May/June 2010
Brazil's thriving economy is creating unprecedented scrap demand at home while helping the country's recyclers reassess their place—and their opportunities—in both the domestic and international scrap markets.
By Adam Minter
It's 10 a.m. on a sweltering February morning in Rio de Janeiro, and Adriano Assi, publisher of Brazil's leading recycling magazine, is about to show me how and why Brazil is able to meet 50 percent of its secondary aluminum needs with UBCs. We walk up a residential street not far from the famed Ipanema Beach, toward the sound of a samba. Then, around a corner, we find its source: a giant street parade, one of dozens that will fill this city during the four-day Carnaval period. In front of us, thousands of people dance behind a float and drum corps, leaving in their wake hundreds of thousands of aluminum beverage cans.
We kick through the parade's refuse, aluminum cans covering the ground like fallen leaves. "What are we doing writing about scrap?" Assi asks me. "We should get some bags and start collecting scrap."
Here and there, a few scavengers do exactly that. I watch as they crush and jam cans into grocery carts and garbage bags. They hardly make a dent in the mess, however. Aluminum cans are so plentiful during Carnaval that one Rio-area recycler described the celebration as "Christmas for the scrap man." At the moment, several football fields' worth of aluminum are left to dry in the sun, but it won't be there for long: "If we come back in an hour, it will all be cleaned up," Assi assures me. Rio's vast peddler class will do most of the work, packing the cans into grocery carts, burlap sacks, grocery bags—whatever works—until they can find a larger buyer, with a truck, who'll take the aluminum off their hands for the going street rate. From there, the material is transported to one of Rio's scrapyards. One downtown Rio yard reportedly processed 60 roll-off containers of UBCs during last year's Carnaval, remaining open day and night. For now, the streets glimmer silver.
It's an apt metaphor for the fortunes of Brazil's scrap recyclers, who—like their counterparts in other developing nations—find themselves the beneficiaries of a surge in scrap demand from domestic consumers. The material is expected to become even more sought after, thanks to Brazil's growing middle class, infrastructure development, anticipated 6 percent annual growth in the near term, and plans to host both the 2014 World Cup and 2016 Summer Olympics. These dynamics, in fact, could transform Brazil—largely a self-sufficient country in scrap—into a net scrap importer just as Brazil's scrap recyclers are beginning to take steps into the global marketplace as exporters.
Significant shifts in economies and industries do not come without tensions, and Brazil's recyclers face several. Smaller processors are keenly aware that the country's hundreds of thousands of scrap peddlers are rapidly organizing into government-sponsored co-ops that compete against them. Meanwhile, Brazilian ferrous processors, especially the biggest, are increasingly frustrated by what they describe as blatant efforts by the country's steelmakers to control the price and flow of scrap.
Despite these significant issues, optimism pervades the Brazilian scrap industry, which has weathered the global economic crisis far better than its counterparts in the developed world and which looks forward to a surge in demand through the 2016 Olympics. Assi, once a scrap processor himself who now organizes Expo Sucata, Brazil's annual scrap recycling convention, exudes confidence in the industry. "Take a look around," he says at the end of a week of traveling to scrapyards in the Rio and São Paulo regions. "Everybody needs our products."
On the Small Side
A week before Carnaval, Assi and I drive to Guarujá, a beachside community an hour from São Paulo, and take a ferry across a narrow strait to Santos, a 400-year-old coastal town that's also home to Brazil's busiest port. From the dock, we drive past the container yards and some of the town's crumbling colonial-era Portuguese architecture. Assi turns left and stops in front of Recimar, a small neighborhood recycling business run by Edmar Corrêa, a former military man in his late 50s. As we enter his warehouse, he greets Assi with a smile. His son, Rodrigo, stands nearby, weighing bags of beer cans from arriving retail customers, mostly independent peddlers who bring in a variety of scrap, including metals, plastics, paper, and electronics. On an average day, 100 to 150 customers visit Recimar, with Mondays being particularly good for cans, Edmar notes.
