July/August 2006
Is China truly the future of the global scrap industry? What about India’s growing role? BIR brought its spring convention to Beijing in search of answers to these and other market questions.
By Robert J. Garino and Adam Minter
The Bureau of International Recycling is no stranger to Asia, having held previous meetings in Singapore and Hong Kong. But this May, BIR brought its spring convention to mainland China for the first time, going right to Beijing—the political heart of that Asian economic powerhouse. By virtually any measure, this bold gamble was an unqualified success for both the Brussels-based association and the event’s 1,100 delegates and guests, who hailed from more than 60 countries.
The convention held special significance for Chinese government officials with oversight of recycling issues. Many of the officials who attended had never interacted with recycling professionals outside of China, despite the international nature of the Chinese scrap trade.
With the luxurious China World Hotel as a backdrop, the BIR Beijing convention had the high-end ambience of the major diplomatic gatherings that site often hosts. Rather than discussing affairs of state, however, the assembled scrap professionals networked with each other and expanded their market knowledge at plenary sessions on metals—ferrous, nonferrous, and stainless—as well as paper, plastics, textiles, and tires. The event also offered workshops on topics such as China’s and India’s scrap-shipper registration programs. The volume of information—like China itself—was overwhelming, so here’s a summary of the high points to bring it all down to size.
Steel and Ferrous Scrap Roll On
The global steel market in 2006 has proved far more resilient than most expected at the end of last year, said BIR Ferrous Division President Colin Iles of European Metal Recycling Ltd. (Warrington, England). Instead of trending lower, the global steel industry has remained solid due, in part, to a more stable Chinese domestic steel market and positive steel consumption in the United States, he noted. In addition, the European market has absorbed its own steel production, thus preventing an inventory buildup there. Consequently, both prices and market sentiment have improved.
Prices for all steelmaking raw materials—including iron ore, pig iron, DRI/HBI, and scrap—have increased “on the back of strong fundamentals,” Iles stated. In the U.S. market, reduced availability of pig iron, HBI, and low-residual scrap is driving domestic scrap prices higher. In addition, the generation of obsolete grades has lagged, intensifying competition among processors and shrinking their margins.
Tight supply conditions are expected to continue, with prices for scrap, pig iron, and HBI remaining “firm for the next few months at least,” Iles said.
Following regional reports on the scrap markets in Russia, India, and China, Peter Hickson of UBS Investment Bank (London) examined China’s steel consumption and the global trends underpinning world steel demand. The key ingredient of his analysis was the linkage among crude oil, scrap supply, and the performance of steel equities. Today’s positive steel markets echo conditions in the 1960s and could continue for the next 10 to 15 years, Hickson said, though he raised a short-term caution flag regarding China’s recent change from a net importer of steel to a net exporter.
The focus on China as a pivotal steel producer and consumer in the global economy continued in a panel discussion featuring Hickson, Iles, John Johnson of CRU International Ltd. (Beijing), Jeremy Sutcliffe of Sims Group Ltd. (North Sydney, Australia), and Xiao-Ming Lu of China Metals (Beijing).
Hickson characterized the global steel market as “robust” thanks, in part, to positive consumption and well-managed finished steel inventories (other than in South Korea). Though China’s steel exports are a “worry” at an average of 1.5 million mt a month, they haven’t been a serious issue so far and are likely to moderate “because China wants it to happen,” he said. Panelists also discussed energy issues in China, currency considerations, India’s emergence as a major steel producer, and Japan’s position as a growing and low-cost scrap supplier to the Asian market.
Stainless Scrap Dynamics Shifting
At the stainless steel and special alloys committee meeting, guest speaker Markus Moll of Steel & Metals Market Research (Reutte, Austria) asserted that China remains the driving force in the global stainless steel arena, but its overcapacity coupled with expansions and consolidations elsewhere will intensify regional competition for Asian mills.
