Mexico limits imports of chemicals, petrochemicals to combat contraband fuel with market's approval

Mexico will temporarily limit imports of some chemicals and petrochemicals in the latest attempt to combat contraband fuel in the country, which accounts for as much as 30% of sales.

The move has sparked criticism by some observers who consider this to be a way for the state oil company Pemex to monopolize imports, but some market participants have welcomed the measure.

Mexico's president on Oct. 23 issued a decree to temporarily limit imports of over 60 fuels and chemicals including benzene, ethylbenzene, toluene, xylene, naphthalene, cresol, butylene, diisobutylene, hexane, heptane, propylene tetramer, naphtha, butanol, hexanol, ethylhexanol, MTBE, isopropyl ether, jet fuel, fuel oil and gasoline with octane below 87. The decree becomes effective Oct. 24.

Sources told S&P Global Commodity Insights two railcars of aromatics (ARO 150) shipping from Houston were blocked from entering Mexico Oct. 24.

The government said it has identified fuels being imported without proper documentation; that fuels are being adulterated, and that some fuels are being imported under a different name to avoid paying taxes.

The government claims that as much as 80% of the fuel in the country could be adulterated. In random inspections, the government found only 25% of fuels analyzed met the technical specifications and that imports of other products exceed the needs of the industry by 40%.

In 2021, the illegal market of fuels in Mexico was roughly 47 million barrels, the government said. If the measure is effective, the government hopes to recover as much as Peso 91.4 billion ($4.9 billion) in fiscal revenues.

Multiple observers criticized the measure.

"They are again trying to monopolize imports," Gonzalo Monroy, CEO of consultancy GMEC in Mexico City, said in a video on social media.

However, market participants told S&P Global Commodity Insights the measure is not only welcome, but highly needed.

"The measure was highly anticipated and desired by the industry," said Alejandro Montufar Helu, CEO of Petrointelligence, a provider of retail prices in Mexico. Montufar Helu said the illegal fuel market in the country could account for as much as 30% of sales, according to his figures.

Montufar Helu also said the illegal fuel market includes fuels that are adulterated; fuel that is imported using any of the chemicals included in the decree; fuel stolen from pipelines, and fuel stolen from Pemex terminals.

The industry was expecting the decree, and actually was hoping it would arrive sooner, according to a market participant who declined to be identified. For those who are playing by the rules, it was impossible to compete with the illegal products, the source said.

"Diesel was diluted with ethanol, mineral oils or even jet fuel to make more money, as ethanol and naphtha were cheaper and jet fuel pays less tax; gasoline was blended with naphtha or with other types of gasoline with less octane," the source said, adding that is a good move, but its efficacy will depend on how impartially it is implemented.