China Looms Large

May/June 1993 

As an emerging player in the global economy, China has the potential to become a major consumer of U.S. scrap.

BY SI WAKESBERG

Si Wakesberg is New York bureau chief for Scrap Processing and Recycling.

A New York Times front-page article proclaims: "Booming China is Dream Market for the West." Reporting from Guangzhou , Sheryl Wu Dunn writes, "In the last few years, optimists say, China has finally begun to generate an industrial revolution and the nucleus of a middle class eager to buy foreign products that used to be unavailable to the nearly 1.2 billion people—22 percent of the world's population—living within China 's borders."

Indeed, the reclusive China has embarked on what one international scrap trader calls a "tremendous" building program that has included substantial foreign scrap purchases. To be sure, China 's economy is burgeoning; it grew 12 percent last year—double the Chinese government's original target.

Lest Western scrap executives become too optimistic, there are apparent pitfalls in doing business with China . One of these is the country's volatile economy, which is expected to grow in the more-modest range of 9 to 9 1/2 percent this year. As one scrap exporter observes, "There's a feeling that last year's growth was much too fast." Other obstacles include China 's tight trade controls, unpredictable demand, currency fluctuations, and inefficient port facilities.

Such is the paradox that is China . On the one hand, it represents perhaps the largest untapped market in the world. On the other hand, it's a newcomer to the international marketplace, and a country just embarking on its industrial development. As a result, China is experiencing the growing pains that all countries must face en route to becoming a player in the global economy—and a reliable consumer of foreign scrap.

The Copper Connection

China emerged as a consumer of U.S. scrap in the mid- to late 1980s, and, in the past two years, has become a strong buyer of some materials—particularly copper products such as No. 2 scrap, insulated wire, and motor breakage. In fact, China absorbed 76,800 million tons (mt) of U.S. copper scrap last year, or nearly a third of all U.S. copper scrap exports, according to the U.S. Bureau of Mines. In November 1992 alone, it imported 15,800 mt of U.S. copper scrap, representing 54 percent of the month's copper scrap exports.

Why does China need so much copper scrap? According to Weiyue Bai, president of Virginia Iron & Metal Recycling Inc. (Portsmouth, Va.), the answer lies in the fact that, while the nation has been expanding its metal demand, its copper reserves remain "limited." And in coming years, he predicts, "it will need as much, if not more, copper scrap than it's been consuming so far." Derek Pannell, president of Noranda Copper Smelting & Refining Co. (Montreal), supports Bai's remarks, noting that " China 's economy is picking up, but its mines and smelters are not able to supply the increasing demand."

A veteran U.S. exporter who has traveled to China offers another explanation for China 's hunger for copper scrap: "Of the 18 existing Chinese refineries, only a few make acceptable cathodes for wire or rod. They, therefore, have to sell their refined copper at prices below the London Metal Exchange. As a result, they look for cheaper grades of scrap to help manage their costs." Raymond K. Yiu, vice president of Ever-Glitter International Ltd. ( New York City ), points out, however, that this situation is headed for a change, noting that "one or two Chinese smelters will soon qualify as being equipped to produce the best-quality material." Chinese copper scrap purchases haven't been without market effects. In fact, when copper rocketed to $1.16 a pound on the Commodity Exchange ( New York City ) in mid-January, industry analysts insisted that Chinese buying was heating up the market. And when the price sank to 99 cents a pound a few days later, the same analysts blamed Chinese selling for pulling the plug. "The Chinese were the only active players in a dull and plodding market," explains one international merchant. "Therefore, their buys and their withdrawals from the market swung a great deal of weight."

The Letdown

China 's appetite for other types of nonferrous scrap falls far short of its demand for the red metal. In terms of aluminum scrap, for instance, China is relatively "self-sufficient," says Bai, adding, "It can get aluminum more readily than copper, and its needs are still not as heavy." Yiu affirms that China 's secondary aluminum industry "is still small," but he notes that "several secondary aluminum smelters are being built." When it comes to nickel and stainless steel scrap, " China is at the point where Japan was 25 years ago—just beginning," one trader says. A trickle of imports of U.S. stainless steel scrap have been noted, but the tonnage—like that for lead and zinc scrap—is not significant.