Though stainless demand in North America could slow in the short term, the Asian and European markets will remain strong in comparison, with the overall short-term stainless market outlook “excellent,” Moll said. In his view, product prices will peak in the third quarter, but the severe destocking seen in the second half of 2005 won’t be repeated this year.
As for scrap’s share in stainless melts, Moll said there’s not enough scrap to maintain the current global share of 35 percent. By 2010, the global scrap ratio could slip to 32 percent as more primary nickel displaces scrap in stainless melts around the world.
In North America, however, the scrap ratio will be more stable, declining slightly from its 2004 level of 56 percent to 55 percent by 2010, Moll said. Even so, he warned, the scrap industry must ensure stainless steel mills that scrap remains the “value source” for nickel units in the long term.
Focusing on the U.S. market, Barry Hunter of Hunter-BenMet Associates LLC (New York) offered a bullish outlook, noting that mills are running “as close to 100 percent as production will permit.” Order books look strong through July, he observed, and lead times are being extended. North American Stainless—the largest U.S. flat-rolled stainless producer—has already announced tonnage allocations on new orders.
Consequently, the demand for stainless scrap has grown “beyond the capability of wholesale scrap supplies and suppliers,” Hunter said. This trend is reflected in lower stainless scrap export volumes, with “aggressive buying” in the Midwest and Pittsburgh markets claiming scrap previously destined for export. If Asian buyers step up their competition for material, the result could be a “significant shortfall of scrap,” Hunter said.
Nonferrous Prices Touch the Sky
At the nonferrous division meeting, Ma Hongchang of the China Nonferrous Metals Industry Association, Recycling Metal Branch (Beijing) reviewed the performance of China’s nonferrous scrap metal industries in recent years, with a focus on copper, aluminum, lead, and zinc.
In 2005, China’s domestic copper scrap output was 1.42 million mt, while its aluminum scrap total was 1.94 million mt. Lead scrap reached 280,000 mt, and zinc scrap was 85,000 mt, giving the country a total nonferrous scrap generation of 3.73 million mt, Ma noted.
China’s main sources of nonferrous scrap include local collection stations and individuals, domestic secondary producers, and imports. Last year, Ma said, China imported 4.82 million mt of copper scrap and 1.68 million mt of aluminum scrap, making imports the main source of feedstock for its secondary metals industry.
Adding to the China discussion, guest speaker Frank-Jürgen Richter of Horasis (Geneva) challenged recyclers to embrace the dynamic changes occurring in China while also recognizing that China must address, and overcome, negative national issues, such as its environment, its fragile banking system, and its ongoing internal social frictions. Despite these hurdles, “the risk of not being in China is much bigger than the risk of being there,” he said, asserting that Europe, in particular, must “reinvent itself” and recover its “lost spirit of entrepreneurship.”
The nonferrous division meeting also featured Jim Southwood of Commodity Metals Management Co. (Wexford, Pa.), who examined the aluminum market, noting that LME cash prices have held above the historical benchmark of $1,500 a mt for the past 31 months. The current price trend is looking to eclipse the previous bull market cycle, which lasted 45 months (June 1987 to March 1991), when the LME cash price averaged $1,967 a mt.
For aluminum, Southwood said, key issues include the global fundamentals of primary metal and scrap’s response, China’s change from being a net importer of primary aluminum to a net exporter, and the influence of hedge funds on aluminum prices.
In 2006, the supply-and-demand balance is pointing toward a 300,000-mt shortfall in primary aluminum, Southwood said. In addition, aluminum scrap demand will continue to increase, though there will be ongoing global tightness in scrap supplies, he asserted. China will experience a growing scrap deficit in the near term, while the U.S. market “has no exportable surplus”—a condition, he said, that will last until the end of the decade. Europe’s scrap supply, meanwhile, is “in balance,” though its position as a net exporter of aluminum scrap will likely generate shortages there as well, Southwood said.
