CEPSA’s China operation improves but challenges remain

CEPSA’s operations in China have left behind the difficulties seen around the start-up of its phenol and acetone plant in 2015 as the country’s economy overcame the gloomy prospects last year and performed better than expected, according to the head of petrochemicals at the Spanish energy major.

Company petchems head Jose Manuel Martinez had said last year the start up at its phenol and acetone plant in China had been “very difficult” as it had coincided with the worst of the Chinese economy’s slowdown in 2015. The company’s plants in Shanghai have production capacities of 250,000 tonnes/year for phenol/acetone and 350,000 tonnes/year for cumene.

“Phenol had a very good performance in the second half of 2016, and we had better-than-expected results. However, prices at the start of this year collapsed as the market traditionally is flooded with US material, as well as the increase in benzene prices,” said Martinez.

“The Chinese benzene market works differently than that of Europe, where higher prices are passed onto customers. In China, if cheaper material is imported into the country in the end that affects your margins [when producing phenol]. If the Lunar New Year falls at the end of January, the situation worsens further.”

DECREASE IN SHADOW BANKING

CEPSA’s production in China is focused on phenol resins – with the construction industry as its main market – and more specialised applications like polycarbonates and bisphenol A (BPA), a market which continued performing well throughout 2016, according to Martinez.

“Our main customers for PC are running at full capacity, and [Germany’s chemical major] Covestro is soon to start up a new PC production line,” he said. Martinez added that growth in China had clearly slowed down in 2016, although some metropolitan areas like Shanghai or Beijing continue to boom, which in turn benefited CEPSA’s construction-focused petrochemical products.

“The north or the centre of the country, where you find a lot of heavy industry, is suffering the economic crisis to a larger extent, and, regarding the housing bubble, the government is trying to regulate the situation, and we are seeing a decrease in shadow banking,” he said.

Shadow banking activities in China become common in the housing market, fuelling rising prices and preoccupying national and local governments alike as the housing stock started to become inaccessible for an average Chinese family.

“While shadow banking is decreasing, the government is also focusing on the regulated credit lines, and we are seeing many corporates with poor credit ratings having difficulties to access financing.”

Martinez said there is a dichotomy of local and national administrations in China and how regulations on financing activities – especially housing – can differ greatly, as they can do in environmental issues. China’s fight against pollution has finally taken centre stage, said Martinez. While the country did not even bother to sign the 2010 Copenhagen climate agreement, it was a leading voice in 2015 for the Paris Agreement.

However, a number of sources in the European petrochemical industry have said stricter environmental rules in China apply only to foreign players, with Martinez pointing that would be somewhat true.

“It’s a half-truth. Those companies located in the biggest and newest industrial parks have the same regulatory pressure [in terms of environmental rules], even more restrictive than those of the EU. In the countryside, however, standards for many SMEs [small and medium enterprises] are not the same,” he said.

“That will ultimately present the Chinese government with a challenge: to make those SMEs, which create a lot of employment, comply with greener regulations. But it’s clear that China’s public opinion’s perception of environmental issues has greatly changed in the last 10 years.”

However, as the Chinese government focuses on reducing its largely coal-fired power stations by investing in renewable energy, the US might take a different approach under President Donald Trump, who promised during the electoral campaign to withdraw from the Paris Agreement. No formal notification has been issued yet.

As CEPSA already sells more than 50% of its petrochemicals outside Spain, according to Martinez, political changes overseas are observed closely.

Although the company does not have any production facilities in the US, where the arrival of Trump could mark a shift in trade policy, it does have operations in Canada, where it produces linear alkylbenzene (LAB) at Becancour, with an annual capacity of 120,000 tonnes/year, according to ICIS Plant and Projects.

“It’s unclear what’s going to happen with NAFTA, but the US Administration’s worries are not focused in Canada but in Mexico. However, the US has always been a very protectionist country, and it’s fascinating how you have this duality of being an open country supporter of liberties but on the other hand has tendencies to look inwards, like in trade,” Martinez said.

