May/June 2003
Chinese scrap operations are an intriguing mix of the primitive and the sophisticated, with one foot in the Third World and the other stepping toward the developed World.
By Adam Minter
The first thing an American recycler notices when touring Tung Tai Group’s scrap plant in Nanhai, China, is the general lack of equipment so common in Western scrap operations. “The next thing a foreigner can’t believe is the number of people we’ve got,” says Joe Chen, president of Tung Tai. “That’s because they don’t understand that in China, it’s the labor—not the machinery—that makes everything work.”
Tung Tai’s Nanhai plant has 450 employees, and almost every one of them has a job that would be financially unjustifiable in a Western scrap operation. At any given time, for example, the plant has scores of employees dedicated to running imported wire and cable through primitive strippers. Other workers do nothing but break circuitboards with hammers and chisels. Further along, dozens of women pick the precious metals from those broken circuitboards. In each case, the hand is the processing and sorting tool of choice.
While this focus on manual work is one of the most important differences between Chinese and Western scrap operations, it is certainly not the only one, as this inside look at Chinese scrap facilities shows.
The Hand and the Machine
In contrast to equipment-intensive Western processing operations, Chinese scrap plants view machinery almost as an afterthought. Cheap labor not only makes manual processing and sorting cost-effective, it also makes equipment maintenance a relative bargain. Thus, in China, there’s little interest in new, high-quality scrap processing equipment. In fact, unlike most Western scrap operators, a major Chinese scrap recycler like Joe Chen can’t even name the manufacturer of his most expensive piece of equipment—a nonferrous baler. “It’s Chinese, copied from American equipment,” he says. “It’s not as good as American equipment, but it’s good enough—and it’s cheaper.”
Tony Huang, president of Shanghai Sigma Metals Inc. (Shanghai), also has more-pressing concerns than his equipment, beginning with the 800 women he employs to hand-sort mixed nonferrous shredder residue imported from Western scrap firms. Sigma’s large-scale hand-sorting operations provide a perfect example of the labor-intensive economics of Chinese scrap processing. In America or Europe, Huang claims, mixed nonferrous scrap can be sorted by flotation plants for about $100 a ton while Sigma’s female sorters can accomplish the same task for about $15 a ton—and do it more precisely.
While hand-work defines the Chinese scrap industry, there are certain jobs that do require equipment, of course. Front-end loaders and forklifts are as common in China as they are in the United States. Truck fleets exist, though they’re smaller and used almost exclusively to transport overseas containers (which are used both for importing material and shipping it domestically). Bigger, heavier machines such as hydraulic cranes are still rare in Chinese plants, in part because of their higher cost and in part because they can be cheaper to rent. In some cases, such rentals are put to uses unimaginable to Western recyclers.
Tung Tai’s Nanhai yard, for example, rents a truck-mounted, 20-meter hydraulic cable crane to unload overseas containers of wire and cable. Workers attach a cable to the top two corners at the back end of the container, then connect this cable to a hook on the crane’s boom. At the other end, employees open and secure the container’s doors. Everyone steps back as the crane lifts the back end of the container, dumping the enclosed 40,000 pounds of wire and cable onto the ground. The entire process takes 15 minutes and costs about $50.
“What would that cost to unload in the U.S. and how long would it take?” Chen asks.
The All-Important Wholesale Trade
In the Chinese scrap industry, Tung Tai and Sigma are large operators with the ability to be export markets in themselves (in fact, Sigma’s prices for secondary aluminum set the market). Shanghai Metallink Trading Co., a smaller operator, runs a midsized yard in Shanghai’s Pudong New Area that imports dozens of shipping containers of scrap each month, though not nearly as many as Tung Tai or Sigma. These firms are, in their own ways, emblematic of the Chinese scrap recyclers with whom most Western operators do business. Yet such mid-to-large-sized companies are a minority in the Chinese scrap industry, which is defined by scores of small operators. Even Sigma, for instance—the largest secondary aluminum smelter in China—reportedly controls less than 10 percent of the nation’s aluminum scrap market.
