Ferrous in China’s “New Normal”

Dec 10, 2015, 12:52 PM
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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.”

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