UK election outcome reduces political uncertainty, but regulation still key for chems - CBA

Author: Tom Brown

2019/12/13

LONDON (ICIS)--The UK Conservative Party's landslide victory points to the likely ratification of a Brexit withdrawal deal that would reduce political uncertainty, but preserving regulatory alignment with the EU27 will determine the success of the process for the chemicals sector, according to a trade body chief.

UK chemicals stocks jumped in early Friday trading amid a wider rally in in domestic stock prices and the value of the pound sterling after the governing Conservative Party secured a sizeable majority in the 12 December general election.

The victory, which gives UK Prime Minister Boris Johnson substantially more power in pushing through a Brexit deal, provides a degree of clarity for the chemicals sector, but the outcome of transition period negotiations that would follow a departure from the EU remain key, according to the head of distributors’ group the Chemical Business Association (CBA).

“The new Government has just over 12 months to negotiate a trading relationship with the EU that gives the chemical sector frictionless access to EU markets. The importance of this task to many thousands of UK manufacturing and service businesses cannot be underestimated,” said Peter Newport, the CBA's CEO.

“[The UK] sells 60% of our chemical exports to the EU and we buy 70% of our chemical imports from the EU. The preservation of this trade and the regulatory alignment it requires will, from the industry’s perspective, decide the long-term success or failure of Brexit.”

Steve Elliott, the CEO of fellow UK industry trade group the Chemical Industries Association (CIA), welcomed the increasing uncertainty of the path ahead the election is likely to provide, but also highlighted the importance of a future trading relationship across the channel.

“The country now has the political clarity and certainty which business has been seeking. Now we have that we must get Brexit right and secure an exit and future trading relationship between the UK and the EU,” said CIA chief executive Steve Elliott.

Odds that the UK will break away from the EU at the end of January rose dramatically as the outcomes of the election coalesced, pointing to a far more decisive Conservative majority than polling numbers had suggested earlier this month.

Polls had always pointed to a conservative victory but the extent of the margin had not been anticipated.

“Few predicted the scale of [UK Prime Minister Boris Johnson’s] win and just how badly the opposition Labour party would perform,” said James Smith, developed markets economist at banking group ING.

The value of the UK pound against the euro also rallied from €1.18 to £1 late on Thursday to €1.21 in early Friday trading, before moderating to €1.20 later in the day.

The extent of the Conservative party victory drastically increases odds that Johnson’s Brexit deal will be ratified in the run-up to the projected next Brexit date at the end of January.

The deal, which is extremely similar to the arrangements agreed by former premier Theresa May and led Johnson to resign from his former role as Foreign Secretary in protest, is expected to be voted on in the near future.

May had called a general election in 2017 in a bid to shore up support for her proposed Brexit deal, but a poor showing that resulted in a hung parliament made gathering support for the proposals more difficult.

By offering a clear simple message of “get Brexit done” and by courting the voters that had drifted towards the UK Independence Party or Brexit Party, Johnson has secured the kind of substantial mandate that had eluded her.

“After three and half years of political stalemate, I hope we can now make rapid progress on our EU exit and future relationship and start to tackle some of the great challenges that are before us,” Elliott said, adding that the CIA continues to back close regulatory alignment with the EU.

Aside from offering greater clarity on the UK’s future relationship with the EU after years of paralysis, the scale of the win may gift Johnson some leeway on the matter of the transition period after the departure date.

The current terms of the country’s divorce from the EU envisage an 11-month transition period to agree a future trading relationship, which is unlikely to be sufficient to agree a comprehensive trading deal, despite the starting point of harmonised regulations between the parties. A free trade agreement between the EU and Canada took nearly a decade to negotiate and ratify.

Any move to extend the transition period will be contentious among Brexit hawks in the Conservative Party but the alternative, where the UK could properly break away from its key trading bloc at the end of 2020 with no trade agreement in place, could be disastrous for trade.

“An extension is an option, but the EU has signalled the UK will need to sign-up to budget payments beyond 2020 – and importantly that this needs to be agreed by the end of June,” Smith said.

“This would undoubtedly infuriate hardline pro-Brexit Conservative MPs, and until now the government has ruled out an extended transition. But with a sizeable majority, this could change – an extension is probably more likely than not,” he added.

(update re-leads, adds CBA commentary)