July/August
2015
As its
economy slows to what the government considers more-sustainable levels, China
anticipates a healthier long-term future for its metals sector. But the
secondary ferrous industry faces lingering challenges, according to those at
the Eighth China International Metal Recycling Conference.
By Adam
Minter
China’s once-booming economy has slowed, and the metal business is
getting dragged down with it. Take, for instance, the steel industry. In 2014,
the world’s second-largest economy grew at a 7.4-percent rate, its slowest in
24 years, according to the China Iron & Steel Association (Beijing). CISA,
a powerful, government-run steel trade association, presented its data at the
eighth China International Metal Recycling Conference, held May 6–8 at the
Shangri-La Hotel in Qingdao, China.
Steel was among the sectors hardest
hit by the skid, with just 0.9-percent growth in 2014—its weakest performance
in 33 years. Yet, far from being downbeat, the 250 delegates (most of whom were
Chinese) were cautiously optimistic that China’s slow-growth, sustainable “new
normal,” as President Xi Jinping has described it, would produce a healthier
and more vibrant steel recycling sector.
The Metallurgical Council of the
China Council for the Promotion of International Trade (Beijing), a government
trade promotion authority, organized the conference, and CISA and the China
Association of Metalscrap Utilization (Beijing) served as hosts. The
presentations thus amplified longstanding government priorities, such as
improving China’s abysmally low ferrous scrap ratio, promoting resource
self-sufficiency, and pushing into the manufacturing of value-added products.
But as most attendees were surely aware, such goals will have to wait for
China’s steel and ferrous scrap industries to emerge from their most dire
circumstances since the global financial crisis of 2008.
For those accustomed to China’s
breakneck growth, the slowdown might produce whiplash. Between 1996 and 2014,
China went from producing 100 million mt of steel a year to 822 million mt. The
growth was predicated on the government’s belief that overcapacity would soon
be fulfilled capacity (and it was, for more than a decade), and the cycle could
repeat. But steel’s growth equation has changed in China. First quarter 2015
crude steel production declined 1.7 percent year on year, to 200.1 million mt,
according to Zhu Jimin, executive vice chairman of CISA. Unfortunately, that
decline in production wasn’t fast enough or sufficient enough to arrest falling
prices. In February, China’s steel pricing index hit its lowest level since
March 2002, Zhu said. The result has been devastating: January and February
profits for CISA members were down 7.6 percent year on year, and more than half
of them (52.5 percent) took losses.
The ferrous scrap experience hasn’t
been much better. The average ferrous scrap price declined from 2,400 yuan
(US$386.55) a mt during the first quarter of 2014 to 2,050 yuan per mt during
the fourth quarter—a 14.6-percent overall decline, according to data presented
by Liang Zhijun, director of the Energy Saving and Environmental Protection
Division at the Ministry of Commerce (Beijing). A weakening ferrous market,
coupled with growing ferrous scrap supplies, drove this decline. China’s
ferrous scrap reservoir hit 6.8 billion mt in 2014, up from 1.6 billion mt in
2001, according to Wang Fangjie, deputy secretary general at CAMU. Meanwhile,
scrap entering the marketplace hit 160 million mt in 2014—more than three times
the 50 million mt on the market in 2001—and scrap metal imports fell almost 75
percent, from 10.14 million mt to 2.6 million mt. Major manufacturers used 88.3
million mt of ferrous scrap to produce steel in 2014—an increase of 2.6 million
mt (or 3 percent) year on year—said CISA’s Zhu, and “the rest was consumed by
small and medium-sized plants,” according to Liang.
Despite this year-on-year growth in
the volume of scrap it uses in steelmaking, China finds itself in the unusual
position of seeing its scrap ratio decline while its scrap supply and steel
production are both growing. CAMU’s Wang reported that the ratio fell from 22.7
percent in 2000 to a mere 10.7 percent in 2014. Likewise, steel production
based on scrap-friendly, low-pollution electric-arc furnaces declined from 11.7
percent of China’s total steel production in 2005 to 7 percent in 2013.
A primary reason for those declines
is that the price of scrap remains high compared with iron ore. “Using scrap
poses no advantages over hot metal,” Wang explained. Australia’s alleged
dumping of iron ore, continued Chinese production of the mineral despite a
global glut, and high duties on imports of scrap metal are among the problems
keeping ore prices low and scrap prices high. Wang’s data showed the gap: Chinese
iron ore imports grew from 20 percent of global tradeable totals in 2005 to 43
percent in 2014. During the same period, China’s share of tradeable global
ferrous scrap imports fell from 11 percent to 4.7 percent.
