Profit margins of British chemicals businesses could be negatively affected by domestic economic uncertainty over the outcome of the Brexit negotiations.
- The British chemicals industry adds about GBP 15 billion of value to the UK economy every year, and annual chemicals exports amount to about GDP 50 billion. The majority of companies within the sector are mature, with a stable customer base. High entry barriers protect the industry due to the required high capital expenditure.
- However, profit margins of British chemicals businesses could be negatively affected by decreasing global demand and domestic economic uncertainty over the outcome of the Brexit negotiations. At the same time, high energy costs (e.g. electricity) in the UK remain an issue for the industry, while competition from low cost producers in Asia is increasing.
- Currently, British chemicals exporters continue to benefit from the weaker British pound against the euro and the US dollar.
- A large number of chemicals businesses are financed through asset based finance. In most instances profit levels are sufficient to cover the interest. Bank financing facilities are adequate, and business refinancing does not appear to be a problem.
- On average, payments in the British chemicals sector take between 60 days and 90 days. Payment experience has been very good over the past couple of years, and the level of protracted payments is low. The number of non-payment and insolvency cases was low in 2016, and this trend is expected to remain unchanged in 2017, as potential repercussions of Brexit on the domestic economy and chemicals exports have not yet materialised.
- For the time being our underwriting approach to the chemicals sector remains generally positive for all major subsectors (basic chemicals, petrochemicals, fine and specialty chemicals).