By Sam Boughedda
Investing.com - According to a report by Bloomberg, Mexico President Andres Manuel Lopez Obrador said on Monday that the country should stop making beer in the north as it faces severe water shortages.
The northern Mexican region of Monterrey is suffering from water scarcity issues. In addition, the region is said to be Mexico's "industrial heartland," with beermakers such as Heineken (OTC:HEINY) NV and Mexican beer giant Grupo Modelo having facilities there.
Bloomberg said Lopez Obrador told beer companies the government will support them in producing beer in the south or southeast.
Mexico's President is said to have told onlookers at a press conference that it is not to say they won't produce any more beer, but that they won't produce beer in the north of the country. "That's over," he stated.
"If they want to keep producing beer, increasing production, then all the support for the south or southeast," he added.
The Mexican President pointed to Constellation Brands (NYSE:STZ) as an example of what policy should look like, with the company previously having plans for a beer plant in Mexicali, a border city, until Lopez Obrador ordered the project to cease over water shortage issues.
Following the Bloomberg report, analysts at Evercore ISI and Morgan Stanley (NYSE:MS) released research notes:
Evercore ISI's analyst told investors: "STZ stock fell ~4% yesterday, following the release of an article by Bloomberg, including comments from President Obrador of Mexico (AMLO) discussing the future of beer production in Northern Mexico. During a press conference with reporters, he made a variety of comments that were confusing, with the intent ambiguous, but the only thing that seemed clear is that the Mexican government will no longer be granting new permits for beer production in the region. From what we can tell, AMLO's comments regarding the water shortage do not mean that he is in favor of forcing STZ to shut its breweries in the North."
"That said, the odds of STZ being asked to reduce production and/or rethink certain expansions may have increased due to the prolonged and severe drought. In our view, if there are constraints on STZ's production in the North."
Meanwhile, the Morgan Stanley analyst told investors in a note: "We acknowledged there is a drought situation and political risk is a wildcard, but after checking in with Constellation Brands, as well as Heineken and ABI (both covered by Pinar Ergun), and reading a translation of the press conference, we are comfortable that his comments were actually a reiteration of existing policy that there will not be new breweries in the North, but in the Southern region, similar to Constellation's prior decision to scrap its plans for a brewery in Mexicali in the North and moved production plans to the South (Veracruz)."