Derailments Threaten To Throw Forecasts Off Track


BMI believes that continued derailments of freight trains in Mexico by organised gangs could impact our rail freight volume growth forecasts for the sector. The risk is that shippers will look to transport their goods by other means, and this in turn could impact rail freight operators' profits.

In the past, organised gangs in Mexico would rob a freight train's contents by climbing into containers when the train was in a slow-speed area and then throwing goods out. There has developed an increasing trend, however, of derailments, whereby rails are broken or removed in high-speed areas, causing the vehicles to crash. The criminals then offload the freight train's contents for sale on the black market; goods stolen in this manner include products as different as auto parts, cement, clothing, wood, fabric and furniture.

The problem has become so severe that the Mexican government is rerouting some sections of railway from urban areas or busy roads in a bid to minimise the potential damage these derailments could cause. This is costing an initial investment of US$335mn.

Will Forecasts Stay On Track
Mexican Rail Freight, 2007-2016 ('000 Tonnes)

Rail freight in Mexico is a growing sector. The declines experienced in 2008 and 2009 during the global economic crisis were reversed in 2010 when volumes expanded by 15.8%, and we estimate that growth continued in 2011and forecast further growth in 2012 and over the medium term. The sector is dominated by two major players: Grupo México (which has a 74% stake in the Ferromex and Ferrosur rail lines) and Kansas City Southern de México (KCSM), a subsidiary of US-based Kansas City Southern, both of which could see their bottom lines impacted should the derailments continue. According to the World Economic Forum's Global Competiveness Index, Mexico's rail quality is ranked 68th out of 123 countries. This puts it a respectable second in the region in terms of the markets we cover, one place behind Panama and one ahead of Chile. Road is very much the dominant land-based freight transport sector in Mexico, but there is growing interest in the rail sector.

BMI notes, however, that should the derailment of trains continue, serious risk will be presented to th e growing interest in the rail sector . Shippers may opt away from transporting their goods by rail for fear of theft, and this presents downside risk to our growth forecasts for the sector - currently forecast to average 3.8% per annum over our outlook period to 2016. The length of Mexico's rail network - 17,166km - makes it impossible to police the extent of it, though the government initiatives in the worst-affected areas - including Veracruz and Michoacan - could help.

Whether moving onto roads is any safer for shippers is a moot point. Cargo theft on Mexican federal highways is 'alarmingly high' according to the Mexican Alliance of Carriers in April. The theft of cargo is indicative of the situation in Mexico, where the key security risk is armed violence by drug and organised crime gangs, which has been allowed to foster by a high level of police corruption.

This article is tagged to:
Sector: Freight Transport
Geography: Mexico, Mexico, Mexico, Mexico, Mexico, Mexico, Mexico, Mexico, Mexico, Mexico, Mexico, Mexico, Mexico, Mexico

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