Airbus warns of “dawning reality” there may be no Brexit deal

Suddenly, businesses across Europe are waking up to the realisation that the UK is currently on course to leave the European Union (EU) on 29 March next year, without a deal on trade and customs.  As Katherine Bennett, the UK boss of aerospace giant, Airbus, warned on Friday:

“This is not project fear, this is dawning reality.”

As the BBC reported on Friday: “Airbus has warned it could leave the UK if it exits the European Union single market and customs union without a transition deal…It also said the current planned transition period, due to end in December 2020, was too short for it to make changes to its supply chain.  As a result, it would “refrain from extending” its UK supplier base. It said it currently had more than 4,000 suppliers in the UK.”

BMW, which makes the iconic Mini and Rolls Royce, added:

“Clarity is needed by the end of the summer.”

Similarly Tom Crotty, group director at INEOS, the giant petrochemicals group, said several companies were putting investment decisions on hold because of Brexit uncertainty:

“The government is relatively paralysed … it is not good for the country.

THE RANGE OF TOPICS COVERED BY THE BREXIT NEGOTIATIONS IS VERY LARGE

This is why my IeC colleagues and I have now launched Ready for Brexit on the 2nd anniversary of the UK’s referendum to leave the EU.  We are particularly concerned that many small and medium-sized businesses (SMEs) – the backbone of the European economy – are failing to plan ahead for Brexit’s potential impact.

As our Brexit Directory above shows, Brexit creates a wide range of challenges and opportunities:

  • Customs & Tariffs:  Export/Import Registration, Labelling, Testing, VAT
  • Finance:  Payment Terms, Tax & VAT, Transfer Pricing
  • Legal:  Contracts, Free Trade Agreements, Intellectual Property
  • Services & Employment:  Banking, Insurance, Investment, Property
  • Supply Chain:  Documentation, Regulation, Transport

And yet, today, nobody knows on what terms the UK might be trading with the other EU 27 countries after 29 March.  Or indeed, all the other countries where UK trade is currently ruled by EU agreements.

The EU is a rules-based organisation, and the legal position is very clear:

  • The UK has notified the EU of its intention to leave by 29 March
  • Negotiations are underway over a possible Withdrawal Agreement, which would set new terms for UK trade with the EU 27 after this date
  • The proposed Transition Agreement, which would extend the deadline for leaving until 31 December 2020, will only apply if this Withdrawal Agreement is finalised in the next few months

Ready for Brexit will keep its subscribers updated on developments as they occur, as well as providing news and insight on key areas of business concern.

A NUMBER OF VERY DIFFERENT OPTIONS EXIST FOR FUTURE UK-EU TRADE ARRANGEMENTS

The UK has been in the EU for 45 years.  Unsurprisingly, as the slide above confirms, the negotiations are proving extremely complex.  Both sides have their own objectives and “red lines”, and compromise is proving difficult.

The negotiators not only have to deal with all the trade issues covered in the Ready for Brexit Directory, but also critical political questions such as the trading relationship between N Ireland and Ireland after Brexit.  That, in turn, is complicated by the fact that the UK government depends on Democratic Unionist Party (DUP) votes for its majority, and the DUP is opposed to any “special deal” on customs for the Irish border.

BUSINESSES NEED TO RECOGNISE THERE MAY BE “NO DEAL” AFTER 29 MARCH
I have taken part in trade negotiations, and negotiated major contracts around the world.  So I entirely understand why Brexit secretary David Davis has insisted:

“The best option is leaving with a good deal but you’ve got to be able to walk away from the table.”

Similarly, International Trade Secretary Liam Fox is right to warn that:

“The prime minister has always said no deal is better than a bad deal. It is essential as we enter the next phase of the negotiations that the EU understands that and believes it… I think our negotiating partners would not be wise if they thought our PM was bluffing.”

The issue is simply that many businesses, and particularly SMEs, have so far ignored all these warnings.

According to a poll on the Ready for Brexit website, only a quarter have so far begun to plan for Brexit.  Half are thinking about it, and almost a quarter don’t believe it is necessary.  This is why we have produced our easy-to-use Brexlist™ checklist, highlighting key areas for focus.

“NOTHING IS AGREED UNTIL EVERYTHING IS AGREED”
As the UK and EU negotiators have said many times over the past 2 years, “nothing is agreed until everything is agreed“.  These 7 words should be written above every business’s boardroom table:

  • They remind us that it may prove impossible to agree a Withdrawal Agreement between the UK and EU27
  • And without a Withdrawal Agreement, there will be no Transition Agreement

Instead, the UK would then simply leave the EU in 278 days time on World Trade Organisation terms.