As for the influence of hedge funds, Southwood noted that only 5 percent,or $3 trillion, of the $60 trillion invested globally is invested in commodities, with the balance assumed to be in bonds (40 percent) and equities (55 percent). Thus, given the relatively small amount in commodities, any portfolio shift toward a larger stake in base metal commodities would have an immediate effect. A $2 trillion shift, for example, would literally “own” more than 100 percent of the annual new production of aluminum, copper, nickel, and zinc.
Hedge fund activity tends to be self-fulfilling on the upside, Southwood continued, in that as fund activity increases, liquidity increases and hedging decreases, resulting in an exaggerated price response as the underlying price of a commodity uncouples from the fundamentals. Though this phenomenon attracts fresh buying, investors saturate the market, ultimately creating a correction that, he said, “will end in tears.”
Rounding out the nonferrous division meeting, Nonferrous Division President Marc Natan of Ecore (Le Pré Saint-Gervais, France) examined significant price influences—such as exchange rates, inflation, energy costs, and world economic growth, among others—and major price impediments affecting today’s primary and secondary metals.
A report by Robert Stein of Alter Trading Co. (Grand Rapids, Mich.) offered a quick glimpse at the North American market. The market has been “brisk at all levels of the industry,” though there are ongoing credit concerns throughout the supply chain, and dealers continue to face cash-flow challenges, the report stated. That said—and “despite the stresses of dealing at price levels never seen before”—the North American nonferrous industry is “thriving,” Stein added.
Paper Faces Steady Demand, Weak Prices
China continues to be the most important market for scrap paper sellers, with total imports reaching 17 million mt in 2005, up from 12.2 million mt in 2004, reported Ranjit Baxi of J&H Sales International Ltd. (London).
North American shipments to China increased from 6.23 million mt in 2004 to 7.47 million mt in 2005, though North America’s share of overall shipments declined from 51 percent to 44 percent, Baxi said. Asia maintained its 23 percent share in 2004 and 2005, as its shipments rose from 2.81 million mt to 3.93 million mt.
Europe’s shipments showed the greatest year-on-year growth in market share, rising from 22 percent in 2004 to 27 percent in 2005.
China continues to boost its scrap paper imports in 2006, with its first-quarter purchases totaling 4.86 million mt, up from 3.1 million mt in the first quarter of 2005, Baxi noted. North America’s first-quarter shipments of 2.33 million mt gave it a 48 percent market share, compared with 44 percent in the first quarter of 2005. Europe’s market share inched up from 27 percent to 28 percent, while Asia lost ground in the quarter, slipping from 23 percent to 20 percent.
Several factors are dampening international scrap paper prices, including dollar weakness, energy costs, and large volumes of exported recovered fiber from the United States, Baxi said. Despite slight increases in demand, the markets remained weak in the first quarter. “The only good news is on the shipping side,” he added. Increases in shipping capacity, “especially with the introduction of superliners,” should push freight rates down and offset the negative factors hampering the markets. According to Baxi, shipping capacity is expected to grow 16.7 percent in 2006, 14.5 percent in 2007, and 13 percent in 2008.
Peter Wang of America Chung Nam Inc. (Los Angeles), the largest U.S. exporter of recovered paper to China, expressed more optimism on pricing based on that country’s continuing strong demand. Citing statistics from Resource Information Systems Inc., he noted that China’s demand for containerboard will increase 2 million mt a year through 2009 to reach 28.18 million mt. “With domestic production capacity increasing, the demand [for] recovered paper also goes up,” he said.
China’s apparent consumption of recovered paper was 28.1 million mt in 2005, with forecasts for that total to reach 30.9 million mt in 2006 and 33.6 million mt in 2007, Wang said, quoting RISI statistics. Imports will remain around 57 percent of total Chinese scrap paper consumption due to a lag in domestic recovery of secondary paper, he added.
Turning to the European Union, German, Austrian, and Hungarian prices have generally remained low and unchanged, despite aggressive attempts by board mills to push prices lower, reported Hubert Neuhaus of SITA Böhm GmbH (Hoccheim, Germany). German scrap paper collection increased 1 million mt in 2005 compared with 2004 and the Hungarian rate is “increasing very fast,” Neuhaus said. In the mid-term, consolidation in the German paper industry will yield stable prices, he added, but in the short term, a German public service strike has trimmed municipal collection and is possibly responsible for a a10 spike in German recovered paper prices.
