Beyond Brexit – Time to Act: The Chemicals sector

Mike Clements Chemicals Leader, PwC United Kingdom 08/08/18

With little more than 8 months until the UK formally leaves the EU on 29 March 2019, what are the latest developments, risks and opportunities for the Chemicals sector?

It was hoped that Government’s recent White Paper on the UK’s future relationship with the EU would provide much needed clarity on our future trading and regulatory environment – vital for the UK’s Chemicals’ industry to continue to thrive. Though it didn’t provide absolute clarity, it did provide a better understanding of Government’s direction of travel and highlighted loudly and clearly the advice of my colleague, Andrew Gray – PwC’s Head of Brexit. That is, businesses should, as a minimum, prepare to be agile and now be stepping up those preparations.

The good news, is that as a largely global industry, the Chemicals sector is used to dealing with a level of ambiguity and geopolitical uncertainty, which provides a degree of resilience in the headwinds of Brexit. However, make no mistake about it, as we close in on the next key negotiation milestone – the EU Summit in October, there is still considerable distance between the UK and EU positions, which makes an outline deal then highly unlikely.

The sum effect is to push out a ‘deal’ to the end of the year or later, which will leave little time for business to respond and to implement, whilst also heightening the real possibility of a no-deal scenario. Therefore it’s important to plan for no-deal, not just a deal scenario.

Although the fear of no deal has increased and contingency plans will get significant attention from the media and the government over the summer, the Department for Exiting the EU appears optimistic that they can deliver the white paper.

Regulation

Undoubtedly one of the biggest issues amongst the Chemicals sector is regulation and its implications for trade. In particular the UK’s potential future relationship with the European Chemicals Agency (ECHA) and the continued applicability of the Registration, Evaluation, Authorisation and Restrictions of Chemicals (REACH) regulations to enable cross-border trade within the EU.

To date, the EU’s guidelines for the future framework has ruled out ‘cherry picking’ on a sector by sector basis, meaning the UK would likely cease to be a member of the ECHA – the impact of which is profound and difficult to underestimate. Since REACH registration is mandatory to trade chemicals in Europe this would mean UK REACH registered chemicals would no longer be able to be sold in the EU post-Brexit. In order to continue to trade, these registrations would need to be transferred to an appropriate EU legal entity, adding cost and complexity.

However, in the UK Government’s White Paper, they have suggested a common rulebook for goods, where the UK would continue to participate in the ECHA, along with no tariff on goods and a potential Facilitated Customs Arrangement to move goods more quickly, with fewer checks and controls. Clearly this would be extremely welcome news for the sector, though the realisation of this vision would necessitate a significant softening from the EU on one of their core policies.

If nothing, politics has proven to be surprising, but this does beg the question, what might an eventual agreement look like? The most likely option seems to be a Canada+ model that would build on the EU-Canada CETA. In this scenario we would expect to see customs being introduced and a strong likelihood the UK would no longer be part of the ECHA, requiring action from the sector.

In a deal scenario then, regulation could look remarkably similar as today, but the implementation and administration could be profoundly more complex. This ambiguity really does highlight the need to agile and have undertaken rigorous planning in the context of your business.

Customs

Beyond regulation, the real prize will be for those businesses that quickly mobilise their efforts around the Facilitated Customs Arrangement with the EU that will limit the burden of customs checks and controls. This, however may not be an easy task and will undoubtedly include significant work to understand and manage the complexity of your supply chain, as well as updating contracts and the impact and changes for your IT systems. In themselves not insurmountable but certainly challenging in a tight timeframe and without total clarity on the regulatory environment.

No deal

In a no deal scenario things clearly look a lot more complex. Here agility is king! Being able to respond with a considered approach that balances the interests of your stakeholders is a tall order and early business and strategic planning will help form a clear view of options and decision points for your business. It’s probable, at least initially, that the UK would cease to participate in the ECHA, which would have clear implications for the cross-border movement of chemicals from the UK into the EU. More importantly this has immense implications across all stages of global supply chains. Having a comprehensive understanding of your supply chain and risk is critical.

People & talent

Aside from regulation & trade, it’s important not to forget People. In truth this is an area that business really ought to have made a start on. The Chemicals sector is a significant employer of skilled talent and has a diverse workforce. As a first step, it’s important to know the composition of your workforce – those EU and overseas nationals working in the UK and UK nationals working in the EU. From this position you can start to consider your policy and wider Talent Framework – how do you attract, retain and develop the right people in a Brexit and post-Brexit environment? In our experience communication underpins your entire people engagement strategy. Do recognise that your people also have a significant amount of uncertainty about their future and will be thinking about the decisions they will need to make. In that sense, knowing their company’s position becomes very important. For instance, whilst the White Paper makes it clear that free movement of people will end, will you be offering support to help existing eligible workers obtain ‘settled status’?

Looking forward

Let’s not forget, there are opportunities too! As the maxim goes, when one door closes, another might be ... slightly ajar. The falling value of sterling relative to other major currencies can make for an attractive investment environment, particularly as employers in this sector are often significant or integral to their local communities. Such investments could be in either new or enhanced facilities for domestic demand, or more long-term as the UK develops Free Trade Agreements (FTAs) with other nations. Equally there can also be opportunities to accentuate strategic value through M&A activity.

Above all, irrespective of Brexit negotiations your ability to be agile will be amongst the key defining factors for your business. To that end, having clear, board-level Governance & Mobilisation plans around the key issues –trade, regulation, people & strategy is essential to being able to recognise and respond to risks and opportunities as they arise.

Contact us

Mike Clements

Chemicals Leader, PwC United Kingdom

Tel: +44 (0) 7740 923 214

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