November/December
2015 In an
ever-changing China, Fukutomi Co. believes plastic scrap still has a future,
but the company must rethink its business practices to succeed in the “new
normal.”
Story and photos by
Adam Minter
These
are tough times for China’s plastics recyclers. Labor costs are rising and
margins are shrinking. Government regulators are less forgiving than ever,
restricting what recyclers can and can’t process. Perhaps worst of all,
manufacturing across China has become a victim of the country’s economic
slowdown, which has reduced demand and prices for scrap plastics.
“Things are different!” yells Steve Wong,
managing director of Fukutomi Co. (Hong Kong), over the humming and grinding of
plastic scrap processing equipment on a sultry Saturday morning. Fukutomi has
been a multinational trader and processor of scrap plastics since the
mid-1980s. Wong is leading me into the company’s suburban Hong Kong processing
plant. It’s a busy and crowded place. A forklift zips by carrying a container
of loose HDPE agricultural drip tube imported from the United States. Nearby, a
Lindner (Arnstorf, Germany) shredder is grinding away at a forklift-load of
that material, deposited a few minutes ago. The shredder reduces the drip tubes
to flakes, which then go through a washer and an EREMA (Ipswich, Mass.)
extruder. “This is the best technology available,” Wong assures me. “And we can
sell our end product into China.”
As Wong is quick to add, however, that’s not
the business model he or other importers of plastic into China are accustomed
to following. He would know: Wong is the executive president of the China Scrap
Plastics Association (Beijing), which gives him unmatched access to data and
industry players. As he tells it, Fukutomi was primarily a trading company for
most its three-decade history. But China’s slowdown and “new normal,” as
President Xi Jinping calls the country’s economic restructuring, has forced it
and other plastics recyclers across China to rethink how and where they do
business. The consequences are global, affecting exporters as much as
importers. It’s a situation, Wong readily concedes, that is unlikely to change
anytime soon. “China has entered a new stage of development,” Wong tells me.
“So the industry needs to find a way [to adjust].”
Taking
the Long View
Fukutomi’s
global headquarters is a few minutes’ drive away from the processing plant, on
the 32nd floor of a high-rise that overlooks Kwai Chung, an urbanized part of
Hong Kong’s New Territories not far from its container port. As Wong leads me
into his office, he tells me frankly that China’s changing market dynamics have
forced the company to reduce employment in the office over the last couple of
years. At one time, he says, it employed more than 100 people; now it employs
about half of that. Nonetheless, even during these slow times it’s an
impressive, buzzing operation, its open layout resembling a stock trading
operation as much as a plastic-bottle-trading one. The buzz could be an
indication of the company’s continued success: In 2014, Fukutomi had sales of
$137 million, according to Plastics News.
Wong tells me his first exposure to the
business was through his father, who started out working for a pelletizing
company and eventually launched his own scrap plastics company. “He bought
local scrap and made pellets for people doing injection molding” in Hong Kong,
Wong recalls. Eventually the business expanded enough to start importing
bulk-cargo shipments of petrochemical scrap from Houston. This was before
containers lowered shipping costs.
The business faded after Wong’s father
developed health problems, and Wong assumed that he’d find another career path.
But while going to school in the United Kingdom in the early 1980s, he began
visiting plastic scrap generators. In those days, he tells me, Indonesia was
the destination for most U.K. plastic scrap. When he returned to Hong Kong, he
started Fukutomi as a vehicle to sell imported plastic scrap into Hong Kong’s
then-thriving manufacturing sector. “There were low capital requirements, and I
had the English [language skills] to help me trade in Europe and the U.S.,” he
explains. In 1984 he imported his first load—PVC checkbook covers and
tablecloths—on a 30-percent deposit, then sold it to a Hong Kong friend who
made plastic edging for bags, making a 50-percent profit.
It wasn’t his only business. Wong also began
trading watches and watch parts. At one time, he was China’s largest importer
of watch movements—the quartz and mechanical “engines” that make watches run—as
well as one of the only entrepreneurs ever to ship watches by container.
Despite his success with watches, he remained focused on trading plastic scrap.
He eventually sold the watch business.
Like many Asia-based scrap businesses, Fukutomi
grew in parallel with China’s three-decade-long economic boom. During the mid-
to late-1980s, Fukutomi imported “a couple of hundred” containers a month,
according to Wong, most of which was film scrap. During the 1990s, that volume
grew to 600 to 800 containers a month. During the headiest years of the 2000s,
the company imported as many as 1,400 containers of scrap a month. For much of
it, he didn’t need to go to the trouble of finding consumers. “I’d sell it to
Hong Kong traders, and they’d do the selling into China,” he says.
