May/June 2000
Selling scrap to China offers both great opportunities and considerable risks. Here's what to expect when you export to the People's Republic.
By Robert L. Reid
Robert L. Reid is managing editor of Scrap.
In China, a person going into business is said to xia hai—literally, leap into the sea.
And U.S. scrap traders should certainly look before they leap into doing business with China, experienced exporters advise.
Not that you shouldn't sell scrap to China. Far from it. China is a strong, if somewhat erratic, market that last year purchased about 32 percent of total U.S. exports of copper/brass scrap, more than 21 percent of aluminum scrap, almost 11 percent of nickel/stainless scrap, about 10 percent of ferrous scrap, and around 16 percent of recovered paper, according to U.S. Department of Commerce figures. And the consensus is that China's appetite for scrap will only increase in the future.
The problem is doing business with China today—and it's a problem that troubles both U.S. scrap shippers and Chinese buyers. U.S. traders, for instance, complain about payment problems and China's ever-changing government restrictions, while the Chinese point to quality concerns and the possibility of smuggling.
But if both sides are seeking cheng gong (or "success," as depicted in the Chinese characters on this page), the key seems to be a mixture of patience and understanding.
An Ever-Changing Experience
Perhaps the first point U.S. scrap traders need to understand about doing business with China is that the entire practice of doing business—at least as the scrap industry understands business—is relatively new in China.
While other Pacific Rim countries like Japan, South Korea, and Taiwan have long histories of buying U.S. scrap, China only became a large buyer a decade or so ago and is still considered an immature market. Moreover, China—officially known as the People's Republic of China—remains a communist state in which concepts like private property, profits, and even legally binding contracts are fairly new.
"China has only been capitalistic for the last 10 years, so its thinking process can be much different than ours," notes Sam Lee, president of SLE Metal Inc., a nonferrous broker in Westminster, Calif.
For one thing, despite China's 14-year-effort to join the free-trade-oriented World Trade Organization (WTO), it also imposes a number of protectionist barriers, including import quotas, import licenses, and a lack of uniformity in tariffs, with different ports often charging "significantly" different duty rates on the same products, sources note.
Payments are also a recurring problem, especially when letters of credit are involved. One trader often had letters of credit delayed two or three weeks from when they were promised, with some never opened at all if the market declined. Another trader reports receiving letters of credit "in significant variation from what the terms of the contract were."
But letter of credit problems aren't unique to China, the second trader stresses, adding that in many Asian countries a "contract" can be seen not as a final document but rather as "the right to continue to negotiate."
Moreover, China's currency isn't fully convertible to other currencies, says Lee. So there really exist two "markets" in China—one based on the official government exchange rate and another using a black market exchange rate that can differ as much as 30 percent from the official rate.
"The actual movement of scrap is based on the black market exchange," Lee says, adding that this creates a problem for U.S. exporters because they can't hedge against shifts in a nonconvertible currency as they can with a fully convertible currency.
And don't look for consistency in China's rules and regulations regarding imports. Rick Schwartz, president of the nonferrous brokerage E-Met L.L.C. (Portland, Ore.), describes doing business with China as "a constantly changing landscape" in which the government can unilaterally impose new rules and regulations regarding the types of material you can export to China, how those materials can be packaged, what kinds of documentation you need, and other factors.
Remember, Schwartz says, "the Chinese invented bureaucracy."
Inspections and Frustrations
The unpredictability of doing business with China hit scrap exporters dramatically last summer when initial media reports said that the Chinese army was opening inbound containers at the country's major ports, looking for smuggled goods. The people examining the containers turned out to be additional customs agents, not soldiers, a trader notes. But the crackdown was accompanied by other measures such as raising duty rates, reducing the number of import licenses, and limiting the ports that importers could use.
Scrap imports were especially targeted because customs inspectors reportedly found new computers, motors, and other items intended for resale being smuggled in as scrap.
Legitimate scrap traders weren't doing the smuggling, but rather people who deliberately mislabeled their inbound containers as scrap, Lee asserts. Such mislabeling of finished goods enables the smuggler to avoid paying duties that can be 10 to 20 times higher than for actual scrap, notes John Chen, executive vice president of Tung Tai Trading Corp. (Burlingame, Calif.), a nonferrous broker that also operates seven scrap processing plants in southeastern China.
And it's not just smuggled finished goods that Chinese inspectors look for—they're also checking for hazardous materials like radioactive metal and medical waste. For years, China protested that the United States was using it as a dumping ground for such dangerous waste. In 1997, the Chinese government even sentenced a U.S. businessman to 10 years in prison for illegally bringing into China more than 200 tons of medical waste and garbage that he'd misidentified as scrap paper.
