Peter Newport, Chief Executive, Chemical Business Association, highlights the industry’s post-Brexit commercial and regulatory priorities.
ith the final outcome of Brexit still in the balance, the industry is clear about what it needs from Brexit – continued frictionless access to EU markets as well as a coherent and affordable UK regulatory regime.
Both are crucial for the future growth and profitability of the UK chemical sector and its ability to supply manufacturing and process industries with the key chemical components on which they rely.
Let’s look at the issues and why achieving a satisfactory outcome is so important for the UK chemical sector.
EU Market Access
The EU is by far the largest trading partner for the UK chemical sector. It is the destination for 60% of the UK’s chemical exports and the source of 70% of the UK’s chemical imports. Continued market access and frictionless trade are essential.
For almost all worldwide markets, access depends on regulatory compliance. It represents a legislated standard for consumer protection, human safety, and environmental protection.
The level of that compliance is set by the authorities in the specific destination market and is non-negotiable. Failure to comply is a barrier to market access. Without market access there can be no trade.
If it is to maintain market access, the UK chemical sector has no alternative but to be a ‘rule taker’ – not just from the EU but also from many other jurisdictions around the world. This will remain the case until such time, in the distant future, when regulations are completely harmonised on a global basis.
It is unsurprising that, since 2016, in order to maintain access to EU markets, a significant number of UK chemical firms have created subsidiaries in EU member states. Other companies have transferred EU REACH registrations to EU-based companies for the same reason. Similarly, we are aware of European-owned chemical companies repatriating products.
Despite previous assurances to the contrary, the UK Government has now made it clear that it has no intention of maintaining regulatory alignment with the EU in relation to chemicals.
CBA has therefore advised its distributor member companies to protect their corporate interests and pursue the following options – before the end of the transition period – to secure continued access to EU markets.
Transfer any current EU REACH registrations to an existing, or new, EU27 subsidiary.
Establish a partnership with an EU-based company and transfer any current EU REACH registrations to that company.
To put the current situation in a real-world context, the chemical sector has integrated and sophisticated supply chains often involving a significant number of substances sourced from worldwide suppliers.
These ingredients are frequently subject to different processes undertaken by different companies in different locations before the end product is delivered to the customer. Even then, this intermediate product may only represent one component in the final product delivered to the end customer or placed on the downstream market.
These factors place a premium on regulatory coherence across global chemical markets in order to protect consumers and the environment whilst maintaining high levels of chemical safety – and avoiding exponential increases in the regulatory burden on business.
These are the arguments that CBA has consistently deployed to Ministers, officials, and Select Committees of the House of Commons and the House of Lords. We have also pointed to the potential long-term damage to the UK economy resulting from failing to secure continued access to EU markets.
UK REACH – A work in progress
The industry has three key issues with the Government’s new regulatory framework for chemicals in the UK: the availability of testing data to support UK REACH registrations; the fees proposed to fund this process; and the implementation timescale for UK REACH. All three factors are already acting as a disincentive for companies to register substances under the UK’s new regime.
The timescale issue has been mitigated by a recent Defra announcement introducing a phased implementation of UK REACH based on tonnage bands. CBA initially proposed this approach some years ago.
However, UK REACH remains a work in progress. Key issues remain unresolved. Solutions must be found before the UK has a workable, cost-effective regulatory regime for chemicals.
A recent industry-wide survey shows that one in five UK chemical companies plan to move their operations out of the country because of Brexit and the same proportion of non-UK companies are planning to reduce their UK operations. The same survey showed that a significant proportion of UK (7%) and non-UK companies (27%) have already made a decision not to register substances under UK REACH.
Since the proposals for UK REACH were first announced, the chemical sector has expressed its collective concern that its implementation timescale was unrealistic. The extended timescale is therefore welcome but without the data and fee issues also being resolved, it merely delays decisions and adds to business uncertainty.
The key point is that UK firms do not own the testing data needed to ensure an effective UK regulatory regime. The majority of this data is owned by consortia of European companies.
CBA surveys indicate that the figure for non-UK ownership could be as high as 75%. The Letters of Access purchased by UK companies are only valid for EU markets, not for third countries which the UK becomes at the end of transition.
We believe that the only pragmatic solution to guarantee the availability of this data is for the Government to negotiate access to the database of the European Chemicals Agency (ECHA). This will help ensure consistent continuing safety, health, and environmental standards, avoid multiple registrations for the same product and the duplication of databases.
We have pointed out that a ready-made solution already exists. Article 120 of EU REACH envisages such a co-operative third country relationship with the objective of achieving a wider and improved regulatory framework for chemicals.
The alternative is to impose either unknown data acquisition costs or a major duplicative testing regime on UK REACH registrants with all the associated costs and increased animal testing this implies.
Without negotiated access to the ECHA database, the industry estimates that UK REACH will cost an additional £1.2 billion to duplicate existing registrations. A single registration could cost up to €300,000 simply to gain access to the testing data owned by European companies.
It is worth noting that the data-sharing rules operating under EU REACH do not extend to UK REACH. The decision to sell, or not to sell, and at what price, is a commercial decision for the data owner(s).
The DEFRA fee structure proposed for UK REACH is identical (a simple exchange rate conversion) to that charged by ECHA for access to the whole of the EU market. This is unsustainable on cost-benefit terms given the relative size of the UK market for chemicals which represents around 12% of the size of EU markets. It is a disproportionate and unsustainable cost on an industry emerging from the Covid-19 pandemic and its recessionary impacts.
This level of fees plus the potential tariff increases on raw materials post-Brexit will force many companies to review the commercial viability of substances sold into the UK market. CBA believes this represents a serious risk for the UK economy that could weaken its competitiveness, stifle innovation, and retard an economic recovery.
This scenario will play out at a time when UK SMEs, making up the majority of the chemical supply chain, are struggling to survive the severe recessionary conditions resulting from the Covid-19 pandemic with depleted financial resources.
The emerging situation will oblige UK downstream users of chemicals to become importers for the first time – a role for which they have no shared history or experience.
We also have doubts that the HSE has the experience or competence to assume virtually complete control over the operation of the UK’s new regulatory regime.
This concern is compounded by the fact that, unlike EU REACH, no independent oversight arrangements have been put in place – leaving HSE in the position of being judge and jury in its own court.
Industry understands that HSE is in the process of a major recruitment exercise to provide the resources it needs to support UK REACH. Some 600 applications have led to a shortlist of 200 people from which some 150 appointments will be made largely made up of recent graduates.
This provides a further reason for industry’s scepticism that HSE will not have the level of experienced regulatory management it requires to oversee UK REACH implementation effectively.
For the chemical sector and the downstream users of chemicals these issues are both urgent and important. Time is running out. The price of failing to find workable solutions in the last few weeks before the end of the transition period will be paid by companies struggling to emerge from the aftermath of the Covid-19 pandemic.