INSIGHT: Spain chemicals plea for auto, construction rescue packages to overcome crisis

LONDON (ICIS)–Spain’s chemicals had been a success story post-financial crisis within the country’s rather squalid industries, but the current pandemic, that has hit the country so hard, has brought entire economic sectors to a standstill.

End demand is simply not there. The chemical industry sells around 20% of its output to the automobile industry, which has been idle since March, with car dealerships shut due to lockdown restrictions and consumers shying away from big-ticket purchases.

With construction accounting for approximately another fifth of its output, the chemicals sector in Spain has seen its two major end markets evaporate over the past two months.

Spain’s industrial sectors account for around 12% of GDP, far from Germany’s 20%, the European manufacturing powerhouse.

And with an economy based in the services sector – tourism is a key source of income -Spain’s GDP is set to fall sharply in 2020. More than 80m tourists visited in 2019, a figure expected to be considerably lower this year.

Most analysts, and the European Commission – the EU’s executive arm – estimate Spain’s GDP fall at around 9%. That is  alongside Italy’s expected 10% contraction, a consequence of the weight of tourism in countries in Europe where the pandemic hit first, and hardest.

The Spanish and Italian governments are putting up a fight with their EU partners about the type of assistance mechanisms they will need to cater for workers in the tourism and related sectors that are expected to be out of work for most of this year.

LONG-TERM, INDUSTRY MATTERS MORE
However, Spain’s industrial companies are deeply concerned about how the just-lifted eight-week lockdown could leave long-lasting scars in manufacturing if urgent rescue packages are not implemented in automobile and construction.

Automobile matters in Spain, with its nearly 3m vehicles produced in 2018 making it the second largest European producer, only behind Germany, according to the EU’s auto trade group ACEA.

In a country of 47m, with a working population of 20m, the sector had provided a lifeline for industry post-2009, with its workers enjoying stable employment contracts and higher-than-average salaries.

The director general at Spain’s chemicals trade group FEIQUE told ICIS on Monday that an urgent rescue plan is needed for the automobile sector.

Without it, the country could risk losing its competitive edge in the industry which, according to some estimates, accounts for 10% of GDP.

Letting automobile go would in turn hit chemicals; the industry posted sales in 2019 of more than €67bn, employing around 200,000 workers.

Spain is the fourth largest chemicals producer in Europe; its annual sales are well below Germany’s €193bn, an industry employing around 450,000 workers, according to the country’s trade group VCI.

French trade group France Chimie does not publish annual sales figures, which are estimated at around €75bn; the industry employed in 2019 around 220,000 workers, the trade group said.

“2020 will be very tough for tourism, but the sector will sooner or later recover: the sun will be there, as well as the beaches, and tourists will come back once we get over the fears related to the pandemic,” said Juan Labat.

“However, we are much more concerned about industry: we need immediate plans to encourage corporates and consumers to purchase new vehicles. We believe with a €400m-package the automobile industry could be saved,” he added.

Equally, construction is a key sector in Spain due to the dual reality of the national likeness for ownership as well as the so-called ‘Florida effect’ – foreigners investing in property as a second residence.

The Spanish construction industry today is not the industry that had overheated the economy up to 2008 after a decade-long housing bubble.

Its demise then ultimately brought the banking system down as workers registering as unemployed and indebted corporates alike stopped paying their loans, making their properties toxic assets.

That is why FEIQUE’s chief said a large-scale programme of infrastructure investment is needed. He said projects planned for rail, road, or water infrastructure, which would total more than €100bn, should be sped up.

Construction materials, said Labat, are made with 90% of nationally produced chemicals, making the industry a key end market for the chemical industry.

A source based in Spain at chemicals major BASF, which employs in its Spanish facilities around 2,500 employees, said that demand in some sectors has even increased – hygiene products or chemicals destined to medical products – but the historic fall in demand from automobile and construction has left petrochemicals reeling.

The company has furloughed – known in Spain by the acronym ERTE – nearly 600 employees at its Guadalajara plant, which mostly serves the automobile industry.

A further 60 were furloughed at its plant in Rubi, near Barcelona.

The source said, however, that all furloughed employees will return to work; it is a statement few Spanish companies are brave enough to make.

The company has also implemented short-term work – or Kurzarbeit – at some of its German facilities, its domestic market, mostly serving the automobile industry.

Analysts at Oxford Economics have pointed out that around 30m workers in the eurozone are currently in some sort of state-subsidised scheme by which they are not working but they are not officially unemployed either.

In Spain, around 4m workers are under some sort of ERTE; in the UK, the government said that by the end of April it was paying the salaries of 6m workers.

As a V-shaped recovery is becoming increasingly unlikely, with the lockdowns easing at a slow pace given the risk of a second wave of infections, fears are mounting that that as half-gas activity becomes the norm and subsidies dry up, unemployment will jump in the eurozone to levels not seen in decades.

“There are 20m workers in Spain, 17m of them in the private sector of which 3m are self-employed. In two months, 4m salaried workers have been put in ERTE, and 1m self-employed have called off their business,” said Labat.

“We need to quickly implement rescue packages to get the economy moving again. You cannot keep the economy in hibernation for long because you go from one risk to a bigger one.

“And both the 4m workers under ERTE and the self-employed need to be back at work as soon as possible or we would risk making them long-term unemployed. And a country like Spain could not live off 12m workers only.”

EUROPE: SOLIDARITY OR COMPETITION?
The sovereign debt crisis in the 19-country eurozone post financial crisis, with smaller economies like Greece and Portugal bailed out in exchange for austerity measures, was a traumatic experience for those two countries that left deep social scars.

Spain’s banking system bail-out was considered at the time to be only partial, although the country also had to digest its portion of austerity. Pensions were frozen, civil servants’ salaries cut, taxes increased, and spending in public services reduced.

The global pandemic of 2020, however, is set to leave an economy deeply damaged in the third and fourth tier of eurozone economies: Italy and Spain, with combined GDP of around €2.0tr and around 110m inhabitants.

The eurozone may find that the response to this crisis may well decide its future. After months of wrangling, leaders of the wider, 27-country EU are set to take a final decision this week on what sort of financing countries like Spain or Italy will have access to.

Debt mutualisation seems to be out of the question – the so-called coronabonds proposed by Italy, a common debt instrument issued by the euro system opposed by Germany or the Netherlands.

A package of low-interest, long-term loans seems the most likely outcome, which could make it palatable to battered Italian and Spanish societies.

Bail-outs and consequent harsh austerity measures seem to be out of the question this time. At its usual slow pace, the eurozone seems to be advancing towards a system more based in solidarity.

Creating a monetary union with economies as different from each other as those in the Mediterranean and northwest Europe always promised to be an interesting experiment.

In the space of 11 years, the eurozone has been confronted by two existential crises. The way out from the financial crisis left scars that crystallised in more anti system parties, division, and little economic, productivity, and wage gains for most.

The way it emerges from this deeper, war-like economic shock may well settle the fate of the continent for a large part of this century.

Insight by Jonathan Lopez