Mexican Companies Begin to Feel Effects of War in Ukraine

The war is even impacting companies with little exposure to the region

Three months since the start of Russia’s invasion of Ukraine, its effects are beginning to be felt by some of Mexico’s larger companies.
May 26, 2022 | 12:19 PM

Mexico City — Three months since the start of Russia’s invasion of Ukraine, its effects are beginning to be felt by some of Mexico’s larger companies.

Although the effects of the war were evident during the first days of the invasion for companies with operations in the two countries engaged in the conflict, as the war has worn on, the effects have become more evident for companies with operations in Europe, and is even beginning to affect companies with little exposure to the region, but which are facing higher costs due to the rise in the prices of energy and some raw materials, mainly those linked to the food industry.

Russia, which is subject to international sanctions, is a major exporter of crude oil and natural gas, while Ukraine is a base for manufacturing activities for sectors such as the automotive industry, while both countries are among the leading producers and exporters of grains such as corn, wheat and soybeans.

“Higher oil and food prices will put further pressure on disposable income in Latin America and increase input costs for several companies in the region,” wrote Carolina A Chimenti, Barbara Mattos and Marcos Schmidt, analysts at Moody’s, in a note in late April.

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Moody’s analysts conducted a risk traffic light study on the effects of the war on some industries in the region.

The airline sector is the most at-risk in Latin America, due to its sensitivity to fuel prices and the financial repercussions of the war, according to Moody’s.

Volaris, Mexico’s leading airline by number of passengers transported, acknowledged the pressures brought by the increase in fuel prices, which it has passed on to passengers with fare adjustments.

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“We have been able to offset 95% of the increase in fuel,” Volaris CFO Jaime Pous said at a conference with analysts and investors last month.

According to Moody’s, the chemical and consumer goods and packaging industries face moderate risks, mainly due to the volatility in the price of materials.

Russia, which is subject to international sanctions, is a major exporter of crude oil and natural gas.dfd

This industry includes Alpek, a Mexican petrochemical company, and whose executives told investors in April that the biggest impact from the war has been the higher energy prices, mainly crude oil.

“Crude oil does not impact our margins, but it has an effect on cash flow,” José de Jesús Valdez, CEO of Alpek, said at a conference with analysts and investors.

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The petrochemical company, known mainly for the manufacture of PET plastic, noted that the increase in energy, crude oil and natural gas prices has been more significant in its operations in the United Kingdom, where it has a manufacturing center that it acquired in 2019.

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Another company within this industry is Orbia, a Mexican multinational focused on the chemical segment. The company told analysts and investors that it has been able to financially ride the increases in raw material costs, supply chain disruptions and energy costs, as well as navigate other trade options, stemming from Russia’s invasion of Ukraine.

Both Orbia and Alpek adjusted upward their earnings guidance following their first quarter results. Orbia raised its expected EBITDA guidance to a range of $1.75 billion to $1.9 billion, while Alpek increased its comparable EBITDA guidance to $1.25 billion.

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Ukraine is one of the world's largest producers and exporters of wheat. dfd

Within the packaged goods segment, food manufacturers Grupo Bimbo and Gruma were among the first Mexican companies to express their concern about the war, as they have manufacturing operations in the region.

They have now acknowledged that they are also on alert due to the volatility of the price of their main ingredients, such as corn and wheat.

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Sigma, another packaged food company, has also faced headwinds from higher fuel, meat and packaging prices, mainly in its European operations, which have been reflected in lower revenues in that market.

“We face higher than expected costs due to the war in Ukraine,” said Roberto Olivares, CFO of Sigma.

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For Moody’s, Latin American companies dedicated to the manufacture of automotive parts could face a moderate risk due to the economic repercussions of the war.

Ukraine is a vehicle assembly center, with assembly plants serving brands such as Skoda, which is owned by Volkswagen Groupdfd

Nemak, a Mexican manufacturer of automotive components, said that the war between Russia and Ukraine is impacting the production of some of its clients in Europe, and driving increased production in North America.

The company is seeing lower demand for its components in Europe because Ukraine is a parts supplier to automotive producers in the region, Nemak executives explained at a conference with analysts and investors.

The Moody’s analysts forecast that Nemak could pass on price increases in raw materials, mainly steel and aluminum, without any significant delay.

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