Most Chinese scrap processors and smelters are small operations of less than 10 employees. Though these operators are located throughout China, they’re concentrated in and around ports, where government oversight is generally more lax than in Shanghai. So, for example, the port city of Taizhou has entire avenues packed with small-time scrap processors and smelters. These small operators don’t engage in much retail buying due to the small amount of domestic scrap in China. Many of these small players buy their scrap from larger companies that import huge quantities of material, then wholesale a percentage of the material to the small operators. Tung Tai, for one, reportedly wholesales almost 50 percent of its scrap to smaller players. As Chen explains, “Why should I pay to sort it if I can sell it for a profit—maybe a smaller one, but still a profit—an hour after it gets here?”
Shanghai Metallink wholesales even more—70 percent—of the material it imports from the United States, says Jian “James” Li, president. Most days, his loading area is filled with small buyers haggling over the low-grade scrap imported by his firm. One afternoon last October, while attempting to manage his smelting operation, Li patiently negotiated the price of a recently arrived barrel of tool steel mixed with copper. The buyer—a small smelter who planned to remelt the material for sale to a Shanghai television manufacturer—offered about $1 a pound for the material. Li had purchased it from a Chicago source for 30 cents a pound.
For larger operators like Tung Tai, the wholesaling business is often a form of outsourcing. For instance, the company can sell its low-grade mixed nonferrous to smaller operators, then repurchase the sorted metal at a higher price and still be able to resell it at a healthy profit. Smaller processors can’t sell their upgraded material directly to consumers because, unlike Tung Tai, they lack the necessary volume as well as the connections to large-scale customers.
This massive wholesale market is one of the lesser-known aspects of the Chinese scrap business but one of the most important. Quite simply, fewer than 200 scrap importers provide about 95 percent of the material nationwide to 99 percent of the operators. For Western scrap exporters, this is a hard concept to grasp—that they sell their material to one importer, who wholesales it to smaller operators in China, who often resell the material to the original importer.
Another notable aspect of the Chinese scrap industry is the close relationship between scrap processors and scrap-consuming operations. In some cases, processors and consumers are located on the same site or right next to each other. Tung Tai’s processing plant in Shenzhen, for example, hosts a wire-products manufacturer over its offices (the factory is a joint venture between Tung Tai and the local government). The scrap processor’s wire strippers work directly in front of the factory, supplying it with a constant stream of copper. Similarly, Shanghai Metallink is partnered with a manufacturer of low-grade stainless wire located in the middle of its yard, and the vast majority of ingot produced by the scrap facility is consumed there.
While the efficiencies gained from partnering with an on-site consumer are undeniable, most scrap consumers in China aren’t located in scrap yards. As a result, Chinese processors—like their Western counterparts—must figure out how to efficiently and cost-effectively ship their scrap to customers. In most cases, Chinese scrap firms prefer to ship their material via trucks, which are economical if the trip is within a three-hour drive. Other shipping options include rail and inland waterways, both of which are extensive and reliable in China, enabling processors to ship economically anywhere within the mainland. Tung Tai, which has seven facilities throughout China, even ships material between its own yards if it can gain efficiencies in the subsequent processing.
Chinese Operations, Inside and Out
The differences between small and large Chinese operators extend far beyond how they procure scrap.
In terms of management structure, larger firms have a more formal hierarchy—for good reason. As an example, Tung Tai’s largest facility has 450 employees and, without a strict management structure, it would slip into operational chaos. Thus, Joe Chen has instituted a disciplined management system that begins at the top with him and extends down to a general manager, then to a yard manager, specific section chiefs (who oversee specific sorting and processing activities), team leaders in those areas, and finally the actual team workers.
Smaller scrap operators, in contrast, tend to run much more informally, with the same fluid personnel structures as small, family-run North American yards.