When I ask Edmar what he does with the electronics, he points at his son. "He fixes everything. If he can't fix the electronics, we sell them to someone else for recycling." Rodrigo, who is busy writing can weights on a pad of paper, smiles sheepishly. In Portuguese, he tells Assi that he can buy broken motherboards for the equivalent of 56 cents and sell the repaired ones for about $39. He sells unrepairable items to an e-scrap broker who, in turn, sells the equipment to recovery plants in São Paulo, he says. When I ask him how he acquired his motherboard repair skills, he laughs and exclaims, "Google!" His father interrupts, assures me that e-scrap is a good, highly competitive business, and leads me further into his warehouse. There, we see motherboards in baskets, several antique typewriters in barrels, and electric motors in various states of disassembly. Corrêa pays a single laborer approximately $400 a month to disassemble motors, a wage that is significantly higher than what he'd pay for similar services in China, I tell him. "We have labor rights here, and much higher taxes," he says. When I ask why he doesn't export the material or sell to an exporter, he shrugs. "We don't know how."
Assi nods. "It's true. In Brazil most of the smaller recyclers don't know how to export yet," he says. "Even if they did know how, the domestic market for nonferrous is still much stronger than what they can find abroad." In fact, the Corrêas are too small to export. They sell most of the goods they process up the recycling chain to midsized recyclers who pick up the material from their warehouse. It's a business model—buying from peddlers and selling up the chain—that works worldwide. In Brazil, however, that business model is threatened by scrap processing co-ops that the country's scrap peddlers—called catadores—are forming with the support of the federal government. The result is that the Corrêas are now competing directly with the government-subsidized collectors. "They are the future of the industry," he tells me. "I can feel the competition."
Brazil's scrap co-ops are not new. They are rooted in a Brazilian belief in social mobility that's very different from the social structures of other developing countries. In China, the low social status of scrap collectors is considered an acceptable, unfortunate, and unchangeable fact of life. Brazil, in contrast, has long maintained that something must be done to improve their lot. In pursuit of that goal, the Brazilian government joined with businesses and nongovernmental organizations in the early 1990s to organize co-ops with improved working conditions and shared ownership. To support the co-ops, the federal government encouraged municipal governments to direct their recyclables away from private entrepreneurs to the newly organized catadores' co-ops. The catadores, meanwhile, are not expected to pay for access to the municipal waste stream, but rather only to process and sell the recyclables they cull from it. (Prior to the co-op system, local governments could generate revenue by selling the material to private recyclers on the open market.)
Official support for this unusual arrangement strengthened with the ascension of Luiz Inácio Lula da Silva to the Brazilian presidency. "Lula," as he is affectionately known, who rose from Brazil's slums to the presidency with only a fifth-grade education, has long expressed sympathy for the plight of the country's homeless peddlers, going so far as to make regular Christmas visits to them. At the end of 2009, his support became more overt, first with the passage of a $128 million line of credit to support the co-ops, then with the establishment of a tax credit for companies that buy their recyclables from co-ops rather than private entrepreneurs. Speaking late last year, Lula said: "If a mayor decides to terminate the employment of 200 to 300 employees in the recycling industry and give the job to a private company, then what will happen is instead of providing a salary to 300 individuals you would be helping only one." It is an attitude and policy approach that easily could undermine small-scale private recyclers like the Corrêas and, potentially, larger enterprises—if the co-ops organize properly. "We have to earn a living, too," Corrêa tells me with a sad shake of the head.
Inside a Co-Op
Later that day, Edmar Corrêa, Assi, and I meet with Fernando Prada, whose family runs Grupo Paco, a midsized recycling group with multiple locations in Santos and São Vicente, an industrial community adjacent to Santos. Like Corrêa, Prada purchases scrap from co-ops and—on a lesser level—competes with them. Together we visit one such co-op, located beside a highway at the base of a hill that, I'm told, is the landfill in which many of the co-op workers once spent their days scavenging. Assi checks in at the co-op's office and then leads us into the small warehouse. Eight men and women stand beneath a cage containing mixed recyclables—mostly plastic and paper—that just arrived via co-op-owned trucks donated by São Vicente's city hall. As we watch, the workers—all part of the 30-member co-op—sort the material into boxes they will later ship to consumers. It's a more orderly, improved version of what they used to do at the landfill.
