June 24, 2008 / 8:58 PM / 12 years ago

Mexico may benefit from higher fuel prices

NEW YORK (Reuters) - Soaring fuel prices may force some companies to move manufacturing and warehousing closer to the United States, a trend likely to benefit Mexico and U.S. urban centers, the head of AMB Property Corp AMB.N Properties said on Tuesday.

Skyrocketing fuel costs are forcing manufacturers to rethink their locations. With oil topping more than $135 a gallon, manufacturers are weighing the costs of labor against the price of shipping, AMB Property Chairman and Chief Executive Hamid Moghadam told the Reuters Real Estate Summit.

“I think Mexico stands to benefit the most,” he said.

Higher fuel costs may affect not only where goods are manufactured but how they are transported and warehoused. Although the upshot is not likely to be a complete overhaul, incremental changes are likely as the cost of fuel trumps labor and rent expenses, he said.

“It’s not going to be any total change of the supply chain,” he said.

Still, while high U.S. labor costs and a lack of manufacturing infrastructure will likely hinder a U.S. rebound in manufacturing prowess, Mexico may benefit as manufacturers seek to cut shipping costs.

“They have the combination of cheap labor and close proximity to the U.S. market as opposed to China, which has the cheap labor but obviously is farther away,” Moghadam said.

Mexico already manufactures items from drugs and food to flat panel television screens and auto parts, he said.

Warehousing and distribution also may shift from sites that are out of the way but offer cheap rents to locations closer to where consumers shop. The new urban or suburban warehouse and distribution centers are likely to be taller instead of the one-story big boxes located in sparsely populated locations.

“Today, with fuel at $135 a barrel, that math argues for shorter runs,” Moghadam said. “You’re more likely to be closer in to population centers. You’ll pay higher rent, but you’ll more than make up for it in higher energy savings.”

Trade routes also may be inclined to change. Instead of goods shipped from China to Los Angeles and then trucked or shipped by rail to the East Coast, shippers may use the Panama Canal more often and sail straight to the East Coast ports, even though it takes longer.

“With increasing fuel costs, that trade-off is more and more in the favor of going directly to the East Coast ports,” he said.

AMB Property has a large presence in Mexico and has invested in developing warehouses in more populated locations.

(For summit blog: summitnotebook.reuters.com/)

Reporting by Ilaina Jonas; editing by Jeffrey Benkoe

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