UK chemicals face disruption of a no-deal Brexit

Author: Will Beacham

2019/08/09

As UK Prime Minister Boris Johnson demands changes to the Brexit withdrawal agreement, and the government steps up no-deal funding, it looks increasingly likely the country’s chemical sector will face an abrupt and painful exit from the EU.

Johnson was elected by party members on a pledge to carry out Brexit without further delay on 31 October, with or without a deal in place. Since becoming prime minister in July he has packed his cabinet with pro-Brexit ministers who are now stepping up preparations for a no-deal exit.

Johnson believes he can persuade EU officials to reopen and alter former PM Theresa May’s Brexit withdrawal agreement. However, EU leaders have said repeatedly that they will not do so. Unless they budge, or Johnson changes his strategy, a no-deal exit remains the default legal position.

With a majority of only one seat in Parliament, Johnson may call a general election to shore up his bargaining position, a move that would have echoes of Theresa May’s disastrous 2017 strategy. But commentators suggest he would do so only after he has pushed through Brexit. There are also questions over whether the UK Parliament could prevent a no-deal Brexit.

CHEM IMPACT – REGULATION, CUSTOMS

The direct and indirect impact of no deal on chemicals may be profound. Perhaps most worrying, with no agreement on chemicals regulation in place, it may become illegal for UK chemical producers to sell their materials into Europe. Although many larger companies may be making progress in preparations, it is thought many smaller companies do have sufficient resources to devote to this.

Europe’s Reach regulation requires all chemicals sold in the EU to be registered. Once the UK exits with no deal, UK-based registrations will likely become invalid. UK chemical producers and distributors wishing to sell into Europe can transfer the registrations to European subsidiaries if they are lucky enough to have them. Another option is to employ an “Only Representative” within the EU to register on their behalf. Or they can stop selling into the EU.

Making UK companies’ lives more difficult is the fact that they must provide, once again, all the safety data required for Reach substance registration. In many cases the data may not be owned by the UK company if it previously took part in shared Reach applications under the Substance Information Exchange Forum (SIEF) system. It may be possible to pay for the data, but this is likely to be at the discretion of other SIEF members.

The UK is hurriedly setting up “Reach UK”, which will attempt to replicate and replace EU Reach in the event of no deal. Chemical companies now face the added burden of registering under both regimes if they wish to continue trading.

The government has, at least, promised to “grandfather” all existing UK-held EU Reach registrations into UK Reach though technical data will still need to be submitted at a later date.

There are also questions over the legality of driving licences and permits for transporting hazardous goods which could ground truck shipments crossing the channel.

As well as regulation, chemical companies, their suppliers and customers will also have to get used to filling out customs declarations and following procedures which will add complexity as well as potential delay and disruption to cross-Channel trade.

CHEMICAL IMPACT – SUPPLY CHAIN

Perhaps the most profound impact for 
UK chemicals could be the potential withdrawal or relocation of players in key end-use segments such as automotive in the event of no deal.

Goods may be subject to tariffs each time they cross the Channel, adding delay and costs, especially in automotive where thousands of parts currently move freely to and from the EU.

Just-in-time delivery will be jeopardised while stockpiling will tie up significant amounts of working capital.

A distributor said: “Can our customers keep going in the UK? We don’t know yet. It will force people to invest overseas.”

A polyolefins buyer told ICIS: “We’ve kept the stock in place we’ve had since 31 March. The cost associated is huge – also is a month’s stock enough?”

With the automotive sector already in trouble globally this year thanks to slowing demand and overcapacity, a no-deal Brexit could prove disastrous to UK operations.

French car group PSA has threatened to move production of new Vauxhall and Opel Astras out of the UK in the event of no deal. Its UK plant at Ellesmere Port in Cheshire exports 80% of its production to Europe while about 75% of the components are imported.

There is also doubt about the future of Nissan’s Sunderland car plant – the largest in the UK. Production of two models was cancelled at the site earlier this year. The company plans to cut 10,000 jobs globally after profits collapsed by 90% in the first quarter.

In late July, BMW CEO Harald Kruger told Boris Johnson to “listen to the economy” and avoid a hard Brexit.

BMW has four British plants and owns the Mini and Rolls-Royce brands.

CHEMICAL IMPACT – DATA FLOW

One area of potential no-deal impact which has not been widely reported is data transfer. As part of the EU the UK abides by EU rules and is allowed to move data around freely.

Without an exit deal, this will come to an end as the UK will be given third country status. While the UK has said it will continue to allow data to flow to Europe, the EU has not reciprocated.

EU27-based customers, suppliers or divisions may not therefore be able to move data to the UK legally under no deal. If the two sides wanted to make an agreement over data, this could take some time to complete.

Ready for Brexit chairman Paul Hodges is concerned that chemical companies are not doing enough to prepare for no deal.

He said: “Chemical companies have largely ignored previous deadlines, assuming that the whole issue will somehow disappear. They now need to move onto an emergency footing, as there are less than 70 working days to prepare.”

He believes trade is likely to be massively disrupted, as very few people can even remember how things used to operate before the Single Market and Customs Union began in 1993.

“Today’s interlinked supply chains mean that UK, EU27 and European Economic Area-based companies will all be impacted from 1 November so planning for No Deal is therefore now an absolute priority.”

WARNING TO GOVERNMENT

On 1 August, the UK’s Chemical Business Association (CBA) warned the government that chemical and supply chain companies are already moving operations out of the UK thanks to the uncertainty over Brexit.

In a letter seen by ICIS to Theresa Villers, the newly appointed secretary of state for the environment, the CBA said: “The political impasse of the last three years has resulted in a significant number of supply chain companies creating subsidiaries in EU member states – with premises and employees – representing a permanent loss to the UK exchequer and to UK employment.”

It added that other UK companies have transferred key products to EU-based companies to guarantee continued regulatory compliance and market access. Europe-owned chemical companies have also repatriated production.

Additional reporting by Linda Naylor