European Geologist Journal 42

International Cooperation in Development of Mexican Raw Materials

By Barney Paul Popkin*

*WASH-ENV-M&E Consultant, Tucson, Arizona USA bppopkin@yahoo.com

Abstract

Foreign capital, technology and know-how have long played a role in the development of raw materials in Mexico. Sweeping government reforms in 2015 now allow for private and international investment in its energy sector, encouraging more international cooperation. International partners in cooperation include its northern, wealthy entrepreneurial U.S. and Canadian neighbors, its former Spanish colonial masters, and more recently, more modest cooperation with European, Japanese and Chinese organizations. Prospects for beneficial cooperation could be improved by minimizing some of the weaknesses currently found.

The United Mexican States is located south of the USA (Figure 1) and covers nearly 2 million km2. It is rich in oil and gas, coal, silver, gold, copper, lead, zinc, minerals and gems, sand and gravel, salt, timber, and seawater. Its varied, largely mountainous terrain, multiple climate zones, and coastal waters provide home to an extraordinarily large biogenetic pool.

Figure 1: Location map of Mexico (CIA, 2016).

For over 500 years, Mexico depended on foreign capital for its raw materials development. Mexico still depends on international cooperation from foreign investors, managers, technologies, and markets. Raw materials were developed for local use, export, political and social reasons, resource independence, as well as investment for profit. For the past 90 years, political and social reasons led Mexico to vacillate between resource nationalization and privatization.

The oil and gas industry and the mining industry are major contributors to the nation’s economy. The industries have tended to be under the control of a limited number of major players, either national companies or a select group of landowners; however, the involvement of international partners is becoming more common. Table 1 compares the two sectors and Figure 2 gives information on July 2016 market prices of some major commodities.

Table 1: Comparison between the Mexican petroleum and mining sectors.

Oil and Gas Sector Mining Sector

Mexico is the world’s 11th largest oil producer, 13thlargest oil exporter, with the 17th largest oil reserves, and 4th largest producer in the Western Hemisphere behind the USA, Canada and Venezuela (CIA, 2014). Oil generates 10% of Mexico’s export income and about 33% of collected taxes.

 

Ending a 76-year largely unprofitable monopoly, Mexico kept 83% of its petroleum reserves within its Pemex bureaucracy, but in an effort to boost declining income and dwindling productivity, government auctions for foreign firms were announced for new shale gas and offshore oil and gas exploration and development. This unknown reserve is estimated at 20% of future production (Parker, 2014). Exxon-Mobil, Shell, Chevron, Petrobas, BP, Russia’s Lukoil, Japan’s Mitsui, Toronto’s Pacific Rubiales, Dallas’ Talos, London’s Premier, Italy’s Eni are among the over 30 firms chasing this market.

The Pemex monopoly also runs Mexico’s retail gas stations either directly or through small but growing private concessionaires like Groupo Hidrosina, La Gas, and more recently, U.S.-based Gulf Oil.

Gold, silver and copper dominate the Mexican mining sector with over 60% of annual production value (Deloitte, 2012).

 

Much of Mexico’s mining sector is controlled by oligopolies, wealthy families and associations. Grupo Mexico of Cananea, Sonora, holds vast mining interests in Mexico, as well as having interests in Minera Mexico, Ferrocarril Mexicano, Condumex, Southern Copper Corporation, Mexican Railway Group and Ferrosur, Asarco, and International Copper Association Banamex.

Main foreign investment countries include the USA, Spain, Canada, Netherlands, Germany, Japan, Belgium, and France, with about 8.8% invested in the sector in 2014 (Secretariat, 2016); Canada represents 75% of the total foreign investment related to the mining sector in Mexico (Deloitte, 2012).

As crude oil prices dropped to almost one third of their previous price over the past several years, Pemex has been under pressure to cut its costs and increase foreign investors.

 

Pemex seeks a sustained price of USD 25/bbl to at least cover its heavily subsidized costs (Domm, 2016), compared to a 2008 peak of USD 120/bbl.

As copper prices slump, dipping below USD 2.00/lb in January 2016, or less than half its 2000 high, it traded at a spot price of USD 2.30 most of 2016. Copper prices were on an upswing during autumn and early summer 2016 on signs of more demand from China, but fell to USD 2.11 on news of Britain’s vote to leave the EU on June 23, which also adversely impacted copper firms’ share price by more than 10 percent on the New York Stock Exchange.

 

Copper miners seek a sustained price of USD 2.15 to consider making future expansions (POT, 2016).

