less well- capitalized companies "will stop growing and let equipment get older," Gomez Tapia said. Over time, that will reduce Mexican truck capacity, and utilization efficiency, and drive up maintenance costs for truckers. In addition to rising fuel and equip- ment costs, Mexican trucking companies are being hit by insurance hikes, rising labor costs, and higher road tolls. The fuel spike alone, Gomez Tapia calculates, is the equivalent of 6.9 percentage point hit to a company's net profit margin. If a carrier's operating ratio was 90 percent on Dec. 31, it suddenly rose to 96.9 percent a day later. "When you add all these costs together, the impact on your net margin is around 4.5 percent, in addition to the 6.9 percent impact from fuel. So, you are talking about almost 12 percent," he said. That would push a carrier with a 90 percent operating ratio into the red at 102 percent. These cost increases are coming so quickly that carri- ers have had little time to prepare or adjust operating strategies. Fortunately for Fletes Express, about one-third of its total revenue comes from companies that pay in US dollars. "That helps to handle some of the exchange rate differences," Gomez Tapia said. Add to higher fuel prices, operating costs, and a weaker peso uncertainty about the future of the North American Free Trade Agreement and the cross-border auto trade under President Trump. Ford Motor dropped plans to build a $1.6 billion plant in SURVIVAL OF THE FITTEST? Mexico's fuel price hikes put smaller trucking companies at risk of failure

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