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Currency depreciation boosts chemical companies in the UK

September 18, 2017
Chemical Value Chain

Production of chemicals increased 3.4%, in volume terms and excluding pharmaceuticals, in the United Kingdom during the first seven months of 2017 compared with the corresponding period last year, says the Chemical Industries Association.

UK output of chemicals in July 2017 was at its highest level since the first half of 2015, CIA says. The figures reflect a “strong growth trend” in chemicals production, says Stephen le Roux, head of economics at CIA.

Speaking at a press briefing in London this week, le Roux said that the UK chemical industry’s performance has been boosted by overseas sales following a depreciation of the pound sterling since the United Kingdom’s vote in June 2016 to leave the European Union. UK exports of chemicals including pharmaceuticals increased 10% in value terms in the January-July 2017 period, although imports increased even more, by 12% in value terms, CIA says. However, there is no visible impact from Brexit on export volumes. “CIA’s members are happy because they have earned more from exports but it’s difficult to see a real volume effect from the pound’s depreciation because both output prices and the value of exports have increased,” le Roux says.

CIA forecasts that chemical production volumes, excluding pharmaceuticals, will rise 3% in the United Kingdom in the full year 2017, rebounding from a 2.4% contraction in 2016. “Almost all subsectors of the industry are growing,” le Roux says. Output by the UK petrochemical and polymer industry is up 8% in the first seven months of the year, he says. Paints and coatings are the only subsector where production is declining, le Roux says.

CIA’s latest quarterly business survey of its members, held in July, revealed growing sales and exports by the UK chemical industry in the second quarter but at a slower pace than in the first quarter with companies expecting gains in sales and export volumes. CIA members expect no change in margins, which are under pressure.

The CIA survey also reveals a strong pickup in capital expenditure and R&D spending intentions by the UK chemical industry, despite uncertainty over Brexit. “Brexit is having some impact on intentions but higher sales are telling companies they should be putting more money into investment,” le Roux says. Brexit uncertainty and higher input costs nevertheless “continue to dominate as the biggest threats” highlighted in the survey, le Roux says.

Companies are most concerned by potential tariff- and non-tariff barriers if the United Kingdom leaves the European Union in March 2019 without a free trade deal. “Our Brexit priorities have not changed since the outset,” CIA chief executive Steve Elliott told the briefing. “We seek reassurance on tariff- an non-tariff barriers, and regulatory continuity.” Non-tariff barriers such as customs delays, import licenses, and quotas have become a bigger concern than tariffs since the June 2016 referendum, Elliott says. “Companies say they could live with [World Trade Organization] tariff rates of 6.5%. But non-tariff barriers have grown in people’s understanding and concern since the referendum.”

If UK and EU negotiators do not make significant progress by the end of 2017 on the United Kingdom’s exit terms and the future trading relationship, the chemical industry will likely have to assume there will be no free trade agreement following Brexit and start making preparations for tariff- and non-tariff barriers. “The end of this year seems lilke a critical point in terms of companies making contingency plans, if there is no clarity by then on the Brexit negotiations,” Elliott says. “The next few weeks could be critical.”

By Ian Young

Source: Chemical Week

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