Because of such problems, China also began requiring preshipment inspection and certification of all containers being sent to China. This means that inspectors—either from or authorized by the China National Import and Export Commodities Inspection Corp. (CCIC)—must examine and certify every shipment of scrap material when it's loaded in the United States. The inspectors come to your facility, notes one West Coast paper exporter, and currently charge $43 a container. Self-inspection is also an option under certain circumstances.
Though waiting for a CCIC inspector can delay shipping material a day or two, the certification itself isn't difficult to obtain, sources note. But it's a good example of the nonnegotiable rules China can suddenly impose on an exporter, notes Schwartz.
"It's within their rights," he adds, "but it's a complicating factor—and in our business, anything that makes things even slightly more expensive or difficult can be daunting."
Just this year, for example, China prohibited the use of packing materials that contain conifer wood unless the exporter can demonstrate—through a U.S. Department of Agriculture certificate—that the wood has undergone a specific heat-treating procedure. China is trying to keep out a wood-eating insect, but the edict could cause considerable disruption because roughly 28 percent of U.S. pallets are made from conifer wood. (In all fairness, the U.S. imposed a similar regulation against Chinese imports a year earlier.)
And then there's the Chinese requirement that the shipper have a copy of the buyer's import permit before sending the material. No other country requires that, Schwartz notes.
Plus, the permit itself generally comes written in Chinese. "So you really don't know what you're looking at," Schwartz says, "or whether the commodity you have is appropriate for the permit unless you have somebody on staff who can translate the permit and interpret it technically into what kinds of materials can be shipped into the country."
Though China's strict import rules are intended to address legitimate problems, the solutions are "inappropriate," Schwartz says. They're an example of China taking two steps forward toward freer markets and then taking a big step back.
As China's market matures, the situation will improve, Schwartz believes, "but in between there'll be a lot of headaches for everyone."
Handling Headaches
So what can scrap exporters do to minimize those headaches?
First, accept the fact that in some cases there isn't much you can do.
"How do you get around an edict that says you need CCIC inspection on every container that goes into China?" Schwartz asks. "There's no way around the problem, you have to deal with it."
But there are other areas where scrap traders have more control over how smoothly they do business with China.
Sam Lee recommends that novices to the China trade shouldn't try doing business directly. Instead, find a reputable broker who's already selling material to China. "That way you can learn what kind of packaging, what kinds of containers, what locations in China are best for you, and the quality of the product needed," Lee suggests.
Only later, when you're more comfortable with the market, should you try selling solo, directly to Chinese buyers, Lee advises.
Fortunately, there won't be any lack of them. In fact, several scrap exporters say they're contacted almost daily about selling material to China. But the large number of buyers can also be a problem—if, for instance, the buyer says he actually "has" a scrap plant in China when, in fact, he only buys for a plant that buys from several brokers and also brings in material on its own. The problem is that China's import licenses limit the tonnage each license-holder can import. So the plant could easily reach its limit before the buyer stops taking orders.
"All of a sudden, you're left in the dust," John Chen explains. "Your buyer's gone, you have to tell your suppliers that you can't take the material anymore, and now your reputation is down the tubes."
So, until you know your buyer better, "it's probably best to sell one or two trial containers," recommends Nick Scully, a California-based consultant for Best Trade Services (St. Louis), who adds: "As in any market, you must be cautious."
After all, with so many buyers in China and Hong Kong, and so large a distance between Asia and North America, it's not unheard of for someone to just disappear—for a phone number to suddenly be cut off or a post office address to become invalid.
For that reason, Chen notes, some scrap traders only work with Chinese buyers who have an office in the United States. But regardless of where the buyer is located, it's important to do your "due diligence." Ask for references from the buyer, ask about his other customers. Find out the buyer's knowledge of the material and his commitment to the industry.
There's no sure-fire reference or seal of approval, of course. But "reputation and past performance" are a good indicator in the export market just as they are for domestic business, says Rick Schwartz.
And there are other clues to look for—like consistency in advertising. "If the buyer's got tons of advertising that always uses the same address, the same phone number, it's less likely that they'll just uproot themselves and disappear," Chen says.
Finding reputable people is also essential if you sell material that you didn't pack into containers yourself. "There's always that one container that can kill you," Chen says. "How do I know what a shipper will put in my container? A new car [to be resold in China]? How can I explain that? I'm dead."
To avoid letter of credit disputes and other payment problems, the most common advice is to get the money up-front or at least a sizable deposit. It's not a question of mistrusting your buyer, Chen says, "but you're dealing with material that won't get there until a month later. You've paid for it up-front, so expect the same from your buyers."
Another solution is for the scrap trader to retain the original bill of lading for the material shipped, notes Scully. The trader then informs the ocean carrier to release the container to the buyer only after he receives the buyer's payment. Though the original bill of lading has historically been the document of title, Scully says, he sees them being used less and less in the Chinese market.
