Sector News

Europe’s recovery at risk

January 2, 2021
Chemical Value Chain

The chemical industry in Europe enters 2021 clouded in uncertainty over the prospects for recovery from the pandemic. A steep rise in COVID-19 cases in the region, particularly the UK, at the end of 2020 has cast doubt on the strength of the predicted upturn. However, a post-Brexit trade deal between the EU and UK ensuring tariff-free trade offers some clarity.

On 24 December the EU and UK reached a deal on trade and future cooperation, ending months of disagreements and intensive negotiations. The agreement was reached a week before the end of the Brexit transition period on 31 December. The UK voted in a referendum in June 2016 to leave the EU, and it formally exited the EU in January 2020.

The deal is based on a free-trade agreement in goods and services, which provides for zero tariffs and zero quotas on all goods that comply with the appropriate rules of origin. It also covers a range of other areas such as investment, competition, state aid, transport, energy, security, and sustainability. The EU and UK have committed to maintain high levels of environmental protection, including carbon pricing.

Meanwhile, binding enforcement and dispute-settlement mechanisms will ensure that the rights of businesses, consumers, and individuals are respected, the European Commission says. “This means that businesses in the EU and the UK compete on a level playing field and will avoid either party using its regulatory autonomy to grant unfair subsidies or distort competition,” it says.

However, because the UK has left the EU single market and customs union, the free movement of people, goods, services, and capital between the UK and EU ends on 1 January.

The deal is “a fair and balanced agreement,” says European Commission president Ursula von der Leyen. Meanwhile, UK prime minister Boris Johnson calls it “the first free trade agreement based on zero tariffs and zero quotas that has ever been achieved with the EU.” He says it is also the biggest bilateral trade deal signed by either side, covering trade worth £668 billion ($898 billion) in 2019.

The agreement has major implications for the chemical sector. The Chemical Industries Association (CIA; London, UK) estimates that 60% of UK chemical exports go to the EU and that the UK sources 75% of its raw materials from the EU. Cefic and the CIA estimate that total chemical trade between the EU and UK is worth about €44 billion ($54 billion) per year. The UK’s exit from the single market and customs union means that, despite zero tariffs, there will be non-tariff barriers to trade such as increased bureaucracy, including customs declarations, and higher regulatory-compliance costs to business.

The CIA says there is “some relief” that the deal confirms tariff-free trade. “We have consistently called for the threat of tariffs to be avoided, so we very much welcome the commitment and hard work from both parties in securing that outcome,” says Steve Elliott, chief executive of the CIA. “Failure here would have seen an annual cost of at least £1.0 billion to the chemical industry.”

Prime minister Johnson has noted the potential for divergence by the UK from EU chemical legislation. The UK is launching its own version of the EU’s Registration, Evaluation, Authorisation, and Restriction of Chemicals (REACH) regulation, called UK REACH. “The prime minister has mentioned chemicals as an industry where we have the potential to do our own thing. With that in mind we need to see, in particular, the extent of regulatory cooperation agreed with regard to the industry’s REACH responsibilities,” Elliott says.

UK chemical businesses have committed “a decade’s worth of investment” in gathering and presenting data for the EU’s REACH legislation, Elliott says. Failure to access this data following Brexit will leave the UK chemical industry “facing a bill of more than £1 billion in unnecessarily duplicating that work for a new UK regime,” he says.

The EU-UK agreement overall “represents a mixed bag for our industry, [but] we shouldn’t underestimate the huge value that a deal brings in terms of certainty,” Elliott says. “Chemical businesses all over the UK have proved to be hugely resilient over this most uncertain and challenging of years, and a predictable trading environment with our most important market-place, coupled with emergence from COVID-19, should make 2021 a year to look forward to.”

IHS Markit, meanwhile, projects a fourth-quarter 2020 sequential contraction in the eurozone economy amid the resurgence of COVID-19 cases and new lockdowns. “In the near term, the outlook [for the eurozone] will mainly be determined by the evolution of the pandemic and the availability of effective vaccines,” IHS Markit says.

After collapsing in the first half of 2020, Western European economies registered sequential improvement in the third quarter. After an overall 7.4% contraction in 2020, IHS Markit projects that eurozone GDP will increase 3.7% in 2021. The UK economy contracted by 11.6% overall in 2020 and a sustained recovery will take “several years,” IHS Markit says.

A stronger euro is also threatening recovery in Europe’s chemical industry. “Compared with Asia and the Americas, the pace and strength of recovery of the chemical sector in Europe is most at risk over the coming months due to the strength of the euro, rising coronavirus infections and reintroduction of social restrictions, and Brexit,” says a recent outlook report from Moody’s Investors Service (New York, New York).

The length and severity of the second COVID-19 wave will likely have a big impact on the EU chemical industry’s performance. ACC says that chemical output in Europe, including Western, Central, and Eastern Europe but excluding Russia, declined 2.2% in 2020 and will grow 3.1% in 2021.

by Ian Young

Source: chemweek.com

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