INSIGHT: Spain chemicals hope to make virtue out of pandemic hit in the 2020s

Author: Jonathan Lopez

2021/06/03

LONDON (ICIS)--The Spanish chemicals industry is hoping for another golden decade as it prepares for the green revolution, despite a worsening political environment where paralysis and instability have become the dominant feature.

Chemicals in Spain have outpaced other industries over the past 10 years. Since 2010, sales have risen 20%, in a decade characterised by hardship as the country reeled from the collapse of the housing bubble that ended abruptly with the 2008 financial crisis.

Chemicals made a virtue of the 2008 crisis by looking beyond the country’s borders – today, more than half of its sales come from overseas.

Annual sales stood at €65bn at the close of 2020, up from €53bn in 2010 (see bottom graphs); within that, chemicals accounted for €45bn, while pharmaceuticals sales stood at €19bn.

Overall, the industry employed 210,000 workers by the close of 2020.

“This growth took place amid two huge economic crises, and at the same time that Spain’s average industrial output fell nearly a third,” said the director general the country’s chemicals trade group FEIQUE.

The damage to the Spanish economy inflicted by the pandemic could prove to be another catalyst for chemicals' growth in the 2020s, according to the group's director general, Juan Labat.

Spain is set to be the second-largest recipient of funds from the EU’s €750bn rescue package; funds are set to start flowing as of the third quarter.

“But even before the EU Recovery Fund was approved, companies were already investing in Spain. Capex [capital expenditure] rose sharply in the 2010s, and projects are being announced with or without the certainty of EU money,” said Labat.

This positive story is the story any chief at a trade group would like to tell, but Labat turns pessimistic when mentioning the one hurdle that could put obstacles in the way: politics.

The birth of a multi-party system post-financial crisis did not bring the positives many Spaniards were hoping for, and instability and paralysis have become commonplace.

ATTENDING THE GLOBAL PARTY
When ICIS spoke to Labat a year ago, there were not many positives to be found; Spain was going through its darkest days in decades, with hospitals in April-May running at capacity as the country was locked up at home in one of the strictest lockdowns in Europe.

While industry managed to keep running, albeit at reduced rates, the deep downturn expected for the Spanish economy did not augur any good prospects but a prolonged and painful downturn.

A fall of 10.8% in Spain’s GDP in 2020, the largest among the major eurozone economies, confirmed the pandemic had inflicted the largest damage to the economy since the Civil War in the 1930s.

Spain would recover its pre-pandemic economic output by the end of 2022 at the earliest, according to the EU's executive body the European Commission; GDP is expected to grow by 5.9% this year, and by 6.8% in 2022.

After the strict lockdown, many companies in the services sectors – 85% of Spain’s economy and main victims of restrictions to mobility – were only starting to count the losses and plan for the downturn; meanwhile, chemicals plants’ managers up and down the country were anxious to increase output as order books kept growing.

By the third quarter of 2020, Spain’s chemicals were joining the global party in manufacturing that has caused record high prices for most chemicals, record highs for shipping costs as the pandemic upended logistics, and record highs for indices measuring activity and sentiment.

The boom continues; in the first quarter of this year, chemicals growth stood at 2%, compared with the fourth quarter, or at 3% if pharmaceuticals are excluded, according to FEIQUE.

The trade group will publish on 9 June their growth outlook for 2021.

Grown in Spain's chemicals mirrors other markets in Europe; in May, the eurozone’s PMI index measuring manufacturing reached fresh highs, with output, new orders, and investment at healthy levels.

“Growth is generalised and in nearly all sectors; output levels are already even higher than in the first quarter of 2020, considered to be the last quarter before the pandemic hit in earnest. Foreign markets are booming, and so are our exports,” said Labat.

Spain-UK chemicals trade, however, has not been that rosy year to date; since January, when a new UK-EU trade deal for goods took effect, trade has fallen, according to official trade figures; FEIQUE's figures also showed sharp decreases in Spain-UK trade in the first quarter.

"Imports of UK material into Spain collapsed in the first quarter, turning our traditional deficit with the UK into a surplus. This is the start of a new trade relationship, and we believe it will normalise overtime and trade will come back as companies get used to the new procedures," said Labat.

Chemicals trade 
(in €/million)
Q1 2020 Q1 2021 Change 
Spain exports into UK 387 319 -17.4%
UK imports into Spain 541 302 -44.2%

Elsewhere in Spain's chemicals sectors, Labat said "automotive is still reeling" from the pandemic hit, with production capacity at around 80%, well below normal levels; the petrochemicals industry sells around 20% of its output to automotive.

"Construction is recovering strongly, and that is key because 90% of the materials the industry consumes are purchased in the Spanish market; EU plans for energy efficiency in the residential sector is set to propel this sector even more,” he added.