"The dangers of this arrangement are obvious," he notes. The trader risks not getting paid for material that's already on the ocean—especially if the market suddenly drops. But on the plus side, Scully adds, "the dealer maintains title to the goods, as no original bills of lading have been sent or issued, and therefore the dealer is free to sell to another buyer." Though this "is certainly not the conventional way of export financing," he concludes, "it seems to work pretty well."
On the Inside
If you plan to actually do business inside China—by owning your own plants or setting up a joint venture—there's a lot to learn and a lot to teach.
Tung Tai, for instance, saw its first efforts inside China, launched in the 1980s, end disastrously. Its plant was ultimately shut down by the government, Chen explains, in part because of excessive regulations and a lack of mutual understanding about the nature of the scrap industry.
Now, he says, Tung Tai knows to build relationships with the local officials, explain what scrap metal really is—i.e., it's not a dangerous "waste"—and highlight the employment and tax benefits that having a local scrap plant will bring to the community.
It's also important to understand the various Chinese ports and educate the customs officials you deal with, Chen says. For instance, some ports in China are so large that they're divided into different sections, each of which has its own customs officials and can be served by different ocean shipping companies. So you need to know exactly where your shipments will go, when they'll arrive, and who'll be examining them.
That way, you can educate the customs officials in that section that coils of insulated wire, for instance, really are scrap—they won't simply be resold as is. Or that electronics scrap isn't just a disassembled whole computer being smuggled in for reassembly and resale. Otherwise, the local officials, who must report to their superiors in Beijing, might reject your shipment or cause delays rather than risk their careers by letting in material at a lower duty. Such delays could make you pay excessive demurrage charges to the shipping company for not turning around their containers quickly.
Likewise, you'll probably see plenty of Chinese officials—from customs to the Chinese equivalent of EPA—at your scrap facilities. Building a good reputation is key, Chen says, explaining that if the Chinese officials "know your name's good, after they check you a hundred times and nothing comes up bad, they move on to other people."
Cultural Conundrums
While Rudyard Kipling's old warning that "East is East and West is West, and never the twain shall meet" is overstated, there's a potential for cultural misunderstandings when U.S. scrap traders deal with Chinese businessmen.
In addition to varying views on contracts, the Chinese are also reluctant to say "no" outright, one trader says. Instead, a Chinese buyer might say, "That would be very inconvenient," which could leave a U.S. exporter wondering what the buyer means. "But in fact," the trader says, "we weren't sensitive enough to ask the right question in the right way."
And while you'll find people who speak English in Hong Kong, which until 1997 was a British colony, don't expect the same from businessmen in the rest of China. To overcome language barriers, it helps to have an interpreter. But be sure he speaks the right language. After all, "Chinese" actually consists of several dialects that are as different as separate languages. Mandarin is the most common dialect and the country's official language. But Cantonese is prevalent in the Hong Kong/Guangzhou region of southeastern China, while the Wu dialect is common in Shanghai.
You should also expect to spend more time closing a business deal in China than you would at home. "A lot of scrap dealers go to China and want meetings—boom, boom, boom," notes Rick Schwartz. "But in China in particular and in Asia in general, you have to take time."
So between the travel, the meals, and the drinking involved in many Chinese business negotiations, it can take two days to get to the real substance of what could have been done in a half-hour conversation, Schwartz says. But to the Chinese, that's all part of setting the stage for doing further business. And during those two days, "their side is finding out a lot about you."
Eastern Futures
China is in a period of great transition. State-run enterprises—including many scrap-consuming operations—are being privatized or shuttered, which has only added to the country's reputation for poor payment. Workers who thought their jobs were guaranteed for life are now unemployed by the millions and starting to protest. Meanwhile, China's communist leaders have recently turned back the clock of progress by threatening to attack neighboring Taiwan (which they consider a renegade province) and purging university professors who have allegedly become too "Westernized."
China's scrap industry is also changing. Currently, for instance, Chinese buyers often pay above-market prices for the scrap they buy. Meanwhile, U.S. traders are getting a reputation for offering the cheapest material at the highest prices possible, which will only hurt them in the long run, traders warn.
"News travels slowly in China," one broker says, "but eventually they'll know they can buy cheaper scrap elsewhere, and they'll feel they were cheated."
Everyday is a learning process in China, that same broker says. "Eventually it'll be a bigger and bigger consuming country. In the next 10 to 20 years, it'll be similar to doing business in Korea, Japan, or Taiwan—very easy, smooth."
But, he concludes, "you have to have patience." •
Selling scrap to China offers both great opportunities and considerable risks. Here's what to expect when you export to the People's Republic.