Brexit-related chems stockpiling continues as producers eye UK Reach implications

Author: Tom Brown


LONDON (ICIS)--Stockpiling of chemicals in the UK continues as clarity on the model for Brexit remains as elusive as ever, while producers from the rest of Europe are eyeing their portfolios in light of the potential for a UK Reach regulatory system.

- Brexit date likely to be extended, but little clarity on when

- UK Reach could cause European sellers to stop exports of some products

The need to ensure stability of supply along chains spanning the UK and mainland Europe, despite any disruption that may accompany the UK’s projected 29 March departure from the EU – an outcome that seems less likely after votes in parliament this week – means that storage space is at a premium, particularly specialist warehouse space.

“We are just trying to keep our tanks as full as possible and we are keeping additional stock – we are bringing forward what we usually stock for the summer when we close down,” said a UK plasticizers buyer, who warned that UK manufacturing would be “decimated” by a no-deal Brexit.

“Stockpiling is already happening because some supply chains are very long, [encompassing] China, India,” said Peter Newport, chief of UK's chemicals distribution trade group the Chemical Business Association (CBA).

Storage for hazardous material is at a particular premium as capacity in certified facilities is being tested by the need to build up stocks to hedge against the possibility of several months of disruption that could follow the UK’s departure from the EU.

“Chemical storage capacity is becoming expensive and availability is restricted by regulatory limitations - COMAH [Control of Major Hazards] and Land Use planning,” Newport added, noting that the CBA had requested clarity from the government on COMAH storage, with repeated responses stating only that the government is working on contingency planning.

The UK's Prime Minister Theresa May’s proposed Brexit deal, which lays out in broad strokes the terms that a full post-divorce trading relationship with the EU will be negotiated under, suffered its latest defeat in the House of Commons – the UK's lower chamber – this week.

The second rejection of the deal, the product of a two-year negotiation, was followed by several other votes on the path that Brexit will take, none of which served to shed much light for business about the ultimate fate of the UK.

UK lawmakers voted to rule out a no-deal Brexit, which would see the country potentially deal with its former partner countries under World Trade Organisation (WTO) rules, in two votes on 13 March.

While those votes set out parliamentary opposition to a no-deal breakaway, an outcome described by industry groups as catastrophic for the chemicals sector, they have no ultimate impact on the trajectory of departure as a hard Brexit remains the default in the absence of an agreement.

UK Members of Parliament also voted for an extension on the 29 March departure date, although this is at the discretion of the other 27 EU member countries, and is complicated further by the upcoming European parliamentary elections, planned for May.

Some EU member state leaders have advocated that an extension either be restricted to a few weeks, or be long enough for substantive change to the current negotiations to be achieved, potentially through a UK general election.

The German Chancellor Angela Merkel would be in favour of an extension to early June, according to analysts, before new Members of the European Parliament (MEPs) take their seats for the first time, raising the possibility that the UK will be forced to run European elections for ministers that never end up taking the seats they were elected for.

There is a possibility that May will run a third vote on her Brexit deal before making a request to extend the 29 March deadline, in the hope that by convincing hardline Brexit supporters that the current text, which grants powers to curb immigration and represents a full departure from the bloc, is  be the most favourable outcome they can hope for.

In the meantime, industry players are forced to operate with no idea when or if the UK will leave the EU, under what terms, and what steps it will be necessary to take to continue trading between the two regions.

Stock built up present may be consumed during the departure delay, and laid in again in the run-up to any future leave date.

Despite the confusion, some players see the formation of a decisive stance against a hard Brexit as a promising sign.

"Brexit risk is fading away, day after day, especially this week,” said a European styrene butadiene rubber (SBR) producer, who reported receiving requests from UK customers to build up stock before the end of March.

What we've seen in other sectors is strong demand in February, and the same in March … in relation to Brexit,” said another market source.

“We are just waiting, tried to stock up.”

Other players in the sector noted that the lack of clarity on the post-trading relationship, and being only a fortnight ahead of the proposed departure date, had led to a limited concrete preparations among some market participants as a result of the believe that it may not ultimately come to pass.

“People are not preparing for Brexit, no-one believes in it but that’s no surprise,” said a market source.

“Orders are picking up in the second quarter, because of Brexit customers have pre-ordered just in case,” it added.

Another source in the European petrochemicals industry said that its UK clients "aren't panicking” and claimed that the stockpiling worries were over-stated.

“Of course, there are some adjustments to do, it will take three to six months, there will be a grey period," the source said.

"It is just a matter of paying a tariff, no big deal.”

Even if May’s deal was to finally be agreed next week, it remains to be seen whether that would allow regulatory harmony with the EU for the chemicals sector.

The UK government has expressed of hopes of associate membership with the European Chemicals Agency (ECHA) post-Brexit, but at present such a category does not exist.

In the event of the UK being classified a third country for ECHA – the agency’s default position for now – the government has said that it will develop a matching UK Reach system.

This would maintain regulatory alignment with the EU, but require UK players and EU entities selling into the UK market to re-register those products, a potentially expensive process that raises questions about whether all of the 16,000 chemicals the UK consumes but does not produce will continue to be sold there.

Matthias Zachert, CEO of Germany-based producer LANXESS, told ICIS this week that the company would stop selling certain materials if the burden of registration was too high.

“Some products which are very small for us, if the re-registration efforts are economically not reasonable, we would just stop selling them,” said Zachert.

In the meantime, UK consumers continue to watch the news coming out of Westminster, and make sure inventory levels are high.

“Most British customers have over ordered this month because they want to get in before the cut-off date,” said a European expandable polystyrene (EPS) seller.

“[They’re now] sitting on too much stock, [we] could see not much business coming if Brexit doesn’t happen [this month]. The only people that are winning are those [renting] storage … but if Brexit looks likely again in two months, [buyers] will have to overstock again,” it added.

Picture source: Ojo Images/REX/Shutterstock

Focus article by Tom Brown

Additional reporting by Vicky Ellis, Heidi Finch, Peter Gerrard, Melissa Hurley, Ben Lake, Jane Massingham, Ciaran Tyler and Stephanie Wix

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