INSIGHT: Spain’s economy, chemicals boom despite political instability woes

SAO PAULO (ICIS)–Spanish chemicals sales are expected to rise in 2024 by 4.8%, compared with 2023, to €86.5 billion while output is expected to expand by 7.1%, the country’s chemicals trade group Feique said this week.

The enviable figures for chemicals are expected to be repeated in other manufacturing sectors as well as in the services sector, which makes up around 80% of Spain’s economy and includes its powerful tourism industry.

For 2025, Feique forecasts chemicals sales will rise by 4.2%, compared to 2024, pushing the country’s chemicals sales over the €90 billion mark for the first time. Output is expected to rise by 3.2% next year.

As far as the economy’s ups and downs, the 2010s will be a decade most Spaniards will want to turn the page on after the country’s banking sector had to be bailed out by the EU in the hangover of its housing bubble, with the consequent strict austerity policies which were the only game in town at the time.

Spaniards can feel a bit more upbeat about the 2020 as its equator approaches, after a start which made many feared a lost decade was on the cards amid a health emergency that put the country under one of Europe’s strictest lockdowns, in a place where being outside is the norm, and with tourism brought to its knees.

It was not to be. Society’s mental health may still be reeling, and may do so for years to come, but the economy’s health is evident and, moreover, the recovery is reaching sectors outside services, creating hopes the much-needed diversification in the economy might finally be taking place.

Just like after its accession to the EU in the 1980s, generous and well-targeted subsidies from the 27-country bloc are propping up the green economy and, with it, manufacturing.

However, the motor of the recovery has once again been tourism: more than 80 million people visit Spain annually, a trend increasing post-2020.

Much has been written about how after the pandemic consumers are prioritizing spending on ‘experiences’, rather than goods: Spain has developed over the past 50 years one of the world’s strongest tourism sectors.

Meanwhile, the booming and fiscally prudent Germany of the 2010s has in the space of just two years turned into the sick man of Europe as it pays a high price for its decades-long geostrategic error of over depending on Russian natural gas, an error which has hit the chemicals industry hard.

The IMF said this week Germany’s output in 2024 is expected to be flat, compared with 2023, a year which was already hard on Germany as the peak of the energy crisis sank in.

Spain’s healthy macroeconomic and chemicals sector-specific figures come against a backdrop of political woes. Spain has not been immune to the current European trend of strong and corrosive polarization. Since July 2023, the center-left government has been navigating in a minority in Parliament.

Pedro Sanchez’s cabinet minority has raised the prospects it may not be able to pass a Budget for 2025, the most important vote annually in Madrid’s Congreso de los Diputados.

While under Spanish law, the cabinet could extend this year’s Budget into next, its inability to pass a new Budget to implement its recent electoral promises would weaken it greatly.

Meanwhile, passing a Budget for 2025 before the year-end would come to guarantee the cabinet’s survival for at least another two years – if needed, it could expand 2025’s budget into 2026. The term is due to end in 2027.

While the economy booms, Spanish politics is suffering a Latin Americanization process – experts’ theory that political instability and fragmentation, leading to weaker Administrations, is the new norm after the hangover of the 2008 financial crash came to end the previous bi-partisan system of alternance in office.

‘ROCKET’ DOMESTIC ECONOMY IS CHEMICALS GAIN
This week, the IMF raised up its GDP growth forecast for Spain in 2024 to 2.9%, up from its July forecast of 2.4% and one percentage point above its forecast a year ago.

In 2025, Spain’s output is expected to expand by 2.1%. Both years, the country’s growth is set to be well above that of the eurozone’s two largest economies, Germany and France.

IMF GDP GROWTH FORECASTS
World and main European economies

	2024	Versus July forecast	2025	Versus July forecast
World	3.2	0.0	3.2	-0.1
Germany	0.0	-0.2	0.8	-0.5
France	1.1	0.2	1.1	-0.2
UK	1.1	0.4	1.5	0.0
Italy	0.7	0.0	0.8	-0.1
Spain	2.9	0.5	2.1	0.0

The healthy macroeconomic figures are filtering down nicely to the chemicals sector, still feeling the scars of the falls in sales and output in 2023, after years of relentless growth except for 2020.

Strong domestic demand and, in 2024, a recovery in exports – which account for around two-thirds of Spain’s chemical sales have allowed the sector to weather the storm better in peers in other major eurozone economies.

