09 Dec 2020 | 17:54 UTC — London

Brexit risks for commodity markets

Highlights

The UK and EU have a sizeable fuel trade, with 40% of the UK's 35 million mt of oil product imports coming from the EU and 61% of the UK's 22 million mt in oil product exports going to the EU in 2018; the Amsterdam-Rotterdam-Antwerp hub dominates shipments.

In 2019, petroleum and petroleum products were the UK's single largest export to the EU by value, at GBP20 billion ($27 billion), amounting to 12% of all UK goods exports to the EU.

The EU and UK both produce more gasoline than they consume, but rely on imports to cover shortfalls of diesel, gasoil and jet fuel; Russia is a big source of diesel imports and the Middle East a major jet fuel source.

Almost all EU jet fuel is imported, while UK production of jet fuel and kerosene for heating covers almost half the country's needs.

Diesel and gasoil account for almost half the EU's 13 million b/d oil consumption and 40% of the UK's 1.5 million b/d oil consumption. In 2019, UK diesel and gasoil production covered roughly two-thirds of domestic demand, which totaled 32 million mt.

The UK, with the bloc's fifth largest refining sector, would face a 4.7% tariff on gasoline exports to the EU without a trade agreement, but zero tariffs for jet fuel, diesel and gasoil.

Brexit is unlikely to affect crude oil trade as EU dependence on imported crude means imports are tariff-free. The North Sea upstream industry is concerned about access to talent, technology and capital; industry group Oil & Gas UK has estimated reversion to World Trade Organization rules could cost the sector GBP500 million.

London — The UK's tense negotiation of Brexit trade terms with the EU is prompting nervousness across the commodity space, with fears of a disorderly departure threatening long-established trade in commodities such as oil, and disruption in areas such as power, although some sectors such as sugar refining and grains may enjoy greater access to global markets.

With less than a month to go before the Brexit transition period concludes on Dec. 31, S&P Global Platts reporters have updated their cross-commodity surveys on the implications.

Oil

Natural gas

  • No Brexit impact is expected for gas markets, including in a 'no-deal' scenario, according to gas grid operator National Grid, with no operational challenges anticipated and commercial arrangements across interconnectors expected to remain the same.
  • The UK imported around 2 Bcm of gas from continental Europe via the BBL and IUK pipelines in 2019, according to S&P Global Platts Analytics, around 3% of UK gas demand. It also exported some 9 Bcm of gas -- to Ireland, and via the BBL and IUK pipelines, to the Netherlands and Belgium.
  • Government guidance says interconnector owners/operators will need to engage with EU national regulators to ensure approved access rules are in place and transmission system operator certifications valid. UK market participants will need to register with an EU regulatory authority under the Regulation on Energy Market Integrity and Transparency (REMIT) for the purposes of market monitoring and avoiding disruption.
  • Brexit could boost the Netherlands' TTF hub, which is the most liquid in Europe having moved ahead of the UK NBP. Twenty-seven countries trading at the TTF under common rules make it a more attractive venue than one governed by the rules of a single country in a different currency.

LNG

  • Traders expect only limited impact. However, a divergence in pricing signals from the UK and continental Europe could alter existing trade flows. LNG trade between the UK and other EU states is rare.
  • The EU does not impose tariffs or restrictions on LNG from non-member countries that export to the single market such as Algeria, Qatar, Russia, Trinidad & Tobago and the US.

Electricity

  • UK firms would have to exit the EU's market coupling initiative under a no-deal Brexit, leading to inefficiencies and a return to explicit auctions of cross-border capacity.
  • UK market participants also face exclusion from EU platforms for forward power capacity allocation and balancing services. They also have to register with an EU national regulator to trade.
  • The UK imports less than 10% of its annual demand via continental links, while acting as a source of exports when margins are tight in Northwest Europe. In 2019, total UK electricity demand was 323 TWh, while gross imports were 24 TWh -- a 7.4% share.
  • UK ministers say they have worked with Irish counterparts to ensure the island of Ireland's Single Electricity Market continues under any scenario. SEM-GB intraday auctions will continue to operate with shared order books between exchanges, offering implicit capacity between the island of Ireland and Great Britain.
  • The market's two day-ahead power exchanges plan to move settlement earlier in the day from Jan. 1, 2021, to 0920 GMT (Epex) and 0950 GMT (Nord Pool). This is seen as likely to split liquidity, potentially boosting over-the-counter liquidity. Nord Pool's N2EX has a liquid GB day-ahead market with 94 TWh traded in 2019.

Coal

  • Several financial commodity traders with clients in both markets have already moved some operations to EU locations. However, the trading impact for coal is expected to be minimal: the UK imported 5.6 million mt of coal in 2017, of which 78% originated from the US and Russia, with only 3.6% coming from the EU.

CO2

  • The UK is set to be the first country to leave the EU Emissions Trading System on Jan. 1, with or without a deal on a post-transition period trading relationship.
  • The UK says it aims to maintain continuity on carbon pricing for about 1,000 UK-based power plants and factories regulated under the EU ETS, and is considering either a standalone Emissions Trading System or a new carbon tax.
  • Consultation documents show a new carbon tax would be set with reference to the average EU carbon price, although the exact mechanism remains undecided, pending a government announcement on carbon pricing policy.

Biofuels

  • Removal of duties could see a flood of imports into the UK to the detriment of domestic producers. Challenging market conditions have already resulted in the shutdown of two major UK ethanol producers and the shape of Brexit will be a critical factor for any potential restart. Until an E10 roll-out supports domestic demand, exports are essential for UK ethanol producers and an EU duty would likely be prohibitive.

Steel

  • UK crude steel production in 2019 amounted to 7.2 million mt, while UK steel consumption was 10.13 million mt.
  • The UK exported 2.5 million mt of steel to the EU, earning nearly GBP1 billion, and 677,000 mt to the rest of the world, which earnt GBP300 million.
  • From Jan. 1 the UK plans "safeguard" quotas for steel imports, mirroring exactly those of the EU, which are based on past import levels (2015-17) and adjusted quarterly. The quota system is under review, but in all likelihood UK safeguards will apply to the EU regardless of any trade deal.
  • Future consumption is tied to uncertainty over the car industry, which accounts for more than 10% of total UK exports.

Sugar

  • The UK has a sugar deficit, with annual consumption of nearly 2 million mt outrunning production of 1.19 million mt in 2019-20. Part of this is met from the EU (about 250,000 mt in 2019-20), while chief non-EU sources are Eswatini, South Africa and Belize.
  • In a no-deal scenario, European white sugar would face a tariff of GBP350/mt, rendering it uncompetitive in the UK.
  • The UK has already announced a new duty-free quota of 260,000 mt for raw sugar from any origin from 2021, meaning raw sugar imports for refining are likely to increase at the expense of European white sugar.

Grains

  • With the UK a wheat- and corn-deficit country a hard Brexit offers buyers potentially cheaper alternatives. Statistics from the Agriculture and Horticulture Development Board show that for 2017/18 the UK relied on 1,600,000 mt of wheat imports (mainly from Germany, France and Canada) and 2,111,000 mt of corn imports (France, Brazil, Romania and Ukraine).
  • Under the current EU wheat regime, beyond an EU tariff-free quota of nearly 1 million mt, imports from providers such as Ukraine and Russia are subject to a tariff of Eur12-95/mt, depending on wheat quality. Similarly, US corn, attracts a 25% tariff on entry to the EU. Freedom to negotiate free-trade deals with such countries could result in lower tariff and non-tariff barriers and therefore lower prices.