VIENNA (ICIS)--The chemical industry’s supply chain will greatly suffer from a disorderly UK departure from the EU, with this being just one of many risk factors causing a more negative outlook on the global economy, according to the global head of chemicals at KPMG.
Paul Harnick said that “almost every week” KPMG is getting calls from chemical companies asking for help as they try to find out what the effect of a no-deal Brexit could be for their supply chains.
The EU’s Single Market allows companies to do intra-trade among the 28 member countries without any tariffs, and regulation is harmonised to diminish red tape.
“The odds for a hard Brexit [the UK exiting the EU without a deal] are getting higher by the day. [There are questions about] how products will be moved between the UK and the EU27 and the chemicals will be one of the most impacted,” said Harnick.
“Chemicals companies are now not only looking at their own exposures but also looking down at supply chains, their suppliers’ supply chain and their customers’ supply chains. Just to understand where every potential exposure to their business is.”
Harnick went on to say that, unlike at the time of the referendum, many companies in the UK, and those in the EU with exposure to the UK, have now internal Brexit teams monitoring developments.
The June 2016 referendum’s result, however, took many companies off guard and progress on analysing potential Brexit scenarios has been slow.
However, as negotiations between the UK and the EU have produced practically no results so far, and less than six months away from exit day, corporates are now in full Brexit swing.
“In the first instance, people focused on the first exposure, things like VAT and customs duties. Most businesses are now running very fast to really nail down exactly every single exposure … and are starting to make very real plans for Brexit,” he said.
“If we end up with a no-deal Brexit, then lots of things are going to fall apart, lots of things are going to stop working and companies are going to have to make very quick and big important decisions in order to continue running their operations.”
Brexit is only one of the many uncertainties the world economy is facing, said Harnick, mirroring voices who increasingly predict an economic slowdown on the back of mounting geopolitical problems like the US-China trade war or the US withdrawal from the Iran nuclear deal.
The International Monetary Fund (IMF) this week lowered its global GDP growth forecast for 2018 and 2019; German chemical major BASF also said this week it is monitoring developments, while crude oil futures have lost ground on the back of worries about global growth.
Asian petrochemicals stocks crashed on Thursday's trading after a sell-off on Wednesday's US trading, with the country's chemical major Dow falling more than 3%. European chemical stocks also opened in the red on Thursday.
Corporates and investors are feeling the pinch from the “huge amount” of uncertainty, which is precisely what businesses dislike the most, said KPMG's Harnick.
While hard data on a real economic slowdown has not come through yet, the problems are just around the corner, he added.
“If you look at the chemical industry, looking at quarterly reports coming from companies, they are all very profitable, and there is a strong market sentiment. M&A [mergers and acquisitions] activity is as hot as it has been since probably 2006-2007 – everyone has got cash and everybody is looking to make deals, make big strategic moves,” said Harnick.
“However, I would just send a note of caution: there are a lot of headwinds out there, and let’s not forget chemicals is a cyclical industry and we have been riding this cycle for a long time. A note of caution for the next two-three years should be required.”
On the US-China trade war, Harnick said the “sensible strategy” would be to assume it will be here for the medium or long term and industrial companies like chemicals need to quickly have potential scenarios in mind and take “real decisions” about what affects their supply chains or their raw materials sourcing.
Following his conversations with chemical industry executives, Harnick said he had detected a real “surprise” about how the trade war between the two countries had escalated as far as it has.
“Clearly, this is moving day to day, and everyday there is the possibility of things escalating further. Most people have taken the view, or rather have the hope, that this will be fairly short term and the respected parties can come to the negotiation table and find a resolution,” he said.
“But as time starts to drag on, the sensible strategy is for companies to start thinking what it could mean for their business if this extends to the medium or longer term. Potentially, there could be quite big changes that companies would need to make in the supply chain and, in particular, the way they move products around the world.”
The annual European Petrochemical Association (EPCA) annual meeting ran in Vienna on 8-10 October.
Harnick is based in New York. This interview was conducted over the phone.
Picture source: KPMG
Interview article by Jonathan Lopez