September/October 2004
China’s paper demand and production—as well as its imports of scrap paper—are skyrocketing. This exclusive inside look reveals the market factors affecting Chinese mills and how recovered fiber will figure in their future.
By Adam Minter
The narrow country roads of Xinxiang County are littered with straw that falls from trucks as they navigate the curves between farm fields. In the distance, new power plants rise from the corn, creating jagged skylines where once there was only horizon in this remote northern part of central China’s Henan province. Closer to the town of Xinxiang, the straw mixes with coal dust on the roads, creating a slippery approach to the gates of Henan Xin-xiang Xinya Paper Mill Branch No. 2, the second-largest producer of containerboard in the county.
Inside, three riding-mower-sized tractors are lined up at a truck scale, towing straw bales that measure 12 feet long and 3 feet high. Ahead of them, a flatbed truck carrying bales of mixed paper from the United States is being weighed. The mill is unloading 2,000 mt of scrap paper today, notes Song Jing Liang, general manager, as he walks toward a large outdoor storage area where a second flatbed is being unloaded by a forklift. “We’ve been buying scrap from L.A. and Vancouver for four years,” Song says. Before that, this mill—like most of northern China’s paper mills—made paper from straw. Today, Song’s containerboard is made from a 60/40 mix of straw and recovered fiber. “It’s a better product,” he states, “and there’s a strong demand for it.”
“Strong demand” is an understatement when it comes to China’s growing appetite for paper. In 2003, China’s production of paper and paperboard increased about 14 percent to 43 million mt while its consumption grew 11 percent to 48 million mt, according to the China Paper Association’s 2003 annual report. That same year, China’s per capita consumption of all paper grades rose 11 percent to 37 kg.
To meet this burgeoning demand, China’s paper mills are adding capacity at a breathtaking rate. Zhao Wei, vice president and secretary general of the China Paper Association, recently estimated that China will need an additional 40 million mt of production capacity to meet current growth trends. In northern Shandong province alone, containerboard capacity will increase 500,000 mt in just the next 12 months.
The main driver behind China’s paper growth is demand for packaging from manufacturers. In 2003, packaging paperboard accounted for 59 percent of Chinese paper production and 54 percent of consumption. Historically, Chinese packaging grades have been manufactured from straw pulp and other low-grade grasses. Quality concerns and environmental issues, however, have forced China’s manufacturers to consider alternative feedstocks—particularly scrap paper. Since 2001, China has been the largest importer of U.S. recovered fiber, primarily of grades such as OCC and mixed that can be used to produce packaging material.
Shifting Toward Scrap
In the early to mid-1980s, thousands of small and midsized paper mills opened on waterways in China’s rural areas. The resulting pollution was a disaster. In response, the Chinese government closed 1,000 of them in 1996. Between 1996 and 1997, China’s production of paper-grade pulp declined 1.6 million mt (according to statistics on chinapaperonline.com), a decline widely attributed to the government shutdown. However, because many of those mills were owned by towns and villages, there was extreme pressure to reopen them, which meant that regulators eventually lost in their efforts to reduce emissions from the operations. Accord-ing to Jintao Xu of the Center for Chinese Agricultural Policy, China’s paper industry is responsible for 10 percent of the nation’s industrial wastewater emissions and 25 percent of all chemical oxygen demand (COD) emissions. More significantly, Xu’s research on paper mill pollution clearly shows that emissions are correlated to size, with smaller mills polluting more.
The Yellow River, known both as the “mother river” and “the cradle of Chinese civilization,” runs through the papermaking regions of Henan and Shandong provinces, picking up a range of emissions that render the drought-stricken waterway a pollution holding pond 200 days of the year. In 2003, the Chinese government took emergency measures to control emissions along the Yellow River, beginning with the hundreds of mostly small, straw-fed paper mills. On Jan. 1, 2004, all mills with annual production below 10,000 mt were shut down (raising the floor from a 1996 law banning mills with production under 5,000 mt annually). Those with annual production of 10,000 to 34,000 mt were allowed to continue operating, but only if they stopped pulping. Mills producing more than 34,000 mt were allowed to continue pulping and production, but only if they installed wastewater treatment systems and replaced at least a portion of their straw pulping operations with less-polluting materials such as recovered fiber. These new regulations reportedly shuttered 1,000 mills in Shandong and Henan. The survivors were able to absorb the lost production, but only if they did it in an environmentally sound manner.
