EU chems ask for pragmatic Brexit while bracing for uncertainty

Focus article by Jonathan Lopez

Members of the anti-EU UK Independence Party celebrate the triggering of exit clause Article 50 at a pub in Brussels on 29 March. Source: Isopix/REX/Shutterstock

LONDON (ICIS)–The UK and the remaining 27 countries within the EU should adopt a “pragmatic” approach to Brexit, according to trade group Cefic on Thursday, but sources within the industry are bracing for more uncertainty as the sterling is expected to depreciate further while negotiations take place.

On 29 March, the UK formally notified European Council President, Donald Tusk, of the triggering of Article 50, the step necessary for exit talks to begin. The Council represents heads of state and governments of every member country.

Some sources in the European chemical industry showed concern about how Brexit could lead to volatile exchange rates that could hurt trade, and legal uncertainty which might put companies off investing in the UK while the outcome is unclear.

“The triggering of Brexit will mean continued uncertainty. It will have a negative impact on the economy,” said a polymers buyer in the UK.

A trader based in Switzerland – a non-EU member country but with access to most areas within the 28-country, tariff-free, 500m-people single market – said that trade will remain unchanged during the next two years, but forecast that the UK may need to pay a large sum to access the single market post-departure.

“I don’t expect any immediate effect from the triggering of Article 50. What type of effect this [Brexit] will have on the duties nobody knows, it is too far forward. Some UK companies may move to Europe so they can avoid the duties and supply their customers,” the trader said.

“A lot depends on Brussels [the EU capital] – they may take a tough position on the UK [who may have to pay between] €50bn and €70bn for Brexit and they [may need to] pay more money if they want to retain the duty free status – think €4bn-€5bn. I think the word for it is blackmail.”

The trader added that this sum is more or less what Switzerland pays every year to the EU to access its single market, arguing that would be the same logic applied to the UK post-Brexit.

“I think, at the end, the market will find its equilibrium, the exchange rate and the tax rates may decrease,” this trader concluded.

A UK chemical importer said on 29 March that the sector is already registering higher prices as a consequence of the weaker pound. The buyer was speaking on the sidelines of the American Fuels and Petrochemical Manufacturers annual petrochemical meeting in San Antonio, Texas.

In Germany, a key trading partner for chemicals in the UK as well as other chemical-intensive sectors like automotive, politicians and business leaders said Brexit should not affect the German economy, a hint about trading arrangements that protect the current ample trading channels.

Trade groups in the EU and the UK, the European Chemical Industry Council (Cefic) and the Chemical Industries Association (CIA), who enthusiastically encouraged the UK to remain within the EU last year, called for clarity and speed in the upcoming negotiations, expected to conclude in 2019 with the UK’s exit after 45 years of membership.

However, Cefic added a caveat. While the UK intends to negotiate both the terms of departure and the new trading arrangements at the same time, the remaining 27 countries may not give into demand.

“While [UK] Prime Minister [Theresa] May states the UK will be looking to discuss trade in parallel to the terms of withdrawal, the EU has given signals that no discussions around trade will be possible until those terms are agreed,” it said.

“It is clear that, in any future solution, the integrity of a strong single market based on four fundamental freedoms of the EU needs to be preserved.”

The trade group’s director general, Marco Mensink, added that legal and regulatory certainty is key for corporates to continue investing in the UK and trading chemicals. Around 60% of chemical exports out of the UK go to the remaining 27 EU countries.

According to Cefic’s figures, the UK’s chemical industry represented about 9% of total EU sales while exports from the 27 EU countries to the UK represented in 2016 €22.3bn, with imports totalling €20.3bn.

“Politicians on both sides must provide the earliest possible signal concerning how the EU and UK will trade in future so companies on both sides can continue their mutually beneficial trading relationship. Decisions about continued investment can only be made based on long-term predictability,” said Cefic’s Mensink.

The UK’s CIA called for an “ambitious” negotiation strategy which secures a “wide-ranging” trade agreement once the country leaves the EU in 2019 and called for the minimal disruption to the current arrangements. The trade group’s CEO, Steve Elliott, urged the government to have a long-term view when it comes to negotiate the departure.

“Whilst we, and others, will scrutinise and seek to influence each and every step until and beyond Brexit, we do want to make sure the Government is in the best informed and advised position it possibly can be to conduct a successful exit from the EU,” he said.

“It is now more important than ever that the Government fully engages with the EU, seeks input from all stakeholders and does not allow any short term political interests to harm future UK trade and investment prospects. I hope negotiations proceed smoothly and, whilst business needs certainty and to some extent speedy resolution, we also urge patience in order to make sure we avoid a bad deal or no deal.”

Financial analysts have also questioned how feasible it would be for the UK to reach both a divorce agreement and a new trading arrangement at the same time, with London-based equity analysts at Germany’s investment bank Deutsche Bank arguing two years of negotiations would not be enough time to reach both agreements.

“The UK continues to want to reach agreement on a comprehensive new deal with the EU27 in parallel with the terms of the divorce by March 2019, an unrealistic timetable and one the EU27 opposes,” said the Deutsche Bank analysts.

“Tusk mentioned damage limitation as the primary goal. Combined with last week’s comments from [EU executive body the] Commission negotiator Barnier on the priority of divorce negotiations and recent press reports, an early assessment of the EU’s stance is that they plan to offer the UK a take-it-or-leave-it option.”

According to the German bank, that option would entail the EU reaching a settlement for a UK exit which includes the country’s current budgetary commitments to the EU budget, with a limited transitional deal, although the 27 remaining EU countries would be “preparing for a hard” outcome if negotiations were to fail.

“So with mutually contradictory goals and significant political obstacles for compromise, it looks set to be a long drawn out negotiation process with the two-year clock now quietly ticking away,” the analysts concluded.

Additional reporting by Stefan Baumgarten, Heidi Finch, Linda Naylor and Barbara Ortner