If you don’t know what WTO terms would mean for your business, you might want to visit Ready for Brexit and begin to use its Brexlist checklist *.

 

 Ready for Brexit offers users a free one-month trial including access to the Brexlist. After this there is an annual fee of £195 to access the platform.  Discounts are available for companies who want to help SMEs in their supply chains to prepare for Brexit, and for trade associations who would like to offer the service to their members.

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2018 will see Winners and Losers appear in plastics markets

Two major challenges face petrochemical and polymer producers and consumers in 2018:

  • The likely disruption created by the arrival of the ethylene/polyethylene expansions in the US
  • The growth of the circular economy and the need to dramatically increase recycling capacity

My new interview with Will Beacham, deputy editor of ICIS Chemical Business, focuses on both these key issues and suggests they will create Winners and Losers.

The new US product will likely change the global market. Its ethane feedstock is essentially a distressed product, which has to be removed to enable the shale gas to be sold.  It is also clear that this 40% expansion of USA polyethylene capacity, around 6 million tonnes, cannot be sold into the US domestic market, which is already very mature:

  • US net exports have actually been in decline in recent years, so it will also be a challenge to export the volumes
  • President Trump’s apparent wish to start a trade war with China will make that market difficult to access
  • It is likely, therefore, that a significant volume will end up arriving in Europe, causing a price war

We have seen price wars before, and the “Winners” are usually the integrated producers, who can roll through margins from the well-head or the refinery into ethylene and polyethylene sales.

The economics of this are relatively simple.  In the US, producers will have to absorb lower margins on the small percentage of shale gas that is used as ethane feed into the cracker.  Similarly in Europe, refinery-integrated producers will have to absorb lower margins on the small percentage of oil that is used as naphtha feed into the cracker.

As the chart shows, this development will be good news for ethylene consumers.  As Huntsman CEO, Peter Huntsman noted a year ago:

“There is a wave of ethylene that is going to be hitting the North American markets quite substantially over the next couple of years. I’d rather be a spot buyer than a contract buyer. I can’t imagine with all of the ethylene that is going to be coming to the market that it’s not going to be a buying opportunity.”

In turn, of course, this will pressure other plastics via inter-polymer competition

Non-integrated producers clearly face more difficult times.  And like the integrated producers, they share the challenge being posed by the rise of sustainability concerns, particularly over the 8 million tonnes of plastic that currently finds its way into the oceans every year.

This issue has been building for years, and clearly consumers are now starting to demand action from brand owners and governments.

In turn, this opens up major new opportunities for companies who are prepared to realign their business models with the New Plastics Economy concepts set out by the Ellen MacArthur Foundation and the World Economic Forum.

The New Plastics Economy is a collaborative initiative involving leading participants from across the global plastic packaging value chain, as the second chart illustrates.  It has already prompted action from the European Union, which has now set out its EU Strategy for Plastics in the Circular Economy.  This aims to:

“Transform the way plastics and plastics products are designed, produced, used and recycled. By 2030, all plastics packaging should be recyclable. The Strategy also highlights the need for specific measures, possibly a legislative instrument, to reduce the impact of single-use plastics, particularly in our seas and oceans.”

Clearly this represents a paradigm shift for the industry, both producers and consumers.

It may seem easier to do nothing, and to hope the whole problem will go ahead.  But the coincidence of the arrival of all the new US shale gas capacity makes this an unlikely outcome.  Companies who do nothing are likely instead to become Losers in this rapidly changing environment.

But as I discuss in the interview, companies who are prepared to rethink their business models, and to adapt to changing consumer needs, have a potentially very bright future ahead of them.  Please click here to view it.

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Goodbye to “business as usual” model for plastics

Polymer markets face two major challenges in coming months. The most immediate is the arrival of the major US shale gas-based ethylene and polyethylene expansions. The longer-term, but equally critical challenge, comes from growing public concern over plastic waste, particularly in the ocean.

The EU has set out its vision for a new plastics economy, where:

“All plastic packaging is reusable or recyclable in a cost-effective manner by 2030”.

Similarly, China has launched a ‘War on Pollution’, which has already led to all imports of plastic waste being banned.

Together, these developments mean there is unlikely to be a “business as usual” option for producers or consumers. A paradigm shift is under way which will change business models.

Some companies will focus on being low-cost suppliers, integrated back to the well-head or refinery. Others will become more service-led, with their revenue and profits based on exploiting the value provided by the polymer (virgin or recycled), rather than just the value of the virgin polymer itself.

The next 18 months are therefore likely to see major change, catalysed by the arrival of the new US production, as I discuss in a new analysis for ICIS Chemical Business.

