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Factbox: No-deal Brexit risks rise for commodity markets

London — The risk of a no-deal British exit from the EU increased Tuesday following the defeat of the Prime Minister Theresa May's proposed Brexit deal in parliament, boosting the potential impact on key commodities.

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With 17 days to go before the UK is due to leave the EU, S&P Global Platts reporters have updated their September 2018 cross-commodity surveys on the implications of a so-called hard Brexit.

OIL

**The UK upstream oil and gas industry is concerned about difficulties accessing talent, technology and capital. Industry group Oil & Gas UK has estimated that reversion to World Trade Organization rules could cost GBP500 million ($651 million) relating to the movement of technology and labor.

**The EU consumes around 13 million b/d of oil, of which the UK accounts for around 1.6 million b/d.

**The industry is also concerned about the impact on the City of London, a prime venue for raising capital and a center of oil and gas investment expertise. Tapping bond and equity markets could become harder for upstream companies as investors shy away, against a background of growing skepticism toward oil and gas investment generally.

NATURAL GAS

**Muted impact, with flows unaffected unless an entirely new tariff system is introduced.

**The UK imported 5.9 Bcm of gas from continental Europe via the BBL and IUK pipelines in 2018, according to data from S&P Global Platts Analytics, around 7% of its total gas demand. It also exported some 7.8 Bcm of gas to Europe -- to Ireland and via the IUK -- last year.

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**Interconnector capacity on these lines is already booked well past the date the UK leaves the EU, indicating flows will continue.

**Gas operators would no longer be bound by certain market transparency instruments. It is possible, however, that UK operators will continue to adhere to the EU's REMIT principles -- in the same way that Russia's Gazprom does for its European operations.

**Could boost the TTF hub, already the most liquid in Europe, having moved ahead of the UK NBP in recent years. This is due to the fact that 27 countries trading at the TTF under common EU rules make it a more attractive venue than one governed by 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 LNG trade flows, with higher-priced markets attracting proportionally more spot cargoes.

**The UK's energy relations with EU countries in 2018 extended into LNG markets, with around 3% of all the UK's LNG imports in that year coming from the EU with France being the sole supplier. While no LNG has landed in UK terminals from EU countries in 2019, 3 cargoes made the journey in 2018 for a total of 219.1 mcm (7.7 bcf). From the opposite perspective, the UK has not sent any LNG cargoes to other European Union states since 2017.

**According to the WTO, the EU does not impose any tariffs or restrictions on LNG from non-member countries, including Algeria, Qatar, Russia, Trinidad and Tobago, the US, and other LNG exporters to the single market.

ELECTRICITY

**UK firms would have to exit the EU's market coupling initiative under a no-deal Brexit, removing efficiencies and forcing a return to explicit auctions of cross border capacity.

**Utilities would also be excluded from EU platforms for forward power capacity allocation and balancing services. They would have to register with an EU national regulator to trade. The cost implications are not seen as significant, however, with post-Brexit trade in electricity expected to grow substantially as subsea interconnectors are built to mutual benefit.

**The UK imports less than 6% of its annual demand from continental links, while acting as a source of exports when margins are tight in Northwest Europe. Over the 12 months to end Q3 2018, total UK electricity demand was 355 TWh, while gross imports were 20 TWh.

**Northern Ireland shares a single electricity market with the Republic and is a deficit region. A chaotic exit from the EU could cause short-term disruption but UK ministers say they are working with their Irish counterparts to ensure the SEM continues under any scenario.

COAL

**A few large physical thermal coal players may leave the UK because they also trade financial products, but many are already located in Switzerland and Asia. Several financial commodity traders with clients in both markets have already moved some operations to EU locations or plan to in the event of a no-deal outcome.

**The volume of thermal coal derivatives traded and cleared on the ICE platform in 2018 totaled 1.55 billion mt, a drop of 9% from the 2017 volume, according to data from ICE Futures Europe and electronic trading platform globalCOAL.

**According to the latest UK government data, the UK imported 5.6 million mt in 2017, largely unchanged from 2016. Of the 2017 volume, 78% originated from the US and Russia, with only 3.6% coming from the EU.

CO2

**UK carbon market players would crash out of the EU's Emissions Trading System, to be replaced by a new UK carbon tax of GBP16/mt effective April 1. This would be in addition to the UK's existing Carbon Price Support -- a tax of GBP18/mt on power sector CO2 emissions -- making a combined carbon tax of GBP34/mt in the UK.

**The new tax would apply to emissions in excess of an installation's annual free allocation of allowances under the EU ETS. The purpose of the new tax is to maintain continuity on carbon pricing for UK industry and to replace UK revenues lost from an end to EU carbon auctions.

**The EU has already moved to protect the ETS itself from a potential flood of surplus allowances from UK sellers, passing legislation in 2017 which would tag and invalidate allowances from any country leaving the EU.

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 the UK's two major ethanol producers and the shape of Brexit will be a critical factor for any potential restart. Until an E10 roll-out supports domestic ethanol demand, exports are essential for UK ethanol producers and an EU duty would likely be prohibitive.

**For biodiesel, pending EU decisions and appeals against Indonesia and Argentina could see anti-dumping duties re-applied, with soy- and palm-based volumes diverted away from the EU, but arbs could still stay open for the UK.

GRAINS

**With the UK a wheat- and corn-deficit country, a hard Brexit offers buyers in these markets 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 major providers such as Ukraine and Russia have an import duty of Eur12-95/mt, depending on wheat quality. Similarly, US corn, for example, receives a 25% tariff upon entry to the EU. Freedom to negotiate free-trade deals with these countries among others such as the US could result in lower tariff and non-tariff barriers and therefore prices for both wheat and corn.

SUGAR

**The UK has a sugar deficit, with annual consumption of 2 million mt outrunning domestic production of 1.4 million mt (2017-18). The deficit is made up from sugar imported from other EU countries (420,000 mt in 2017-18), with the rest coming from outside the EU.

**More imports could be sourced from Brazil, India and Thailand.

**Currently out-of-quota EU import tariffs on white and raw sugar stand at Eur419/mt and Eur339/mt respectively, while the in-quota tariff for raw sugar (CXL duty) is Eur98/mt on a quantity of up to 677,000 mt.

STEEL

**The UK steel sector exported 2.3 million mt of steel to the EU in 2017, around 30% of its total production.

**While there is only a small risk that the EU and UK would impose tariffs on steel, the situation for consuming sectors could be different, according to UK manufacturers' organization EEF. Tariffs on cars could reduce demand for automotive steel in the UK. The car industry accounts for 12% of total UK export of goods.

**According to lawyers contacted by S&P Global Platts the UK government has already notified the World Trade Organization that in the event of a no-deal Brexit it will use WTO agreements on international trade. Vehicle sectors will thus trade under WTO rules unless they sign custom-made agreements with the EU. Under WTO rules, UK companies selling vehicle components to the EU would face an average tariff upon entry to the EU of 4.5%.

-- Staff reports, newsdesk@spglobal.com

-- Edited by James Leech, newsdesk@spglobal.com