May/June 2005
At a March conference in China, international scrap traders heard about that country's interest in consolidating its ferrous scrap purchases, among other news. Here are the highlights from that notable event.
By Adam Minter
The last 18 months have marked the most tumultuous period in the 20-year history of the international Chinese scrap trade. Those months were largely defined by market volatility—caused in part by economic dictates from the Chinese government—and China's new supplier registration system, both of which altered the trade's dynamics.
While these shifts caught some global scrap traders by surprise, they were, in fact, mentioned—implicitly and explicitly—as far back as November 2003 at the first China International Metal Recycling Forum in Guangzhou, China. In truth, it is common practice for the Chinese government to indirectly "announce" significant news in such public forums rather than directly through official media. Thus, scrap traders who attended this year's second China International Metal Recycling Forum, held in March in Guangzhou, wondered if they'd hear equally momentous news.
Notably, the 2005 forum attracted 450 Chinese, European, American, and other international delegates—more than double the 2003 attendance. Equally notable, however, was the absence of high-level representatives from China's State Environmental Protection Agency (SEPA) and any representatives from China's General Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ). Attendees speculated that there were no AQSIQ officials due to the controversial nature of that agency's recent supplier registration system, which has caused considerable headaches for companies that ship scrap to China.
The forum did benefit, however, from the participation and sponsorship of the China Iron & Steel Association (CISA), the China Association of Metalscrap Utilization (CAMU), and the China Nonferrous Metals Industry Association (CNIA), each of which possesses policymaking and regulatory power in the Chinese government. And indeed, officials from those organizations outlined short- and long-term goals that could significantly alter the international scrap trade. In particular, they expressed a common desire for a more consolidated Chinese scrap industry. Also, two major presentations outlined China's interest in group-purchasing arrangements for ferrous scrap to protect Chinese scrap buyers from market shifts. In other presentations, Chinese officials revealed a trove of statistics on the country's primary and secondary metal industries.
A Consolidated Ferrous Future?
The price swings that wracked the Chinese ferrous scrap market in mid-2004 were partly the result of macroeconomic policies of the Chinese government, including the tightening of loan requirements on new steel mills and the closing of many small producers, several presentations noted. Despite these efforts, 2004 Chinese steel output increased 50 million mt to 272.5 million mt, with scrap consumption totaling 54.3 million mt, according to CISA figures.
China's domestic scrap supply reportedly accounted for the majority of its ferrous scrap needs. Production scrap from Chinese metallurgical enterprises provided 18.4 million mt in 2004, according to CAMU. Meanwhile, China's roughly 5,000 ferrous scrap collection companies supplied about 30 million mt of "social scrap"—roughly defined as scrap not generated in industrial enterprises—last year, with projections calling for 34.9 million mt of domestic ferrous scrap recovery in 2005, noted Wang Zhenwu, executive vice chairman of CAMU. Additional steel scrap tonnage is supplied by China's shipbreaking and automotive dismantling industries.
Imports of ferrous scrap—which totaled 10.2 million mt in 2004—generally fill the remaining demand. In 2005, China's total ferrous scrap demand could reach 55.2 million mt, of which 13 million mt will be imported, reported Wu Jianchang, vice chairman of CISA.
Several presentations noted the growing recovery of ferrous scrap by China's automotive dismantling industry. This industry "will become one of the major scrap suppliers in the near future," asserted CAMU's Wang Zhenwu. As he noted, the 367 authorized Chinese auto dismantlers have the capacity to process more than 2 million vehicles a year, though they are expected to dismantle only 1 million units in 2005. This excess capacity is due, in part, to China's 2001 ban on imports of end-of-life vehicles (ELVs). Since that ban, China has worked to standardize the importation of scrap automobiles "so as to broaden imported scrap resources," Wu said. The import ban on ELVs is expected to be lifted this year, a move that would help China's dismantling industry fill much of its excess capacity.
Overall, the structure of the Chinese steel industry changed markedly in 2004, with a strong trend toward consolidation of large steel companies into even larger regional enterprises. This consolidation trend is supported by the Chinese government, which views it as a way to improve the country's steelmaking technology and raw material purchasing system.
