By Nigel Davis
LONDON (ICIS)--Collectively, chemical companies have put their messages across to government about Brexit. The response has been to make ready for a ‘no deal’ scenario.
“That is what we have to prepare for because anything else would not be prudent,” Richard Carter, managing director of BASF companies in the UK and Ireland, told ICIS in an interview last week.
For BASF, a ‘no deal’ Brexit, in which the UK would crash out of the single market and the customs union without a trade agreement in place, would cost an estimated £50m/year because the UK imports more than it exports.
Ultimately, this is a loss of competitiveness and, in the eyes of the parent company in Germany, its UK subsidiary’s operations fall down the competitiveness league table.
This is of great concern for Carter, who is spending more and more of his time talking about Brexit outcomes with his own people and now with suppliers.
A worst-case scenario would see a considerable reduction in efficiency along the supply chain, with just in-time operations at risk.
BASF and the rest of the industry need much more clarity on the regulatory position, particularly, as regards to REACH, post-Brexit.
“All sides of the debate need to understand the absolute need for a transition period,” Carter said.
“We are in a critical period between now and the end of the year,” he added.
The UK’s Prime Minster Theresa May met European Commission president Jean-Claude Juncker on 17 November with the hope of making some progress on the build up to more substantive talks.
The European Council meeting of heads of state and government in December is seen as a vitally important time for seeking further agreement on Brexit outcomes, although decision-making talks are by no means guaranteed.
For chemical producers, the uncertainty created by the positioning ahead of Brexit negotiations and the way in which the outcome of meetings is drip-fed through the UK parliament and the media is intensely dispiriting.
“We work in a highly regulated industry that is science- and fact-based,” Carter said.
Particularly at this point in the negotiations, companies have to make sure that their voices are heard, he added.
Now is the time to use the industry’s national and international trade associations to push the messages out in the UK and across Europe.
“We welcome the just-released CIA [UK trade group Chemical Industries Association] and Cefic statement because the member states need to be made aware of [the implication] of a ‘no deal’,” Carter said.
He believes strongly that companies have to stop sitting on the fence.
Their very real concerns about the potential for disruption, for the worst case of a ‘no deal’ and for clarity on regulation and for a possible transition period have to be made more widely known.
He said he is surprised that BASF has not been approached by its business partners to talk about Brexit, as this sort of dialogue has to begin in earnest, he said.
Firstly, Carter said he expects BASF in the UK to talk with its service providers to see what their ongoing plans are and, in the coming months, the company is likely to reach out to its key customers to see what they are doing.
“We do find it surprising that nobody has come to us,” Carter said.
The company is likely to move out across its logistics chains to see how the ground lies and what concerns and contingency plans others have.
Different Brexit scenarios are believed to have been drawn up by the German chemicals trade association, the VCI, as German companies are spending time to try to understand what the lie of the land might be under different Brexit conditions.
US chemical major Huntsman’s CEO Peter Huntsman warned on 16 November of the possible impact of Brexit-related costs, particularly tariffs, should WTO rules apply after the UK leaves the EU for whatever period.
Peter Huntsman does not necessarily see a bad future for the UK outside the EU, and possibly some longer-term positives, but short-term disruptions threaten to stifle investment in the chemical industry across Europe.
“There are all sorts of opportunities of [a] Brexit done right,” he said at a CIA Brexit conference. “Let’s not get lost in the weeds.”
However, he is concerned about the short-term issues and their potential for causing problems later for assets across Europe.
Company boards will be reluctant to sanction capital expenditures on European assets not knowing how the customs, trade and regulatory environment might look like in fourteen months or two years’ time.
And, any underinvestment in assets now is not likely to be felt until five years down the line, by which time it may be too late for some facilities in Europe.
Unfortunately, this uncertainty in the decision-making process is not confined to the UK.
Multinational companies usually have a range of investment opportunities and will allocate capital preferentially where business conditions are likely to be best and there is at least a degree of certainty in the investment outcome.