In the days following June’s referendum calling for the United Kingdom to leave the European Union, observers around the world weighed in on the decision’s impact. The short-term effects—a drop in the pound’s value and political confusion—were immediately clear. Longer term, the Brexit decision raised the prospect of changed UK economic growth expectations.1 And with already-weak global growth, some have wondered about Brexit’s effect on the global economy2.
In this environment, miners are bound to ask what Brexit will mean to them. As Figure 1 shows, there are both upside (green) and downside (red) factors to consider—some of which have already taken place, and others that may soon follow.
To better understand the likely impact of Brexit on the industry, Accenture looked at 12 countries that have significant mining operations, and analyzed their vulnerability to Brexit-driven challenges. This analysis considered three key factors for each country:
The ability to attract foreign direct investment (FDI) into mining from UK sources—determined by share of UK FDI of total mining FDI into a country’s mining sector from Jan 2010 to Dec 201511.
The importance of mining exports the country sends to the UK—determined by minerals commodities exported to the U.K. as a percentage of a country’s total mineral commodity exports in 201512.
The role of UK-based financing—determined by consolidated financial sector claims on the U.K. on an ultimate risk basis, including off balance sheet exposures such as derivatives and guarantee, as a percentage of GDP in 201513.
These three factors were then distilled into a Mining Susceptibility Index (MSI) that ranks each country in terms of its mining industry’s risk from Brexit. (See Figure 2). The higher the index number, the greater the linkage to Brexit impacts.
Australia tops the list, primarily because of the reliance of its financial sector on the UK. Australia’s financial sector claims that are at stake represent 12.9% of GDP. The country’s banks are already cutting back their derivatives and trading book exposures to the UK from previous quarters, but the banking sector’s significant exposure to Britain (and the EU)14 will affect the cost of capital as well as access to funding for miners in that country.
In terms of foreign investment, Australia attracted US$6.7 billion in FDI inflow from the UK, representing 40 percent of the total investments into its mining sector. However, this statistic is somewhat misleading, because that investment was focused largely on two London-based global mining companies that were funding their operations in Australia. Meanwhile, the UK only accounted for US$234 million (0.1 percent) of Australia’s total mineral exports. Overall, then, if one were to exclude the financial-sector claims, Australia would rank much lower in the index.
Next on the list is India, a country with deep historical connections to the UK. It receives almost all its mining-sector FDI from the UK, and 1.1 percent of its total mineral exports go to the UK. Norway’s linkage is based largely on the fact that the UK is a sizeable customer for its mineral exports. And Brazil is seeing strong ties because of its significant 46.5 percent FDI inflow from the UK, and because 1.8 percent of its total mineral exports go to the UK. The same can be said for South Africa, which obtains 56.4 percent of its FDI from the UK, while sending 2.1 percent of its total mineral exports to that country.
Brexit is likely to be both complex and lengthy, and there are other factors not included in the MSI that miners need to consider. On the supply side of commodities, Brexit will have relatively little direct impact because the UK does not produce many commodities. However, the UK is a key trading partner of China, which underpins world commodity demand. So it will be imperative to monitor Brexit’s impact on China closely, especially the development of trade agreements between the UK and China. The weakening Pound has already added depreciation pressure of the yuan15.
Currency values will also play a role. (Figure 3 shows Brexit’s immediate impact on a number of currencies.) A weaker Pound will help bolster the share prices of miners operating in the UK, because commodity prices and valuation of companies are reported in US dollars. Generally, however, as Brexit unfolds further, the strengthening of the US dollar is likely to create headwinds for many countries’ mining exports.
Fortunately, there are some clear bright spots for miners post-Brexit. For example, commodity prices are not likely to retreat sharply, simply because many commodities are already priced so low that they are barely covering operating costs. Also, while some speculate Brexit may keep global economic growth in low gear for some time16, it is at least not expected to bring the global recovery to a halt17. Furthermore, if UK weather the adverse impacts of Brexit, the resultant upside in economic growth will buoy commodity growth.
1 Mark Mulligan, Trouble in Britain probably not enough to push a July rate cut, Canberra Times, 28 June 2016. Factiva, Inc. All Rights Reserved.
2 Vanessa Desloires, Brexit 'isn't the GFC': Australian banks remain sound as British banks sink, The Sydney Morning Herald, 28 June 2016. http://www.smh.com.au/business/markets/brexit-isnt-the-gfc-australian-banks-remain-sound-as-british-banks-sink-20160627-gptb6v.html
3 Lau, R. P. (2016, June 28). Bloomberg. Retrieved from http://www.bloomberg.com/news/articles/2016-06-28/gold-veteran-says-brexit-may-mark-start-of-major-bull-market.
4 Analysis of CapIQ data as at 29 June 2016.
5 Presentation - Dan Smith, Commodity markets bounce higher in 2016 – froth or fundamentals?, Oxford Economics, 29 June 2016.
6 Buttonwood. (2016, June 24). Economist. Retrieved from http://www.economist.com/blogs/buttonwood/2016/06/bond-markets
7 Fletcher, G. W. (2016, June 24). The Guardian. Retrieved from https://www.theguardian.com/business/live/2016/jun/24/global-markets-ftse-pound-uk-leave-eu-brexit-live-updates
8 Wieczner, J. (2016, June 27). Fortune. Retrieved from http://fortune.com/2016/06/27/fed-interest-rate-brexit/
9 Bennett, J. (2016, June 28). Dow Jones Newswire. Factiva, Inc. All Rights Reserved.
10 Vibhuti Agarwal and Alex MacDonald, WSJ ' Brexit ' Vote Pours Cold Water on Tata Steel 's Sale Plans, WSJ, 27 June 2016. https://global.factiva.com/redir/default.aspxp=sa&NS=33&AID=9ACC001400&an=AWSJ000020160627ec6r001qb&cat=a&ep=asi
11 Analysis of fdimarkets.com data.
12 Analysis of GTIS data.
13 Analysis of Bank of International Settlements data,http://stats.bis.org/
14 Michael Roddan, Bad year for ASX as Brexit takes toll, The Australian, 28 June 2016. Factiva, Inc. All Rights Reserved.
15 Tara Cunningham, Chris Graham, Pound plunges further after hitting new 31-year low after Carney warns UK has 'entered period of uncertainty', The Telegraph Online, 6 July 2016. Factiva, Inc. All Rights Reserved.
16 Larry Elliott, Britain's new chancellor hasn't had the baptism of fire many predicted, The Guardian, 20 July 2016. Factiva, Inc. All Rights Reserved.
17 Oil prices up as global markets recover post Brexit, Agence France Presse, 01 July 2016. Factiva, Inc. All Rights Reserved.