Labat mentioned prices for organic chemicals, for example, which have increased around 40% since the lows of 2020, or prices for polymers, up 10%.

He also said that, while employment in the years after the 2008 fell 20%, employment during the current downturn has fallen only 2%.

Like in many other European countries, governments came to the rescue of ordinary workers by paying their salaries almost in full, even if they were not in employment, while the economy was going through the shock of the pandemic; workers under furlough schemes are not added to the unemployment statistics.

Initially, there were fears that a prolonged downturn would make the system untenable for the Spanish Treasury; but the Spanish government has already agreed with employers and trade unions successive extensions of the furlough scheme (known in its Spanish acronym as ERTE), and it remains in place.

“The indicators we are working with right now make me confident the Spanish economy is in a position to re-absorb those workers who remain in furlough schemes,” said Labat.

Furlough schemes were not widespread within Spanish chemicals as activity remained healthy.

As in their drive to increase exports, Spanish chemicals also mark a difference with other economic sectors in the country in the fact that, for the most part, employers and employees tend to be at peace.

In April, both sides agreed another collective bargaining agreement for the industry which envisages salary increases – 1% in 2021, 2% in 2022, and 2% in 2023 – and included some other benefits related to remote working, retirements, and gender equality.

THE ELECTRIFICATION RACE
Automotive does matter in Spain, and Labat demanded from the government more support for an industry that in 2019 stood as the second largest in Europe, with 2.8m units produced, second only to Germany.

The sector employs 575,000 workers who are paid above the average industrial wages in Spain; its recovery is key for many other sectors to take off after the pandemic, said Labat.

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As the sector remains far from a full recovery, Labat said it was counterproductive to introduce a tax on 1 January on vehicles' pollution levels, a tax which follows a mandate from a EU-wide directive on emissions.

EU countries had the option to delay its introduction, however, and many did so; European trade group ACEA has said the tax negatively affected sales in the first months of this year.

The Spanish Congress actually voted against the tax in May after some parties brought it for consideration; the coalition government of Pedro Sanchez, supported by the social democrats of PSOE and the newly-formed far-left party Unidas Podemos, does not have an overall majority in Congress.

The bill however still needs to go to the Senate, where the government has more support.

“The introduction of the tax depressed demand up to May, and I am not surprised: at 10-15% [tax on the purchasing price], depending on polluting levels of the vehicles, is a big ask for consumers in the current environment," said Labat.

“The fact the government lost that vote in Congress shows how most parties thought it was counterproductive," he added.

Labat said, however, demand seemed to be taking off in May, with the effects of the tax starting to dilute.

Then, of course, there is electric vehicles (EVs); Spain’s sector is still in its infancy, although EU green plans are set to accelerate electrification.

While a chunky subsidy from the state of up to €5,000 can be obtained for the purchase of an EV that costs up to €45,000, the prices are still high for a country only starting to emerge from the downturn.

Moreover, Europe's first and second largest deposits of lithium – indispensable for battery production – are in the Portugal-Spain border: development of mining there could propel Iberia as an EV champion.

The mine on the Spanish side, in the region of Extremadura, is still to pass some administrative hurdles until the final green light, and Labat points that “mining is a very difficult industry to sell” to the Spanish public opinion.

But, he said, not only Extremadura would greatly benefit from the mine, in a region where jobs are badly needed, but the whole country would reap the benefits because mining would spur associated investments: all countries in Europe are competing to attract investments in battery production.

“This is what we are talking about here; mobility is going electric, and we need to step up our game. Installing charging points is the easy bit; for a country like Spain, retaining and growing the automotive sector is key,” said Labat.

Like in all changes, there will be losers on the race to electrify mobility – the refining industry in Europe being a clear candidate.

In Spain, the government has also been ambitious about this, and the Law on Climate Change currently being debated in Parliament contemplates that by 2040 vehicles produced cannot emit any carbon dioxide (CO2) at all: this would shut the door for biofuels, on which some Spanish crude majors had put their hopes in.

“Unless the industry can come up with a technology that is able to capture the CO2 in the vehicle’s exhaust pipe, which is unlikely, the companies running Spain’s nine refineries are facing a very difficult dilemma,” said Labat.

“But not only the companies. If you look at the economies of the areas where the refineries are located, they depend almost entirely on the refinery.

"Smaller, regional parties in Congress have already said to me they cannot vote in favour of supressing, in the space of 20 years, a sector with €40bn/year in sales that employs 200,000 people," concluded Labat.

Spain chemicals sales... 
In thousand million euros
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...of which more than half are exports 
In thousand million euros
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Insight article by Jonathan Lopez.

ICIS will be publishing the second part of this piece on Friday (4 June), including FEIQUE’s director general take on the EU Recovery Fund implementation in Spain, the disappointing Spanish political environment, and the EU’s latest push to make the chemicals regulatory regime Reach even stricter