INSIGHT: Seeking stability and direction after UK votes to leave the EU

By Nigel Davis

LONDON (ICIS)–“It is what it is, we’ll get over it,” seems to be the immediate reaction in the chemical business to the UK referendum vote to leave the EU.

Clearly, there are short-term implications: the plunge in the value of sterling and the steep fall in the value of the euro being the most immediate and impactful. Stock prices have fallen sharply across Europe. The oil price has dropped too as money has shifted to the safer haven of the US dollar. Gold prices are up around 7%.

Re-aligning Britain’s’ relationship with the EU will take years and the implications for trade, regulation and (relevant to the chemical industry) energy policy now are far from clear. Companies and institutions have to work through the ramifications of the Brexit vote not so much on day to day or short term business but on the longer term outlook.

The EU is not competitive in chemicals. Company profits have been eroded by high energy costs and an increasingly stringent regulatory burden.

These hit producers in the EU large and small. One senior executive today laid much of the blame for the out vote in the UK firmly at the door of legislators, in other words, the European Commission, which has devised a tougher business environment for EU industry as the bloc has sought to push ahead with its industry, health, safety and environment and climate change agenda.

What Brexit means for UK chemical companies is not yet clear, other than a short-term lift for exporters because of the weakness of sterling. But bear this in mind, the UK chemical and pharmaceutical industry makes 60% of its exports to other EU nations. The EU accounts for 40% of its imports. The importance of the trade deals that have to be struck as the Brexit process unfolds cannot be underestimated.

Second on the agenda is regulation. UK chemical producers will not extricate themselves from Reach – they will have to comply if they want to continue to do business within the EU. But Reach, the EU’s chemicals control legislation, presumably will have to be implemented in UK law and a question is how long will that take?

Currently there is no clarity, just a shocked reaction across the UK industry and the EU.

“The German chemical industry has always been committed to the political and economic unity of the European Union. For this reason, I very much deplore that the British voters decided yesterday to leave the EU,” said VCI president Marijn Dekkers on Friday.

“Especially now, at a time of timid economy recovery in Europe, their leaving the European Union is a negative signal for the further economic development. Less economic growth in the EU Member States and weaker export business will be the consequences. But the political damage weighs just as heavily,” he added.

The UK chemical industry trade group, the Chemical Industries Association (CIA) was firmly behind remain and finds itself now out on a limb as it works with its members and government to try to achieve some clarity on what will and will not change.

“This is democracy in action – both in terms of the result and the level of participation,” said CIA chief executive, Steve Elliott.

“It is not the decision that our sector wanted, but we fully respect the wish of the people for change. Whilst business craves certainty, it is also used to operating in challenging and changing circumstances; this is what companies and their representative bodies do wherever they operate. We now have to look to the future and I am confident that an important and resilient industry such as ours can prosper in this new situation.”

The UK contributes about 9%, or €46.3bn to EU28 chemicals sales, while the EU chemicals trade balance with the UK averaged about €2bn between 2007 and 2014. Petrochemicals and other chemicals represent together 41% of total UK chemicals sales, the European chemicals trade federation Cefic said on Friday. Petrochemicals is the largest exporting segment of EU chemicals to the UK.

“Given this importance for Europe we need to work closely to ensure that existing trade and investment is not weakened and future opportunities are seized,” Cefic said.

“As the implications of today’s referendum unfold more concretely, we look to the respective governments, Parliaments of the UK and European Union Member States to work hard with the European Commission on securing the right framework for establishing new arrangements so our economies can continue to grow.”

The possible lengthy Brexit process – Article 50 of the EU’s Lisbon Treaty that allows for exit of a member state will not be triggered until after current UK Prime Minister David Cameron has left office in October; the exit process itself will take at least two years  – leads to just what business does not want, uncertainty. But it will prevail.

During this time almost anything can happen. The Brexit vote has unleashed financial market turmoil. The Governor of the Bank of England, The IMF’s Christine Lagarde and the US Federal Reserve were all on Friday seeking to calm the markets.

The UK is expected to suffer most and possibly slip into recession. There will be a global impact because of the potential now for the grand EU project of closer political integration to unwind. A mild global recession might be expected.

For Europe, the outlook is stark. Europe’s politicians learned on Friday that a key member state, the second largest economy in the bloc, was prepared to leave, its people disillusioned with the EU’s policies and goals and particularly its inability to address critical issues of sovereignty and immigration.

There has been much written about the rise of right-wing politics across the EU and the potential for leave or remain referendums in other member states. There, was and is in the UK, a clear feeling that democracy in the EU has been eroded with power going to the unelected and intensely bureaucratic European Commission.

“The past years have been the most difficult ones in the history of our Union,” said EU president Donald Tusk in a press statement on Friday morning. The EU is not only a “fair-weather project”, he announced.

“Today, on behalf of the 27 leaders I can say that we are determined to keep our unity as 27. For all of us, the union is the framework for our common future.”