One of the survivors was Liudian General Paper Mill in Xinxiang County, Henan province. While other mills have been forced to close, this mill is expanding, with plans to add five new production lines. This summer, the plant began conducting tests on one new line that will produce containerboard from a 50/50 mix of straw and U.S. scrap paper, says Zhang Guan An, general manager. “Scrap has good elasticity,” he notes, “and straw has good strength.”
For Liudian, China’s tighter regulations have been good for business, despite the higher price of scrap paper compared with straw (for reference, 1 mt of straw costs about $35). The mill’s use of scrap paper has helped it not only meet the government’s emission rules but also increase its production. To explain, emissions from China’s paper mills are licensed by the State Environmental Protection Agency on the basis of COD emissions from specific pulping processes. Prior to the new regulations, the Liudian mill was licensed to emit COD from 70,000 mt of straw. Due to its wastewater treatment facility, the mill was allowed to continue pulping 70,000 mt of straw.
Yet Liudian, recognizing that scrap paper emits only 20 percent of the COD of straw, made the strategic decision to shift 20,000 mt of its pulp from straw to recovered fiber. As a result, Liudian’s license was adjusted to allow the use of 100,000 mt of scrap paper, maintaining its prior emission level while doubling its production level.
Zhang walks into a warehouse where the new paper machine is test-producing sheets of containerboard faster than the dozens of workers can grab them and return them to the pulping machine. He strides out a back door where unruly piles of soggy Chinese newspapers sprawl against drooping piles of corrugated. He tears a piece from one of them and runs a finger across the fuzzy fibers. “Domestic Chinese paper isn’t as good as American paper,” he says, explaining that “a lot of it has already been recycled once.”
Liudian won’t face any such quality problems once its starts production on its new line. That’s because the scrap component for the new line will be high-quality U.S. OCC, which will eliminate the quality problems of producing paper products exclusively from domestic Chinese materials.
Navigating the Import Obstacles
Zhengzhou, located 400 miles northwest of Shanghai and 300 miles south of Beijing, is China’s most important railway hub, serving as a switching station for traffic from north to south and all points east and west. One mile west of Zhengzhou’s railway station is the modest three-star Guangdong Hotel. For the past year, Liu Lin, director of the Zhengzhou office of Tianjin Tonghui (Group) Enterprise Co. Ltd., has occupied an eighth-floor office there, making arrangements to serve as the primary importer and distributor of U.S. scrap paper in northern Henan province. Liu already claims to have 15 major Chinese mill customers, all of whom are now required to use recovered fiber for at least a portion of their pulp. “This will be a good business,” she says confidently.
“The demand is strong.”
To an extent, Liu had a head start. Tianjin Tonghui is one of the leading logistics companies in Northern China, with special expertise in delivering power plant equipment to the region’s coal-fired power stations. Conveniently, many of Northern China’s larger paper mills operate their own coal plants—an advantage that frees them from China’s expensive industrial power markets.
Nevertheless, it has taken Liu a year to prepare for Tianjin Tonghui’s scrap paper shipments. “Customers are easy,” she says. “Licenses are hard, and customs is getting tougher.” To serve as an import agent for scrap paper, Tianjin Tonghui first had to apply for a scrap paper import license. The process for obtaining this license was anything but straightforward, requiring approvals from provincial and federal environmental authorities as well as proof that she had acceptable consumers for the imported material.
China’s strict licensing requirements force importers to take special care with their export suppliers. In the past year, there have been several high-profile cases in which Chinese Customs turned back U.S. shipments of mixed scrap paper due to contamination by waste. In late spring 2004, for instance, Customs at the Port of Huangpu in Guangzhou halted a shipment of 967 mt of mixed paper that was found to contain household and medical waste. The shipment was returned to the United States, and the importer is currently under investigation. The government’s willingness to highlight such cases shows how seriously it takes the issue.
Chinese importers are well aware that U.S. mixed paper—increasingly derived from single-stream curbside collection programs—often violates industry specifications and tries the patience of Chinese Customs. As a result, China’s scrap paper importers have been among the strongest supporters of the new AQSIQ import licenses that have caused U.S. scrap metal and paper exporters so much difficulty. As a major Shandong paper buyer states, “We’re the end-user, so we want CIQ [China’s import inspection agency] to assure us that we’re getting a waste-free product. There’s no advantage to us receiving garbage. That should stay with the packager in the United States.”