The number of Chinese steel enterprises producing 2 million mt a year or more grew from 35 to 43 last year, while the number with output exceeding 3 million mt a year increased from 18 to 26, Wu noted. Shanghai Baosteel and Angang Steel Group—China's largest steelmaker, with at least 10 million mt of production—and most other CISA members continue to be state-owned and, in many cases, are consolidating with other large state-owned enterprises to create huge regional steel enterprises. For example, the large Dalian, Wushen, and Beiman steel companies have combined to form the state-owned Northeast Special Steel Group.
In contrast, private steel enterprises accounted for only 29.4 percent of China's steel output in 2004, Wu said. Nevertheless, the production of the 14 private CISA members grew at a faster rate than the output of the association's state-owned members.
Currently, China produces the vast majority of its steel in blast furnaces, with scrap-fed electric-arc furnaces (EAFs) accounting for about 15 percent of its production, Wu said. While China's EAF production—and, hence, its ferrous scrap consumption—will grow in the future, the overall EAF market share in China is expected to remain largely the same. "The reason for this," Wu stated, "is that scrap is still in short supply, the price is high, electric power is in short supply, and the fee for electric power is high."
The last cost factor is significant: According to Wu, the average electricity cost for EAF steelmaking in the United States is 4 cents per kwh; in China, the cost ranges from about 5 to 7 cents per kwh. From a policy standpoint, though, the real bottleneck is a scrap shortage, Wu said. As a result, he encouraged the development of DRI and hot-metal charging for EAFs "so as to mitigate the dependence on scrap and, at the same time, improve steel purity."
Several speakers maintained that high ferrous scrap prices and unpredictable scrap markets have hampered the development of the Chinese iron and steel industries. One solution could be group purchases of ferrous scrap, according to Wu and Wang. "We suggest that the state encourage the iron and steel producers to turn gradually from separate purchasing to united purchasing," Wu said. "It will be beneficial to selecting proper scrap suppliers and scrap products and also beneficial to lowering freight and cost."
Adding detail to this proposal, Wang noted that the Chinese government "will accelerate harmonization and cooperation between big domestic scrap entities and set up a scrap purchasing alliance so as to form long-term cooperative and steady overseas supply channels." In October 2004, he reported, SEPA and China's Ministry of Commerce approved CAMU's plan to set up an "experimental scrap distribution base" in Jiangsu province, thus opening the door to "the initial reform of the scrap supply and demand mechanism of our country." This so-called East China Scrap Distribution Base will be refined and then spread nationwide. "It is planned that the scrap distribution base of our country will take shape in five to ten years," Wang said.
The announcement of consolidated scrap buying overshadowed other events at the conference and elicited a swift response from ReMA Chair-Elect Frank Cozzi of Cozzi Enterprises Inc. (Burr Ridge, Ill.). "We must all remember that scrap markets, particularly scrap metals and even more specifically ferrous metal markets, are the purest example of supply-and-demand economics," he said. "These markets are very efficient and any attempts to artificially interfere with these markets can have dramatic adverse effects." In conclusion, he cautioned that "any attempt by consumers to consolidate their buying in an effort to lower prices is ill-advised."
Aside from the consolidated buying issue, China intends to step up pollution control and environmental protection regarding the scrap import trade. In the only presentation by an official from SEPA, Zhong Bin of the agency's solid waste department departed from his printed remarks and noted: "In the future, not all ports will be allowed to import steel scrap. It will be restricted to ports capable of doing so in accordance with inspection standards."
