Lack of chips hits bonds of Mexican auto parts firms

As semiconductor shortages shake global supply chains, few auto parts suppliers have been as hard hit as those in Mexico.

Nemak SAB and Metalsa SAMakers of the engine blocks, gearboxes, bumpers and fuel tanks found in assembled cars around the world have seen their bonds perform the worst among their emerging market peers over the past six weeks.

Companies are being hit harder than rivals because, while chip shortages have hampered car production globally, some of the worst-hit assembly lines are in the United States, Canada, and Mexico, where chip is used. most of the pieces from Nemak and Metalsa.

The drop in demand is so severe, and the auto parts industry is such an important part of the economy, that the central bank says it could cut growth this year by as much as one percentage point.

“If you look at the global shortage of chips, the region that has been affected the most has been North America”Said Guido Vildozo, a senior automotive analyst at IHS Markit in an interview from Boston. “A difficult path awaits us ”.

The troubles in Mexico are a testament to how shortages affect supply chains around the world and may end up costing automakers up to $ 210 billion in sales. Last week, General Motors Co. said the chip shortage would hurt performance into next year, while reporting a 25% drop in revenue. Ford Motor Co. said its factories won’t run at full capacity until the end of next year and that the chip crisis could extend into 2023.

“To face this situation, we continue with the implementation of measures focused on improving efficiency and operational flexibility.”Said a Nemak spokesperson. “We believe that the fundamentals of the industry remain solid “.

Metalsa officials declined to comment.

Both Nemak and Metalsa bonds began to fall between mid-to-late September as the effects of the chip shortage on automakers became clearer, according to Sebastian Hofmeister, a strategist at Lucror Analytics who last week. changed its recommendation on Nemak’s 2031 bonds from buy to hold.

Over the past six weeks, Nemak bonds have lost 5% and instruments maturing in 2031 fell 7.4 cents, from a September high of 93.3 per dollar. Metalsa’s 2.2% loss was not so sharp, its 10-year bonds fell 4.8 cents to 93.9 cents, but the losses are still well ahead of the 1% average decline for Mexican companies.

“Supply chain problems and especially semiconductor shortages are now beginning to spread to credits in Latin America“, said Roger Horn, Senior Strategist at SMBC Nikko Securities America in New York. “It’s really hard to know how long this will last, but some bondholders are thinking of at least a year”.

That could be a serious drag on Mexico’s economy, where vehicles and parts account for nearly 25% of total exports, totaling more than $ 120 billion in 2019, before the pandemic slowed production. . Mexico is also a key link in the global automotive supply chain and is the fourth largest exporter of vehicles and parts in general, according to the International Trade Center.

Nemak’s production volume fell 23% last quarter and company executives attributed it to a decline in light vehicle production due to chip shortages. Metalsa has not yet reported its third quarter results.

“Every day that passes and that they cannot make the deliveries, translates into less income that they will have”Said Luis Maizel, co-founder of LM Capital Management in San Diego. “And sadly, they can’t do anything. They are just a little cog in the big story”.

In other areas of the Mexican markets, peso-denominated sovereign bonds rose last week, joining the gains of their dollar-denominated counterparts.

TIIE rate swaps rose across the board and one- and two-year instruments advanced for the ninth consecutive week. The depreciation of the peso exerted strong upward pressure on the front end of the swap curve, even as US yields fell and Mexico’s third-quarter gross domestic product contracted, which fell short of expectations.

The TIIE curve now discounts almost 100 basis points of hikes before the end of the year. The peso exchange rate and US Treasury measures remain the most important factors for Mexican swap rates.

Little data will be released this week. Mexico is expected to register slightly less remittances in September than the previous month and the Mexican PMI figures from Markit will be released. The nation will also release the IMEF manufacturing index for October, international reserves and domestic vehicle sales for October.