The Right Break

Colombian manufacturers could be getting just the break they need, with the decline in the Colombian peso of some 30% since mid-2014 boosting their competitiveness in both the domestic market and in other export destinations. However, even with the currency moving in the right direction, statistics from 1Q2015 indicated a 2.1% fall in manufacturing output in YoY terms, indicating that falling oil revenues are weighing the sector down more than the opportunity to be more competitive with imports. Over 2014, despite GDP growing in real terms by 4.6% over the year, the industrial sector was only able to register a 0.2% gain, down even on the weak 0.6% rise seen at end-2013, according to Colombia’s national statistics agency DANE. While Colombia’s manufacturers may have long complained about the impact of increased imports following the signing of free trade agreements with the US, EU, and its regional neighbors, the government seems determined to better leverage the country’s natural strengths through the Trans-Pacific Partnership talks.

In 2014, the industrial segment represented 11.1% of real GDP, down slightly on the 11.2% recorded at end-2013, according to DANE. The largest sub-segments by size in GDP generation were chemical products (12.8%), oil refining (11.7%), non-metallic minerals (9.0%), clothing and textiles (6.9%), and basic metals (6.8%). As a proportion of Colombia’s workforce, DANE estimated that in 1Q2015 industry employed 12.2% of all formal workers, making it the fourth largest supplier of jobs in the country. In YoY terms, employment in the industrial sector increased by 6.4%, despite the slow growth exhibited by the sector as a whole.

During 2014, the biggest sub-sector supporters of industrial growth according to the Ministry of Commerce, Industry, and Tourism in terms of real output growth in the industrial sector were motor vehicles and engines (9.0%); beverages (4. 0%); milled grain and starches (4.3%); sugar mills and refineries (6.7%); other food products (4.2%); other chemical products (1.8%); other types of transport equipment (7.0%); processed meat and fish (3.4%); non-metallic mineral products (1.8%); and processed dairy products (3.8%). Overall, in the growth category, both the local automotive industry and agro-industry producers are responding well to the declining peso, allowing for improved exports from these sub-segments. As the second largest auto producer
In terms of laggards, the subsectors that most negatively affected growth over 2014 were: oil refining products (-12.2%); printing and related services (-8.9%); rubber products (-18.1%); machinery and special purpose equipment (-16.0%); processed wood products (-21.2%); spinning, weaving, and finished textiles (-4.7%); manufacture of knitted and crocheted textiles (-4.1%); clothing and apparel (-1.5%); other manufacturing industries (-5.0%); and precious and non-ferrous metals (-2.3%). Unsurprisingly, the refining industry had the biggest influence on low industrial growth. Representing some 19% of all manufacturing in the country at end-2014, its 12.2% decline was primarily sourced from lower gate prices and the ongoing closure of the Reficar refinery for upgrades. With oil refining remaining the second largest contributor of industrial output, its ongoing woes will continue to weigh down growth in the sector as a whole.

GOT CAPACITY?

The capacity utilization rate (CUR) stood at 72.3% in 1Q2015, well down on the five-year moving average of 76.4% and the end-2014 figure of 75.9%. In fact, the CUR levels recorded over 1Q2015 were the lowest in the past five years; underlining some of the weaknesses the industrial sector is experiencing in Colombia. The sectors that recorded the highest CUR rates included motor vehicles and engines (92.5%); paper and cardboard (86.5%); non-metallic minerals (85.1%); chemicals and basic chemicals (83.0%); iron and steel (82.3%); yarns, fabrics, and textiles (81.0%), and food processing (79.4%). Some of the strongest sectors in terms of improved CUR included the yarn, fabrics and textiles sector, up 22.7 percentage points in annual terms, motor vehicles up 21.9 percentage points, and the appliances and electrical equipment segment, also up a strong 19.4 percentage points in YoY terms for 1Q2015. As many of these sectors can be sensitive to cheap imports from abroad, the effects of a weaker peso can be said to be giving them the push they need to grow. However, with the CUR overall on the low side, the big detractors were the auto parts sector, down some 19.1 percentage points in YoY terms, and the refining sector, falling by 11.9 percentage points in capacity utilization terms.

EXPORT MARKETS

While organizations such as ProColombia are seeking to create markets for Colombian producers to enter, the capacity of the industrial sector to play a more meaningful role, especially in the agro-industy, value adding is being pursued. By end-2014, the level of Colombian exports was found wanting. Over the 2014 period industrial exports worth some $19.47 billion were recorded, showing a worrying 10.2% fall. In fact, the only main category of industrial export to record even single-digit growth over 2014 was the food and beverage segment (3.5%). In terms of markets, 76% of all industrial exports went to countries with which Colombia has a free trade agreement. Unsurprisingly, the US is the main export market for industrial goods, at 32.1%, members of the Andean Community (Bolivia, Ecuador, and Peru) at 20.1%, and the EU (12.1%). Flip over to the imports side for industrial commodities, and the imbalance becomes more apparent. Some $61.35 billion in industrial product imports were recorded for 2014, an increase of 8.3% in YoY terms according to DANE statistics. Clearly, not only do Colombian industrialists need to better serve the export market, they also still have a lot of potential to penetrate the domestic marketplace.