A more significant difference can be seen in the physical environment of the facilities themselves. “China is way ahead on some things,” Chen says as he conducts a tour of Tung Tai’s 3.6-acre Shenzhen facility. “Look at this cement,” he states, pointing at the 8 inches of reinforced concrete that covers the entire operation. “We’ve had this here for over a decade, since we started. How many yards in the U.S. can say that?”
In the United States, environmental concerns and requirements have been the main drivers behind the partial or total hard-surfacing of yards. In China, cheap labor and inexpensive materials have made hard-surfacing an automatic operational decision for larger companies (though concrete surfaces are virtually nonexistent in smaller yards). This hard-surfacing—combined with the availability of cheap labor—generally means that mid-to-large Chinese scrap operations are better organized than their American counterparts.
While the average Chinese scrap yard—small or large—may look different on the outside to Western recyclers, the offices are quite similar. China’s bigger players use computerized inventory systems that are every bit as advanced as those in the United States. At Sigma, Tony Huang uses his laptop to determine the weight of material in any of his hundreds of loading bays (Huang’s inventory is weighed and reweighed every time it’s moved). Tung Tai’s Chen can determine, with a few keystrokes, scrap inventories at any or all of his seven plants in China. Shanghai Metallink has not only computerized its inventory, but it is actively bringing together buyers and sellers of Chinese scrap in its proprietary chinascrap.com electronic marketplace.
“It’s one area where we’ve been ahead of the U.S.,” says James Li, explaining that “China came into the world markets as computers and networks and the Internet were first coming into the mainstream of scrap.”
An Environmental/Regulatory Evolution
Any Western recycler who reads a newspaper has seen the controversial articles on the “dumping” of so-called hazardous wastes in China and the resulting environmental, health, and safety nightmares from the handling of that material. This is an undeniable reality in some parts of China. In Taizhou’s densely packed scrap districts, for instance, it’s common to see dumping in rivers, open burning, and leaking fluids.
Fortunately, this situation is changing. Even two years ago, China was far more open to shipments of potentially hazardous materials, and some Chinese operators were willing to use cheap labor and lax regulations to scavenge the materials for a profit. Increasing government regulation is forcing change, however. In the past 18 months, materials that were previously imported without problems are now routinely stopped and even turned back from Chinese ports (though it must be noted that there are regional variations, with certain ports being more “friendly” to certain materials and processors). “You can’t dump anything in China,” Joe Chen states. “It’s the same as the U.S.” This has seriously hurt some Chinese firms, taking away up to 50 percent of the business that had sustained them through the 1990s.
Aside from such import controls, perhaps the most significant regulatory issue in China is the regional variation in enforcement. While the central government in Beijing claims that it has uniform national regulations, the truth is that certain provinces—especially in the south—exercise significant control over how and why regulations are imposed. “A place like Guangdong province is just too big for Beijing to regulate right now—so Guangdong regulates itself,” Chen says.
In contrast, Shanghai is heavily regulated. This has affected scrap companies mostly through the irregular imposition of import duties, with Shanghai having the most expensive duties in China. According to Sigma’s Huang, a duty of $200 to $300 in the southern provinces can be $1,000 in Shanghai. This gives recyclers an incentive to import low-grade material through southern ports like Guangdong and Shenzhen.
Yet even Shanghai can be selective in its enforcement, focusing its attention on larger operators like Sigma (partly because regulators have begun to recognize that larger operators are the primary source of scrap in China). Huang says he is subject to both planned and surprise safety and environmental inspections. Punishment for noncompliance starts at about $1,200 and can reach $12,000, also possibly resulting in the suspension of operating licenses.
Chinese regulators reportedly tend to focus on air-quality issues first. At Tung Tai’s larger facilities, diesel emissions are tested regularly. For its part, Sigma has an extensive emissions-control system connected to its aluminum smelters and fuel-oil generators, and it undergoes regular, scheduled air-quality inspections.
