INSIGHT: EU recovery funds to boost Spain chems as push for decarbonisation powers ahead

LONDON (ICIS)–Spanish chemicals got a confidence shot this week after the EU agreed a €750bn recovery package to soften the pandemic-induced downturn focused on decarbonisation, the CEO at trade group FEIQUE told ICIS.

Spain will be able to access €140bn from the fund, with nearly €75bn available in grants and the rest in loans. Conditions for both will be linked to tangible progress towards transport electrification or energy efficiency in the construction sector, among others.

The total amount represents 11% of Spain’s 2019 GDP, which came in at €1.25tr.

FEIQUE’s Juan Labat was “satisfied enough” with the EU historic summit’s outcome. It would boost chemicals, he suggested, but he warned that the work Spain has to do will be a once-in-a-generation effort which, if successful, could help diversify the Spanish economy.

An economy largely dependent on services – and, within them, tourism accounting for more than 10% of GDP – and where industry accounts for less than 15% of output, was set to be hit hard by a virus that spreads fast and mostly unnoticed. Spain’s economy is expected to end the year 10% smaller.

Labat wants more and better industry – a mantra widely shared in Spain, but rarely applied by successive governments – so the country is best placed to cope with future economic downturns, alleviating the large spikes in unemployment and ever-rising public debt which tend to be the norm when the country suffers a recession.

The EU recovery funds, he said, cannot be used for ordinary spending – he mentioned pensions, public sector wages, or “a potential universal income” – but instead the conditions will be clear in that the EU’s decarbonisation process is not reversible.

Mobility, construction, agriculture and the wider food chain will be targeted. These are sectors that crave advanced materials the chemicals industry would provide, and where Spain has some strengths to build on.

Labat probably did not suspect in April – when the pandemic hit Spain hardest – that by July he would be preparing for his summer break having celebrated two key packages that place chemicals on the road to recovery.

In June, he spoke to ICIS about the “very positive” effect on chemicals from the €1.0bn automotive rescue package approved by the Spanish cabinet. It was much higher than expected; the petrochemicals industry sells around 20% of its output to the automotive chain.

A similar plan approved in France at the beginning of June has already helped raise that country’s car sales, according to EU trade group ACEA; a bright spot in a still-depressed industry.

SPAIN: SUN, SAND, AND INDUSTRY
Labat, who represents an industrial sector which managed to substantially grow post-financial crisis, has always been an advocate for a larger industrial base which, in turn, would prop up chemicals.

Most of the chemicals growth in the past decade came from exports. The current EU recovery plan could be a golden chance to, finally, undertake reforms that could propel the country into a more sustainable path.

“The EU is asking us for reforms to change the economic model, which is not a small endeavour – but, if we get it right, Spain could look very different in a few decades. And this cannot only be a temporary measure to soften the blow of this recession; this will look at digital transformation, a decarbonised industry, a better vocational training system,” said Labat.

“We have had meetings with the ministries of industry, economy, and ecological transition: we have been consulted in plans to be presented in September by the cabinet to the European Commission [the EU’s executive arm] which are likely to fall now under the investments coming from the recovery fund.”

Labat said that two of the plans – on mobility and sustainable construction – will implement fundamental changes: in automotive, by 2021 “most of Spanish car producing plants” will have an electric vehicle (EV) model among their portfolio, an area where Spanish producers are lagging behind peers, propping up that value chain.

In construction, Labat said a plan to be pitched to the Commission in September will total €27bn for a 10-year period; it would not only include individual properties’ energy efficiency but cities as a whole, from lamp posts to more and better green spaces, from public buildings’ energy efficiency to recycling.

Labat said that with more than half of the country’s housing stock built before 1980, Spain’s properties are craving for energy efficiency measures to counterbalance the dependence on imported sources of energy.

When thinking energy efficiency, think foams, think polyurethane (PU), and think advanced materials.

Automotive matters. Despite its generally weak industrial base, Spain has managed to remain the second largest producer in the EU with nearly 3m vehicles manufactured in 2019, according to ACEA’s figures.

The EU funds could facilitate now the jump to the next automotive era of electrification and the key for it all to function: batteries.

“There will be a battle in coming years in Europe regarding development and production of batteries, and where those hubs will be located. The chemicals industry is key in providing the materials for that,” said Labat.

As Labat predicted when the rescue package was approved in June, that public support was the key for confidence to return to automotive.

In past weeks, key announcements have poured in, with Volkswagen saying it is to invest €5.0bn in its Spanish operations, with plants expected to be at 100% by August.

Peugeot and PSA have confirmed that their Spanish plants are to remain in operation; Labat said there was a fear the two French majors would relocate to their domestic market after the French government exerted great pressure for them to do so.

Operating costs in France, however, remain substantially higher than in Spain and, for now, all plants are set to continue operating.

PANDEMIC SPEEDS UP INTEGRATION
In this week’s summit, the block of four countries dubbed the Frugal Four – the Netherlands, Austria, Sweden, and Denmark – put up a battle and some officials even spoke about the need to avoid transfers of “free money” to southern neighbours, insisting on harsher conditions and on reducing the amount in grants.

France and Germany, however, leant towards the Italian and Spanish side in response to a once-in-a-century emergency.

The outcome was extraordinary;  less than 10 years ago German Chancellor Angela Merkel said debt mutualisation among the 19 eurozone countries was unlikely to happen in her lifetime.

With her still in office, and with the pandemic having probably given Germany the confidence it was starting to lack, Merkel has precisely just agreed to debt mutualisation.

The German establishment, perhaps assuming now that the country’s progress – and its natural 430m-people market which is the EU –  does depend in part on the progress of two members totalling more than 100m inhabitants, has fully recognised that Italy and Spain are not Greece.

The trauma caused by the pandemic certainly spurred the EU to act differently this time, and the Greek experiment and its social costs, reeling to this day, could clearly not be applied to the third and fourth largest economies within the bloc.

Labat was clear: while there are conditions to the funds to be transferred, these will not imply men in black – the auditors from creditors – that regularly flew to Athens in the early 2010s to control Greece’s public finances, the image of a country put on its knees as some sort of punishment for past sins.

This time, the conditions will demand structural reforms on the economic model, and always looking at decarbonisation. The EU’s Green Deal is more of a reality this week.

A virus that spreads fast and mostly unnoticed was set to hit hard social interaction and overcrowded tourist spots: the downturn in Italy, Spain, Portugal, and Greece is expected to be severe.

The EU of 27 countries – the UK exited in January – posted a GDP of €13.9tr in 2019; well over 50% of that corresponded to Germany (€3.44tr), France (€2.43tr), Italy (€1.79tr), and Spain (€1.25tr); all figures from Eurostat.

With most forecasts predicting GDP falls of more than 10% for France, Italy, and Spain, EU leaders had to act decisively to push the economy as well as the EU project itself further.

They seem to have succeeded, at least in part. Richer members have bought, for the moment, into the “solidarity” that was meant to be at the heart of the EU project.

“All in all, I think Italy and Spain did well [in the EU summit]. Spain is to receive 5% fewer funds it demanded: as the result of a negotiation, this was part of the equation. The threats from the Frugal Four didn’t materialise, as Germany and France clearly picked the other side,” said Labat.

“It’s clear there will have to be reforms Spain has been postponing for years, but these are the right reforms which can prop up sectors we are already strong in. The deal agreed this week has generated a positive expectation in the EU as a whole. Global investors will take note of this.”

Insight by Jonathan Lopez