INSIGHT: And still nobody knows…

By Nigel Davis

LONDON (ICIS)–And still nobody knows. “The European Union referendum has delivered a result that brings with it risks and opportunities for the UK’s chemical supply chain,” said the Chemical Business Association (CBA), on Thursday.

This is a body that represents largely distributors, traders and others operating in chemicals in the UK.

“We face a period of uncertainty and have to resolve a series of issues that do not lend themselves to quick or simple solutions,” it added.

UK chemical producers celebrated the achievements of their workforce individually and collectively in Liverpool on Thursday night at the Chemical Industry Association’s  annual awards dinner. The CIA represents predominantly the interests of the UK’s producers of chemicals and pharmaceuticals.

A curious atmosphere of celebration and resolution settled on the evening. Business has to adapt and cope with changing and sometimes challenging circumstances. Uncertainty following the Brexit vote does very few any good. 

“In addition to satisfying the expectations of ‘Leave’ voters, the UK faces currency volatility and an adverse market reaction,” the CBA had said earlier.

“It must also resolve internal social and constitutional tensions as well as redefining its international role as a trading partner independent of the European Union.”

That last point is critical. Britain has to redefine its trading links and chemical producers know what framework they prefer.

Major producers made their position clear to the UK government on Friday having been in contact with the UK’s Department for Business Information and Skills (BIS) through the week.

The CIA’s Council met on Thursday and drafted a letter to potential Conservative party leaders and others in government pressing for access to the EU single market and an industry aware energy policy.

The letter, from CIA president, Tom Crotty of INEOS and the CIA’s chief executive Steve Elliott, was to those hoping to replace David Cameron as Prime Minister and copied to the First Ministers in Northern Ireland, Scotland and Wales plus the leaders of the Liberal Democrat and the Scottish National Party (SNP) in Westminster.

Every successful economy has a strong manufacturing base, with a chemical sector at its heart, it said. The three key priorities for the UK on leaving the EU to ensure that success are access to the single market, the availability of skilled people and the supply of competitive and secure energy, it added.

The industry said it will develop detail in coming weeks and months on these priorities to help inform the Brexit negotiations.

The Brexit vote potentially opens up the UK’s trade, energy and regulatory environment for debate if and when a negotiations begin on Britain’s eventual exit from the EU.

“In a clear call for stability, clarity and action we agreed to press current and future political leaders to get a grip and use business to help deliver the country’s new future with access to the single market, the availability of skilled people and competitive and secure energy,” said Steve Elliott in Liverpool.

Chemical producers see an opportunity in the political turmoil following the Brexit vote to press home the vital importance of the sector to the UK’s economic well-being and how important Britain’s energy environment as well as free trade will be to them in future.

The UK chemicals and pharmaceuticals sector believes that its contribution to the UK economy could increase from about £200bn/year today to £300bn/year by 2030.

Currently it employs half a million people, spends more than £5bn on research and development, invests £4bn a year in capital expenditure and contributed more than £40m every day to the UK economy, Elliott said.

The table shows the relative production of UK petrochemicals, intermeidates and plastics in the EU 28 using ICIS data.

Source: ICIS

There is concern that while a split with the EU might be manageable in the short term, over a 10 or 20 year period of ongoing investment it could severely damage UK chemical producers.  

On the other hand, the current government’s support of shale gas exploration is attractive to big energy users and to companies that might be able to exploit any potential shale gas advantage.

Europe’s chemical industry is under acute competitive pressure from low cost producers in the ethylene chain particularly in the Middle East and now in the US.

But the UK now has three of the five large gas crackers in Europe – the conversion to gas at SABIC’s Wilton plant in the northeast of England being almost complete.

There is potential for downstream investment based initially on imported ethane for the crackers, one major producer has indicated.

That would run against the European trend, as might the opening up of chemicals research, development and early stage research exploitation, if the UK is able to attract researchers and entrepreneurs cost effectively from a talent pool that includes China and India.

Of course, currently, ‘if’ is the operative word.

Law firm Eversheds has undertaken some preliminary work on the implications of a Brexit. Companies in the chemicals supply chain have to identify commercial contracts at risk under certain Brexit scenarios, it suggests. “A starting point for contingency planning is an initial high level assessment of trading relationships to identify priorities, for example by focusing on strategic contracts,” it says.

Contract clauses for or against a UK-based company could be triggered by the consequences of a particular type of Brexit, for example. And while the regulatory obligations of some in the supply chain might be reduced the standards of performance of others might also leading to a general weakening of supply chain performance.

Commenting specifically on compliance law, Eversheds, says that while there will be no immediate change before the UK’s position outside the EU is decided, the UK may come under pressure to abide by EU regulation in return for continued access to the European Single Market.

“What is clear is that fully appraising and responding appropriately to the situation will incur considerable time and money, with a long period of uncertainty,” it says.