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Oliver Wight EAME Blog

Brexit and the Chemical Industry

29 November 2018

Written by Paul Ducie, Partner at Oliver Wight 

With Brexit negotiations well underway, a cloud of ambiguity continues to overshadow the Chemical industry, as it remains unclear whether it will be a soft departure, or a hard exit. Regardless, deal or no deal, with the UK chemical industry Britain’s second largest exporter to EU*, Brexit is going to significantly affect the way the industry operates.

However, just because the exact parameters of the deal (or no deal) are unknown, it would be a mistake to adopt a ‘wait-and-see’ tactic as that would leave insufficient time to prepare an adequate exit strategy. Contingency plans must be made now and in actuality, plans could have been set in motion when the result of the Brexit referendum was announced in June 2016. In fact, the 29th March 2019 is only the first piece of the puzzle – the formation of the trade deals that will follow Brexit is where organisations need to focus their planning efforts, according to the Independent’s economic commentator, Hamish McCrae.

With Oliver Wight’s Integrated Business Planning (IBP) process, organisations can build agility into planning processes to be able to quickly adapt to issues as they emerge. Using assumptions and detailed scenario-planning, Chemical Companies will be able to anticipate and plan for varying Brexit eventualities. These techniques use the latest information to assess the current situation, and both the assumptions and scenarios can be updated to reflect realigned plans as circumstances change.

In this blog, I’ve highlighted three key areas specific to the Chemical Industry which need to be addressed as it braces itself for Brexit, and how the implementation of IBP can help to mitigate this uncertainty.

Regulations & recognition
The UK’s current adoption of REACH regulations for chemicals facilitates the mutual recognition which allows chemicals processed and tested in the UK, to be sold in the EU. However, if there is no deal, UK organisations would no longer be able to sell into the EEA market without either transferring their registrations to an EEA-based organisation, or anticipating the expenditure of resources for re-testing and compliance.

Either would have a significant impact on costs, resources, lead times and inventory, and these are factors that Chemical Companies must consider when making assumptions and scenario-planning. This will have considerable impact on product portfolio plans, as the process for registering and obtaining market authorisation for new UK chemicals remains unclear. Until there is clarity, IBP can enable organisations to pick the most ‘likely’ scenario and reshape the product portfolio accordingly – diverting resources into R&D for example, or streamlining a range of products, to minimise the impact and take advantage of opportunities as they arise.

Costs & tariffs
One of the most contentious issues surrounding the terms of the Brexit agreement is Britain’s membership in the single market – it remains unknown whether it will remain or leave the customs union with the European Union. Although there are several possible scenarios, all will influence the way UK chemical companies trade. If the UK leaves, there will be additional complexity in the form of tariffs and customs declarations which will directly impact the cost of goods, affecting margins and profitability. Given the current pre-Brexit profitability challenges, it will be crucially important for Chemical Companies to understand how any increased costs will impact the commercial viability of their portfolio.

Higher costs could be compounded by a devalued British pound. Depending on the situation on the 29th March 2019, organisations need to be prepared for a further dip in the power of the pound, and a spike in costs. Decisions will have to be made as to whether these additional costs are absorbed, or are passed onto customers. However, organisations which have already implemented IBP will have gap-closing processes in place that will have anticipated for the eventuality of a weakened currency. IBP identifies significant risks or significant opportunities early enough so alternative plans can be developed, and equips organisations with a competitive advantage as they establish a proactive – not reactive – culture.

Supply chain
Heavily reliant on EU supply chains, the UK chemical industry could be seriously disrupted if the UK leaves the single market. The status of UK companies will change – they may no longer satisfy EU requirements, for example. Border processes will require additional time to clear customs, with some experts predicting long tailbacks at Dover in light of a ‘no-deal’. Without an appropriate planning response, a slowing down of the supply chain will increase costs and decrease customer satisfaction, as delays damage the operational effectiveness and profitability of the industry.

Depending on the outcome, Chemical Companies may need to significantly rewire their supply chain design if they are to remain competitive – at a recent Oliver Wight event, supply chain design post-Brexit was cited as the number one concern by the Senior-level attendees. In the context of Brexit, a flexible, agile and adaptable supply chain could mean the difference between flourishing or extinction. For Chemical Companies dedicated to building an agile and effective supply chain, IBP will help Business Leaders to make fundamental decisions such as whether to stockpile materials in the short-term or moving to local raw material suppliers as well as opening new UK- or EU-based facilities to meet demand in the longer-term.

Even without the shadow of Brexit, the chemical industry is facing formidable challenges in the 21st century marketplace; rigorous environmental legislation, increasing costs for raw materials, pressure from competitors and margins being squeezed. Add a never-before-seen-event such as Brexit into the mix, it’s clear that the chemical industry needs to have its focus on ‘action’ rather than ‘reaction’. It’s not too late - the common-sense approach of Integrated Business Planning has been designed to provide the clarity necessary for proactive planning. Unpredictable environments, such as Brexit, are the very eventualities in which IBP demonstrates the full power of its capabilities. It allows organisations to execute an effective strategic response to any and every situation, using tools such as analytics and scenario-planning to create contingency plans as circumstances change.