In the post-pandemic instability, Spanish chemicals sales rose sharply in 2021 and 2022, as prices globally shot up, but fell by nearly 7% in 2023 as prices came down, with output declining by 0.7% compared with 2022.

In 2024, the story has been one of growth again, as already forecast in an interview with ICIS in July by Feique’s director general.

“Prices are recovering from the lows we saw in 2023 – I think by the end of the year selling prices on average should reach pre-crisis levels. Demand at home is holding up strongly and exports remain healthy,” said Juan Labat at the time.

“In Spain, production of basic chemicals is recovering strongly, and this is important because output in that subgroup had fallen the most, down 11% in 2023, but it is up 8% year to date [to July]. Practically all sectors are performing well – paints, personal care, pharmaceuticals… Considering the economics of countries around us, the Spanish economy is bit of a rocket.”

For comparison, chemicals sales in Germany, the largest chemicals producer in Europe, stood at €229.3 billion in 2023, in a powerful manufacturing sector which employs 470,000 workers. For comparison again, Spain’s chemicals companies are expected to close 2024 with a 250,000-strong workforce.

However, the headline positive figures hide underperformance in key sectors, according to Feique’s President, Teresa Rasero, who is also the board’s chair at Spain’s subsidiary of French industrial gases major Air Liquide. This week, Feique’s annual assembly re-elected her for the post for another year.

Rasero said that while consumer chemicals, specialties, and health products are growing healthily, basic chemicals are still struggling with high energy costs, worsened by Spain’s “non-existent or very low” public support for energy-intensive industries, compared with peers such as Germany or France.

In the EU jargon, this is called the carbon emission rights expenses. Feique said that figure in Spain in 2024 is expected to stand at a mere €300m annually in coming years, well below the support which neighboring countries have deployed, which runs into the billions.

“[Emissions expenses compensation is] non-existent or very low compared to the few countries that have established a comparable regime. The problem is that it is precisely the production of basic chemicals or other similar energy-intensive industrial sectors that are essential to maintaining our strategic autonomy,” said Rasero.

“We need more competitive energy prices and to accelerate the decarbonization processes, which are key aspects for the future of the European productive economy.”

Feique’s president said the €300 million support in Spain is set to fall very short in a chemicals sector which would need €3 billion annually in investments to decarbonize between 2025 and 2050, according to the trade group’s forecast – a whooping €75 billion which will hardly be realized if all the effort is to come just from the private sector.

The trade group said the annual €3 billion would need to be distributed in €1.7 billion for capital expenditure (capex) to build and modernize chemicals plants; €850 million for operational adjustments during technological transitions; and €450 million for maintenance and regulatory compliance.

The daunting task is clearly showed in the headline figure of what the industry must achieve: Spain’s chemicals must reduce 12.4 million tonnes of annual CO2 emissions by 2050.

DECARBONIZATION FUND: WHO PAYS?
The Spanish cabinet has spent months negotiating a bill with employers and employees representatives an industrial policy, with both sides supporting the overall bill’s targets.

With the decarbonization challenge hurrying along, Spain may be finally coming to terms with the fact that its weakened manufacturing sectors need revival, so it is able to weather storms such as the 2020 shock, when airports, hotels, and beaches remained empty.

Spain’s manufacturing accounts for around 12% of its GDP. Economists’ mantra about a healthy economy being one in which 20% of its output comes from manufacturing only rings true, among the EU’s major economies, in Germany, after decades of delocalization and deindustrialization in most of Europe.

Spain’s attempt to pass an industrial policy worth the name is also a bit of a novelty: the country’s policymakers had not sat to negotiate a similar initiative since the 1980s, when the country seemed to confidently put most of its eggs in the tourism basket, Barcelona’s 1992 Olympics catalyst included.

With that industrial policy bill expected to pass, Feique is proposing to include in its implementation the creation of a decarbonization fund.

“[The Decarbonization Fund could be financed with] at least 50% of the income from emission rights, which last year reached €3.5 billion. We estimate the fund should aim for a figure close to €2.5 billion annually, which would help guarantee the continuity of our country’s strategic industrial assets in a competitive manner,” said Rasero.

In the past years, Feique’s executives have said, publicly but also privately, that the cabinet has been prone to listen to the trade group’s lobbying, giving an access to the corridors of power it lacked in the past, as the cabinet aims to expand and improve manufacturing employment.