The United Kingdom increased its scrap paper collection 8 percent in 2005, to 7.7 million mt, yielding a recovery rate of 62 percent, reported David Symmers of the Independent Waste Paper Processors Association (Daventry, England).
Mill closures, high energy costs, and a lack of domestic demand have created a long-term trend of growing exports, with U.K. scrap paper shipments rising from 2.6 million mt in 2004 to 3.3 million mt in 2005, of which 1.5 million mt went to China. In 2006, Symmers conjectured, “exports may exceed domestic consumption.”
Italy is in the fifth year of a “dull market,” and recyclers “absolutely need to make profits,” said Giuseppe Masotina of Gruppo Masotina Spa (Corsico, Italy). Markets for all grades have remained mostly stable, with a good balance between supply and demand. Box manufacturers are suffering from “pitiless competitors” in Asia, however, he added.
Italian exports of scrap paper declined because of an almost total ban on shipments from all Italian ports due to a new interpretation of waste definitions by Italian customs. According to Maso-tina, the situation isn’t totally resolved, though customs has become more lenient in recent months, thus allowing a slow recovery.
EU, China Address Scrap Tire Problems
European countries are scrambling to find destinations for end-of-life tires in advance of a July 2006 European Union ban on landfilling whole or processed tires.
According to Tire Committee Chairman Barend Ten Bruggencate of VACO (Leiden, Netherlands), the 25 countries in the EU have reduced their collective landfill rate for ELTs from 62 percent in 1994 to 20 percent in 2004. The EU 25 also recovered 3.2 million mt of ELTs in 2004, putting those tires to beneficial use—primarily retreading, energy recovery, and material recycling.
China, meanwhile, has begun to place a greater emphasis on tire retreading as a solution to its rapidly growing ELT problem. In 2005, China consumed 4.4 million mt of rubber, making it the largest rubber user in the world for the fourth year in a row, reported Jiang Zhiyun of the China Tire Retreading, Repairing & Recycling Association (Beijing). Of that material, 60 percent went into the production of 260 million new tires, of which only 5 percent can be retreaded, he said.
On the scrap side, China generated about 120 million ELTs in 2005, Jiang said. Of those, the country used 1.2 million mt to produce reclaimed rubber, 100,000 mt for crumb rubber, and processed 20,000 mt into carbon black and oil. China retreaded about 7 percent of its ELTs, with the majority intended for trucks and buses.
An AQSIQ Update
China’s import/export regulations took center stage at a meeting of BIR’s International Environment Council. According to Yilei Hao of AQSIQ, there are currently 3,352 AQSIQ-registered suppliers of scrap to China, with another 2,490 applicants pending. Since the program began, 1,411 applicants have been refused, 12 registrations have been suspended, and 10 registrations have been revoked, he said.
Based on Hao’s statistics, the “quality of scrap shipments has improved” thanks to both the AQSIQ registration process and improved inspections at Chinese ports. In 2004, he noted, China blocked 1,500 containers—or 0.56 percent of all imported scrap containers—from entering the country on environmental grounds. In 2005, that number decreased to 921, or 0.28 percent of all scrap containers. The overall number of disqualifications also has dropped. Last year 5,039 containers were disqualified out of 326,600 shipped, a rate of 1.54 percent, down from 1.93 percent in 2004.
AQSIQ is currently testing a pilot “e-inspection” system that will allow importers and exporters to view the results of inspections online, Hao said. The program is expected to be fully introduced in 2007.
Robert J. Garino is director of commodities for ISRI. Adam Minter is a journalist based in Shanghai, where he writes about business and culture for U.S. and Chinese publications.
Is China truly the future of the global scrap industry? What about India’s growing role? BIR brought its spring convention to Beijing in search of answers to these and other market questions.