Brexit Complicates U.K. Lube Industry

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The United Kingdom formally left the European Union on Jan. 31, triggering a transition period until the end of this year. Ideally, 11 months will be enough time for the EU and the U.K. to negotiate a new free-trade agreement. Some estimate it will take 10 years to negotiate a new treaty, however. The U.K. is also free to negotiate trade deals with other countries during this period.

Until 2021, the trading relationship between the U.K. and the EU remains the same. The Single Market, the Customs Union and the free movement of people – the mainstays of the EU project – continue to apply. A customs union is a free-trade area in which at least two countries agree to abolish restrictions on mutual trade, and to set up a common system of tariffs and import quotas that apply to non-members. The single market refers to the EU as a territory without any internal borders or other regulatory obstacles to the free movement of goods and services.

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One change in the transition period is the effective creation of a customs and regulatory border between Northern Ireland and Great Britain – the name of the island comprising England, Scotland and Wales. Northern Ireland is part of the U.K.

Some goods entering Northern Ireland from Great Britain across the Irish Sea would be subject to checks and tariffs. Refunds would be available if goods stay in Northern Ireland rather than enter the EU, including the Republic of Ireland over the land border.

For the lubricant industry, it is effectively business as usual until the end of the year, which creates a period of some stability.

Tony Ball, director of the U.K.-based additives distributor Ashdowne, told Lube Report, We dont supply anything into [Northern Ireland) itself, but do transit some goods to the Republic [of Ireland] via that route so it would be an issue for us. It may be that we choose shipping via Dublin rather than Larne.

The U.K. governments legislation known as the Withdrawal Bill prohibits an extension of the transition beyond Dec. 31, 2020, which opens the possibility of a so-called no-deal Brexit.

The latest indications, widely reported in the U.K. media, are that the U.K. government plans to move away from the EUs Single Market and Customs Union at the end of the transition period.

Beyond December 31, 2020, the U.K. government is already making sounds around divergence and not alignment, which is a bigger risk for our sector, David Wright, director general of the U.K. Lubricants Association, told Lube Report.

Wright noted specific concerns for the sector. On REACH, for example, they have suggested the U.K. continue to follow the articles, but reserve the right to diverge from the annexes, which would not give business the long-term certainty it needs.

In the short term, the government has published a temporary tariff table. For base oil, additives and finished lubricants, this means no import duty into the U.K. HM Revenue and Customs have prioritized security, trade flow and then revenue, in that order, to determine the risk of not being able to get goods into the country.

How this leaves U.K. exporters sending their goods to the EU, which might or might not be subject to a common external European tariff, remains to be seen, Wright said.

If the late-year situation warrants it, Ashdowne will likely build up stock in the last quarter of this year, Ball suggested

We ran up stocks in October 2019, ahead of a potential no-deal Brexit. With the transition period looking like it will be honored by both sides, we are not considering stock build again until September 2020. If similar issues for the end of 2020 remain a possibility, well replicate our March and October 2019 strategies and build stocks throughout the fourth quarter, Ball said.

Overall, the transition period creates a short term level of stability for the next six to nine months. Based on the U.K. governments intent, the initial indication is that the industry will need to prepare for a significant level of regulatory divergence from the EU by the end of 2020. How the U.K. and EU trade agreement negotiations progress during this time will influence the level of concern for the lubricants businesses as the years end approaches.

Photo: karen roach/Shutterstock

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