Nothing lasts forever, especially high scrap
prices. The 2008 global financial crisis took just as heavy a toll on plastics
recyclers as it did on other sectors of the scrap industry. Like every plastics
trader in China, Fukutomi took a heavy hit as prices plunged. As markets
recovered, however, it didn’t see its volumes return to the same levels. The
problem was no longer the global financial situation; rather, greater market
transparency was making the industry far more competitive on both sides of the
Pacific. “Suppliers can now go direct” to consumers, Wong explains. “They can
look online for importers and prices.” Wong isn’t too bothered by the
development, however. Fukutomi is confident enough in its relationships with
its supply base to post current Hong Kong and China buying prices to its
website for anyone who wants them. Wong takes great pride in cultivating and
maintaining relationships with suppliers. “Many people have been with me for
years,” he says.
It’s also worth recalling that market
transparency increased gradually, and it didn’t catch Wong completely by
surprise. As early as 2004, Fukutomi began to invest in its own processing
facilities in mainland China. “That way, I can get the business that’s going
direct to others,” he says. It now operates several technologically advanced
recycling operations across the mainland. In Dongguan, for example, Fukutomi
operates an electrostatic sortation line for e-scrap plastics. When I express
surprise at the company having that type of operation, he smiles. “We are not
the only one,” he says. “This is common throughout the mainland now. The wages
are so high we need automation.” (Like other plastics, ABS has been negatively
affected by falling commodity prices and the slowing Chinese economy.)
Over the last 15 years, wages for factory
workers across China have risen significantly, from under $100 a month at the
beginning of the 2000s to as much as $750 a month today. Wages are not the only
growing labor-related expense, either. China’s population-control policies have
resulted in a smaller number of working-age adults, and that smaller group now
has the leverage to demand better working conditions. Those demands are
shrinking once-large profit margins across China’s industrial sector. Dealing
With the Impacts of Green Fence
In
2008, when Wong opened a large plant in Shantou, a city on the mainland roughly
175 miles northeast of Hong Kong, he was convinced that a big part of
Fukutomi’s future was to import and process plastics on the mainland. But as
mainland wages rose, the case for processing scrap in Shantou became weaker.
Hong Kong’s labor costs are still higher than mainland China’s, but adding in
the customs duties and headaches of conducting business across the China–Hong Kong
border makes manufacturing plastics in Hong Kong a much more attractive
proposition. (Hong Kong is sovereign Chinese territory, but it operates under
its own political system, rules, and laws.)
That case was further strengthened in February
2013, when the Chinese government began the enforcement action to prevent
imports of contaminated and other prohibited scrap materials that became known
as Green Fence. Fukutomi, like many established plastics recyclers, welcomed
such regulation if it meant consistent application of China’s customs rules.
But also like many other recyclers, Wong says he was caught off-guard by the
scope of the action and the seemingly harmless materials it affected. “It’s
during Green Fence that I became active in the [China Scrap Plastics
Association]. I had to know more about what’s going on,” Wong says.
At Fukutomi’s Hong Kong plant, Green Fence’s
impact is evident in the scrap storage areas. Stacked bales of HDPE pill
bottles imported from the United States await processing. The bottles are empty
and clean, but Green Fence rules consider them biowaste, which China forbids.
Wong walks me to another corner of the warehouse, where he reaches into a bag
of never-used plastic IV valves that suffer the same fate. “In Hong Kong, it’s
OK to import medical production scrap, but not in China,” he notes. “So we
process them here.”
Some of this material was coming to Fukutomi’s
Hong Kong plant before Green Fence, but only for separation and grinding; the
Green Fence restrictions mean Fukutomi has to process it into pellets in Hong
Kong as well. Wong continues the tour, leading me past baled corrugated plastic
U.S. Postal Service boxes. “Those are prohibited from China because they are
contaminated with steel fasteners,” he says with a sigh. Next up are bales of
LDPE agricultural film imported from the United States. We can see bits of mud
and dirt. “Around 20 to 50 percent of the weight is mud and sand, so it can’t
go to China, either,” he tells me.
In this case, as in others, China’s loss is
Hong Kong’s gain. Fukutomi, which once exported agricultural scrap such as drip
tape and irrigation hoses to processors in mainland China, is now aggressively
expanding its purchases of that material, seeking new suppliers around the
world, all with the intention of processing it in Hong Kong and shipping the
pellets to China. That said, Fukutomi continues to be a major broker of scrap
plastics into China, benefiting from the small uptick in plastic scrap imports
that trade statistics show occurred in the third quarter of 2015.
