Brexit Impact On Import Costs May Hurt UK Manufacturing

Can manufacturing firms survive a weak pound sterling?
A weak pound and rising import costs could spell trouble for the UK manufacturing industry. But the current situation offers opportunities as well as risks.
Friday 24 June was a significant day in UK history, as the British public voted (by a majority of 52% to 48%) to leave the European Union. The social, political and economic ramifications of this momentous decision were immediate and widespread, with the Prime Minister resigning from his post and the financial markets plunging into uncertainty.

This uncertainty had a drastic knock-on effect on the value of the pound sterling which fell at one point by over 11% to £1 = $1.28 – the lowest it’s been in more than 30 years. While the Brexit dust has settled somewhat, the pound sterling is still in a weaker position than it was before the referendum, and there are fears that, if the situation continues, this could have serious implications for the UK manufacturing industry.

Rising Import Costs

The low value of the pound could spell danger for the UK manufacturing industry, particularly if it is sustained over a long period of time. Many manufacturers import their raw materials from outside of the UK and the low pound could significantly increase the cost of these goods, with some companies predicting an average increase of 5%.

Over the shorter-term, most companies can cope with temporary fluctuations in price, but if the pound sterling remains weak over the longer term, we are likely to see a more obvious impact on manufacturers’ purchasing power when importing materials from abroad. Manufacturing has notoriously lean profit margins and many companies will be unable to absorb these extra costs. Instead, they could find themselves in the unenviable position of choosing between taking a hit to their profits or raising their prices and passing the pain on to their customers.

Not All Bad News

It’s clear to see why some businesses may be concerned about the impact of Brexit, but it’s not all bad news for the UK manufacturing industry. In fact, companies who are flexible enough to adapt to the new climate could actually find themselves benefiting from the weak pound sterling.

As we mentioned above, the low pound sterling will have an impact on import costs, which could be detrimental for companies who source their raw materials from outside of the UK. Conversely, however, firms who export their products to Europe and beyond should find themselves able to either increase their profit margins or to sell their products at a lower price – and any decreases in price are likely to lead to increased sales to international customers.

A flexible approach will be critical if companies are to capitalise on the opportunities that the weak pound can offer. Those firms who can switch their focus from UK sales to foreign exports will be best placed to succeed in this new market place. Whether or not this can be done will depend largely on the company’s market and, given the wide breadth of applications associated with their products, UK label manufacturers in particular could find themselves in an advantageous position.

It’s impossible to predict with any certainty how the manufacturing industry will be affected in the longer term. What is certain is that we are entering unchartered territory and there are likely to be some turbulent times ahead. However, with the risks come opportunities and UK manufacturers need to be innovative and flexible enough to take advantage of these in order to weather the storm ahead.