The good news for scrap processors is
that the situation appears to be unacceptable to top-level Chinese
policymakers, who view a successful scrap industry as a means to accomplish
policy ends well beyond raising scrap ratios. Policy analyst Zhang Deyun
stressed this point. Representing the Department of Resource Conservation &
Environmental Protection at the National Development & Reform Commission
(Beijing), China’s top economic policymaking agency, Zhang noted that the
Chinese government views resource self-sufficiency—in everything from agricultural
products to scrap—as a national priority. The 30 billion mt of ferrous scrap
that he claims China will accumulate by 2030 “can reduce our reliance on
imported iron ore.” That’s one reason China has “always placed resource
recycling high on a list of strategic industries,” he noted.
Unsurprisingly, CAMU’s Wang
indicated his organization’s support for government proposals to lift China’s
steel scrap ratio to 20 percent among “mainstream steel mills” (which generally
excludes small and midsized operations). He believes that domestic resources
are sufficient to push up the ratio 1.5 percent annually for the next decade,
reaching 20 percent by 2020 and 30 percent by 2025—“not easy,” he conceded
regarding the more distant goal. He bases those figures upon the assumption
that China’s steel production will remain roughly 800 million mt annually and
will require increased ferrous scrap imports, despite China’s growing scrap
reservoir.
Vehicles
Enter the Recycling Scene
Raising the scrap ratio will require a bigger contribution from
China’s automobile recycling industry, according to several speakers. China has
been the world’s top automobile consumer for five years, purchasing 24 million
vehicles in 2014, which raises the number of passenger vehicles in the country
to 154.5 million, said Long Shaohai, chairman of the China National Resources
Recycling Association (Beijing).
As a blog post on the Financial
Times website recently pointed out, at the start of China’s car-buying boom in
the early 2000s, the available cars were mostly of poor quality. Many of those
vehicles are entering the recycling stream. Long’s data showed that there were
597 licensed auto recyclers in China at the end of 2014, up 3.6 percent year on
year. They recycled 88.1 percent more vehicles in 2014 than 2013, a total of
1.5 million vehicles, though Long suggested that the actual number could be
closer to 2.2 million. But even that higher number is less than half of the 4.8
million de-registered vehicles in 2014, which means that “approximately 50
percent of the vehicles scrapped in China went back to market illegally,” Long
said.
He cited three issues that might be
interfering with the “orderly” operation of the car recycling sector. First,
the downturn in steel scrap prices has hurt auto recycling businesses that
“depend on the sale of ferrous scrap for 90 percent of their operating
profits.” Second, there is very little demand for or use of used auto parts in
the Chinese marketplace, depriving recyclers of an important revenue source—and
one that recyclers in other countries covet. And third, the government subjects
the industry to a 17-percent value-added tax, “far higher than what recycling
enterprises pay in other countries.” As a result, “there are underground
dismantling markets across China” that place de-registered vehicles and parts
back on the road in China and other countries, he said.
Among his policy suggestions, Long
urged the government to encourage and regulate the remarketing of used parts.
In 2013, he noted, China’s State Council (akin to the U.S. presidential
cabinet) issued a notice requiring industries to develop such rules and
guidelines. The directive included a mandate that by 2015 China must have the
capacity to remanufacture 800,000 engines, as well as other parts for passenger
vehicles and vehicles used in the agriculture, mining, and engineering
industries. Long didn’t indicate how close China has come to fulfilling these
goals, which, in itself, is a telling oversight. Toward More
Disciplined Recycling
The biggest problem the Chinese ferrous industry faces, from the
perspective of the speakers, is unregulated competition from privately held or
local government–owned small and midsized steel plants. These smaller
operators’ ability and willingness to flout China’s VAT rules gives them a
significant price advantage over more law-abiding CISA members when purchasing
scrap. Meanwhile, because of their smaller size and local ownership—often in
concert with local governments—they also may flout expensive environmental
regulations. As a result, “scrap goes to these rogue operators, and the
regulated operators can’t get enough,” NDRC’s Zhang said. Specifically, they
can’t get enough at the price they want to pay.
This is nothing new. For as long as
China’s steel markets have been expanding, China’s biggest mills have
complained about the unfair advantages their smaller counterparts enjoy. At
scrap conferences dating back at least to the mid-2000s, Chinese regulators
have promised to do something about the problem mills, and yet the problem
appears to grow. At first glance, there is little reason to believe that new
efforts to rein in the small-time competition will be any different.
The circumstances today are quite
different in two very important respects, however. First, the Chinese economic
slowdown provides regulators with a largely unprecedented opportunity to crack
down on mills without causing additional, perceptible damage to the economy.
Second, and perhaps more important, Xi Jinping’s government is the most powerful
Chinese government in decades, and it has shown a capacity to push for—if not
succeed at—reform across other parts of the economy. Under his leadership, fast
growth is out, and sustainable growth—the “new normal”—is in. As CISA’s Zhu put
it, “The traditional, longstanding development model, whereby steel mills
expand their production capacity and then compete on low prices, will no longer
work under the ‘new normal.’”