The second chart indicates the potential impact of these new capacities by comparison with actual production since 2000, with 2019 volume forecast on basis of the planned capacity increases. But can this new PE volume really be sold? It certainly won’t all find a home in the US, as ExxonMobil Chemicals’ then President, Stephen Pryor, told ICIS in January 2014:

The domestic market is what it is and therefore, part of these products, I would argue, most of these products, will have to be exported”.

And unfortunately for producers, President Trump’s new trade policies are unlikely to help them in the main potential growth market, China. As John Richardson and I noted a year ago, China’s $6tn Belt and Road Initiative:

“Creates the potential for China to lead a new free trade area including countries in Asia, Middle East, Africa and potentially Europe – just as the US appears to be withdrawing from its historical role of free trade leadership”.

The task is also made more difficult by the inventory-build that took place from June onwards as Brent oil prices rose 60% to peak at $71/bbl. As usual, buyers responded by building inventory ahead of price increases for their own raw materials. Now they are starting to destock again, slowing absolute levels of demand growth all around the world, just at the moment when the new capacity comes online.

SUSTAINABILITY CONCERNS ARE DRIVING MOVES TOWARDS A CIRCULAR ECONOMY
At the same time, the impact of the sustainability agenda and the drive towards the circular economy is becoming ever-stronger.  The initial catalyst for this demand was the World Economic Forum’s 2016 report on ‘The New Plastics Economy’, which warned that on current trends, the oceans would contain more plastics than fish (by weight) by 2050 – a clearly unacceptable outcome.

Last year’s BBC documentary Blue Planet 2, narrated by the legendary Sir David Attenborough, then catalysed public concern over the impact of single use plastic in packaging and other applications. Even Queen Elizabeth has since announced that she is banning the use of plastic straws and bottles across the royal estates, as part of a move to cut back on the use of plastics “at all levels”.

Single use plastic applications in packaging are likely to be an early target for the move to recycling and the circular economy. This will have a major impact on demand, given that they currently account for more than half of PE demand:

    • Two-thirds of all low density and linear low density PE is used in flexible packaging – a total of 33 million tonnes worldwide
    • Nearly a quarter of high density PE is used in packaging film and sheets, and a fifth is used in injection moulding applications such as cups and crates – a total of 18 million tonnes worldwide

Virtually all of this production is potentially recyclable. Producers and consumers who want to embrace a more service-based business model therefore have a great opportunity to take a lead in creating the necessary infrastructure, in conjunction with regulators and the brand owners who actually sell the product to the end-consumer.

Please click here to read the full analysis in ICIS Chemical Business.

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Difficult times ahead for US polyethylene exports as business models change

This wasn’t the chart that companies and investors expected to see when they were busy finalising $bns of investment in new US ethylene and polyethylene (PE) capacity back in 2013-4.  They were working on 3 core assumptions, which they were sure would make these investments vastly profitable:

  • Oil prices would always be above $100/bbl and provide US gas-based producers with long-term cost advantage
  • Global growth would return to BabyBoomer-led SuperCycle levels; China would always need vast import volumes
  • Globalisation would continue for decades and plants could be sited half-way across the world from their markets

The result is that US ethylene capacity is now expanding by 34% through 2019, adding 9.2m tonnes/year of new ethylene supply, alongside a 1.1m tonnes/year expansion of existing crackers. In turn, PE capacity is expanding by 40%, with supply expanding by 6.5m tonnes/year through 2019.

It was always known that most of this new product would have to be exported, as then ExxonMobil President, Stephen Pryor, explained in January 2014:

“The reality is that the US from a chemical standpoint is a very mature market. We have some demand growth domestically in the US but it’s a percentage or two – it’s not strong demand growth,” Pryor said, adding that PE hardly grew in the US in a decade. “That is not going to change…The [US] domestic market is what is it and therefore, part of these products, I would argue, most of these products, will have to be exported,” Pryor said.”

But now the plants are starting up, and sadly it is clear that none of these assumptions have proved to be correct:

  • Oil prices have fallen well below $100/bbl, despite the OPEC/Russia cutback deal, and US output is soaring
  • Companies were badly misled by the IMF; its forecasts of 4.5% global GDP growth proved hopelessly optimistic
  • Protectionism is rising around the world, with President Trump withdrawing from the Trans-Pacific Partnership and threatening to leave NAFTA

As a result, US PE exports are falling, just as all the new capacity starts to come online, as the chart shows:

  • US net exports were down 15% in the January – September period, confirming the major decline seen this year
  • Net exports to Latin America were down 29%, whilst volume to the Middle East was down 31%
  • Volume has risen by 40% to China, but still amounts to just 440kt – enough to fill just one new reactor

And, of course, PE use is coming under sustained pressure on environmental grounds, with the UK government suggesting last week it might tax or even ban all single-use plastic in an effort to tackle ocean pollution.