Figure 2: Recent commodity post-Brexit prices of selected materials (Metals, Mexico Mining Center and Crude Oil, West Texas Intermediate Crude Oil Spot Price, 9 July 2016).

Oil and Gas Industry

The oil and gas industry operates through its national monopoly Pemex. Since its founding in 1933 and its quick expatriation of foreign oil company facilities, Pemex was and continues to be heavily subsidized by the Mexican government. Pemex lost money until 1962, when a financial breakthrough occurred after Pemex obtained international credits from the British Board of Petroleum Equipment (GBP 10M) and US financial institutions (USD 50M), including Chase Manhattan Bank, to modernize and stimulate the sector. Over its long history, Pemex has depended heavily on foreign subcontractors to provide technology and service expertise.

The Mexican government has begun to reform its monopoly of its oil and gas sector with a PRI-PAN political alliance which enabled the December 2013 approval of constitutional reforms on energy, constitutional reforms in December 2013, and secondary laws approved in August 2014 (Seelke et al., 2015).

Offshore drilling is the main area of expansion, with new discoveries reported recently by Pemex (OET, 2016). Other developments include some financial difficulties for Pemex, hurt by low oil prices. The need to cut costs may thus stimulate further international partnerships and cooperation, as may the push to open up to competition. It was recently reported that the oil industry regulator of Mexico has for the first time approved drilling in Mexico’s waters by a firm other than Pemex (Scully, 2016).

Mining

Mining has been taking place in Mexico since at least the 1500s. Technology introduced from Europe after the Spanish conquest led to expansion in the mining, especially of gold and silver, and metals made up the majority of the exports of “New Spain” for centuries afterwards (MMR, 2013). Couturier (2003) notes the high cost of new mining technologies, the extent of capital transferred to fixed mining works, the improved silver refining methods, the policies of the Spanish crown and its constant need for money, and the foreign control over the mines in the 18th century. The government favored large enterprises and monopolies in the hands of wealthy Spanish merchants.

Taylor (2001) discusses how the silver boom energized Mexican-U.S. trade, the economic development of Southern California, and the Mexican government’s attempts to control the mines and their foreign investors in the 19th century. Hart (2008) notes the pre-Mexican Revolution period’s silver bonanza. American investors began purchasing mines and expanding their hold on natural resources outside in the mid-19th century and 1910. Technology, industrialization and politics tied Mexican mining communities to the U.S. and China. This led to development which relied on foreign investments, managers and technology.

Shepherd (2000) writes on the silver mining challenges faced by an American silver mining company from 1880 to the early 20th century, while Calderón (2000) discusses the complex mining-driven ideology, economic growth and social disruption in both Mexico and the western U.S. from the late 19th century to 1930. And finally, Lowell (2014) recounts his experience as an American mineral exploration geologist working in Mexico from the mid-20th to the early 21st century.

In May 2008, building on a 100-year legacy of Cornish miners in Mexico, the mining industry issued an Initial Public Offering on the London Stock Exchange as Fresnillo, the world’s largest producer of silver. The enterprise raised some USD 2 billion, but London dominates international mining finance. Today, Mexico ranks as one of the world’s top metals producers (Deloitte, 2012). Money collected from mining royalties is to go to the Fund for Sustainable Regional Development in Mining Municipalities. A variety of metals are mined in Mexico, including copper (Figure 3).

Figure 3: Grupo Mexico’s Cananea mine in Mexico holds the second biggest copper reserve in the world. Image courtesy of Lokomen123.

Figure 4: USGS Mexican minerals map (January 13, 2013).

However, metals are not the only products mined in Mexico: other minerals are also abundant (Figure 4). Salt, for instance, is also important. In 2014, Mexico exported slightly over 9 million tons of salt from its Exportadora de Sal facility in Baja California Sur (Figure 5) – jointly owned by the Mexican Government and Japan’s Mitsubishi and  worth USD 164M – making it the world’s seventh largest world producer and fifth largest salt exporter, after the Netherlands, Canada, Germany and Chile (Geo-Mexico, 2015).

Figure 5: Loading a salt barge at Exportadora de Sal facility in Baja California Sur, a joint venture of the Mexican government and Mitsubishi of Japan.

Investments and international cooperation

Investment in Mexico’s raw materials is funded by wealthy, traditional landowning and property-rich families, as well as consortia and concessionaires, and of course by foreign investors, donors and the federal government. Table 2 provides some insights into Mexico’s mining industry and shows the sectors’ importance and trade agreements.

Table 2: Mexican Secretariat of the Economy mining insights.