Such scrap quality issues are readily apparent at Henan Xinxiang Xinya Paper Mill Branch No. 2. There, the bales of quality OCC are stacked six high in the outdoor storage yard. Next to them are OCC bales of lesser quality, the purity compromised by white office paper and an occasional pizza box. Bales of mixed paper are stacked three high beside the OCC. True to their name, the mixed bales contain a range of papers, from white office paper to detergent boxes to wax-coated corrugated. These bales also include plastic bags, plastic bottles, pieces of foil, even a vinyl CD carrier.
All of this material is destined for an adjacent building that houses the mill’s pulping line, where the floor is covered with various grades of paper that converge on two conveyors. Teams of six workers are hunched over, pulling plastic, pizza boxes, and waxed material from the mix, tossing these prohibited materials into haphazard piles. Other workers throw the remaining “acceptable” paper onto the conveyors.
The laborers, who are likely paid around $60 a month, don’t upgrade the material so much as serve as a primary filter for it. In fact, significant amounts of waste make it past the laborers into the pulping process. This is evident from the piles of wet, partially shredded plastic bags piled in a stinking mess beside the tanks on the pulping level. Workers lift this material onto canvas tarps and drag it away for disposal.
After such contaminants are removed, the pulp—a 60/40 mix of straw and scrap paper—is fed into an enormous space that houses two new containerboard machines. This mill—which operates 24 hours a day, including weekends and holidays—has a production capacity of more than 100,000 mt a year, and it will import at least 50,000 mt of OCC in 2004 to meet that capacity, says Song Jing Liang, the mill’s general manager.
The Big Player
Yinhe Paper Group, a 5,000-employee state-owned behemoth, is China’s ninth-largest paper manufacturer. The mill is in Linqing City, which sits 65 miles west of Jinan, Shandong’s provincial capital. Yinhe, formed in 1958, currently has 28 production lines capable of producing 500,000 mt of paper annually. Until three years ago, that capacity was fed by straw and wood pulp. In 2002, with the aid of the Chinese government, Yinhe added a 200,000-mt-a-year high-performance corrugated medium line—the largest in Northern China—that requires a 50/50 mix of straw pulp and recovered fiber. Sud-denly, Yinhe was a major buyer of U.S. scrap paper. As part of the capital improvements surrounding the new line, Yinhe invested approximately $50 million on a wastewater treatment system designed primarily to handle emissions from straw pulping.
In 2003, Yinhe imported 100,000 mt of North American scrap paper, the majority of which was OCC, reports Susan Huang, the company’s import/export director. In 2004, it will import a similar amount, with a slightly higher mixed content. Then, after the mill adds a containerboard production line, Huang plans to purchase 200,000 mt of recovered fiber in 2005 and 600,000 mt in 2006. “There’s less and less raw material for papermaking in China,” she says. “That’s why pulp imports are rising. That’s why recovered fiber imports are rising.”
Yinhe’s corrugated medium line is housed in a long, white brick building, the front of which is devoted to storing bales of OCC and mixed paper. Small teams of workers stand on two moving conveyors, racing to rip apart bales and remove prohibited materials before the paper falls into two hydrapulpers. “You can’t expect virgin pulp,” Huang says, adding that about “ninety percent of what we buy from North America is good.”
At Yinhe, the process of eliminating prohibited materials and outthrows continues in the hydrapulpers, where thick ropes about 10 feet long dangle into the hot, swirling pulp, capturing plastic bags and other detritus. Behind the pulp vats, several of the “full” ropes are left for disposal. They are a bizarre sight, looking like 15-foot shredded plastic snakes that measure at least one foot in diameter and weigh hundreds of pounds.
From the hydrapulper, the pulp is then pumped into a filtration room where remaining contaminants—mostly shreds of plastic—bubble up through filters. An engineer from the firm’s import/export office shakes his head as he pulls a handful of waste from a filter. “Too much trash in the bales,” he sighs. “People could do better.”
Yinhe is moving aggressively to address at least some of its growing demand for purer fiber. Its steps are evident in the fast-growing aspen trees that line the highway into Liqing. With government aid, Yinhe has planted nearly 300,000 acres of aspens along the local roads. Beginning in 2007, these trees are expected to feed a 100,000-mt-a-year wood pulping line. This wood pulp won’t be nearly sufficient, however, to fulfill Yinhe’s goal of producing 1.5 million mt a year of paper and paperboard within the next decade. That goal will require import-ed raw materials.