Taking advantage of that, Feique is confident the bill will include proposals to implement carbon contracts which would resemble those already in place in EU countries such as Germany and the Netherlands – another chemistry hub due to its location – as well as Denmark.

“Our objective is that carbon contracts for difference [compensation to energy-intensive sectors] can be applied to essential technologies for decarbonization such carbon capture, utilization, and storage (CCUS), electrification, hydrogen, and renewable gases, oriented both to supply and demand requirements, when necessary,” said Rasero.

SPAIN POLICIES, EU-WIDE DECISIONS
The 27-country EU remains, despite recent setbacks and delays to key policies, the world’s self-declared champion in the effort to decarbonize, a move which could not come sooner in a region which mostly lacks all the conventional energy sources that have fueled the modern industrial era.

Whether the bloc and the world at large are able to decarbonize in such a relatively short period of time – target for 2050 in the EU, 2060 in countries such India or China – remains to be seen.

However, for Spain specifically, climate change deceleration and adaptation are set to be key challenges in years to come, as increasing and more intense heatwaves and droughts hit its powerful agricultural sector, as well as human health.

However, certain wave against urgent decarbonization targets is gaining traction in the EU, fueled by climate change skepticism related to the loss of jobs. The trend is reaching the EU’s capital Brussels, where policymakers are considering delays in the targets.

Turning upside down an industrial model created over the past two centuries in just two decades was always going to be a challenge, to put it mildly.

Industry players in all sides – employers and employees – around the EU have, have been lobbying hard for some of those delays, which will invariably increment regulatory burdens and, most likely, costs.

In July, Feique’s Labat he said the EU’s new approach to industry was good news, but added finetuning is needed if the EU is serious about safeguarding its diminished remaining industrial fabric.

For example, he was very critical of the many changes to the deadlines for phasing out some polluting technologies, which only contribute to create uncertainty for many businesses, he said, arguing companies do want to go greener but are fearful of failing along the way if the regulatory environment is unstable.

“What we saw, for example, with Green Deal targets for certain technologies to be phased out by 2035, which soon after the Deal’s passing were changed to 2033: that is simply not serious and the opposite of legal certainty,” said Labat.

“We want to go greener, but it would help if the authorities understood the huge undertaking this will mean. And, obviously, companies in our sector don’t work out their capex [capital expenditure] plans with just the short or medium term in mind: those assets are planned for several decades.”

In another interview with ICIS in July, the chemicals lead at the country’s main trade union, Comisiones Obreras (CCOO), said the industry’s workers do see an opportunity in the EU Green Deal, rather than a threat, but added that tight timeframes risk jeopardizing that support.

“We have had cases, like in automotive, where obviously adapting a plant producing combustion engine vehicles to produce EVs [electric vehicles] is an expensive and time-consuming process: the authorities want us to go faster than we could possibly go,” said Daniel Martinez at the time.

“And, still on EVs, the infrastructure across the EU – with a few exceptions – remains far from what is needed for a full transition towards electric mobility. We need to be realistic here.”

All in all, he concluded, moves by some political groups in the EU to practically dismantle the Green Deal are not welcomed by the chemicals industry as a whole, which is set to benefit from the green transition, he said, describing himself as a “techno-optimistic.”

This week, Rasero said the EU’s current music about industry is starting to rhyme, after the recent publication of official reports by Enrico Letta and Mario Draghi, showing a potentially competitive pathway towards an EU’s decarbonized industry, as well as the approval of the EU’s Strategic Agenda 2024-2029.

She also mentioned the chemical industry’s own Declaration of Antwerp. While fully supporting decarbonization efforts by 2050, the private-led initiative was mostly an emergency cry for extended state support if the endeavor is to be successful.

“The EU must propose an industrial model that is simultaneously oriented towards sustainability and competitiveness, and which always keeps in mind the objective of reducing the costly and complex regulatory framework and the administrative burdens that flood us with inefficiencies,” said Rasero.

“The model must serve to reduce the cost of energy in the EU, guarantee access to critical and strategic raw materials, and effectively transform industrial sectors while respecting technological neutrality.”

SPAIN CHEMICAL SALES
Turnover in thousand million euros
Annual change in %

Source: Feique

Insight by Jonathan Lopez