The same assumptions also drove expansion in US PVC capacity, with 750kt coming online this year.  US housing starts remain more than 40% below their peak in the subprime period, and so it was always known that much of this new capacity would also have to be exported.  Yet as the second chart confirms:

  • US net exports were down 6% in the January – September period, confirming the decline seen through 2017
  • Exports to Latin America were down 9%: volumes to NAFTA, the Middle East and China were at 2016 levels

PRODUCERS NEED TO DEVELOP NEW BUSINESS MODELS
These developments are also unlikely to prove just a short-term dip.  China is now accelerating its plans to become self-sufficient in the ethylene chain, with ICIS China reporting that current capacity could expand by 84%.  And the pressures from pollution concerns are growing, not reducing.

The key issue is that a paradigm shift is underway as the info-graphic explains:

  • Previously successful business models, based on the supply-driven principle, no longer work
  • Companies now need to adopt demand-led strategies if they want to maintain revenue and profit growth

We explored these issues in depth in the recent IeC-ICIS Study, ‘Demand- the New Direction for Profit‘.  It is the product of 5 years of ground-breaking forecasting work, since the publication of our jointly-authored book, ‘Boom, Gloom and the New Normal: how the Western BabyBoomers are Changing Demand Patterns, Again‘.

As we highlighted at the Study’s launch, companies and investors have a clear choice ahead:

  • They can either hope that somehow stimulus policies will finally succeed despite past failure
  • Or, they can join the Winners who are developing new revenue and profit growth via demand-led strategies

US export data doesn’t lie.  It confirms that the expected export demand for all the planned new capacity has not appeared, and probably never will appear.  But this does not mean the investments are doomed to failure.  It just means that the urgency for adopting new demand-led strategies is ramping up.

 

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Grangemouth develops cluster-based vision for the future

Grangemouth Oct14Exactly a year ago this week, the INEOS petrochemical business at Grangemouth in Scotland was facing closure.  This would have been a disaster for the thousands of people employed directly and indirectly, as well as for Scotland.

The blog was very closely involved in helping to achieve a successful outcome alongside the Scottish and UK governments, INEOS and the UNITE union.  One key lesson from the dispute was the need to plan ahead, as the BBC summarised at the time:

“Perhaps the main lesson to learn from this is the need to think and plan ahead….For 49 hours between Wednesday and Friday, the threat to Grangemouth prompted Scotland to face up to a future without the business of producing and processing hydrocarbons.  This has taught us a lot about the refining and chemicals industry, just one facet being the threat facing Europe from efficient competition in other parts of the world.”

A year later, the blog is delighted to be able to update on the exciting developments now taking place.  It chaired a recent Round Table in Scotland of senior executives from industry, academic and government, organised by Scottish Enterprise.  Its summary is captured in the above interview.

The detail of the discussion is contained in an excellent ‘Chemicals in Scotland’ publication and series of video interviews with key players including Tom Crotty of INEOS and Sandy Dobbie of Chemical Sciences Scotland (both produced by ICIS for Scottish Enterprise).

VISION FOR 2025 IS CLUSTER-BASED
One key outcome was a Vision for 2025.  This aims to set the framework for future development.  It will be based on building clusters, in line with Shell Chemicals’ CEO Graham van’t Hoff’s focus described yesterday.  The full Vision is as follows:

Scotland’s chemical and pharma sector will be providing its customers with products that deliver greater performance and are more economically affordable. It will be much larger and also exporting more.  There will have been a convergence between bio-, physics, chemistry and computational sciences, and companies will be operating with a solution orientation.  Technology translation will thus be a core skill and there will be a landscape of relevant technology centres. Investment in bio-refineries will also be well underway. 

“Scotland itself will be operating as a cluster, and this concept will be replicated in different ways in different functions and industries to enable companies to “work around” silos and produce solutions. 

“Spectacular new science will have been developed in formulation and there will be an ability to solve big complex problems, with research progressing through to the provision of real-life solutions via strong collaboration between industry and academia.  Examples will probably range from world-leading expertise in crystallisation across to marine products. The development process will have built on the concept of diversity to avoid focusing on a few “big bets”. 

“There will be a Europe-leading cluster at Grangemouth based on a portfolio of advantaged feedstocks and a virtual cluster based on the pharma/fine chemicals supply chain.  Scotland will also have built strong SME collaboration around customer-facing businesses.  The university base will be carrying out broad and deep research linked to effective delivery methods.”

Grangemouth’s renaissance is an example for everyone involved in Europe’s petrochemical industry.