Brexit: Oceania Not Affected Much, Europe May Face Minor Backlash

Given the shock and panic it engendered, it seems the exit of the U.K from the EU was unexpected, or at least considered unlikely. In a two horse race, its peculiar this result was so unexpected, but there’s nothing like financial markets for behaving like high-strung thoroughbreds startled by the merest bite from a horse-fly.

As global business comes to terms with the implications of Britain’s impending exit from the European Union, it is important to keep the situation in perspective. "The world keeps on turning," according to the report's opinion.

For businesses in the P&P and wood products industry, IndustryEdge considers the following to be the key issues related to the Brexit as it applies to Australia's potentially growing paper industry:

Has the currency crunch has just begun?

The currency and exchange rate implications of the British referendum outcome were immediate and severe. For the immediate future the focus will be on market stability. Almost all major capital markets lost value when the results of the vote were announced. Some of this was realignment after markets were primed the wrong way in the lead up to the vote.

The upside of the falling value of the British Pound (GBP), particularly against the U.S. dollar, is that it also dragged down the Australian dollar (AUD) and the New Zealand dollar (NZD), as well as the Euro. All of these currencies declined to a far lesser extent than the GBP. To what extent this may assist or hinder Australasian exporters and importers is unclear. The length of time the local currencies are suppressed will be the critical factor. If a stronger U.S. dollar is a component in the medium term, further turmoil can be expected as the U.S. elections draw near, especially given the disparity between presumptive major party nominees Donald Trump and Hillary Clinton.

We offer the cautionary note that the fracturing of global financial markets, including P&P, on the back of the seemingly unimaginable Brexit may merely be a precursor to the dysfunction that will arise in November should the USA’s most unimaginable election result (any range of factors from a Trump victory to a failure of Clinton to secure 270 electoral votes - throwing the Presidential selection to an already troubled and unpopular U.S. Congress) transpire.

As the chart below shows, the last month has seen turbulence for relevant currencies, with speculation about the outcome of the British referendum providing some of the uncertainty over that period.

Balance of trade creates concern only at specific product level. The U.K., and also to a large extent Europe/EU, are not significant destinations for wood products or pulp and paper products from Australia and New Zealand. The balance of trade between the two regions show there is a greater propensity for Australia and New Zealand to import from the U.K. and Europe. However, compared with the volume and values being traded between Australasia and Asia, any changes in the European trade are not going to be significant in the overall balance of trade.

At a product-by-product level, this is less the case, with some key grades, especially of printing and communication papers, being extensively imported from Europe. Some of these are hotly contested, where the market operates on wafer thin margins and in a context of global oversupply. For some, there is a component of domestic manufacturing, for other products, it is an entirely import trade.

It is notable that wood processing and pulp and paper manufacturing equipment continues to be imported from Europe. Brexit is unlikely to impact that element of the trade. Both Australia and New Zealand have a small trade interface with the U.K. In both cases, Australasia imports more than it exports to Britain.

However, there isn't much in it. For instance, in April 2016, Australia's trade deficit with the U.K. for paper and paperboard was AUD 5.8 million, with imports accounting for just 2.8% of the total value of paper and paperboard imports for the month. In New Zealand, the deficit was NZD 1.5 million, in what is an observably far less stable two-way trade with the U.K.

Demand and consumption fundamentals did not change last week. Supply patterns, on the other hand, may change and could do so dramatically in Europe. It is less likely there will be significant trade impacts in Australia and New Zealand, but there will, as outlined above, be some distractions, if not disruptions.