Zhu described what the steel
industry should look like under Xi’s “new normal”: “It’s the trend that
companies must be proactive about mitigating their excess capacity, control
their production, and refocus on quality and differentiated competition in the
future.” It’s not just a trend, however. It’s a direct order from the top,
as NDRC’s Zhang made clear. “Parents like well-behaved children,” he said. “So
we’ll do our best to help compliant companies.”
None of the speakers outlined in
detail the actual means by which the “children” will be disciplined, but hints
emerged throughout the conference. This isn’t unusual: Chinese officials don’t
like to pre-announce policies (as the global scrap industry has learned the
hard way over the years). But it wasn’t hard to discern the allusions to
policies and their enforcement. Of these, perhaps the most ominous was
announced by Li Xinmin, former director general of the Pollution Prevention and
Control Department at the Ministry of Environmental Protection (Beijing), in
the midst of a long and complex presentation on China’s new laws and
regulations regarding environmental liability: “Under the new law, officials
will be held responsible for their entire lives for environmental damage done
during their tenures,” he said. That’s a change in keeping with President Xi’s
recent emphasis on cleaning up China’s environment—and its corruption. In the
past, Chinese officials knew they could leave behind environmental mistakes
when they were rotated to new positions; their connections, which they often
had forged via corruption, could shield even junior-level officials from
prosecution.
In keeping with past CAMU
conferences, speakers made clear that China will continue ongoing efforts to
shrink and consolidate its steel industry. CISA’s Zhu cited China’s most-recent
Five-Year Plan as bolstering the effort. In particular, he noted that the
ferrous scrap processing industry entrance requirements, which the government
announced in 2012, had produced real results: 130 companies (old and new), with
a combined 50 million mt of production capacity, have qualified. That’s still a
long way from covering the entire industry, but only two years into the
process, it’s a striking accomplishment.
Adam Minter
is a freelance writer based in Kuala Lumpur, Malaysia, and author of Junkyard
Planet.
Addressing
Nonferrous Concerns
Though primarily concerned with the ferrous scrap industry, the
conference frequently touched on issues of concern to the nonferrous industry
in the age of the “new normal.” The only in-depth talk devoted solely to the
nonferrous sector came from Bian Gang, director general of the International
Department of the China Nonferrous Metals Industry Association (Beijing). He
noted that the current slowdown, as well as the overcapacity issues, have had a
“painful” effect on all aspects of the nonferrous industry, primary and
secondary alike. “Many medium and small enterprises are either shut down or
producing at half of their capacities,” he said. “Even some large producers
have utilization rates below 60 percent.”
Low prices prevail across the
sector, and financing has tightened considerably, particularly for small and
medium-sized companies, leaving many in search of funds to get them through the
downturn. Nonetheless, Bian pointed out that since 2014, the capital markets
have recognized the Chinese government’s interest in developing the sector over
the long term and have started investing in it. According to his data,
investors have identified some very large companies in which they might place
their money, including six secondary copper companies, each with capacities
over 100,000 mt annually; five secondary aluminum companies, each with
capacities over 300,000 mt annually; and 12 zinc companies, each with
production capacity over 20,000 mt annually. Bian didn’t provide any numbers on
lead production, but he noted that lead producers are improving and
consolidating capacity as well.
Most significantly, China’s
secondary nonferrous industry is continuing its long-term migration away from
China’s east coast and traditional recycling zones (such as Guangzhou and
Ningbo) to the western and inland provinces, where faster development rates and
lower labor costs provide significant advantages. Bian highlighted the National
Development & Reform Commission’s (Beijing) program to build up “urban
mining” bases throughout China focused on appliances and e-scrap, as well as
wires and cables, old machinery, lead-acid batteries, and vehicles. At the end
of 2014, China had 45 such bases, including 13 in central and western regions.
Ninety percent of them have planned for nonferrous projects, he said, and half
have designated secondary nonferrous metal processing as their “pillar”
industry. Following on a decade of recycling park development, Bian left little
doubt that consolidated recycling zones are China’s present and future.
Speakers at the conference from all
sectors hinted of efficiencies and innovations that may prove significant to
the long-term health of China’s secondary nonferrous industry. But long-term
planning on the part of particularly insightful company managers is not necessarily
what’s driving these improvements. Bian, during his remarks, explained that the
innovations were more often than not “due to the constant decline in
profitability. … Companies are forced to make additional efforts in energy
conservation and other efficiencies.” He specifically pointed to the copper
industry’s increasing interest in precious metal and anode mud recycling as
examples.
But these advances cannot mask the
serious problems that persist throughout China’s secondary nonferrous industry:
continued overcapacity, a lack of value-added products, and an underdeveloped
domestic recycling network. On that last point, Bian announced that CNIA’s
Metal Recycling Branch is now collecting data on key domestic nonferrous
companies and their raw material use. That information should go a long way
toward helping Chinese policymakers and companies chart a course through
China’s evolving “new normal.”