| ISRI Leaders Address China Forum
Three ReMA representatives discussed the North American scrap market in speeches delivered at the second China International Metal Recycling Forum, held in March in Guangzhou, China. The ReMA representatives included President Robin Wiener, Chair-Elect Frank Cozzi of Cozzi Enterprises Inc. (Burr Ridge, Ill.), and Nonferrous Division Chair Tom Mele of Connecticut Metal Industries Inc. (Monroe, Conn.). ReMA's General Counsel/Vice President of Government Relations Scott Horne also attended the forum but was not a speaker. In her speech, Wiener focused on "the single most important policy impediment to recycling worldwide—the improper inclusion of scrap in the definition of solid waste." As she explained, "Confusions caused by including scrap materials in the definition of solid waste and the inappropriate application of solid waste regulations are a continuing problem for recyclers worldwide." Wiener also outlined ReMA's increased focus on environmental compliance, worker safety, and quality. The association's Design for Recycling® plan "could help ease the long-term impact of regulatory and legislative controls while also enhancing environmental protection and worker safety worldwide," she noted. Design for Recycling encourages manufacturers to consider the recyclability of their products and eliminate—to the extent possible—hazardous and nonrecyclable materials from the production process. ReMA is also advancing the industry through its new Recycling Industries Operating Standard (RIOS), an integrated environmental, health, safety, and quality standard designed specifically for scrap recycling operations. The writing of the standard is virtually complete, and ReMA is developing the "toolkit" for implementation. "With RIOS, scrap consumers will have a new benchmark for establishing confidence in their suppliers," Wiener said. "We believe this has the potential to be the single most-important trend in the scrap recycling industry over the next several years." Frank Cozzi focused his remarks on North American scrap markets, while Tom Mele, speaking on behalf of ISRI, provided "A North American Perspective of Aluminum Scrap Exports to China." While in China, the ReMA delegation met with staff from the U.S. Embassy to begin planning ReMA's first trade/study mission to China, which will take place later this year. The mission will focus on paper recycling. ReMA officials also met with China's General Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ) to discuss outstanding issues regarding its new scrap supplier registration regime. ReMA was a supporter of the China International Metal Recycling Forum, along with the Bureau of International Recycling. |
Evolving Nonferrous
China's imports of nonferrous scrap continued to grow at a startling rate in 2004. Its aluminum scrap imports, for instance, totaled 1.2 million mt—almost double its 2003 level of 650,000 mt. Those imports accounted for 55 percent of China's aluminum scrap needs, said Li Hongwei, president of METRUST Consulting Center and CNIA's metal recycling branch. China filled the rest of its aluminum scrap demand with production scrap (16 percent), domestically collected scrap (16 percent), UBCs (7 percent), and other minor sources. Overall, China's domestic aluminum scrap recovery totaled a reported 500,000 mt in 2004. (Please note: Authoritative statistics on China's domestic scrap recovery do not yet exist, but its import numbers are more reliable.)
In 2004, imports of copper-bearing scrap were about 4 million mt, up from 3.2 million mt in 2003. According to Zhang Xizhong, director of the Beijing Zhongse Metal Recycling Institute, the actual copper content of China's copper scrap imports was approximately 25 percent, or 800,000 mt, though he didn't explain the methodology used to determine that percentage. In addition, Zhang asserted that the illegal importation of copper-plated sheets and scrap circuitboards accounted for approximately 50,000 mt of China's copper scrap imports in 2004.
China's total output of all nonferrous metals reached roughly 14 million mt in 2004, with nonferrous scrap accounting for 23 percent—or 3.2 million mt—of the total, reported Wang Jiwei, secretary general of CNIA's metal recycling branch. Last year, China remained the world's largest producer of aluminum, lead, zinc, tin, and magnesium as well as the second-largest copper producer and the sixth-largest nickel producer.
According to Wang, there were more than 3,000 secondary aluminum smelting enterprises in China in 2004. While that figure is large, it is considerably smaller than the number of enterprises in 2003 because the government shut down many small aluminum enterprises—generally those with annual output below 5,000 mt—in two major processing zones. Four of China's aluminum smelting operations had annual output in excess of 50,000 mt in 2004, while 26 operations had production levels from 10,000 to 50,000 mt. Like his ferrous counterparts, Wang encouraged the development of larger enterprises in the Chinese nonferrous sector.
As for copper, Wang observed that in 2004 "the overall scale of the recycled copper industry became bigger, represented by higher output by all enterprises and higher output by the biggest enterprises." Notably, there are only four Chinese secondary copper producers with annual output of more than 10,000 mt, said Pan Wenju, deputy secretary general of CNIA.
China's secondary nickel industry reached 20,000 mt of recovery in 2004, with an additional 15,000 mt of nickel scrap used directly in stainless steel and high-temperature alloy production. The nation's overall nickel production was 75,400 mt last year, of which recycled output accounted for as much as 27 percent.
Both Wang and Pan paid special attention to China's recycled lead industry, with Pan noting that only three Chinese secondary lead producers have annual output exceeding 10,000 mt. According to Wang, those three account for 50 percent of China's total recycled lead output, which was approximately 240,000 mt in 2004. The remainder of its output comes from small-scale enterprises that produce low-quality products with little environmental or workplace safety controls.
