Sector News

The majority of the European petrochemicals market is in favour of the UK remaining in the EU, but opinion remains divided on how much of an impact a leave vote would have on the industry.

On the 23 June, UK voters will decide whether to stay in the EU. The ramifications of such a move and the ripple effects it would produce are nearly impossible to accurately predict. The UK public is currently nearly evenly split between stay and leave, according to a Financial Times poll of polls dated 12 April.

Current trade deals, sanctions and regulations will need to be re-established in the event of a leave vote, but the unprecedented nature of this potential action makes predicting the eventual results nearly impossible.

The UK’s Chemical Industries Association (CIA) published a survey of its membership on the 12 April 2016, showing that 62% of respondents wish the UK to remain. 38% had not decided a position. No company of the 93 surveyed said leaving the EU would be in their best interests.

The sentiment around the markets is one of trepidation. Richard J Carter, managing director of BASF UK and Ireland, said, “We don’t and cannot know the terms that would be agreed in such case but the political uncertainty would cause volatility in markets and add costs and uncertainty to trade and investment.”

“From a relevant market such as the UK, we would rather see them helping establish change from within than comment from the outside” said AzkoNobel spokesperson Mirjam Veenhof.

Tony Bastock, chairman of UK chemical manufacturer, Contract Chemicals Ltd highlighted the potential difficulties a UK producer would encounter. He said:

“The business success of many smaller chemicals companies in the UK is dependent on maintaining and growing their export penetration of EU markets. My own company, as with many others has over 80% of its business in the EU, facilitated by free access into the single market and by competitive raw materials from that market,” Bastock said.

“Even the threat of Brexit has caused our customers to question placing future business with us; a full exit would certainly destabilise and damage our future growth and the jobs and innovation we support,” he added.

There was also fear of “British contagion”, wherein other countries may seek to reconsider their own membership status in the event of a UK exit, potentially resulting in a domino effect that would seriously weaken the EU.

Players also questioned the impact of an exit on the importance of the UK as a market.

“We live and work in a global market and are in direct competition for investment which is tied to jobs. A British exit would significantly dent the UK’s position from our perspective,” Carter said.

“People work in this business from all over the world. If access were to change that would have a major impact,“ said a source at Germany-based Bayer.

Others were less worried about a UK exit.

“Most of our paints and coatings businesses are local, meaning the production in the UK is often meant for the national market,” Veenhof said.

“I expect our business not to be affected or only to a minor extent,” said a source at K+S.

Others saw a breakaway vote as potentially the cause of significant market unrest.

“[A UK exit would be] very disappointing and a bad decision in the long term,” said a UK solvents trader, speaking on 15 of March.

Some European players saw a benefit from the potential for an to lead to cheaper costs in some areas and higher trade outside the EU, due to the UK gaining increased ability to deregulate.

A European olefins producer said: “I believe there will be no negative effect on petrochemical demand in Europe [if the UK were to leave the EU] because there are already different currencies and the company landscape will not change.”

The key point of tariff changes produced many opposing views. “There will be tariff barriers going up, [which] will depend on how we are classified… [there] will be higher tariffs as [the UK government] want to de-incentivise [foreign imports], competitiveness of exports into the EU will be threatened,” said a ethanolamines and glycols reseller

“I don’t know if there would be duties,” said a methylene chloride producer. “But look at all the bilateral agreements on duties between the US and EU. Or other countries and the EU. So there is a duty but essentially it is set at 0% if the partners agree.”

Looking ahead, some players are already planning to consolidate until the outcome of the referendum becomes clear. Speaking on the sidelines of the ICIS Polyethylene Terephthalate conference, on the 9th March 2016, a buyer said: “I won’t take any risks for June. With Brexit [British exit] and [economic uncertainty in] Greece still on the line, there is too much at risk.”

The bulk of companies remain conservative in enacting strategies to deal with fallout from an exit. Due to the complexity and confusion around the realities of a leave vote, most sources said they were not currently enacting any policy changes.

One source said their board of directors are not actively discussing an exit until the vote had been concluded. It said that this was due to the extended period of time it would take for the exit to even be completed, two years at a minimum. Under Article 50 of the EU treaty.

“In terms of contingency plans well we don’t have any detailed contingency plans at this stage of the game,” said Ben Van Beurden, CEO of Anglo-Dutch energy major Shell, on 4 February 2016.

A source from German K+S said simply that they had “no plans.”

It is apparent that even though the gravity of the decision is immense, opinion on the implications of a vote by UK citizens to leave the union remain divided, and there is little to be done in a practical sense until the results are in. Even if UK decides to remain, it seems that the markets will feel the effects in the lead up to the vote.

By Ben Lake

Source: ICIS News