March/April 2008
China's rapid industrialization and rising living standards are beginning to generate significant quantities of domestic scrap. As collections rise, the scrap world must consider what significance Chinese scrap volumes will have on world markets. By Adam Minter
Just before daybreak, small blue trucks begin to arrive at the gates of Huadong Nonferrous Metals City near Linyi, in the northern Chinese province of Shandong. They carry loads of radiators, motors, and other combinations of scrap metal and plastic that are harder to distinguish in the near-darkness. The guards don't care about the contents, they just check to make sure the trucks are licensed to be there, then they wave them into a wide-open area divided by a crossroad. In the distance, on two sides of the opening, two-story warehouses extend in all visible directions. The arriving trucks take their place alongside trucks that arrived earlier—some as early as midnight, I'm told. Shadowy figures emerge from the warehouses, some on foot, some riding motorized three-wheel carts with hoppers on the back. Here and there, a few slower figures push scales that rattle along the concrete.
By the light of dusty headlamps, the scene is nearly empty. But when the first hint of sun turns the Shandong sky to a dusky orange, the trickle of arriving trucks becomes a rush, and within 10 minutes motorcycles, three-wheelers, and piles of nonferrous scrap of every conceivable variety jam the wide boulevards of Huadong Nonferrous Metals City. As sellers unload onto the pavement, buyers weave through the material, making offers and taking notes. Last year, Huadong scrap companies purchased and processed more than 1 million mt of nonferrous metal, and this year the numbers should be even bigger. According to the burly manager of the market, Mr. Liu, 30,000 to 40,000 vendors are qualified to sell here. They come from all over northern and western China to sell to the roughly 800 scrap processors and dismantlers who rent 968-square-foot processing stalls at Huadong Nonferrous City. Founded in 2005 with the support of the local government and operated by privately-held Jinsheng Copper, it is, by far, China's largest and most important market for domestically generated scrap recyclables, and—by virtue of its careful organization, regulation, and scale—it's a model for how China's national leaders hope the growing domestic recycling trade will operate.
The growth of China's domestic recycling is real, according to Chinese officials. At the November 2007 Recycling Metals International Forum, the Chinese Nonferrous Metals Industry Association Recycling Metal Branch (CMRA), which hosts the meeting, distributed figures indicating that scrap collection had increased significantly from 2002 to 2006. Specifically, CMRA reported that aluminum collection grew from 1.3 million mt to 2.35 million mt; copper grew from 290,000 mt to 680,000 mt; and scrap lead grew from 170,000 mt to 390,000 mt. (To no one's surprise, the CMRA's logo is everywhere at Huadong.) Domestic ferrous scrap growth has been equally strong, with overall scrap collection reaching 38.1 million mt in 2006, up 3.4 percent from 2005, according to a March 2007 speech given by Yan Qiping of the China Association of Metalscrap Utilization. In fact, domestic collection of aluminum and ferrous scrap far exceeded the import volumes during the same period, though, notably, copper collection did not.
As impressive as this growth might seem, future growth will assuredly be much, much greater. After all, China's economic development is still relatively young, and its population's mass consumption of goods they might eventually recycle—everything from washing machines to automobiles—is just beginning. The first large wave of modern Chinese consumer acquisition took place in the mid- to late-1980s, and many of those products, particularly appliances, are at the end of their reasonable, useful lifespans and are ready to be recycled. At the same time, members of China's middle class, particularly on its affluent East Coast, have achieved levels of disposable income that allow them to purchase and upgrade consumer goods—especially electronic ones—before they wear out on the basis of desire more than need. Further, consumers, business, and government together are spurring a Chinese construction industry that—in its pursuit of newer and better buildings—is, in turn, spurring the growth of the demolition business and, by extension, a massive new source of ferrous structural scrap.
A Scrap Society
The streets that cross the Huadong market area lead to warehouses and stalls where workers store and process most of the scrap. As we walk through them, we pass numerous bank branch offices ("The traders make good money!" Mr. Liu says), a post office ("They often need to wire money!"), and a police station ("They only intervene in a fight among traders!" he laughs). Behind one warehouse, we see rows of stalls packed with every conceivable variety of electric motor, many tens of thousands of them, all domestically generated. Many of the stalls have dogs—some rather large and fierce-looking—tethered to large hunks of scrap. "Many of the traders like to time the market," Mr. Liu whispers. "So they keep dogs to bark in case someone tries to take their inventory."
The warehouses in the next row, and the space behind them, contain stalls filled with electrical transformers. Near the corner of the warehouse, a lean worker shoves a nozzle into the top of a transformers he just purchased and drains the oils into a large plastic fuel container. A fluids recycler in the Linyi area buys and processes the oil, Mr. Liu says. As for the transformer itself, workers will cut it apart and disassemble it in the stall area. Burning is prohibited at Huadong, and though the park has security and police, the best enforcement comes from the other traders. "They don't let anybody do anything that they can't do," Mr. Liu chuckles. "That keeps things honest."