Even for copper scrap, China has virtually disappeared from the market since November, according to U.S. traders on both coasts. One shipper noted in February: "At this time last year, I'd already contracted for thousands of tons of copper scrap to be shipped to China . This year, so far, it's been nothing."

The primary explanation for this dramatic drop-off is the devaluation of China 's currency—the yuan, also called the RMB—says David Lee, a nonferrous metal trader with David J. Joseph Co. ( Cincinnati ). The RMB began to weaken in mid-1992, he notes, losing l5 to 20 percent of its buying power. By November, the free market exchange rate had dropped to 7 RMB to the dollar, and it sunk further, to 8.8 RMB to the dollar, earlier this year. Even that may not be its stopping point. Some forecasters, in fact, have been speculating a possible 10-to-1 relationship. And as long as China 's currency remains destabilized, export sources agree, its scrap purchases will be extremely limited.

Chinese demand for U.S. copper scrap also dropped off because of competition from European scrap, which can cost up to 5 cents a pound less than U.S. material, including scrap shipped from the West Coast, sources say. Though the quality of the less-expensive European scrap is reportedly lower than similar U.S. grades, many Chinese consumers do not require high-quality scrap for the copper products they make, traders note. As a result, cost has been the ruling factor.

Strong domestic demand for some types of copper scrap has also limited exports to China . For example, one large U.S. refinery reportedly has been aggressively buying motors, paying top price for them. "Getting that kind of scrap for shipment to China—which will bring at least 2 cents a pound below what the refinery pays—is next to impossible," an East Coast exporter says.

There is also some belief that China has become loaded up with primary and blister copper, which it acquires primarily from South Africa , and with Russian copper scrap (and aluminum) that has poured into Rotterdam or been re-exported from Germany . "That may be another reason why China hasn't been buying U.S. metal," a domestic shipper remarks.

Steel Scrap: The Next Big Purchase?

Steel is a vital building block in any country's development, and—as one might expect— China 's steel production has shown consistent growth, bolstered by demand from its construction industry. While the Chinese steel industry still relies on iron ore as its major raw ingredient, it has begun to recognize the importance of steel scrap. One U.S. shipper goes so far as to say, "Just as copper scrap was the big Chinese purchase item in 1991 and 1992, so iron and steel scrap will be the big purchase item in 1993 and 1994."

U.S. exporters seeking a piece of this business, however, will have to contend with competitors in Europe and the Pacific Rim , many of whom may have supplied China with relatively cheap steel scrap in 1992. Japan, for instance, began to cut its steel production as its economy eroded last year, and offered surplus scrap to China at lower prices. "At that time," one trader recalls," China could buy material from Japan at less than $100 a ton, while it had to pay $120 to $130 for comparable U.S. scrap."

Nevertheless, Bureau of Mines statistics show that China imported 215,000 mt of U.S. steel scrap in 1992, a figure that's nearly six times what China absorbed in 1991, though still small potatoes compared with total 1992 U.S. steel scrap exports of approximately 9 million mt. Much of this demand came at the end of 1992, with December shipments of U.S. ferrous scrap peaking at 95,000 mt, accounting for an astounding 44 percent of China 's total annual demand. The surge, industry players say, was the result of Chinese consumers scrambling to fill their allotments under China 's import quotas, creating a "congestion at ports" in the process.