Sophisticated
Processing In Shantou
Fukutomi’s
largest plant is the sprawling 25-acre facility in the free-trade zone of
Shantou. As we arrive early on a Sunday morning, the free-trade zone is
uncharacteristically quiet. Although Chinese industrial zones tend to operate
seven days a week, it’s been that way since the economic slowdown, Wong says,
adding that his plant, too, has been a little slow.
As Chinese manufacturing facilities go, this is
one of the nicest I’ve ever seen. The plant has a four-story office building, a
large worker dorm, executive mansions, and a large decorative pond complete
with fountain. The actual sorting and production buildings almost seem to be an
afterthought, but, of course, they’re not.
In my estimation, Fukutomi’s Shantou plant is
as technically and operationally sophisticated a plastics recycling operation
as exists in Asia today. The main production buildings are multistory mazes
with extruding lines for everything from PET films to PVC wallpaper flakes; the
company even has a thriving business in recycling PLA (polylactic acid)
plastics into cups and utensils it says are biodegradable. The processing
equipment is both local and imported, but the scrap is all imported. “You
really need local connections to get the domestic scrap,” Wong tells me. “And
domestic is down these days, too.”
On the first floor of one of the buildings,
high stacks of plastic pallets sit next to a Chen Hsong (Hong Kong) Jetmaster
injection-molding machine that’s been idled for the weekend. On the third
floor, two workers are running a small shredding, washing, and extruding line
producing HDPE pellets. “HDPE always sells,” he reminds me. The room is
well-ventilated, unlike the home recycling workshops that have developed a
notorious reputation in both Chinese and foreign media for their dangerous
conditions.
Some of the worst of those workshops were in
China’s notorious “e-waste” dumping ground, Guiyu—a township just a few miles
from the free-trade zone and under the jurisdiction of Shantou. But at this
facility, there’s no sign of the environmental or safety problems that have
long plagued China’s scrap plastics industry. “Why [would someone] go work like
that when I need workers here? That’s the industry’s past,” Wong says.
When I ask him whether informal-sector
recyclers have lower costs, he scoffs and points to China’s manufacturing
slowdown and its impact on raw material suppliers across the world. “The small
workshop margins are shrinking like everyone else’s. Who is going to buy their
finished product in this market?” Wong quickly names several plastic-oriented
industries—including shoes and electronics—that are leaving China.
The problems in the scrap plastics sector go
well beyond demand. “Mixed WEEE [waste electrical and electronic equipment]
plastic is not worth the trouble at the moment,” Wong says, for several
reasons, starting with duties. “Customs uses the prime [plastics] price to fix
the duty on imports,” he explains. That approach to assessments is difficult
for scrap recyclers during good times, and in 2015’s down markets, when some
grades of recycled plastics are cheaper than virgin, it’s untenable.
Meanwhile, the mixed nature of e-scrap plastics
makes pricing a gamble. “There are lots of additives in the plastics that can’t
be picked up by near-infrared sensors,” he explains. “There’s a lot of
wastage.” Values, he says, have fallen as low as $100 a metric ton. “Eventually
we’re going to have to turn to oil pyrolysis.”
The situation is far from hopeless. At the
immense Shantou plant, Fukutomi focuses on what seems like every kind of
plastic except WEEE scrap. Lots of companies are still researching how to
incorporate recycled plastics into their products. Scrap plastics are a key
part of China’s plastic supply chain. Wong tells me that Chinese demand for
plastics is about 80 million mt a year, roughly one-third of global demand, and
he estimates scrap fills half of that demand.
During my visit in August, there was
considerable uncertainty as to how strong that demand would remain in the wake
of China’s stock market crash, which was certainly going to affect the plastics
recycling trade. Many recyclers had turned to the stock market in 2014, when
demand slowed for plastics, Wong explains. When the market crashed, so did their
access to capital to invest in their businesses. Many plastic scrap recyclers
took huge losses.
As we tour the Shantou facility, I stop beside
a window with a view of much of Shantou’s free-trade zone. Wong, who was born
in Shantou, found this a desirable location for the facility. It was the ideal
logistical hub, with easy access to imported scrap and customers around China.
During our Sunday visit, it seems as if most of the activity is related to
Fukutomi. “I knew China would slow down one day,” Wong tells me with
characteristic candor. “But I didn’t realize it would happen so soon.”
It’s fair to say that most of his colleagues
and competitors in the plastics recycling industry also were caught off-guard.
Wong expects that he and the rest of the industry will emerge healthy, but
changed. “China will still need plastic,” he tells me. “Everybody knows that!” Adam Minter is a
freelance writer based in Kuala Lumpur, Malaysia, and author of Junkyard Planet.