One of the workers, a 66-year-old woman named Marta Maria, leaves her sorting station to speak with us. She's a mother of two who has worked in the co-op since its inception, she says. Prior to that, she worked in the landfill. "It's cleaner to work here," she says, "but I'm not making any more money than I did when I was alone." She doesn't specify her share of the co-op's profits, but the others estimate that it can't be more than $500 a month. If that's true, it suggests to Assi and others that the co-ops themselves are rife with inefficiencies—a private plastic scrap company wouldn't employ as many people as are found in the average co-op—and, potentially, corruption.
In any case, despite a lack of economic incentives, Maria says she's grateful for the two years of continuing education the government provided when she joined the co-op. Classes in scrap sorting and basic accounting were particularly valuable, she notes, though she doesn't overstate the change in her station since joining the co-op. "I work here 7 a.m. to noon," she says, "and after that, I spend the rest of the day sweeping streets."
She follows us into the adjacent loading area, where the co-op's trucks are arriving with loads of paper. "Not a kilo is paid for," she says proudly. "All for free." Over my shoulder, I notice Corrêa shake his head at Prada. As Maria goes back to work, Corrêa and Prada start whispering excitedly to each other.
Back in the car, Assi translates their discussion. "The co-ops are supposed to empower the catadores, but they actually exploit them," he says. "The catadores don't have any labor rights at all because they're entrepreneurs, not employees, so the co-op doesn't have to pay their health insurance or other labor taxes. That's a big advantage for the co-ops [compared with] the private yards. And look at the employees. They don't make any more money. They just have a roof to work under." Politics and corruption also enter the discussion. The co-ops "pay their electric bills to city hall instead of the electric company," Corrêa says. "What does that tell you?"
With all those advantages, Prada says, "If you are subsidized, you should be killing the unsubsidized businesses." Then he pauses and smiles. "But they aren't smart enough to do that." The private companies are still operating, in part due to the co-ops' mismanagement and (most likely) corruption, and also, Corrêa and Prada say, because the co-ops largely are handling low- value items like plastics rather than higher-margin items such as UBCs. "You're still better off being independent if you are a can collector," Corrêa says. "Why would you share those profits? But if the co-ops grow…" He stops with a shrug.
Prada's Grupo Paco has two nearby yards that process the full range of recyclables from the region's municipal waste stream, including significant paper, plastic, nonferrous, and ferrous operations. We stop by his 4,000-square-yard ferrous plant where, he tells us, the company processes roughly 800 mt a month. The facility is filled with unprepared ferrous, including white goods and illicit slot machines the police confiscated and destroyed. Several hydraulic cranes idle in the midday sun while three workers fill a baler with sheet metal. Compared with the co-op workers, Grupo Paco's employees do quite well, earning about $700 a month as well as benefits that include state-mandated health and pension contributions. "What the government should do is create a program so that the co-op workers can be trained and employed by private scrapyards," he says. "They'd be treated much better."
"But then the government won't have the political benefits of co-ops," Assi points out. "That's the real problem."
Low-Grade to the Landfill, Not China
While walking through a Paco yard, I notice a pile of old VCRs and DVD players, and I ask to see how the company processes those products. Prada smiles and leads me to a locked room where stacks of PCs are in various states of repair. Like Corrêa, he knows the money to be made in repairing rather than recycling PCs. "If we can't fix it, then we send it to a guy in São Paulo who recovers the palladium from the chips. What they can't recycle is landfilled. There isn't any cooking of circuitboards here."
From there he takes us to a small shed where an old man, equipped with a hammer, a screwdriver, and pliers, pulls apart a telephone cable amidst circuitboards, a few electric motors, assorted e-scrap, and communication cable of all grades. He's a contractor, Prada tells me, and what he can't process by hand, Grupo Paco will send to a landfill. When I point out that Chinese buyers would buy the material by the containerload, he tells me that he and most other Brazilian scrap processors just don't have much experience with exporting. One reason is that the limited supply of and domestic demand for Brazilian scrap make it some of the world's most expensive, Assi explains. Also, Prada—like many Brazilian scrap dealers—expresses ambiva-lence about China's low-wage economy and its impact on Brazil and the rest of the world. "I don't really like seeing our metal go there and come back as cheap products," he says.