Since this flurry of activity, Chinese demand has receded, though there has been a great deal of talk in recent months about Chinese buying, particularly of rail scrap. "A day doesn't go by that I don't receive at least two or three calls for steel scrap to China , mostly from Chinese traders in Canada ," says a Midwest scrap executive. A trade newspaper reported earlier this year, in fact, that Chinese agents were scouring the nation for as much as 20,000 mt of rail scrap for rerolling purposes. While U.S. scrap traders say that figure was inflated, most agree that the Chinese consumers would take all the rail scrap they could get. The problem is that "there's a shortage of this grade of scrap," notes one executive, "and U.S. rerollers aren't about to let it leave the country."

China is also said to be seeking expansion of its ship-breaking industry. Some U.S. exporters have already sold ships to China for scrapping, and there are significant ship-breaking operations in place at several Chinese ports.

A Rip Van Winkle Of the Paper Market

China first showed great interest in U.S. scrap paper about two years ago, but its political unrest, the worldwide economic downturn, and the credit crunch have made its demand "spotty" and any effective business "unrealizable," says Steve Vento, president of the international division of William Goodman & Sons Inc. (Sunrise, Fla.). Chinese buying has also been affected by sharp competition from other Asian paper-consuming countries such as Taiwan, South Korea, and Japan.

According to the American Forest and Paper Association (Washington, D.C.), China imported approximately 332,800 mt of various grades of U.S. scrap paper in 1992, with old corrugated containers (OCC) accounting for the lion's share at 176,000 mt. That's less than China imported from the United States in 1991, but more than many expect for 1993. Though "there have been a few good orders," Vento says, the total so far this year has been "negligible." Phil Epstein, vice president of marketing for K-C International Ltd. (Rochelle Park, N.J.), agrees, noting, "In recent months, there's been no major impact made by Chinese buying either on the East or West Coast. When the Chinese do come in, it's usually for a major purchase, but their demand is not consistent."

Still, U.S. paper exporters expect Chinese demand for U.S. paper to grow later this year because the nation lacks raw material and will have to continue to import scrap paper to make needed paper products. " China has a definite need for scrap paper, particularly for packaging," says William A. Nielsen, president of Nielsen & Nielsen Inc. (Pomona, Calif.). China has been relying on pulp, as well as on domestic nonwood fiber, including hemp, jute, abaca, and rice, Nielsen observes, but it has realized the importance of using less-polluting scrap paper. As a result, he says, the country has begun importing scrap—primarily OCC, old newspapers, and small amounts of unsorted mixed paper. And in the long term, Nielsen asserts, "the Chinese market holds great promise." Vento concurs, likening China to Rip Van Winkle and predicting that it could become a big-time consumer of U.S. secondary fiber in four or five years.

That seems to be the consensus of U.S. traders of all kinds of scrap materials: It is only a matter of time before China 's economy and industrial base mature, enabling it to join—and perhaps surpass—other countries as a strong, reliable consumer of U.S. scrap. As one another scrap export executive concludes: "The future is certainly slanted to Chinese buying. Once it gets itself straightened out, China will be an active and vital market for U.S. suppliers in the next decade."

Trading With China

All across the United States , scrap executives' telephones have been ringing off the hook with calls from people who insist they know a consumer in China who wants to buy scrap—usually a huge tonnage. "But in the end," says one U.S. scrap executive sourly, "it usually turns out that they don't have the ability to buy anything."

The problem is that, to bring scrap into China , a company must acquire an import license from the Chinese government—a feat typically attained by companies with bases in mainland China and trading offices in the United States (though there are some U.S. companies that operate in partnership with Chinese consumers). Even some Chines consumers lack import licenses and, thus, may have to purchase U.S. scrap through a licensed Chinese trading company.

In addition to concern about this licensing obstacle, many U.S. scrap officials who have done business with China express some dissatisfaction with Chinese buying methods. "Some Chinese consumers seem to think nothing of canceling contracts when it suits their purpose, and often their letters of credit are not confirmed," asserts one U.S. shipper, who likens their methods to "some Indian buyers." A veteran metals exporter agrees, noting that "there are problems with contracts, with letters of credit, with cancellation of purchase orders. You have to know your way around and move very gingerly.             —S.W.