After a weekend of political turmoil in both the U.K. and for European Union leaders, focus shifted Monday back to the economy and business impact of the Brexit vote. As procurement and supply chain professionals start to consider the short- and long-term consequences of the decision, our sister site MetalMiner has released its preliminary analysis on where metal prices could head, what the future of British steel looks like and how the backlash against immigration could affect construction and metals production.
Outlook for Metal Buyers
Two major reactions to the vote are important when considering short-term metal prices: the strengthening of the U.S. dollar and the selloff in global stock markets.
Since prices for aluminum, copper, zinc and other industrial metals closely track movements in the dollar, the declining pound pushed base metals down Friday. While this is “just a one-day move,” MetalMiner Lead Forecasting Analyst Raul de Frutos said, “it is likely that the euro and British pound will continue to decline in Q3 as markets recognize the risks the vote poses for Europe as a whole.”
The drop in stock prices globally signaled continued fears about global growth, particularly in Europe. This should add to the short-term pressures on metal prices, de Frutos said. “The correlation between stock markets and metal prices is not always strong, but it’s hard to imagine metal prices rising while people lose their faith in the economy and stock markets collapse.”
The medium-to-long-term picture is a more difficult guess. But based on several factors, de Frutos foresaw a possible recovery:
“As stock markets plunge, the Fed will not only hold off on raising rates but could even put rates into negative territory like other central banks have recently done. That would disappoint yield-seeking investors and put pressure on the dollar. Also, after the storm passes and the EU and Britain figure out the next steps, their currencies should find stabilization.
“The medium-to-long-term guess: The dollar weakens and mine shutdowns help tighten metal markets. Industrial metal prices start to recover.”
The Future of British Steel
Procurement and supply chain organizations will now be tasked with wading through the uncertainty surrounding international trade regulations, and one of the industries most immediately threatened could be British steel.
“Foreign companies buying British steel should not be concerned in the short term about continuity of supply,” MetalMiner Co-founder and Editor-at-Large Stuart Burns wrote Monday, “but in the medium-to-long term, the health of the industry relies on the deal that is negotiated with Brussels for tariff-free access to the E.U.”
This puts the U.K.’s steel industry in a precarious situation, Burns said. Maintaining access to the E.U.’s single market will be key to attracting investment from multinationals such as Tata Steel and Thyssenkrupp AG. If the U.K. cannot obtain amicable trade terms between itself and the continent, Burns said, “wherever a multinational has facilities within the E.U. and the U.K., they will face a decision: do they invest in the E.U. or in the U.K?”
Labor Market Effects
As Spend Matters noted in its earlier coverage of Brexit implications for procurement, the prominent role of anti-immigration sentiment in the vote could shrink the supply of low-skilled labor in the U.K. Of the 2.2 million people from other E.U. countries currently working in Britain, three-quarters will not likely be able to clear the same visa hurdles other foreign workers face, according to the Migration Observatory at Oxford University.
This has stark implications for construction, mining and metals production in the U.K., MetalMiner Editor Jeff Yoders said. “There could be a real labor shortage if native U.K. workers can’t or won’t do the highly specialized work demanded of these industries.”
There is some indication that U.K. companies would make up the difference by recruiting British rather than E.U. graduates. “Unskilled labor positions, however, on U.K. construction projects that could suffer without migration as seasonal and per-project hiring would have a smaller pool to draw laborers from,” Yoders said. “The bigger effect on the local economy will be felt by lower-wage industries such as picking crops, serving coffee and cooking in restaurants.”