Split opinions over Brexit impact on petrochemicals markets

LONDON (ICIS)–Much as in the political world, opinions on the UK’s upcoming referendum on EU membership in the petrochemicals industry are split. Some are wary, while others see potential opportunities in a scenario where the UK votes to leave the EU.

There are also players that doubt that their trade or production will be affected no matter what UK voters decide at the polls on 23 June. Despite that, lots of eyes are currently on next week’s referendum and its potential impacts on petrochemical markets and the wider economy.

Areas that are likely to be affected short-to-long term include economic growth, interest rates, exchange rates, trade regulations, production levels and demand.

UK ECONOMIC UNCERTAINTY
While a lot of ink has been spilled about the potential long-term ramifications for the UK economy of an exit, some changes have already been taking place merely with the prospect of a division. With the odds so close, both “leave” and “remain” campaigns are perceived to have realistic chances of winning, which has kept the economic climate under pressure.

According to analyst firm Markit Economics, UK economic growth in May remained close to the weakest seen over the past three years, while employment growth, backlogs of work and inflows of business decreasing.

This has been linked in many cases to growing uncertainty about a UK leave vote – or Brexit – and players holding off on investments until an outcome has been decided.

The UK pound has been falling against the euro, US dollar and yen and in June, and indices measuring investor uncertainty hit levels last seen in the 2008 financial crisis.

In May, the Bank of England (BoE) stressed that the impending Brexit vote is having a negative effect on market activity, and stated that the uncertainty is making predictions in the short to medium term more difficult than usual.

This climate has affected some UK petrochemical players that have quoted softening demand in the wake of the referendum: “Customers are reducing their volumes by 10% because of the approaching EU referendum in the UK,” a buyer of caprolactam estimated.

“I would definitely say that the market has softened in every sector, May volumes were lower than what we saw last year on all grades. Customers have no idea what is going on but it is clear that their customers have reduced their order intake,” a polystyrene distributor added:

 A plasticizers buyer noted a similar trend: “Our demand is down, we haven’t been that busy. I am not sure that the whole Brexit thing plays a role but it surely doesn’t help.”

Apart from slow demand, some sources have voiced concerns over the weakening pound.

“No comments as yet on the Brexit vote from any of our raw material suppliers but we could be impacted quickly after the vote from exchange rate shifts up or down, depending which way the decision goes,” a buyer in the UK said.

Some UK suppliers raised isopropanol (IPA) prices at the beginning of March despite the balanced-to-soft overall market.

Others have not yet experienced any effect on their business but expect it to happen following the referendum.

EFFECT ON EU MARKETS
The effects of a Brexit are also expected to be felt by European economies outside the UK, with the shockwaves most noticeable in Germany, according to chemical producers’ trade group VCI.

A vote by the UK to leave would lead to a drop in exports from the European chemicals and pharmaceuticals industries to the country in the medium-term, and a drop of direct investment in the UK and the EU, the VCI said.

The UK was the fourth-largest export market for Germany-based chemicals and pharmaceuticals producers in 2016 after France, the US and the Netherlands, with €12.9bn in sales representing 7.3% of total exports for the sector that year.

Investor confidence in Germany fell in May, partly because of fears over the UK’s possible exit from the EU, Germany’s Mannheim-based ZEW economic research group said, adding that its economic sentiment indicator for Europe’s largest economy fell 4.8 points, to 6.4 in May

The Netherlands is another country that is likely to feel the impact of a UK leave vote, on the economic and petrochemicals fronts.

Chemical, rubber and plastics production in the Netherlands could shrink by as much as 4.8% as a result of a Brexit, according to The Netherlands Bureau for Economic Policy Analysis (CPB). According to its report, the Netherlands chemicals, rubber and plastics industry to have a 34.5% import/export connection to the UK.

POTENTIAL REGULATORY CHANGES
How trade flows between the UK and the EU are affected in the case of a Brexit will largely depend on any potential regulatory changes.

A Brexit could mean big changes in the regulatory environment and a massive headache for chemical companies operating in the country.

The EU’s Reach regulation is probably the one piece of legislation most heavily impacting UK chemical producers. And with the EU being one of the industry’s key trading areas, Reach compliance for exporters or their customers will be necessary whether Britain exits or not. This is because anyone exporting to Europe must register their products.

According to David Gordon, partner in the environmental and chemical industry group at law firm Squire Patton Boggs, upon exit Reach would no longer apply in the UK. The only UK legislation which currently applies to Reach is for enforcement of the regulation.

Upon exiting Reach, UK companies exporting to Europe could face substantial extra costs, as they would have to go through the registration process all over again.

“Leaving the EU creates a vacuum, so we would either have to adopt EU regulations from within the EEA or create new legislation in order to trade,” says Gordon.

SPLIT INDUSTRY OPINIONS
There are still a lot of question marks over the overall effect of a leave vote on the wider economy and the petrochemicals sector in particular, which keeps opinions polarised.

Some point to Switzerland and Norway as examples of countries with healthy economies and strong currencies despite not being EU members.

One producer based in Germany said: “If you look at the industry structure of Great Britain, it will be like the Norwegian or Swiss one which at the end could increase competitiveness. For EU it could be rather beneficial. 

“If you look at the story, what happened to the Swiss franc, it’s up a lot. Also the Norwegian kroner is a strong currency. Switzerland is not a catastrophe, but a viable model.”

Other sources based in the UK, however, have expressed different opinions. 

“My personal view is that it would be a disaster. For better or worse we need Europe as much as they need us.” a trader said, with a UK-based ethanol source adding: “If UK ethanol buyers want stable pricing, they need to vote remain. It’s probably the same for all commodities.”

A UK PET buyer commented: “You like the principle of being an independent country until you start to hear the issues. You start listening to financial experts and IMF and Bank of England nothing to do with party politics, listen to all the warnings. It is not scaremongering, it is real.”

“If we come out of the EU, for my own viewpoint 30% of what we make is exported to Europe and if customers have to add on a tariff, will we be competitive? Probably not. My site could lose a third of its business and a third of its jobs.”

Others doubt there will be any significant changes even if the UK votes to leave the EU.

One trader said:  “If there is a Brexit, I think the existing trade agreement will be free unless other arrangements are made. I think there will be a transition period. I don’t think there will be any problem at all.”

And a producer that sells to the UK commented: “Brexit wouldn’t impact imports into the UK. Interest rates change can have impact, regulations will have to stay the same – the impact on our business is going to be small either way. What happens with the oil price will play much more important role than Brexit”

Yet, positive or negative, limited or considerable, the referendum on 23 June and a potential leave vote are likely to have some effect on market players based in the UK or trading with it.

Focus article by Yana Palagacheva

Additional Reporting by Will Beacham, Caroline Murray, Vasiliki Parapouli, Chris Barker, Melissa Hurley, Ben Lake, Vicky Ellis, Heidi Finch, Nel Weddle, Truong Mellor

Picture source: Xinhua News Agency/REX/Shutterstock