UK’s chems orders, output up in Q1 but mid-term risks inflation, regulation post-Brexit

LONDON (ICIS)–The UK’s chemicals industry – including pharmaceuticals – weathered the lockdown in the first quarter with sharp rises in orders and output, as exports to overseas markets outside the EU rose, the country’s trade group Chemical Industries Association (CIA) said on Monday.

The UK’s chemicals industry is highly dependant on the EU, from which the country withdrew on 31 December, with new trading arrangements kicking off in January; the industry managed to achieve trade without tariffs, but in terms of regulation there are still too many questions answered.

Trade with the 27-country bloc fell sharply in January, the first official figures available to measure the impact of the trade deal, although the falls were also linked to pre-existing stocks and the logistics woes caused by the pandemic.

NOW AND IMMEDIATE FUTURE: BOOMING
The manufacturing sectors turned out to be the least badly affected by lockdowns, as social distancing measures are easier for industrial facilities than customer-facing services sectors, which have bared the brunt of the downturn.

In the UK, chemicals has benefited from that trend. Even with a lockdown like in Q2, as the country tried to limit spread of a new variant found there in December, manufacturing seems to have been spared from the hit this time around.

In the first quarter, compared to the fourth, more than 80% of companies surveyed by CIA reported that total sales volumes either increased or stayed the same; domestic sales stood practically flat, but exports to non-EU markets rose, leading CIA to describe the January drop as something that “looks like a temporary” fall.

Over 40% of respondent companies said new orders had risen in the first quarter, compared to the fourth, while 34% said production had risen, helping increase capacity utilisation by 32%.

As the UK speeds up the vaccination process, chemicals also see the immediate future with optimism, with 90% of companies expecting sales at home, to the EU, and to other markets all increasing.

But the successful vaccination campaign in the UK may give way to other pressing concerns; Brexit arrangements are a seismic change for a country which ended 47 years of EU membership.

Added to the logistics mayhem caused by the pandemic, Brexit will prove a labyrinth for an industry that fears higher costs related to regulation are coming up.

“Over the next 12 months, as the post-Brexit issues of transportation for exports and imports (85% reporting logistical issues as the biggest problem in doing business) hopefully calm down, the positive feeling is even higher,” said Steve Elliott, CEO at CIA.

For the next 12 months, around 65% of companies expect an increase in new orders and in production levels.

INFLATION IS BACK
Together with Brexit, the CIA said it was concerned about inflation being a “growing threat” to the UK’s economy performance.

While inflation has remained lower than the historical average since the 2008 financial crash, the CIA said the large amounts of borrowing in 2020 to pay for the pandemic and its associated costs could result in tax increases for corporations as current rates would not make up for the shortfall.

CIA said that as the UK’s Treasury-issued 10-year government bond yields have tripled 0.3% to 0.8% in a few months, that would represent a large amount extra to cover on debt costs.

“[This could] potentially use up the majority of the £17bn the government expects to raise from increasing corporation tax,” said Elliott.

“In our survey, just under 50% of respondents reported that a rise in inflation was a worry for their business while a further 45% said it was a slight concern. There are very real concerns remaining and we are quite rightly not complacent about achievements to date.”

THE ELEPHANT IN THE ROOM
The trade deal reached at the 11th hour on 24 December spared chemicals of tariffs that could have brought a bill of around £1.0bn if trade had ended up being subject to standard World Trade Organization (WTO) terms, with hefty tariffs.

But a long-running campaign by the industry to stay aligned with the EU’s Reach failed and the country is now under a transition period for that specific issue and a UK-style Reach which companies fear would imply repeated costs to register their substances with the UK regulator when established.

The industry says the cost of a UK Reach could end up totalling £1.0bn.

Financial analysts and economists have also showed concern the trade deal with the EU only covers trade in goods; the UK’s prowess comes from its London-centred financial services.

Until December, the EU’s 500m Single Market was its natural market; now the sector has lost the so-called passporting rights to do that.

Elliott concluded: “In 2021, [we have to have] a UK Reach regime that is more supportive of business and an energy and climate change policy framework that enables chemical businesses to maximise their contribution towards the country’s net-zero [emissions] ambition.

“It also means support for our customer industries who include automotive, aerospace and food and  drink … I welcome the publication of Build Back Better and other linked initiatives including net-zero opportunities, but we all want to see the overall look of how Government sees the future British economy.”