Spain Petrochemicals Report Q3 2009

The Spanish petrochemicals industry will be severely hit by a deep and prolonged economic recession, but gas supply from Algeria could provide producers with access to cheap feedstock in the long term, bolstering their competitiveness on the European market, according to BMI's latest Spain Petrochemicals Report.

In 2008, Spain had a polyolefins capacity of 3.07mn tonnes per annum (tpa), of which 245,000tpa was HDPE, 495,000tpa LDPE, 490,000tpa LLDPE, 1.16mn tpa PP, 165,000tpa PS and 515,000tpa PVC. In Q109, the Instituto Nacional de Estadstica (National Institute of Statistics, INE) reported an 11.1% yearon- year (y-o-y) fall in the output of chemicals and chemical products, with a 4.0% y-o-y fall in March.

Output of rubber and plastic products fell 20.7% y-o-y in the January-March period, with a 26.7% decline reported in March. The fall in output in the chemicals, rubber and plastic segments followed trends observed in the rest of Europe and continued the decline seen in H208.

It looks like 2009 will also be a difficult year for the petrochemicals industry due to the impact of the economic crisis and difficulty in raising capacity limits. With reduced demand in petrochemicals such as ethylene and polypropylene, the industry is set to struggle. Many petrochemicals consuming firms facing falling sales, rising arrears and lack of credit are likely to go out of business in 2009. BMI is forecasting a decline in chemicals output of at least 12% in 2009, while rubber and plastics output is set to shrink by 22% due to a sharp contraction in the economy, rising unemployment and a resulting slump in consumer demand. With lacklustre domestic demand - particularly from the construction and automotive industries - and a collapse in exports, the petrochemicals industry could fare far worse, with significant downside risks. In 2008, Spanish vehicle production fell by 12% y-o-y to 2.5mn units, according to industry association Asociacin Espaola de Fabricantes de Automviles y Camiones (Anfac). Additionally, Spanish construction activity has collapsed, with Spanish construction activity down 16.4% y-o-y in Q408, the largest fall in the EU, further adding to the woes in the steel industry. Another factor facing Spanish petrochemicals producers is high energy costs, which by the end of 2008 had led to a 50-100% rise in electricity costs, a situation that could prove to be as damaging as the recession itself.

First gas exports through the Medgaz pipeline from Algeria to Spain are expected by the end of this year.

In order to gain from the project, the Spanish petrochemicals industry will need to secure gas allocations, which will be difficult in a tough climate where there is pressure to reduce electricity tariffs, while the industry itself is operating at well below capacity.

Meanwhile, in a move that could significantly alter the petrochemicals landscape in Spain, and that on a wider scale underlines the emergence of the Middle East as a dominant force in the sector, in March 2009, Abu Dhabi state-owned investment group International Petroleum Investment Company (IPIC) increased its equity holding in Cepsa to around 47% after acquiring Banco Santander's 32.5% stake in the company for around EUR2.8bn (US$3.8bn). IPIC also agreed to acquire the 5% equity holding of utility Unin Fenosa in Cepsa as part of the same deal. In total, IPIC will pay EUR3.3bn (US$4.4bn) to increase its stake in Cepsa from 9.5% to 47%, making it the second largest shareholder in Cepsa after French oil major Total, which has 48.8% of the company.