Cheap Natural Gas to Fuel Mexican Manufacturing Boom

Moneybox
A blog about business and economics.
July 2 2013 9:02 AM

U.S. Natural Gas Boom Poised to Generate Manufacturing Rennaissance—in Mexico

A worker sews a shoe in the factory where the shoes given to Pope Benedicto XVI during his 2012 visit to Mexico were made, in Leon, Guanajuato State, on March 1, 2013.
A worker sews a shoe in the factory where the shoes given to Pope Benedicto XVI during his 2012 visit to Mexico were made, in Leon, Guanajuato State, on March 1, 2013.

Photo by Ronaldo Schemidt/AFP/Getty Images

The availability of cheap fracking-derived natural gas in the United States has prompted a lot of speculation about a domestic manufacturing rennaissance, but also a lot of skepticism. Today I read a fascinating report from the Boston Consulting Group that argues the manufacturing boom will be real enough—but it's going to happen in Mexico.

They say that "[a] tipping point was reached in 2012, when average manufacturing costs in Mexico, adjusted for productivity, dropped below those of China." In other words, rising real wages for Chinese manufacturing workers mean that unit labor costs in Mexico are now just as low. Meanwhile, thanks to NAFTA and geography, it's much cheaper to export American natural gas to Mexico than to ship it to Asia through LNG ports. So right now "electricity costs are around 4 percent lower in Mexico than in China, for example, while the average price of industrial natural gas is 63 percent lower." Add to that the fact that Mexico has an advantageous location in terms of shipping products to American and Canadian consumers and the logic looks pretty compelling—Mexico is going to be the factory location of choice for many companies.

On top of all that, Enrique Peña Nieto is proposing big policy changes to boost foreign investment in Mexico's domestic oil and gas sector that could further entrench these advantages.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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