I hear that sentiment even more bluntly in Rio de Janeiro, where Augusto Amaral, commercial director of Recibrás, a family-owned conglomerate of Rio-area scrap companies, asserts that scrap exports to China are tied to the laundering of Chinese retail exports sold in Brazil and that he—and others in the industry—do not want to support such activity. When I ask for a deeper explanation, he gives me a tutorial on how exporters of low-cost Chinese goods to Brazil set up offshore accounts that allow them to take advantage of the differential between Brazil's official and black market exchange rates, with scrap serving as the outbound goods in this arrangement. "Who wants to support that?" he asks. "It's one of the reasons why so many of us are opposed to Chinese ownership of Brazilian yards." He turns to Assi. "I know somebody in Brasilia [Brazil's capital] who we can talk to about that."
As I walk through Recibrás' new, high-security, 10,000-square-yard facility, Luiz Melo, the company's director and son of its founder, tells me that the business handles roughly 5,000 mt of nonferrous scrap a month. He stands surrounded by the yard's massive inventory: a large pile of radiators is next to him, just across from a 15-foot-high pile of scrap pots and pans, and other piles of motors and an array of cable and wire. "We could sell this all tomorrow as export, but we'll get a better price in Brazil," he says. The receiving area, complete with a scale wrapped in barbed wire that opens only when the gate to the street outside is closed, is jammed with trucks and traffic. Despite the scale of Recibrás' nonferrous business, there is almost no production scrap. "Rio has very little manufacturing anymore," Amaral tells me. "And those manufacturers] that are still here prefer to toll their own scrap for tax reasons. They won't sell to us."
So Recibrás is awash in the scrap collected from the streets of Rio. In the back of the plant, workers stand waist-deep in newly delivered sacks of UBCs from the Carnaval parades. The cans sprawl outward for dozens of feet from a conveyor that feeds them into a small baler. Beer cans constitute well over 90 percent of the inventory. Here, at least, it's not hard to believe that half of Brazil's secondary aluminum supply is generated by beer drinkers.
According to Henio de Nicola, coordinator of the recycling committee of the Brazilian Aluminum Association (ABAL) (São Paulo), Brazil generated between 350,000 mt and 400,000 mt of secondary aluminum last year. Meanwhile, published statistics indicate that Brazil recycled 324,000 mt in 2007, with secondary aluminum accounting for 35.3 percent of Brazil's total aluminum supply that year. In a meeting, de Nicola confirmed that slightly more than half of all secondary aluminum generated in Brazil comes from UBCs, with a total UBC recycling rate that exceeds 90 percent. "The problem we now face," de Nicola says, "is where to get additional supply. Our economy isn't developed enough to be generating old scrap, and we're at the limits on UBCs. So we must look to imports." In fact, as the global economic crisis loosened its grip on Brazil in the second half of 2009, it began to import scrap aluminum on a very modest basis—60,000 mt for all of 2009, de Nicola reports. With economists predicting 6 percent annual growth in Brazil's economy for the next several years, the country's demand for aluminum—and other materials—will grow.
Ferrous Heartburn
Logic would suggest that the steelmakers, who always benefit during an infrastructure boom, also would be looking to ramp up imports. The reality is much more complicated, however. Brazil's steel industry, long an exporter of high-quality, low-cost steel, is consolidated into three major steelmakers that have been able to control the price and flow of ferrous scrap in Brazil. With the advent of the strong global market, though, Brazil's ferrous scrap processors have begun to demand better treatment and better prices from the Brazilian steel industry. The tensions are sharp, dividing an industry accustomed to a guaranteed supply of scrap and an upstart set of recyclers learning that they can do better. This growing conflict could foreshadow tensions in other sectors of Brazil's recycling industry as the global economy—and scrap prices—recover.
In 2009 Brazil produced 26.5 million mt of crude steel—down 22.4 percent from 2008—with roughly 25 percent of that tonnage made from scrap, according to from the Brazil Steel Institute (Rio de Janeiro). Brazil exports about one-third of its steel production—8.9 million mt—to countries eager to get their hands on the low-cost but high-quality material. It's a market phenomenon that has kept the Brazilian steel industry afloat even during the low-growth decades from which the country's economy is now emerging. Equally important, it gave Brazil's recyclers a guaranteed, consistent buyer for their scrap. That doesn't mean processors were happy with the situation.
