INSIGHT: Pre-Brexit UK chemical industry sentiment remains mixed

By Nigel Davis

LONDON (ICIS)–UK trade group, the Chemical Industries Association (CIA) is expected to publish the results of its latest membership survey on Thursday highlighting pre-Brexit sector sentiment.

Chemical companies have been encouraged by the UK’s ’til now good economic performance and stronger European manufacturing. The weaker pound sterling has helped lift chemical exports to the EU 27 nations and the rest of the world by 23% in value terms, in what CIA officials have called an overall good performance.

The trade group’s director for energy, trade and competitiveness, Nick Sturgeon, noted this week that core manufacturing in the EU is picking up “pretty strongly”. It is a key driver for European chemicals demand.

The slip in UK consumer confidence and the potential for rising inflation, on the other hand, is worrying. But exporting chemical companies can be encouraged by the current, relatively favourable, environment and relatively positive supply/demand balances.

There is concern, nevertheless, with the uncertainty the pre-Brexit process creates and, of course, with the post Brexit industrial landscape.

The association expects these Brexit threats and uncertainties to be reflected in the membership survey.

“It’s a bit jittery,” the CIA’s chief executive, Steve Elliott said on Tuesday, describing the concern about post Brexit chemical industry investment intentions. Likewise, the drop in UK retail sales in the first quarter, for the first time since 2010, is hardly encouraging and sets some alarm bells ringing.

The chemical industry is encouraged by what is seen by many as the positive presidential election result in France but, as noted by CIA president Tom Crotty, who is a director with INEOS, the far right candidate Marine Le Pen secured 11m votes.

“There is an investment need in Europe”, Crotty said during a meeting with UK journalists, adding that the industry needs more ethylene and propylene.

Crotty dismissed the idea that there might be a need for a new cracker in Europe but said that INEOS was considering expansions – he confirmed that the company was looking at the feasibility of building a propane dehydrogenation (PDH) unit in Europe.

“You expand where you have the opportunity,” he added, although he described this as more of a technical question to do with feedstock availability and logistics, rather than one driven by politics.

CIA executives and board members are worried that UK chemical companies could be frozen out of EU supply chains. That would come at a particularly bad time for the country’s small to medium sized players who are becoming much more interested in global trade.

The critical issues for companies in Brexit are business continuity, the regulatory environment, energy, research and development and the free movement of labour, among others.

Britain may not be looking so much for regulatory continuity across the board, but there has been talk of replicating the key EU regulatory authorities in the UK.

Many executive on the continent see Britain’s proposed Great Reform Bill as a means to de-regulate in the UK, while it is expected to be designed to cement a great deal of regulation in British as opposed to EU law.

The chemical industry clearly would want the UK to take more of a science-based approach to regulation and avoid what is seen as the over-burdening excess of the precautionary principle, which industry suggests tends to work to stifle rather than promote innovation.

Britain would be excepted to adopt the Reach chemicals registration, evaluation and authorisation regulation, Crotty suggested. “Reach regulations have to be absolutely standard across Europe,” he said

However, he added that the UK government could take a more pragmatic approach to other aspects of industry regulation, singling out the 2012 EU Energy Efficiency Directive, which advocates a continuous 2%/year improvement in energy efficiency.

The position taken in the directive is “very simplistic”, he said. “Many of our processes are close to their stoichiometric limits,” he added, describing how it is virtually impossible to reach such goals.

The CIA has modelled for a ‘hard’ Brexit and on-going discussions with government will be putting emphasis on the potential impact of tariff and non-tariff barriers, the free movement of people and the free movement of R&D on its member companies.

While only between 4% and 5% of the total chemical industry workforce in the UK are EU nationals, the proportions rise markedly, and close to 20%, in technical positions and among contact teams.

There has to be continuity in these areas otherwise industry grinds to a halt.

Chemical companies are likely to push through whatever channels are open to them with government for sector agreements under Brexit, which might secure the more critical aspects of free trade and the movement of people across Europe. The less optimistic among them envisage a Brexit transition period that could extend to 10 years or more.