AUTO SECTOR

Colombia is holding up its title as the second largest auto manufacturer after Brazil, at some 110,000 units in 2014 split between four main producers—Sofasa (Renault), GM Colmotores, Hino, and CCA (Mazda)—that formed 99% of all unit assembly. The sector contributed some 0.3 percentage points worth of growth for the industrial sector over 2014. Auto imports of 218,000 units were recorded over the same period, with CCA ending its assembly facilities and instead turning to Mexico to source imports for its Mazda lines. Overall in 2014, production in the auto sector rose by 9.0% on the back of a 2.7% rise in sales. However, while the domestic side provided some succor, the export market soured, with numbers down some 40.7%. The biggest loss was accrued by the end of the export quota for vehicles sent to Argentina, seeing Colombia shut out of that market. Other major export losses for local assemblers were Mexico, down 30.8%, Chile (-28.2%), and Guatemala (-27.5%). With local car assemblers only able to source around half of their parts from local suppliers, the dependency of the sector on intermediate imported inputs is its soft underbelly. Overall, exports of finished vehicles from Colombia are traveling close to their 2010-14 average at some 27,000 units, according to BBVA.

Motorcycles are a completely different story. Colombia produced some 625,000 units domestically in 2013 in a market size of 674,000 units. Over that year, some 613,000 units were sold, with 95% of the total belonging to domestic manufacturers. Of the 19 domestic assembly companies, Auteco had a 38.6% market share, followed by Incolmotos on 19.2%, Fanalca with 16.5%, Corbeta on 16.2%, and finally Suzuki with a 9.5% market share. Exports represented only 1.7% of domestic production, making them a marginal player to say the least.

BEVERAGES

Also contributing 0.3 percentage point worth of growth over 2014, the beverages sector had a 6.6% share of total industrial production for the year. The beverages sector has had a difficult time since the global financial crisis in 2008, though has been on the repair since 2011. In 2014, production output from the sector grew by some 4%, while realized sales were up 2.8%, according to DANE. Much of the increase in sales was thanks to a bounce in domestic consumption, as exports actually fell by 6.9% over the year. The top three export falls in terms of volume were Ecuador, down 60.7%, Puerto Rico (-7.2%), and Venezuela (-88.8%). However, Venezuelan beverages have started the road to recovery in more high-value markets, including the US (up 9.1%), Spain (11.1% rise), and Peru, which shot up 407.9%, most likely representing a low base effect.

OTHER CHEMICAL PRODUCTS

Although in the 2015 series this category has been given a slightly broader weight at 12.8% for year-end 2014, in the 2014 statistics the category had a 9.2% showing in industrial sector value contribution. It supplied 0.2 percentage points of growth for the sector over 2014, with production up 1.8% and realized sales growing a more modest 0.3%. Exports for the sector were down 3.6% over the year, with most realized to neighbors in the Southern Cone.

OIL REFINING

The oil refining sector is continuing to underperform, with production off by a significant 12.2%, with sales dropping in sympathy by 12.7%. Exports were an even more dramatic 35.1% below the 2013 figure. It is hoped that the bringing onstream of the 165,000 bpd expansion to the Reficar refinery in 2H2015 will see a turnaround in the fortunes of this sector, which helped bring down industrial growth by 0.7% for Colombia in 2014. The ongoing closure of the 80,000 bpd Cartagena-based refinery has knocked the wind out of the refining sector ever since work began on its expansion. The effects were still being felt in 1Q2015, with production down some 16.2% in YoY terms for the sector, and sales off an even more worrying 14.8%.

NON-METALLIC MINERALS

The non-metallic minerals sector has been on a slow rise up over recent years, buoyed especially by growth in the local construction sector. The sector represented 9% of industrial sector GDP generation in 2014, according to DANE, making it the third largest segment. Over 2014 its real output was up by 1.8%, though realized sales were marginally down by 0.6% for the year. With the start of a new government program to encourage heightened activity in the real estate sector, the segment may receive a new burst of growth, as exports for 2014 actually fell by a cool 24.4%.

TEXTILES

The various sub-segments of the textiles industry have also had a tough 2014. For clothing and apparel, although actual sales rose by 2.2%, production was down 1.5%. DANE suggested that domestic sales, up by 3.64% over 2014, have been the major trigger for the subsector, though also noted that large inventories toward the end of the year had begun to build with sales slowing. Exports were also down 11% for the year. For knitted and crocheted apparel, a similar picture emerged, with production down 4.1%, but realized sales actually up 4.1%. Once again, it was the domestic market that was supporting the subsector, as exports fell some 16.6% over 2014. As for spinning, weaving, and textile finishing, production was down 4.7% and sales also fell 5.7% in 2014, with a 14.4% drop in exports a major influencing factor.