Martinez said that the UK’s exit from the EU, planned for 2019, would bring higher prices for its consumers if trade barriers were imposed as the country leave the 28-country single market.

However, he said that “thinking selfishly” CEPSA will not be affected as the products it ships into the country, mostly LAB for production of detergents, are not produced locally.

SPAIN’S RESILIENT CHEMICAL INDUSTRY SEEKS SUPPORT

Spanish chemicals have returned to the employment levels reached at the pre-financial crisis peak and have become a strong industrial sector within manufacturing, but higher-than-peers energy costs and insufficient infrastructure are impeding further progress.

Spain’s industry (excluding construction) accounted for 18% of the country’s gross value added (GVA) in 2015, according to the European statistical office Eurostat, a decline from the 21.4% posted in 1995.

In the EU as a whole (28 countries), the figure in 2016 stood at 19.3%, while that for the eurozone (19 countries) stood at 20.1%. However, Spain’s love of home ownership as well as the so-called Florida effect, referring to foreign property ownership, means the chemical-intensive construction sector has always been a key industrial driver in the country.

By 1995, it accounted for 9.3% of the country’s GVA. However, following the collapse of the 1998-2008 housing bubble its weight within Spain’s economy in 2015 had fallen as low as 5.6% of GVA.

As Spanish chemicals continuously try to catch up with those of Germany, the largest and most successful chemical sector in Europe, two key dragging factors stand out: the high electricity costs for an essentially energy-intensive sector and the lack of support from public institutions.

When the Spanish economy was booming and becoming a key renewable player worldwide, the governments of the time decided that consumers would be fully charged for the development of green energies. As a consequence, Spanish households and businesses pay one of the highest prices in Europe.

While Germany adopted a similar policy, it included safeguards to ease the bill for industrial players which facilitated German industry to continue being competitive in the European and global stage.

The director general at chemicals trade group FEIQUE spoke in an interview with ICIS of “subterfuges” used in Germany, and demanded the Spanish government to take the same action. However, Spain’s disdain for the manufacturing sector over the last 20 years is starting to show in the daily operations of manufacturers.

For chemicals, the high electricity costs are aggravated by a lack of infrastructure, which make investment decisions by companies more difficult.

For instance, Tarragona’s chemical park in the northeast of the country has been demanding modern, high-speed cargo rail connection to France to the north and Valencia’s harbour to the south for at least two decades, barely the same time institutions have been studying the project.

While the 10,000 jobs dependent on the park have remained stable over the last year, efforts to bring more investments have so far been unsuccessful.

A positive came on 16 March, however, when Germany’s chemical major Covestro announced it was to keep its methyl di-p-phenylene isocyanate (MDI) 170,000 tonnes/year plant at the site running, after announcing in 2015 its shutdown at the end of this year.

Equally, the head of petrochemicals at energy major Cepsa told ICIS the company’s site in Algeciras in the south, with access to one of the largest harbours in the world, has no access by rail to its own domestic market as there is no connection with the centre of the country – and the bulk of its consumers. The scene of inland container rail harbours which is common in Germany is practically non-existent in Spain.

After two inconclusive elections in December 2015 and June 2016, the Spanish political class managed to agree the formation of a minority government led by the conservative Popular Party’s Mariano Rajoy.

The new government formed in November 2016 placed industry under the ministry of economy’s umbrella, a fact celebrated by FEIQUE but dismissed by the trade unions as one more belittlement from the public institutions. They argued that the minister in charge of keeping Spain’s expenditure in line, as the EU rules demand lowering the public deficit and debt, would not be the best person to put part of the state coffers’ money to support industry.

Spain’s chemicals resilience resembles that of the country as whole. With unemployment still at 18%, foreign visitors might wonder how a country which has gone through so much pain in the last nine years has not socially exploded yet. The big metropolitan areas are going through a mini-boom but this is hardly felt in the provinces.