Mining in Mexico and the World (Secretariat, 2016) Foreign Trade/Countries with Treaties and Agreements signed by Mexico (Secretariat, 2015)

Mexico in the world 

 

  • Ranked first place in silver production worldwide. It ranks among the top 10 world producers in: bismuth, fluorite, celestite, wollastonite, cadmium, molybdenum, lead, zinc, diatomite, salt, barite, graphite, gypsum, gold and copper.
  • It is the first destination in investment in mineral exploration in Latin America and the 4th in the world (SNL Metals & Mining, 2015).
  • It is the 5th country in terms of being the best environment for mining businesses, according to a report by consultancy Behre Dolbear published in August 2015.
  • As of July 2015, the mining-metallurgical sector generated 352,666 direct jobs and 1.6M indirect jobs, according to a report by the Mexican Social Security Institute. The mining-metallurgical sector in Mexico contributes 4% of national GDP.
  • Mexico has signed bilateral investment treaties with over 30 countries.
  • Mexico has a network of 12 Free Trade Agreements ​​with 46 countries, 32 Agreements for the Promotion and Reciprocal Protection of Investments with 33 countries and 9 agreements of limited scope (Economic Complementation Agreements and Partial Scope Agreements partial) within the framework of the Latin American Integration Association.
  • Mexico is actively involved in multilateral and regional organizations and forums such as the World Trade Organization, the Asia-Pacific Mechanism Economic Cooperation, and the Organization for Economic and Cooperation and Development.

 

U.S.-Mexico cooperation includes (Seelke et al., 2015): Bilateral Framework on Clean Energy and Climate Change (2009); North American Development Bank loan of over USD 577M since 2011 for wind and solar energy development; USAID’s Mexico Global Climate Change program, a 5-yr, USD 70M greenhouse gas reduction and low emissions program (2011-2014); U.S.-Mexico Trans-boundary Hydrocarbons Agreement, a Gulf of Mexico energy partnership (2012). A USAID pre-2000 “Partnership to promote Clean Technology in the Mining Sector in Latin America and the Caribbean” included pollution prevention in Mexican mining.

Additionally, EU-Mexico cooperation includes: EU-MEX INNOVA (2013-2016) for clean energy development; EU-Mexico Global Agreement (2015) for renewable energies; and the EU-Mexico GEMex (2016-2020) 3-year renewable for geothermal energy, where each party is contributing EUR 20M.

Potential barriers to international cooperation

The mining industry faces certain challenges. In 2014, there were more than 37 disputes over land, water, environmental and social issues related to the mining industry. For instance, Gómez (2013) discusses confrontation between the Mexican National Miners’ Union and transnational corporations in 2006. Many of the weaknesses listed in the SWOT analysis (Table 3) pose major problems for both smooth operation and close international cooperation. Corruption appears to be one such issue, not only on an industrial scale but in terms of daily life, as well (see Box 1). In addition, personal accounts from international experts working in the Mexican mining industry give evidence of working conditions and customs that sometimes hinder safe and efficient operations (see Box 2). Such problems in the mining industry may pose barriers to extensive international cooperation.

Table 3: SWOT Analysis of international cooperation in Mexican raw materials.

SWOT Analysis
Strengths
  • Extensive natural resources for development at competitive costs
  • Rising middle class wanting to invest and demanding better and more goods and services
  • Growing economy
  • Favorable labor laws
  • Basic education, training and literacy in Spanish and English
  • Vibrant, young, educated and skilled labor force
  • Awareness of challenges among public sector operators, generous North American donors; well-informed academics, researchers and private sector advisors, consultants, and engineering firms; successful non-governmental organizations
  • Strong maquiladoras (free-trade zones along the U.S.-Mexican border with special privileges for owners, operators and laborers) and shelter companies
  • Good infrastructure: highways, roads, bridges, rail, trucking and shipping
  • Liberalized and favorable US/Mexico trade policies
  • Expedited USA/Mexico customs services; expanding and new ports of entry
  • Favorable regulations and enforcement
Weaknesses
  • Corruption, poor governance and public management, institutional and political constraints, threatened press and media, criminality, heavily centralized decision making, embezzlement, bribery, corruption, nepotism/cronyism/favoritism, and lack of trained and motivated personnel
  • Labor shortages and rising labor costs
  • Non-transparent contracting, procurement, bidding regulations and processes
  • Inadequate ports of entry
  • High bank interest rates
  • Economy is highly tied to the U.S. economy
  • Socioeconomic and class stratification
  • Violence involving criminal organizations that presents a risk in parts of Mexico (particularly some areas along the U.S.-Mexico border)
  • Some sectors are reserved exclusively for the Mexican State or for Mexican nationals
  • Logistical, distribution and supply chain challenges
  • Government restrictions on certain foreign investment; red tape, corruption, arbitrary licensing decisions; high mining taxes, tariffs, and fees; archaic legislation; weak intellectual property rights.
  • Claims of government reform may be oversold.
Opportunities
  • Growing demand for low-cost, high-quality raw materials
  • Labor costs comparable to Asia-based manufacturing, extensive trade agreements and a strategic location between North and South America
  • Government is positively oriented to foreign investment with efforts to carry out economic reform and new investment opportunities
Threats Growing national and local movements in environmental protection; threats by indigenous peoples and labor rights movement; materials reduction, reuse, recycling and substitutions; phasing out of fossil fuels; competition; fluctuations in demands and exchange rates

