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Profiting from Brexit: UK sealmaker benefits from devalued pound

Chris Rea gives a characteristically bullish response when asked how Brexit will affect his Yorkshire-based manufacturing business.

“The pound has depreciated by more than 15 per cent against the main currencies we trade in,” says the pugnacious boss of AESSeal, a mechanical sealmaker, referring to sterling’s slide over the past 18 months.

“Meanwhile the World Trade Organization tariff for the goods we produce is on average 1.7 per cent. So tell me: how exactly is it going to hurt us?”

Mr Rea speaks for those entrepreneurs who see the UK’s scheduled 2019 departure from the EU as a chance to make more money, rather than a challenge to their bottom lines.

As the managing director of a company that has kept production in the UK, invested in high-tech manufacturing processes, and exports a niche product around the world, he is confident that any downsides from Brexit will be more than compensated for by the pound’s weakness.

Mr Rea remains unworried by the possibility of higher tariffs, customs hold-ups or other issues he sees as avoidable or easily surmounted.

AESSeal may not be a household name, but it is the world’s fourth-largest maker of mechanical seals — essential components for virtually all rotating machines involving fluids, which play a vital role in activities ranging from chocolate production to oil refineries.

The worldwide demand for his products — and Mr Rea’s own almost Germanic focus on producing specialised industrial goods — mean he is reaping a dividend from the slide in the value of the pound after last year’s vote to leave the EU.

“The decline in sterling we’ve seen gives us a cheap currency, similar to the benefit that Germany got from swapping the D-Mark for the euro,” he says.

Set alongside that, the company’s own analysis suggests the additional duties its customers might face because of Brexit are small.

Some sectors may be particularly exposed if the UK leaves the EU without a deal; the car industry would face 10 per cent tariffs under WTO rules. But the 1.7 per cent tariff on mechanical seals — which stop fluids leaking out when pumps and similar devices work at high speed — compares with EU average tariffs on non-agricultural products of 2.6 per cent.

An AESSeal technician works on a dry gas seal. Mechanical seals play a vital role in activities ranging from chocolate production to oil refineries © AESSeal

Moreover, AES faces tariffs only when its exports classify as manufactured products. Export parts to assemble to order, as the company often does, and the rate falls to zero.

More than 80 per cent of its £143m sales last year were to customers outside the UK, of which a quarter were to the EU. While some executives worry that bureaucracy and regulations will impede trade more than tariffs, Mr Rea is not fazed by the possibility of customs hold-ups at the European border either: “If I can get a part to a customer in the US overnight now through UPS, I don’t see why it should not be the same with Europe.”

Meanwhile, imports of components — likely to be subject to tariffs should Britain leave the EU without a trade deal — are relatively low.

“We looked at the impact [of such a scenario] and concluded that it would cost us about £59,000 a year,” says Mr Rea.

The company, which he set up in 1981 after starting out distributing seals for a US producer, still manufactures nine-tenths of its output in Britain, mainly from two modern factories in the old steel town of Rotherham. All its main rivals are based either in the US and the EU.

Mr Rea is the first to admit that AES is not a conventional UK business. With its international focus and family ownership (he still owns 60 per cent and has no intention of listing the shares), the company bears a strong similarity to the Mittelstand companies that provide the backbone of the German economy.

Currency devaluations have a mixed record of delivering export surges — at least as far as Britain is concerned — since demand for its predominantly high-value industrial goods tends to be less sensitive to price than commodity products.

But Mr Rea, who has already cut labour costs over the past five years from 11 per cent to 6 per cent of the selling price, thinks AES will prove an exception, since his business model is largely based on offering a cheaper alternative to his rivals.

Most companies in his sector make their profits by selling highly priced replacement seals, which make up the losses incurred by initial bulk sales to equipment manufacturers. Because of seals’ importance in assuring safety, many end users are reluctant to switch suppliers. That is especially true of the oil and gas industry, which accounts for half the global market and where even a tiny leak can cause a catastrophe.

Still, Mr Rea is hoping to win new customers by offering more economical replacement parts, especially to countries such as Turkey, Colombia and Brazil — the kind of emerging markets Brexit advocates say could provide a fillip to British exports.

He argues that the low oil price has made the energy industry more price sensitive, making the post Brexit devaluation a bigger competitive advantage for UK manufacturers. “It is easier to take a calculated risk when oil is at $50 a barrel than when it’s at $140,” he says.

More broadly he is relaxed about the risk of non-tariff barriers to trade after Brexit. “The barriers to trade in my experience are more around language than anything else,” he says. “We’re fortunate in this country to speak the global language of business.”