What also keeps things honest is what's next door: the headquarters and furnaces of Jinsheng Copper, China's largest privately-held copper manufacturer. Last year, Jinsheng purchased 300,000 mt of copper scrap from Huadong's 800 dismantlers, and it would have purchased more if the material had been available. What the traders don't sell to Jinsheng they tend to sell to scrap consumers in the nearby provinces of Jiangsu and Zhejiang, both of which house thriving secondary metal industries. "We do the collecting and processing here," Mr. Liu explains, "and they do the utilization. But soon we will do utilization, too." In fact, if all goes according to plan, Linyi—with the support of Jinsheng and local and national governments—soon will be the domestic scrap recycling capital of China.
Linyi's thriving scrap industry dates to the late 1970s. Located in the south of Shandong Province, roughly a one-hour flight northwest of Shanghai, this was historically a poor agricultural region with little industry. During the first hint of the reform and "opening-up" that has transformed China's economy, Linyi's locals quickly seized the opportunities of the new China and went into the only business available in a then-remote part of the country: scrap. "Nobody made them do this. I did it, too," recalls Wang Jinglian, the founder and president of Jinsheng Copper, sitting in a conference room that overlooks the building housing his ThyssenKrupp copper production line. "I had a bicycle and I collected steel."
The scrap business in Linyi developed rapidly, and by the early 1990s its large and informal scrap market was devoted entirely to the processing of any domestically generated metal peddlers could transport and profitably sell there. As Linyi's trade increased, so did the prices, as did the distances people traveled to sell to its traders. Wang established Jinsheng in 1993. In 1998—when he was just 36 years-old—he constructed its current facility, and in 2005 Huadong Nonferrous Metals City went up right next door.
Wang is a charming, easygoing man who wears his success lightly. In conversation, he leans forward to make his points, most often with a smile. His eyes hint at his curiosity and wide-ranging intellect. During an interview he is just as likely to ask a question—"What do you think copper will do before Chinese New Year?"—as he is to answer one. In 2007, the CMRA named him one of China's 10 outstanding entrepreneurs in the scrap recycling industry, in part because of his willingness to take on the responsibility of operating Huadong Nonferrous Metals City.
Wang admits that, before Huadong, Linyi's small-scale domestic scrap market was a sprawling, disorganized mass of small, unlicensed businesses, many of which openly flouted tax and environmental regulations. The establishment of Huadong, with its licensing requirements, its central administration, and its informal neighbor-to-neighbor enforcement, has done much to fix these problems, though Wang admits that things "are not yet perfect." When I ask him for lessons he's learned in running Huadong, he extols the benefits of bringing small dealers together into a centralized area "under the same ideals."
Growth on the Horizon
Wang and Jinsheng will take these lessons to heart as they move into the advanced planning stages of a second recycling park on the outskirts of Linyi's rapidly developing Nanfang New Area. As we ride out to the site in a company van, Wang points out that—in addition to its longstanding ties to the trade—Linyi's extensive network of rail links and newly built roads make it an ideal location for China's domestic dismantlers. "My ambition is to make this the base for domestic [nonferrous] scrap recycling in China," he tells me.
Outside of the van windows, a new city is rising out of the farm fields. I count 31 construction cranes on the horizon when we stop at an intersection. We speed to the outskirts of town, past a new convention center, bus station, and a monumental municipal headquarters. Along the way, a Jinsheng worker points out a new set of high-rise buildings and tells me that many of the Huadong traders have moved into them. Later, Wang Jinglian, who takes obvious pride in the rising fortunes of his industry and its entrepreneurs, laughs as he tells me that, 20 years ago, "nobody wanted to marry a scrap man!"
We arrive at a desolate agricultural crossroads swept by winds but otherwise silent. Wang steps out of the van and points to the four blocks of land surrounding the intersection. The construction will be staged, he explains, but when complete he expects the park to process more than 300,000 mt of copper annually. Of that, 150,000 mt will be sourced domestically; the other 150,000 mt—all low-grade materials—will be imported. "Domestic scrap is growing rapidly, but Jinsheng's expansion requires more than we can get domestically," Wang explains. "So we will import." Thus, this year China's most important domestic recycler is planning to become—instantly—a major importer.
Long-term, however, the company sees its future as domestic scrap, and so do the current occupants of the land at this crossroads. On the corner of the property Wang says is destined for imported scrap, several small sheds are fronted by a sign advertising scrap purchases and dismantling. "Linyi is full of scrap," one of Wang's staff members explains. So is China. How long until that scrap enters the country's still relatively rudimentary domestic recycling system remains a question. Despite a large and growing middle-class, China remains a poor country, and reuse and repair—rather than disposal—will continue to limit the amount of scrap flowing into Huadong for years. The sheer size of China's population and middle class guarantees that even that limited volume is a large volume, and it's a volume that does not have to arrive in containers from overseas. "Domestic scrap is cheaper," Wang explains. "And it is easier to control the quality when you buy it." For now, there simply isn't enough available domestically. So long as China's growing ranks of middle-class consumers continue to increase their spending power, the demand for nonferrous metal will likely outpace the supply of domestic scrap for years, if not decades.
