6/27/2016 4:03:00 PM
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PERSPECTIVE: Is ‘Brexit’ Corrosive for Fasteners?
Editor’s Note: UK-based Fastener + Fixing Magazine executive editor Phil Matten explains what could happen to the fastener market after the exit from the European Union.
On June 23, 2016, Great Britain’s electorate made a seismic decision, voting by 52% to 48% to end its 43-year membership in the European Union. Will it be the UK’s Independence Day, as many believe, or the first step in the disintegration of the United Kingdom – or even the European Union itself?
No one knows the answer to that one. In fact, the only “certainty” for the next two years and likely for much longer, is “uncertainty.”
For the fastener industry that is a corrosive prospect.
In the immediate aftermath of the referendum, the British Pound plunged 11% against the U.S. Dollar, recovering to end a tumultuous week around 8% lower. It also fell against the Euro. For exporting UK fastener exporters that represents a short-term competitive opportunity.
However, unless sterling recovers significantly over time, wholesalers reliant on imports from Asia and Europe and manufacturers importing raw materials will feel the inflationary impact. On the upside, stainless steel wholesalers, which have suffered lower cost competition from Eurozone stockists, are likely to gain some and importers, says Matten, are going to have to cope with significant currency volatility, as an inevitably jittery market reacts to day-to-day developments on the EU withdrawal process.
The key problem is no one really knows how the UK is going to unwind from EU membership, because nothing like it has really happened before. The legal framework, Article 50 of the Treaty of Lisbon, is vague on detail – its writers never really expected it be used.
UK Prime Minister, David Cameron, who announced he would step down following what was for him a referendum defeat, says he will not invoke Article 50 until his successor is announced in October. That delay buys the UK a bit more time to work out who will lead its government and how it will approach negotiations with the EU. That matters, right now, even amongst ‘Leavers’ there is no clear definition of the relationship the UK will seek.
EU leaders are less than happy at the prospect of delay. The effect of uncertainty on their own economies and political constituencies demands the quickest possible resolution to a situation they never wanted. Formally, the UK leaves the EU two years from when Article 50 is invoked. During that period a spaghetti mountain of legal and financial relationships must be unravelled and the UK has, somehow, to negotiate the best possible new relationship with its nearest, 500 million population, market place.
During that period uncertainty is likely to be most corrosive for the fastener market. UK construction activity has been buoyant over recent years providing good volumes if tight margins for fastener suppliers. An underlying housing shortage has helped drive demand but primarily it has emanated from confidence in the future of the UK economy. That is now smoke gone in the breeze, and could prove hard to recover for years. Ironically, given the role played by immigration concerns during the referendum, UK construction may be hit by another confidence issue.
Around 40% of its current workforce are EU citizens, many from Poland, filling critical skills and labour gaps, which would otherwise have throttled off recent growth. The long-term position of those employees is now in doubt. Many may well look to stay; some may feel it safer to return home or look for work elsewhere in the EU.
The UK fastener supply chain has also benefited from a vibrant vehicle manufacturing sector and all its tier industries. The UK hosts major plants for Jaguar Land Rover, BMW Mini, Toyota, Nissan, Honda, General Motors and Ford plus special carmakers like Aston Martin and Bentley.
Right now all are issuing some variant on a “business as usual” message but approaching 60% of UK built cars are exported to the EU so there will be little appetite for new investment, and every possibility existing plans go on hold, until the trading relationship with the continent clarifies. On the other hand the UK is Germany’s largest car export market so there will be real pressures on all sides to maintain tariff free trading if at all possible.
That’s the real problem. No one knows what kind of deal the UK will ultimately be able to achieve with its biggest and nearest market. Leave supporters are convinced the EU cannot deny the UK continued access to its markets because its major industries want to sell to the UK. I hope they are right but am not so sure.
The EU now faces a massive test of its own coherence. If it accedes to a special deal for the UK it sets a precedent for other disaffected member states, and political parties in its major economies, to hanker after the Brexit deal. Negotiations may be much tougher than the Leavers hope and failure could lead to a, maybe gloriously, isolated but ultimately not so great Britain. @2016 GlobalFastenerNews.com and Fastener + Fixing Magazine
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