INSIGHT: UK petrochemical industry braces for various Brexit scenarios

LONDON (ICIS)–More than two years after the Brexit vote and less than four months before the UK is set to leave the European Union, one word is continuously being used when referring to post-Brexit Britain – uncertainty.

The lack of clarity over Brexit has weighed on the value of the pound sterling and confusion on long-term trade agreements has made it difficult for businesses of all sorts to plan firm strategies beyond 29 March 2019.

The petrochemical industry is no exception given that the EU is its most important trading partner for chemicals, accounting for 60% of UK chemical industry exports and 75% of imports.

British companies are currently bracing themselves against the various scenarios likely to unfold in the final months before the UK officially breaks away from the EU.

The UK cabinet under Prime Minister Theresa May last week approved the draft Brexit deal reached between the UK and the EU. But while this approval in theory should have moved the country a step closer to finalising its long negotiations with the EU, in reality the post-Brexit future of the UK and the EU remains as uncertain as ever.

The day after the cabinet’s approval, Dominic Raab quit his government position as Brexit Minister, leading to a spate of resignations by government figures responding to the draft bill.

The pound fell dramatically by almost 2% against the euro following the resignations.

Meanwhile, more members of the ruling Conservative party began openly criticising the draft bill with some of them also submitting letters of no confidence in May’s leadership.

A lot of questions remain unanswered, which could realistically lead to a few very different scenarios for UK-based businesses.

Scenario 1: The draft bill is approved by EU countries and the UK parliament

This is the favoured scenario by the industry as the draft bill aims to guarantee frictionless trade for any final agreement between the UK and the EU.

As part of the deal, a temporary, UK-wide customs agreement will be implemented and then reviewed in July 2020, six months before the end of the official transition period. The agreement could then be extended or terminated –  a decision that must be agreed jointly by the UK and the EU.

UK chemicals trade group, the Chemical Industries Association (CIA), welcomed the draft bill shortly after news of it emerged, saying that the deal would signal a way forward for the industry, providing it with much-needed certainty.

Under such a deal, no major obstacle or changes in the way the UK and the EU trade goods are expected. Furthermore, if a deal is finally agreed, this is set to firm and stabilise the value of the pound after recent losses and increased volatility.

A great deal of technical work on a final proposal is still required, however, to determine the position of the UK as regards major EU environmental and other policies. That includes the position of the UK as a country outside the EU and its relationship to the EU’s chemicals regulation Reach and the European Chemicals Agency (ECHA).

Yet, many hurdles need to be passed for the draft bill to be approved in the first place. The withdrawal agreement will first need to be finalised and formalised at a European Council Summit set to take place on 25 November.

Members of the UK parliament are then expected to hold a meaningful vote on the deal in December. With members of the ruling party and the opposition openly criticising the draft bill, it currently seems unlikely that it will be approved.

Scenario 2: The bill is rejected and the UK leaves the EU with no deal

This is the scenario most feared by the chemical sector as it threatens free trade and the robust regulatory environment within which it operates with EU counterparts.

“We watch with horror,” CIA president Tom Crotty said last Thursday as UK government ministers resigned in the face of the draft withdrawal agreement.

A no-deal, hard Brexit would provide no framework to build on future trading agreements with EU countries, including regulation, anti-dumping duties, tariffs and changes in logistics.

Under such a scenario, the British economy and the value of the pound are likely to be hit by growing uncertainty, adding a further complication to UK-based companies that import raw materials from Europe. Access to competitively-priced energy and feedstock resources is the top priority for nearly half of UK chemical industry executives, a recent survey showed.

Hard Brexit supporters have pointed out that under such a scenario, the UK will be shifting to World Trade Organisation (WTO) rules, which will allow the country to start signing its own trade deals immediately and make it more competitive in the future.

This view has not been shared by the vast majority of business.

“I don’t think that’s true, I think it will be disastrous for the UK manufacturing industry… and we do need to speak up,” Crotty previously told ICIS.

In a wider context, a hard Brexit could also worsen a global recession risk, which is already on the horizon, according to Ready for Brexit chairman Paul Hodges.

Steps taken by UK buyers

The UK’s Chemical Business Association (CBA) has encouraged chemical distributors to continue to prepare for a no deal outcome, despite the announcement that a draft agreement has been reached.

UK buyers across many markets have been building stock, to try and manage any short-term logistical difficulties come March 2019.

This has been the case with the polypropylene (PP) and polyethylene (PE) markets, where some buyers have started committing to more stock.

“We are planning on increasing inventory but are trying to work with our suppliers so they share the risk with us,” a PP buyer has told ICIS, “We are also looking at moving spot buying from outside the EU… we are trying to spread the risk.”

Many buyers do not have the storage capacity to hold raw materials for longer periods, so building inventories can only be seen as a short-term tactic.

Other products seem less exposed to the risks of a hard Brexit.  For example, a polyethylene terephthalate (PET) producer commented:

“Take the pessimistic scenario that Brexit happens and there is a 6% duty for EU product to enter the UK. In this case it will be [similar to the agreement] we have with China now.”

“In general the PET market in the UK is specific. There are several big clients and not a big amount of smaller clients, so it’s a simple market,” he added.

Scenario 3: A second referendum, no Brexit

A third major scenario in case the draft bill is not approved by MPs could involve a second referendum, which allows for a no Brexit scenario.

Theresa May has recently acknowledged that remaining in the EU will be one possibility for the UK.

European Council President Donald Tusk has welcomed such an option saying last week that the EU is “best prepared for a no Brexit scenario”.

Such an outcome would be particularly smooth for the industry as it would mean no changes to trade and regulation as they currently stand, as well as a less volatile currency.

While several MPs have called for a second referendum, others have vocally opposed the idea with the option currently seeming the least likely of the three. There is also doubt that there is enough time to organise a referendum and end Brexit before 29 March 2019. It is not yet clear how the process of halting Brexit would work in theory under the Article 50 process.

Other possible outcomes

There are also a few sub-scenarios which could delay any of the above developments or see further options emerging.

– A European Economic Area membership: Adopting the so called ‘Norway model’ during the transitional period has recently been discussed as an option despite the PM earlier ruling it out

– A no-confidence vote against Theresa May: If enough members of the leading party request it, a no-confidence vote against the PM could be triggered. If she loses it a new leader of the party will be chosen

– New general election: If a no-confidence vote is lost by the PM, the country could face a new general election. If a pro-remain government is elected, in theory there is a chance of Brexit being halted before March 2019

– Later complications in case the current draft bill is passed: Even if the current draft bill is successfully approved, that does not guarantee a smooth transition. With many vocal opponents of the deal, later complications could emerge, such as a second independence referendum taking place in Scotland

Click here to view related stories and content on the Brexit topic page

Additional Reporting by Will Beacham, Tom Brown, Nigel Davis, Linda Naylor, Katherine Sale, Caroline Murray, Samantha Wright

Clarification: Clarifies exit date in paragraph 2