On 31 December 2020, the United Kingdom (UK) will officially exit the European Union (EU), ending 43 years of political and economic association. This is the first time a major country has left a significant trading block. The UK is a member of the G8, one of the eight most powerful countries in the world.
Another failure in the world of election forecasting meant that the 2016 referendum decision to withdraw from the European unit, or “Brexit”, came as a surprise to many. Trevor Gauntlett, an independent industry consultant, joined Vicky Denton, CEO and Editor-in-Chief of F&L Asia Ltd, on F+L Webcast to discuss the impending split and potential ramifications for the lubricant industry. Gauntlett, an analytical chemist by training, has over 25 years’ experience in Blue Chip chemicals and oil companies, including 18 years as the technical expert on Shell’s Lubricants Additives procurement team.
EU membership extends various benefits to member states including open borders, the absence of tariffs for goods transported, and the free movement of people. The free movement of people is the issue that placed Brexit at the forefront of UK voter’s minds, says Gauntlett. Over the past decade the UK population has grown by approximately 10 million, mainly due to immigration, he says.
The UK trades more with the EU than anywhere else in the world. Approximately 500 ships navigate the English Channel daily, making it one of the most intensely shipped stretches of water in the world. While the UK is demanding the ability to break from EU rules, at the same time they are seeking a frictionless trade association that includes a notable free trade area. Brexit will likely have a significant impact on trade flows.
In recent times, manufacturing output in the UK has been in decline. In many areas, the region is no longer as self-sufficient as it once was, says Gauntlett. Large quantities of manufactured goods enter the UK from Europe. The enduring Covid-19 pandemic has also exposed restrictive supply chains and a lot of single sourcing.
None of the “big four” additive manufacturers make additive components or blend additives in the UK. However, Lubrizol, Afton Chemical and Infineum all have major UK research centres. While ExxonMobil continues to manufacture Group I base oils in the UK, volumes are limited with respect to demand, he says. The majority of base oils are imported. Among major oil companies, only French energy major Total still blends lubricants in the UK.
Overall, Europe has a significant trade surplus with the UK. Some analysts believe this surplus provides the UK leverage as the EU has more to lose from a UK withdrawal.
Brexit is unlikely to have a noticeable impact on European industry bodies, such as the European Automobile Manufacturers Association (ACEA), says Gauntlett. ACEA is a non-legislated, voluntary, membership-based organisation. Irrespective of location, the way individual factories interact with parent companies or the association will not change, he says. The same applies to the European Ecolabel certification. Though, Gauntlett concedes that devolved legislative organisations in the UK have authority over environmental legislation, as opposed to central governance.
REACH refers to the Registration, Evaluation, Authorisation and Restriction of Chemicals. Previously, the European Chemical Industry Council (CEFIC) has cautioned that the UK remaining in EU REACH is the only way to avoid total market disruption. While the UK has confirmed it will retain REACH, it has explicitly stated it will not follow the annexes, the detailed component of the legislation, says Gauntlett. Businesses operating in the UK and the EU will need a separate registration in both markets. The former Shell representative warns of cascading issues stemming from a potential divergence from EU REACH.
The European Commission issued a notice to stakeholders on the Withdrawal of the United Kingdom and EU Rules in the field of chemicals, regulation under REACH, on 30 March 2020. Correspondence outlined post-Brexit implications for the registration of substances on their own, mixtures or articles manufactured or placed on the EU market in annual quantities of one tonne or more.
Manufacturers or producers established in the UK will require registration with a manufacturer or importer in the EU, or appoint an Only Representative in the EU as the registrant for the substance. Downstream users in the EU will need to assess whether the substance is registered by a registrant established in the EU. If not, they will be required to appoint an Only Representative, register the substance in the capacity of an importer or Only Representative, or adapt their supply chain accordingly.
UK Companies are anticipating regulatory divergence, rising costs, and supply chain disruption as a result of the government’s plans. The Chemical Industries Association (CIA) has indicated that the change is likely to weaken the competitiveness of the UK manufacturing industry and could result in the loss of key chemicals.
The significant divergence between the European and UK legislation could necessitate modification of the chemical registration and testing processes – adding further costs. This may affect the willingness of foreign companies to enter the UK market, says Gauntlett.
The issue of duty and tariffs also remains unresolved. At present, goods pass the UK border without import duty or registration checking — in either direction. This will all change on 1 January 2021, says Gauntlett. Companies face the prospect that all freight crossing the border could be inspected, potentially resulting in consignment delays. The Netherlands, in particular, has hired thousands of new border inspectors, indicating inspections may become commonplace.
An ever-present issue for UK industry is the lack of clarity. UK authorities are still negotiating exit terms with the European Union. The aim is to complete their talks by the end of September, and for the final terms to be ratified during the European Council meeting in October. Companies will not gain clarity until a negotiated settlement is achieved.
Failure to negotiate an exit deal that includes a significant element of free trade could have significant cost implications for UK companies and those with UK suppliers. The automotive industry is one example where integrated supply chains are cause for concern. Parts manufactured in the UK cross the border multiple times during manufacture and assembly. At this stage, there is no guarantee they will not face multiple tariffs. Downstream customers in the EU may look to source raw materials and components where they can guarantee zero tariffs, says Gauntlett.
From an upstream supply perspective, the current Covid-19 pandemic has had a limited impact on the lubricants industry in the UK and Europe. Sufficient freight forwarding resources have been available to maintain supply to blenders and customers, says Gauntlett. Downstream has caused the greatest headache as customers have shut down or severely curtailed their activities. Brexit was going to be a complex divorce at the best of times. Covid-19 has sharpened the issue of trade between the two regions, he says.
Covid-19 has taken away some flexibility for companies on both sides of the English Channel. Depleted resources and travel restrictions have impacted the ability of larger companies to stock build against the possibility of a “no-deal” Brexit on 1 January 2021. If businesses cannot stock build, they may shift their supply elsewhere to avoid the real possibility of import tariffs, suggests Gauntlett.
Brexit in a Covid-19 world is likely to offer significant challenges. The risk that larger companies lose interest in the UK, if not part of a uniform market, may create opportunities for independent manufacturers. Many small and medium UK-based lubricant manufacturers only have a UK customer base and see Brexit as an excellent opportunity to fill niche requirements, he adds.