While Yinhe occasionally imports other grades of U.S. scrap paper, including a recent batch of new double-lined kraft corrugated cuttings (the mill’s engineers couldn’t make it work), it has found that OCC and mixed are still the grades most appropriate to its needs. That will change: Recently, Yinhe purchased a secondhand Black Clawson deinking line from a company in Beijing. “Right now, it’s not cost-effective to run it,” Huang says, “but we hope to start it by the end of the year.” When this deinking line starts, Huang expects to feed it with U.S. ONP.
China’s Paper Recycling Goals
Ten miles south of Zhengzhou, the landscape begins to roll into gentle hills that emerge into vast green valleys choked by smog. The highway is jammed with farm tractors dodging speeding cement trucks and flatbeds loaded with crushed rock. After an hour, the highway narrows and turns toward the hills, following the contours of a desperately poor mountain landscape dotted with impoverished villages.
After another half hour, trucks laden with bales of scrap paper begin to dominate the roads. On the right, the decrepit Zhengzhou Chunguang Paper Co. Ltd. emerges. Workers in loose, dirty cotton uniforms, some barefoot, move slowly across the loading area, curious at the sight of visitors.
The mill’s manager is a friendly, gregarious man who leads the way up a metal staircase to a wood-lined office where portraits of Mao and Mao’s wife are given a place of honor behind the monstrous wooden desk. The manager notes that the mill produces about 50,000 mt a year of containerboard, using primarily scrap. (The facility also purchases an undisclosed amount of wood pulp at the unbelievably high price of $725 a mt.) “There are no raw materials out here, so we buy scrap,” he says, noting that he buys grades such as mixed, No. 8, No. 11, No. 13, No. 19, and No. 37. In general, he says, he prefers to buy U.S. scrap paper, which the mill has been using since 1994.
“The competition for scrap paper is really tight right now,” the manager bemoans. “We can barely make ends meet.” Adding to his challenges, China is facing an energy crisis, but his mill does not produce electricity like bigger mills. Still, the privately held mill employs 800 people and ships containerboard to box manufacturers all over China.
By truck, the Zhengzhou Chun-guang mill is three hours from the nearest railway hub—an impossible distance in many respects. Yet the fact that the mill perseveres is a testament to the strength of China’s demand for paper. Undoubtedly, massive new mills in Guangdong and Shandong will continue to garner the most attention as well as the lion’s share of imported scrap, but smaller players such as Zhengzhou Chunguang are rapidly adapting themselves to markets as they happen. They tell an equally important story.
The growth of China’s recovered fiber demand is tightly tied to China’s growth as a manufacturing base. Less obvious, however, is the dependence of that recovered fiber demand on the Chinese government’s continued interest in reducing paper-related water pollution. Though recovered fiber undoubtedly produces a higher-quality paper product, it is a high-priced alternative. If China’s environmental authorities lose their battle to reduce papermaking emissions—as occurred in the 1990s—many mills would likely revert to straw as a cheaper raw material, with an immediate and negative impact on recovered fiber imports. This scenario is indeed a possibility. After all, since market reforms began in China in the early 1980s, the Chinese government has consistently shown a preference for jobs over environmental protection. Without question, reopening Northern China’s small mills would result in additional employment.
In the meantime, China is struggling to create domestic paper recycling programs, which it hopes someday will replace at least some imports of recovered fiber. Currently, China claims to recover about a third of its paper. Whether it succeeds in raising that level is largely irrelevant: Chinese consumers of recovered fiber universally agree that China’s recovered fiber is of poor quality compared with U.S. scrap paper. Nevertheless, those same consumers would like nothing more than a low-cost and reliable alternative to “expensive” imports.
Song Jing Liang of Henan Xinxiang Xinya Paper Mill Branch No. 2 strolls among the haystacks behind the mill’s production building.
“We could operate with scrap only,” he admits, “but the problem is getting it.” A tractor races past him, sending crows fluttering out of the straw. As he emerges from the storage area, another flatbed arrives to unload bales of imported mixed paper. “What we need is a proper domestic paper recycling program,” Song says. “The government should encourage better recycling. Right now, the quality is not steady, and neither is the quantity—but one day it will be.”
Adam Minter is a journalist based in Shanghai, where he writes about business and culture for U.S. and Chinese publications.
China's paper demand and production—as well as its imports of scrap paper—are skyrocketing. This exclusive inside look reveals the market factors affecting Chinese mills and how recovered fiber will figure in their future.