Commodity Analysis

Brexit and after…

Gayathri G | Updated on January 17, 2018 Published on July 03, 2016



What the developments imply for the global commodities market and India’s farm exports

Now that splitsville has finally happened, what is in store for the global commodities market and Indian farm exporters? While the UK’s actual exit from the EU will take at least two years, with procedural hassles being worked out, some implications might well be immediate.

As Garry Jones, CEO of the London Metal Exchange (LME) put it, the main issue is not volatility but uncertainty about regulations. Though Brexit will have a small impact on operations of the LME as a functional market, commodity exchanges and traders are gearing up to counter potential risks that might impact market integrity.

The Intercontinental Exchange (ICE) raised the margins across asset classes to manage excessive volatility, post outcome of the referendum. Among currencies, the bourse has raised margins on the euro-pound sterling contract by 30 per cent to 3,000 pound sterling, while the same on pound sterling-dollar has been raised by over 27 per cent to $2,550. The two contracts are expected to be the most impacted. Among commodities, the margin on gold 100 ounce futures has been revised to $4,700, and on mini gold 32.15 ounce contract to $1,511.05 — both up 4.5 per cent. On silver, the margins are up 12 per cent to $5,600 per 5,000-ounce contract and to $1,120 per 1,000-ounce mini contract.

Though a clear picture is yet to emerge on the post-Brexit relationship between the UK and the EU on the trade front, trade analysts suggest many options. A report from HFW Commodities, an international law firm, highlights three scenarios:

One, the  UK  could negotiate trade deals with the EU similar to the ones with Norway, wherein the country continues to be a member of the European Economic Area and contributes to the EU budget or like Switzerland  which is in the  European Free Trade Association but not the EEA. Two, the UK may come out with its own set of comprehensive FTAs allowing access to the EU markets in certain areas. 

Or three, the UK  may resume its standalone membership of the WTO.

For commodities, there seems to be no major change in terms of accessibility as the metals market is, to a larger extent, influenced by  China. But Brexit will impact  import and export and transit procedures, says the report. For commodity traders based outside the EU, if the  UK  chooses to revert to  WTO rules, there is a chance of hike in tariffs on UK imports and exports of goods. For a UK-based trader, the fate of physically-settled contracts (which the EU treats as derivatives contracts) would be uncertain, it adds.

Impact on warehousing

The LME has 15 accredited warehouses across the EU for storing various metals. As it is, the exchange has been coming out often with a new set of directives and warehousing rules to cut down long waits, especially in the case of aluminium. Brexit will compound the warehousing problems because for goods stored in an EU location, the cost of storing could come under an EU investigation, while the storage contract is subject to English law.

Indian farm exports

The churn would add to Indian exporters’ compliance costs as they will have to adhere to two different standards. For instance, the EU is the third-largest importer of India’s seafood. So, with Brexit, marine exporters will suffer as they would have to adhere to separate sets of safety norms, quarantine measures, and these will cost them more.

Indian spices, tea, mango, grape and basmati rice are being exported to the UK in large amounts, while there is a separate set of EU regulations governing import of chilli and its products and nutmeg from  India.

Realisations from tea exports could take a hit as the EU imports 42 million kg of tea of which 20 mkg is shipped to the UK. 

The possible meltdown of the pound sterling will hit Indian farm exports to the UK.

But, since the actual exit or the transition will take two years, Indian exporters have ample time to rebuild their strategies, look for newer geographies, and put in place newer risk mitigation and hedging strategies.

But two lesser-tracked commodities may stand to gain in the Brexit development: cocoa and natural gas. While gold dazzles on its haven appeal, cocoa and natural gas are still traded in pound sterling and if the UK currency takes a beating, these two commodities will surely rally. Also, the  Scotland factor and its plans to veto Brexit will have to be watched.

Published on July 03, 2016

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