Box 1: Personal account of recent Mexican petrol station bribery.

In July 2016, a Mexican-American neighbor planned a sightseeing and shopping visit to Puerto Peňasco, Sonora, Mexico, taking her estranged former husband along with her as his Spanish is better and he is better equipped to bribe the Pemex petrol station operators for a lower fuel price. Bribery is common at border, customs, police and other stations and public facilities in Mexico.

Box 2. Personal account of recent Mexican mining inefficiencies by a mining geologist.

On the basis of my year spent at Compania Minera Dolores, State of Chihuahua:

 

a) Need for expatriates to be given extra protection (i.e. flying between Chihuahua City and the mine site) to avoid possible kidnap by drug runners.

b) Inability of senior Mexican mine management to show an example to their subordinates by adhering to normal work/leave rotation rosters. The general manager (and his assistant) at the Dolores mine worked from Monday morning to Friday morning each week, flying in and out from/to Chihuahua City and spending three days every weekend with their families at home. Everyone else working at the mine was required to work two weeks continuously at the mine, followed by a one-week leave.

c) Inadequacies and unhelpfulness of the Mexican police in upholding the rule of law. There was an incident where the vehicle that brought in food was stopped from progressing to the mine. Certain villagers put up barricades which they refused to pull down unless the mine paid them USD 100,000. The mine manager tried to call in the police but they said that they didn’t want to get involved! The matter was finally resolved by involving local politicians, who insisted that the barriers be pulled down.

In order for Mexico to capitalize on its strengths and take advantage of its opportunities (see Table 3) and mineral resources (see Figure 4), some progress in tackling these issues would be highly beneficial.

Conclusion

Mexico has gone through different stages in the development of its raw materials resources – exporting to Spain as a colony for centuries, moving later to nationalization of industries – and seems to be entering a new phase in which international partnerships and cooperation will be more welcome. International investments and projects are in place, especially with its North American neighbors, but the circle of partners from other areas of the world is expanding. While there are issues to be addressed (corruption, security, bureaucratic red tape, etc.), the opportunities for international cooperation are promising.

Acknowledgements

I am especially indebted to the wisdom and guidance provided by Bruce Raymond, Chuck Josephson and Mina Goldberg of Tucson; David Pollard of Loughborough; Emeka Ezeh of Abuja; Igor Ziderer of Dushabe; Ihor Nikiteno of Dnipro; Jim Jacobs of San Francisco; and Omar Barrios of Lima.

References

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CIA. 2014. “Energy: Mexico”. World Factbook. CIA. June 20, 2014.

Couturier, E.B. 2003. The Silver King: The Remarkable Life of the Count of Regla in Colonial Mexico. University of New Mexico Press. Albuquerque.

Deloitte. May 2012. Mining Industry in Mexico.

Domm, P. 2016. “Mexico’s oil plan: cut costs, find foreign investors”. IHS CERAWEEK. February 26.

Geo-Mexico. 2015. “Why is the world’s largest salt-works in Baja California Sur?” Geo-Mexico, the geography and dynamics of modern Mexico. February 12. http://geo-mexico.com/?p=5667

Gómez, N. 2013. Collapse of Dignity: The Story of a Mining Tragedy and the Fight Against Greed and Corruption in Mexico. Benbella Books, Dallas, Texas.

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Parker, N. (2014) “Mexico puts out the welcome mat for Big Oil”. CNN. August 14. http://money.cnn.com/2014/08/14/investing/mexico-energy-reform

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Shepherd, G. 2000. Silver Magnet. In Fisher, R.D. (ed.), History of Copper Canyon and the Tarahumara Indians Anthology. Sunracer Publications, Tucson, Arizona, chapter 6.

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This article has been published in European Geologist Journal 42 – International cooperation on raw materials.

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