No-deal Brexit risks for commodity markets
With the European Commission viewing a no-deal UK exit from the EU on April 12 as “increasingly likely”, S&P Global Platts reporters have updated January’s cross-commodity surveys on the implications of a hard Brexit.
**No-deal has no impact on zero tariffs on crude oil, but would have some impact on oil products. It implies an end to participation in the EU’s duty-paid regime governing movement of goods imported into the bloc.
**The UK is proposing zero tariffs for virtually all oil products in a no-deal scenario. This means tariffs dropping to 0% from 4.7% for gasoline, and remaining at the current rate of 0% for most other products.
**Industry group Oil & Gas UK has estimated reversion to World Trade Organization rules could cost GBP500 million ($651 million) relating to the movement of technology and labor.
**No-deal could lighten emergency stock holding obligations as the EU stipulates higher emergency stocks than those required by the International Energy Agency. EU countries that hold UK emergency stocks under ticketing arrangements, however, could decline to do so in future.
**The EU consumes around 13 million b/d of oil, of which the UK accounts for around 1.6 million b/d.
**The UK polymers industry is among the most exposed to the possibility of future trade friction between the UK and EU. The country is a net importer of polymers including polypropylene copolymer, high density polyethylene and polyvinyl chloride.
**Polyethylene terephthalate, used to make plastic bottles, has been singled out with 6.5% tariffs in the event of no-deal, while other polymers will be tariff free. Europe exported a total of 113,400 mt of PET into the UK in 2018.
**While other plastics products will be tariff free, logistics delays, currency devaluation and regulatory divergence between EU and UK chemical laws remain key issues for the petrochemical industry.
**Imports of iron, steel, aluminum and other base metals into the UK totaled GBP3.5 billion in 2018. Of this, GBP1.49 billion was iron and steel, GBP1.4 billion was aluminum and aluminum products, and GBP606.14 million was base metals and base metal products.
**No-deal would remove safeguard quotas on 15 product categories to UK steel mills, considered to be uncompetitive on a global basis.
**It would subject UK metals trade to low-level import tariffs announced March 13. Little would change for the steel industry, with tariffs on imported steel and iron products remaining at or near zero.
**Changes will be greater for aluminum, where import tariffs will be reduced to zero from 6.3%, while tariffs on imports of base metals, excluding aluminum, will be reduced to zero from 1.8%.
**Little impact, with flows unaffected unless an entirely new tariff system is introduced.
**The UK imported 5.9 Bcm of gas from continental Europe via the BBL and IUK pipelines in 2018, according to data from S&P Global Platts Analytics, around 7% of its total gas demand. It also exported some 7.8 Bcm of gas to Europe — to Ireland and via the IUK — last year.
**Interconnector capacity on these lines is already booked well past the date the UK leaves the EU, indicating flows will continue.
**Gas operators would no longer be bound by certain market transparency instruments. It is possible, however, that UK operators will continue to adhere to the EU’s REMIT principles.
**A divergence in pricing signals from the UK and Continental Europe could alter existing LNG trade flows, with higher-priced markets attracting proportionally more spot cargoes.
**LNG trade between the UK and the EU is limited but on the increase, with three cargoes from Montoir to the UK in the fourth quarter of 2018, and one re-load from the UK to the continent.
**The EU does not impose any tariffs or restrictions on LNG from non-member countries, including Algeria, Qatar, Russia, Trinidad and Tobago, the US, and other LNG exporters to the single market.
**UK companies would have to exit the EU’s market coupling initiative, removing efficiencies and forcing a return to explicit auctions.
**Utilities would be excluded from EU platforms for forward power capacity allocation and balancing services. They would have to register with an EU national regulator to trade.
**The UK imports less than 6% of annual power demand from the continent, while acting as a source of exports when margins are tight in NW Europe. UK demand is around 340 TWh/year, gross imports 20 TWh/year.
**Northern Ireland shares a single electricity market with the Republic of Ireland and is a deficit region. No-deal could cause short-term disruption.
**Large physical thermal coal players may leave the UK because they also trade financial products, but many are already based in Switzerland and Asia. Several financial commodity traders with clients in both markets have already moved some operations to EU locations.
**The volume of thermal coal derivatives traded and cleared on the ICE platform in 2018 totaled 1.55 billion mt, a drop of 9% from the 2017 volume, according to data from ICE Futures Europe and electronic trading platform globalCOAL.
**The UK imported 5.6 million mt in 2017, largely unchanged from 2016. Of the 2017 volume, 78% originated from the US and Russia, with only 3.6% coming from the EU.
**UK carbon market players would crash out of the EU’s Emissions Trading System, to be replaced by a new UK carbon tax of GBP16/mt (effective April 1. This would be in addition to the UK’s existing Carbon Price Support — a tax of GBP18/mt on power sector CO2 emissions — making a combined carbon tax of GBP34/mt in the UK.
**The new tax would apply to emissions in excess of an installation’s annual free allocation of allowances under the EU ETS. The purpose of the new tax is to maintain continuity on carbon pricing for UK industry and to replace UK revenues lost from an end to EU carbon auctions.
**The EU has moved to protect the ETS from a potential flood of surplus allowances from UK sellers, but analysts predict a Eur5/mt short-term drop in the EU allowance CO2 price in the immediate aftermath of a no-deal.
**Removal of duties under no-deal could see a flood of imports into the UK to the detriment of domestic producers.
**Challenging market conditions have resulted in shutdown of a major UK ethanol producer, while a second one has been going through intermittent closures and restarts, currently running at low rates until further clarity on the policy framework. Until an E10 roll-out supports domestic ethanol demand, exports are essential for UK ethanol producers and an EU duty would likely be prohibitive.
**For biodiesel, pending EU decisions and appeals against Indonesia and Argentina could mean anti-dumping duties re-applied, with soy- and palm-based volumes diverted away from the EU, but arbs could still stay open for the UK.
**With the UK a wheat- and corn-deficit country, a hard Brexit offers buyers in these markets potentially cheaper alternatives. Statistics from the Agriculture and Horticulture Development Board show that in 2017-18, the UK relied on 1,600,000 mt of wheat imports (mainly from Germany, France and Canada) and 2,111,000 mt of corn imports (France, Brazil, Romania and Ukraine).
**Under the current EU wheat regime, beyond an EU tariff-free quota of nearly 1 million mt, imports from major providers such as Ukraine and Russia have an import duty of Eur12-95/mt, depending on wheat quality. Similarly, US corn, for example, receives a 25% tariff upon entry to the EU. Freedom to negotiate free-trade deals with these countries among others such as the US could result in lower tariff and non-tariff barriers and therefore prices for both wheat and corn.
**The UK has a sugar deficit, with annual consumption of 2 million mt outrunning domestic production of 1.4 million mt (2017-18). The deficit is made up from sugar imported from other EU countries (420,000 mt in 2017-18), with the rest coming from outside the EU.
**The no-deal Brexit temporary tariff-rate structure would affect the import duty on white sugar, which was reduced to Eur150/mt from Eur419/mt. The tariff of raw sugar for refining was maintained at Eur339/mt, but a new 260,000 mt import quota for raw sugar with zero duty and not restrictions on origins was announced.
**The 260,000 mt zero tariff raw sugar is open to any origins, this could potentially open the doors of the UK market to Brazilian or Thai raw sugar.
**LDC countries will have an opportunity to supply raws for refining at zero tariff, through the trade agreements signed with the Government, even over and above the 260,000 mt quota. It is forecast that Mauritius and Belize would quickly confirm trade agreements, in the event of a no deal Brexit, as these are historical suppliers of raw sugar, as well as a potential opening for Fiji.