Tung Tai and Sigma have both been subject to surprise inspections for potentially hazardous materials (including medical waste and electronic products). Radioactive scrap is a continuing concern, in part because radiation-detection equipment is scarce in the Chinese scrap industry due to the lack of domestic scrap sources. Instead, operators tend to rely on the extensive and sophisticated radiation-detection systems at China’s high-tech ports (including Hong Kong).
China is also increasing its attention to water pollution, including announcing several programs to clean up major waterways. These programs are focused primarily on the issue of dumping, which means it will likely be many years before Chinese regulators consider related issues such as storm-water runoff.
Safety inspections also occur, though formal government-imposed safety regulations generally don’t exist. Instead, companies tend to implement their own “best practices,” and regulators have vast discretion to judge whether those practices are good enough. This can create puzzling and difficult situations: By law, for instance, employees aren’t required to wear hard-hats, steel-toed boots, or safety glasses, yet many regulators require them. Likewise, basic safety equipment such as fire extinguishers and first-aid kits are matters of choice and convenience for most employers. A related issue—workers’ comp insurance—doesn’t exist in China. Instead, workers are covered by a complex set of government programs funded by a 36.5-percent payroll tax that pays for pension, medical, and health benefits (though, in reality, all but the largest and most-visible Chinese companies avoid paying this tax.) Included in the health benefits are provisions for worker injuries, though these are paid at the discretion of local bureaucrats. Workers with similar injuries in different cities will often find themselves with vastly different benefit payouts. A career-ending injury can occasionally mean a lifetime of modest benefits, but it can just as easily mean immediate medical care followed by nothing.
Beyond government regulations, some Chinese scrap companies have adopted their own no-landfill policies for both environmental and business reasons. Tung Tai, for instance, has reportedly had a no-landfill pledge since its inception in the 1980s. This pledge means that all of its scrap products and byproducts must find a beneficial use. Take the large piles of insulation from scrap wire and cable that accumulate in its yards. This material is picked up by rubber and plastic recyclers who, at least, use it as fuel (an increasingly difficult practice given China’s tightening air-quality standards).
Sigma, meanwhile, has an informal no-landfill policy, though its policy has everything to do with business and little to do with the marketing of environmental consciousness. In short, Sigma can make money on material that’s considered worthless to Western processors and consumers. As one example, Sigma outsources its dross to an independent satellite company that recovers additional aluminum from the material, returning the metal to Sigma. Other metals are also recovered but retained by the contractor as payment for the aluminum recovery. Finally, the remaining byproduct is shipped to a water-purifier producer, which uses the material as a filtering agent.
A Developed Future?
As China’s economy develops, domestic sources of scrap will become more prevalent, and competition for the material will become more intense. This will drive down the price of imported scrap, forever changing the wholesale character of the Chinese scrap industry. Combined with increased environmental regulation, smaller operators will be forced to consolidate and larger firms will find themselves competing in ways currently unthinkable.
Sigma, for one, is preparing for future changes by becoming bigger. Currently, it is building what will be the largest secondary aluminum smelter in the world, taking up 360,000 square meters on the outskirts of Shanghai. This facility will be capable of consuming different scrap materials, including turnings, for which there are currently limited markets in China.
In contrast, Tung Tai is exploring new locations for its operations, including the Philippines and Vietnam. According to Joe Chen, the company will likely be operating in one of these countries in the next couple of years.
When asked how long the Chinese scrap business can continue to operate as it currently does, Chen shrugs and says, “Five years? It’s changing already.” Such estimates are difficult given the rapid changes in areas such as labor, regulations, and the internal and external market for Chinese goods and services. Eventually, though, China will complete the transition from a developing country to a developed one, and Chinese scrap operators will evolve beyond their Third World traits to more closely resemble their Western counterparts. When that happens, China could lose many of its current competitive advantages, and Western scrap could be exported less to China and more to the next developing nations in line—the new Chinas. •
Adam Minter is a journalist based in Shanghai, where he writes about business and culture for Chinese and U.S. publications.
Chinese scrap operations are an intriguing mix of the primitive and the sophisticated, with one foot in the Third World and the other stepping toward the developed World.