US stock indices fall over 3% after UK exit vote

After markets reacted globally on Friday, officials point to issues with trade negotiations, chemical regulations and “a distinct possibility of a recession”. The ballot count begins late on 23 June 2016 at Seven Towers Leisure centre for North Antrim and Mid Ulster. (Mark Winter/REX/Shutterstock)

(updates with details, closing prices for stocks, indices)

HOUSTON (ICIS)–US stock indices fell by more than 3% on Friday in one of their steepest losses in months, with shares for many chemical companies falling by over 6%.

Every US-listed stock followed by ICIS fell. The decline followed the so-called Brexit referendum, in which UK voters decided to leave the EU.

The UK is a major trade partner with the US, according to statistics compiled by the American Chemistry Council (ACC).

In 2015, US chemical exports to the UK totalled $7.46bn, making it the seventh largest destination behind Brazil. Chemical imports from the UK totalled $13.3bn, the fifth largest provider for the US, behind China.

The British pound weakened against the US dollar, reaching levels on Friday not seen since the recession of 2008-2009. A stronger dollar makes US exports less competitive and UK imports more attractive.

This could threaten the profitability of the INEOS cracker in Grangemouth, UK, since the plant would rely on US ethane. The cracker’s capacity is 700,000 tonnes/year, according to ICIS plants and projects.

These currency fluctuations extend beyond the British pound.

The Mexican peso also fell sharply against the US dollar, reaching the multi-year lows seen earlier in 2016.

Mexico is the second largest chemical export market for the US, behind only Canada, according to ACC data. US chemical exports to Mexico reached $21.7m in 2015.

A plastics seller from Mexico said on Friday that it did not expect to conduct any large operations during the day due to the magnitude of the market reaction to the UK vote.

In addition to currency fluctuations, the UK’s decision to exit the EU will throw the country’s trade agreements with the US up in the air, said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics. 

The EU had negotiated the trade deals for all of its member countries – both in regards to agreements with other nations and with the World Trade Organization (WTO), Hufbauer said. “All of these are now question marks.”

In a statement, the US Chamber of Commerce urged policymakers to avoid precipitous action in the upcoming negotiations with the EU.

“American companies’ investments in Britain are worth more than half a trillion dollars, and many of those investments were made to reach not just British consumers but those in the European mainland as well,” according to a statement by Thomas Donohue, the chamber’s CEO. “We are committed to working with the UK government to ensure that the priorities of these stakeholders are taken into account in the debates that lie ahead.”

Trade agreements are not the only items that will be disrupted by the UK leaving the EU. The union’s Reach (registration, evaluation, authorization and restriction of chemicals) regulations could be another challenge.

Upon leaving, Reach would no longer apply in the UK, according to David Gordon, partner in the environmental and chemical industry group at law firm Squire Patton Boggs. The only UK legislation that currently applies to Reach is for enforcement of the regulation.

Upon exiting, UK companies exporting to Europe could face substantial extra costs, as they would have to go through the registration process all over again. The regulation for chemicals is probably the one piece of legislation most heavily impacting UK chemical producers.

Jonathon Wright, a partner with the consultancy Roland Berger, warned that the UK vote and subsequent exit could weaken the European economy. “There is a distinct possibility of a recession, which will directly impact the European chemical companies.”

On the other hand, the UK has a chemical trade deficit with the rest of the EU, so more favourable trade agreements could be negotiated in the upcoming years, said Paul Bjacek, a principal director who leads Accenture’s chemicals and natural resources strategic research.

Overall, small businesses in the UK seemed to favour leaving the EU more than larger firms – due to stricter regulations, Bjacek said. As a result, there could be more investment from smaller firms in the medium and long term.

This trend could even lead to more innovation, since smaller businesses are the font of such developments, he said.

Regardless of the long-term prospects, the immediate fall-out of Thursday’s vote was pessimistic.

In the US stock markets, the Dow Jones Industrial Average closed at 17,400, down more than 611 points or 3.39%. The S&P 500 closed at 2,037, down 76 points or 3.60%. The Nasdaq Composite fell to 4,708, down 202 points or 4.12%. The Dow Jones US Chemicals Index fell by nearly 5%.

Polyurethanes producer Huntsman fell by the most, declining by 11%. Paints and coatings producer Valspar and vinyls producer Axiall fell by the least, less than 1%. Both are being acquired.

Among the majors, Dow Chemical fell by 4% and DuPont declined by 5%.

Refiner Valero fell by 2%. Fertilizer producer PotashCorp dropped by 3% while industrial gases producer Praxair declined by 4%. Paints and coatings producer PPG Industries fell by 8%.

Additional reporting by Yana Palagacheva and Marianela Toledo

INSET IMAGE: The first ballot boxes arrive for counting late on 23 June 2016 at Manchester Central convention centre. (Joel Goodman/LNP/REX/Shutterstock)