Ferrous Future
If Linyi represents the future of domestically generated nonferrous scrap, then Zhangjiagang is its ferrous counterpart. Two hours north of Shanghai, on the banks of the Yangtze River, the Fengli Group maintains what is almost certainly the world's largest inventory of ferrous scrap metal. "Two hundred thousand tons," says Charlie Li, a representative of the company's foreign trade office, as he leads me through the gate to the sprawling ferrous yard. Ahead of us, in long rows that reach hundreds of meters to the river, piles of ferrous await processing and shipping.
Though little-known outside of China, Fengli has long been China's leading ferrous scrap buyer and processor—and it has largely focused its buying and processing on China's domestic markets. The company estimates that 60 percent of the metal in its ferrous yard is generated domestically, and it expects that proportion to grow. In early 2008, the company began operating a 10,000-hp shredder in nearby Xuzhou, just two hours upriver, that it projects will produce roughly 400,000 mt of high-quality shred in its first year. Meanwhile, the Zhangjiagang yard will generate more than 600,000 mt of high-quality prepared scrap, most of which it received from an informal network of dealers, peddlers, and smaller yards that choose to sell to Fengli based upon its good reputation and reliability. "We pay on time," Li says, laughing.
Privately held since its founding in 1983, Fengli operates four scrapyards in Hong Kong in addition to its massive 1,900-acre headquarters in Zhangjiagang. The location is key: Zhangjiagang is within trucking distance of Shanghai and the "Su Nan" industrial corridor that stretches north from Suzhou to Wuxi. Fengli is the exclusive ferrous scrap importer for thriving Jiangsu Province; other local ferrous scrap buyers must buy from it. In principle, at least, this consolidated purchasing arrangement lowers the price of imported scrap, and for years China's industrial policy-makers have expressed their desire to develop a nationwide consolidated import system based upon this model. Whether or not such a system works is difficult to judge; regardless, it undoubtedly will expand to other parts of China. But with China's ferrous scrap imports either stagnating or shrinking over the last several years, Fengli and Chinese policy-makers are starting to look more seriously at the domestic scrap situation and how best to exploit it. Thus, Fengli's new American-made shredder sits on the border of four major provinces, each with thriving construction—and demolition—businesses capable of feeding Fengli's 10,000-hp beast with a near-bottomless supply of structural steel. On the consumer end, Fengli is within trucking distance of Shagang Steel, China's largest privately held steel company, which consumes 40 percent of Zhangjiagang's output. In the other direction, Bao Steel—China's largest steelmaker, and another major Fengli consumer—is a two-hour float from Fengli's docks.
Close proximity does not always guarantee a market, though, especially in China, where high electricity costs and low coal costs have been driving down the proportion of Chinese steel made in EAFs from scrap. As a result, Fengli has long been a scrap exporter, sending large quantities of processed steel scrap to Taiwan. In 2008, the company has targeted Vietnam and its few but rapidly growing ferrous scrap consumers as potential buyers for its new stream of shredded scrap.
In Zhangjiagang, Fengli remains open to importing scrap—it currently purchases sizable quantities of Japanese scrap—but it remains wary of high-priced U.S. ferrous. It prefers to import low grades of ferrous akin to those the country generates domestically. "We have the resources and labor to process the material," Li says. "No. 1 doesn't make sense for us." Indeed, in China, the only true market for prepared scrap is a steel mill, and scrapyards like Fengli are geared toward doing the preparation.
At Fengli, the methods are simple. In the Zhangjiagang yard, its workers process 5,000 mt of low-quality, domestically generated, unprepared steel daily using 80 alligator-style shears lined up in a row. The transformation is startling: On one side of the shears are rusty, dirty piles of scrap; on the other side is some of the cleanest prepared steel scrap in all of Asia.
With a collection network that stretches across some of China's wealthiest and most industrially active regions, the Fengli Group will likely remain China's domestic ferrous leader for the foreseeable future. There's a good chance that the company's ferrous growth will soon find its way out of China and onto international markets, where its product will compete with scrap from Japan, Europe, and the United States in Southeast Asia. Indeed, this role—Chinese ferrous scrap exporter—might be the company's most important and forward-looking one. How long it remains the premier—if not the only—Chinese export player might well determine the next major shift in the dynamics of the international ferrous scrap trade. For now, it remains the dominant player in a domestic Chinese ferrous market that—so long as EAF capacity remains stagnant—has matured early. •
Adam Minter is a journalist based in Shanghai, where he writes about business and culture for U.S. and Chinese publications and maintains a blog, www.shanghaiscrap.com. Read Minter's assessment of China's domestic electronic scrap processing in the May/June issue of Scrap.
China's rapid industrialization and rising living standards are beginning to generate significant quantities of domestic scrap. As collections rise, the scrap world must consider what significance Chinese scrap volumes will have on world markets.