By Nigel Davis
LONDON (ICIS)--UK polyethylene price volatility might have been expected post the Brexit referendum. The value of sterling plunged once the outcome was known. And the pound has been volatile since.
Polymer prices reflected this and the much wider uncertainty during the limbo period of tough words but little substance. Now negotiations have begun, the potential timescale for a Brexit and possibly for subsequent negotiations on Britain’s future relationship with the EU have become clearer.
The chart above shows the sterling/euro exchange rate since the beginning of last year to date, and the sharp drop in sterling's value after the Brexit vote on 23 June 2016.
The charts throughout show the differential between UK and EU polymer prices, which reflect the period of Brexit uncertainty. They formed part of an ICIS presentation on Wednesday at a British Plastics Federation (BPF) Brexit conference.
The UK imports all its C4, butene-based, linear low density polyethylene (LLDPE) and all its high density PE (HDPE) so negotiations on the future relationship between the UK and the EU are vitally important.
‘Brexit means Brexit’ is a phrase heard often in the UK but apparently in continental Europe some still believe that there is a way back for the EU. That is really not the case, a legal expert told the BPF audience.
Indeed, the terms of a Brexit – the divorce from the EU – could be agreed before the two-year deadline stipulated in Article 50. That could introduce even greater uncertainty into business processes, into tariffs and trade.
Britain leaving the EU and the need for bloc-wide programmes to address defence and immigration are expected to blow a €20bn hole in the EU budget. So some creative thinking will be needed to balance the books.
Creativity will be needed too on the part of negotiators once the UK’s divorce settlement with the EU has been agreed. Only after that agreement will myriad relationships between the UK and the EU other 27 nations be re-established. The process could take years.
“It is incredibly complex,” said KPMG partner Justin Benson at the BPF event. The legal aspects are mind-boggling and sorting through them will take time, he added.
The point of no return in the divorce talks is expected around September/October next year and, after that, critical aspects of business to do with employees, business processes and logistics will be up for grabs.
Some in the UK chemical industry have held out the prospect of sector deals emerging for an interim period, at least immediately following Brexit, but such deal-making currently seems highly unlikely.
The UK chemical industry sees access to the single market and the prevention of non-tariff barriers to trade as being one of its core Brexit priorities.
Staying in the single market for a transition period would help support trade, investment and jobs as well as overall economic growth for the time it takes to build a future relationship with the EU, the trade group’s Council agreed on 15 June.
A transition towards a ‘softer’ Brexit would benefit industry, which fears the imposition of World Trade Organisation (WTO) tariffs (currently 6.5% for polymers) on imports from the nations remaining in the EU.
It also fears potentially significant non-tariff barriers that could be raised before clear agreement on the future relationship is agreed.
Manufacturing companies are already looking at their warehousing capabilities in a post Brexit environment and ways in which raw materials and products will move between the UK and the EU.
The UK will be a third country and new agreements with the EU will have to be thrashed out.
Given the potential impact of the negotiations on the value of sterling and the uncertainty that is likely to surround the financial markets and business around the time of the divorce settlement, cash will be king.
Whether a soft or hard Brexit is the final outcome, the possible shift in tariffs and substantial non-tariff issues, alongside a potentially monumental change in customs procedures, makes the clever management of cash going into 2019 vitally important.
A hard Brexit, for whatever period of time would push up costs for importers of polymer and most other materials. UK plastics prices would have to rise against the much broader backdrop of rapid inflation.
Companies will be running Brexit scenarios, trying with little real information to chart courses through the uncertainty. Their need for information, and for greater clarity on how business will be affected in the Brexit aftermath, will be immense.