Wang's presentation was particularly notable for its detailed description of the increased attention the Chinese government is giving to the nation's recycling industry. In March 2004, Hu Jintao, secretary general of the Central Committee, pointed out that as China develops, "maintenance of resources and the environment should be taken into full consideration and he asked for the active development of a recycling economy," Wang noted. The results of this high-level policymaking are tangible: China's powerful National Development and Reform Commission (NDRC) has entrusted CNIA's metal recycling branch with the medium- and long-term development of the country's nonferrous recycling industry. This project's purpose, Wang said, is "to guide and promote the healthy development of the recycled metal industry."
The first draft of the project will be posted in June. The complete plan, reportedly to be posted in October, could have a significant impact on all aspects of China's nonferrous scrap trade.
Offering more evidence of Beijing's interest in scrap recycling, Wang noted that the government established "special-purpose funds" last year to support the construction of recycling demonstration projects. (Wang, in fact, sits on the board that examines such projects.)
Similarly, the NDRC has approved funds for several scrap appliance recycling demonstration projects in northern China. In addition, 2004 marked the first time the government treated the nonferrous recycling industries as entities separate from their primary counterparts. The main effect of this decoupling will be in the macroeconomic policy arena and, specifically, in taxation.
After Wang's presentation, Li Hongwei of METRUST and CNIA's metal recycling branch followed with a talk that was startling in its candor. "Because of the ignorance and neglect of the government, the aluminum industry has not received proper oversight," he said, departing from his printed presentation. Indeed, the bulk of Li's talk focused on a Ministry of Finance tax regulation issued in 2001 that exempts aluminum scrap dealers from China's 17-percent value-added tax (VAT) while giving aluminum scrap users a 10-percent refund on the VAT. That 7-percent difference is, in effect, a tax on China's aluminum scrap consumers, he said. "The aluminum industry cannot use legal means to survive because of this tax policy, and it is predictable that many of these businesses will have to shut down," Li asserted.
In his view, quality issues are of equal concern to the long-term viability of China's secondary aluminum industry. According to a recent survey, Li said, 26 percent of fabricated aluminum products in China are defective, and "most of the problem is due to scrap." Though he didn't offer specific solutions regarding the quality issue, Li suggested that a consolidated secondary aluminum industry in China would be better able to invest in technological improvements.
An Unexplained Future
Unlike the 2003 conference, the 2005 China International Metal Recycling Forum lacked detailed analyses of China's burgeoning domestic scrap market. In general, Chinese speakers acknowledged that supplies of domestic "social" scrap—as opposed to domestic production scrap—are growing and that these supplies will eventually satisfy the majority of China's scrap needs. Few details were presented, however.
In addition, the detailed presentations on emerging markets that made the 2003 forum a guidepost for the international scrap trade were conspicuously absent. Instead, projections relied on general observations derived from macroeconomic trends that simply point to growth.
CNIA's Wang Jiwei offered some projections on when China's appetite for imported nonferrous scrap could decline. The volume of end-of-life products in China will steadily increase, reaching a near-term peak in 2010, he said. Reclaiming such products "will offer an unfailing supply of raw material to the recycled metal industry of our country, and recycled metal will evolve ... into the main raw material source."
Wu Jianchang of CISA noted a similar trend in the ferrous scrap industry. By his analysis, China's steel production capacity will reach 380 million mt by 2010, while its demand for ferrous scrap will climb to about 60 million mt. In the intervening years, "the proportion of social scrap will rise and will become the main scrap source," Wu stated.
Despite the lack of presentations with strong analyses of market potential, the announcement of China's plans to consolidate its ferrous scrap purchases was the 2005 conference's biggest news—and, perhaps, a significant moment in the evolution of China's scrap markets. When the next forum is held in 2007, the success or failure of such a buying regime could be a top presentation issue.
Though many delegates expressed deep concerns—privately—about the proposed consolidated scrap buying program, there was no lack of enthusiasm in the informal, smoke-filled "trading floor" just outside the conference hall.
There, from early morning until the last speaker of the day, Chinese buyers traded business cards and prices with international scrap suppliers. While many deals were undoubtedly brokered at the 2003 forum, the sheer scale of the 2005 trading crowd was unprecedented, suggesting an evolving level of comfort among the Chinese, European, and North American scrap metal industries. Only time will tell whether this comfort level will grow or diminish as China develops its own scrap industry according to the central government's dictates. •
Adam Minter is a journalist based in Shanghai, where he writes about business and culture for U.S. and Chinese publications.
At a March conference in China, international scrap traders heard about that country's interest in consolidating its ferrous scrap purchases, among other news. Here are the highlights from that notable event.