Back in São Paulo, Marcos Fonseca, commercial director at RFR, one of Brazil's largest ferrous scrap processors, sits in a second-floor office overlooking a six-year-old, 10,000-square-yard plant that processes 30,000 mt a month. The company, a recent merger of three companies, operates three additional, smaller yards that provide another 10,000 mt of processing capacity a month, and this volume appears to give RFR some leverage that other yards lack. "We're starting to receive the international price for our scrap," Fonseca tells me with a smile. Before that, he explains, the consumers controlled the price. "The steel companies would call us up, say ‘Send us scrap,' and then hang up. It wasn't a partnership. It was a hostage relationship. There was no negotiation," he says.
RFR's relationship with Brazil's big three steelmakers has deteriorated precipitously in recent years as global markets have given it and other scrap exporters alternative destinations for their scrap. Fonseca leads me into the yard, and we stop behind the company's 3,000-hp, domestically built Tectrix shredder. "When we started shredding, that pushed the steel companies to start improving prices," he says. "Then we started threatening [to export]." Shredded scrap is easy and profitable to export, and RFR is exporting it—to Pakistan, India, and Bangladesh. Meanwhile, since the economic crisis began, RFR no longer sells to one of the three large steel companies. Fonseca won't say why, but another recycler—Marcio Trujillo Rodriguez, director of Trufer, one of São Paulo's oldest family-owned scrapyards—describes his own experience. "They told me that if I export scrap, they won't buy from me anymore," he says. His story is not unique. Another São Paulo scrap operator showed me documentation—including shipping papers—that one of the big three steel mills is importing U.S. ferrous scrap even as it informs at least some of its scrap suppliers that it will no longer buy from them if they export.
Like RFR, Trufer is exploring export markets. On a humid and drizzly afternoon, Rodriguez led me to the farthest corner of his yard, past piles of unprepared steel, hills of stainless clips, bales of prepared steel, and mountains of shredded scrap. "This is all going to India," he said, pointing at a pile of steel turnings—reportedly material that Brazil's scrap consumers covet—stored in a shed several stories tall. As we talk, a crane loads the material into upturned containers—30 of them in all. If the loss of a major domestic customer has hurt his business, Rodriguez isn't saying so. He has a high-quality product, a 3,000-hp Metso shredder, and a location in the heart of São Paulo's manufacturing district. Like his counterparts, he knows that Brazil's ferrous scrap supply is poised to grow with its middle class, and he's equally convinced that the demand for that scrap in Brazil will grow. In the long term, he maintains, the steel mills will have little choice but to deal with him. In the near term, he's beginning to learn the ins and outs of exporting.
And why not? Brazil's economy is expected to grow for years to come, and companies like RFR will be the beneficiaries. According to RFR's Fonseca, the firm has 80 trucks devoted to picking up scrap from more than 300 companies in the booming São Paulo region, reportedly the source of more than half of Brazil's scrap. The steel mills, despite their best efforts, are growing weaker, and the co-ops are too small and focused on lower-value items to pose a significant threat, Assi explains. Landfilling automobile shredder residue and rising wages are concerns, but Fonseca isn't worried thanks to the prospects ahead. "It's a good moment," he says.
Assi agrees. "Look, the problems in the market are a good thing," he says. "It means we have good products and a growing economy. Brazil's future is better than any other developing economy's, in my opinion." On the way back to downtown São Paulo, he points out the city's automotive manufacturing district and, closer to town, the steel skeletons of residential high-rises sprouting from old neighborhoods. "Brazil is doing great," he concludes. "Maybe better than great, even."
No doubt, exports will play a greater role in Brazil's scrap economy in the next decade, but only because free and open markets always encourage the flow of material in and out of a country. With dynamic growth and some of the best prices for scrap in the world, Brazil promises to become an important importer as well, joining Japan, South Korea, and other developed countries that do not generate enough scrap domestically to fuel middle-class lifestyles and growth patterns. "Already," Assi tells me, "we are starting to see a few people coming and looking around. I think there will be more, and soon." •
Adam Minter is a journalist based in Shanghai, where he writes about business and culture for U.S. and international publications. He also maintains a blog at www.shanghaiscrap.com.
Brazil's thriving economy is creating unprecedented scrap demand at home while helping the country's recyclers reassess their place—and their opportunities—in both the domestic and international scrap markets.