March/April 2011
Trends in scrap supply and demand and high labor costs have China’s scrap companies moving from hand-processing to mechanized shredding and downstream separation, with long-term implications for scrap exporters and equipment manufacturers.
By Adam Minter
Cheap, plentiful labor.” Say these three words at a scrapyard in the United States or Europe, and you’ll get stories about sprawling Chinese recycling facilities where migrant laborers hand-sort material too expensive to process in developed countries. It was supposed to last forever, this cheap, plentiful labor, providing China with an everlasting advantage in the global scrap markets, and giving exporters a guaranteed alternative to their domestic markets. But in the last two years, as the world’s scrap exporters have been preoccupied with their recovery from the late-2008 market turmoil, China’s scrap industry has been undergoing a dramatic yet little-noticed transformation. It’s mechanizing at an unprecedented pace, adopting developed-world scrap processing technology and methods in addition to—and often in place of—human labor. This is a profound, undeniable change, arguably as important to the world scrap markets as the first regular Chinese imports of developed-world scrap in the mid-1980s. Exporters and equipment manufacturers are likely to feel its impact for years to come.
For a firsthand look at this new chapter in Chinese scrap recycling, I arrive on the outskirts of Lianyungang, a major port 200 miles north of Shanghai, at midnight on an early winter evening. Here at the new ferrous scrapyard of Armet Renewable Resource Co., a subsidiary of China Armco Metals (San Mateo, Calif.), I watch as a grapple on a Chinese-built material handler reaches into a two-story-tall pile of domestically generated scrap motorcycle frames, car body panels, and steel signage. The grapple picks up a load of the gnarly stuff and drops it onto a conveyor that feeds it into a 3,000-hp, Texas-built, Metso Recycling (San Antonio) shredder. Later the company will load that shredded scrap onto barges and ship it to a manufacturer in northern China that is tightly connected to China’s hot (some say overheating) construction industry. Though company officials decline to discuss production volume, the company hopes this facility eventually will handle 1 million mt of ferrous scrap a year, according to public documents.
The domestic processing of ferrous scrap is nothing new in China, but even as recently as two years ago most of the country’s ferrous was hand-processed, produced in smaller quantities, and sold to local consumers. Five years ago, the notion of a Chinese shredder was exotic, if not preposterous. Labor was cheap, and China’s supply of and demand for steel scrap was still relatively modest and local. In retrospect, all three of those conditions—cheap labor, low supply, and low and localized demand—were transitory. In fact, they’re now mostly in the past, as China’s three-decade-long economic development program has improved logistics, raised wages, and—not coincidentally—left behind the waste and scrap of first-wave and second-wave consumers eager to consume like Americans.
Few are surprised by the growth in the Chinese domestic collection of scrap; the broad trends have been obvious for years. Only in the last two years, however, have domestic collections seemed to reach a critical mass worthy of large-scale domestic processing and shredding. In 2009, Chinese production scrap collection reached 30.4 million mt, up from 28.6 million mt in 2008 and 27 million mt in 2007, according to figures provided by Yan Qiping of the China Association of Metalscrap Utilization (Beijing) in an April 2010 speech. (Yan also consults for Armco.) Meanwhile, what the Chinese call “social collections”—basically, any ferrous generated outside the factory gates—reached 45.8 million mt in 2009, up from 42 million mt in 2008 and 43.1 million mt in 2007. (Yan attributes the drop-off between 2007 and 2008 to the drop in prices caused by the economic crisis.) Industry watchers expect total Chinese domestic collections of ferrous to have reached 100 million mt in 2010 and to keep growing.
But even 100 million mt doesn’t meet China’s steel scrap needs. The country will face an annual shortfall of 10 million mt of ferrous scrap for the foreseeable future, according to CAMU’s Yan and other ferrous industry analysts. Theoretically, at least, shredders can help by speeding the process of bringing collected scrap to market, raising the overall price, and encouraging more collection. “China’s steel mills want more and more scrap,” explains Ji Zhang, general manager of the Armet plant in Lianyungang. “And the government is supporting investment in this industry.” What is unlikely to change any time soon is secondary production’s status as a small proportion of China’s total steel production. Secondary production was only 15 percent of the nearly 600 million mt of steel China produced in 2009 (in the United States, more than 50 percent of steel is made from scrap), and several factors—high electricity prices, scrap shortages, and the comparatively cheap costs associated with blast furnace operations in China—continue to give blast furnaces the upper hand.
The domestic scrap shortfall is not just a matter of quantity, though. Chinese scrap processors will continue to need imported scrap for the foreseeable future to boost the quality of material they provide to the country’s mills. Like most ferrous shredders in China, Armet’s domestic supply consists largely of sheet metal, bicycle and motorcycle frames, structural steel from demolished buildings, siding, and body panels from cars hand-disassembled in China’s growing body of end-of-life vehicle recycling plants, which primarily feed the country’s robust reuse market. That mix will soon change, though: In mid-December 2010, this facility was awaiting its first load of baled U.S. car bodies, according to a source close to the company. Car bodies are the best and cheapest way for Armet to fulfill its customers’ demand for quality ferrous, but they’ll have to come from imports until China generates a sufficient quantity of its own ELVs. China still prohibits the import of scrapped automobiles, however, and the quasi-legal nature of this trade—even if it’s trade in just bodies—argues against it becoming a significant source of ferrous scrap in the near term. That said, advisers to Chinese policymakers involved in import regulations related to scrap have made it clear to me, to overseas officials, and to importers and exporters that they are determined to loosen restrictions on currently prohibited materials. The timing of such regulatory changes is still uncertain. If and when China lifts those restrictions, it will provide scrap processors with an important and tantalizing market for automobile bodies.
Vanishing Labor Advantages
It would be difficult for China’s scrap processors to meet the steel industry’s need for ferrous scrap with alligator shears and hand-processing, but China’s skyrocketing wage inflation in the last 18 months makes it nearly impossible. Huang Chung Sheng, chairman of the Ye Chiu Group (Taicang, China), can attest to the wage inflation the company has experienced at its aluminum smelter in Taicang, which produces 20,000 mt of aluminum ingot each month using 1,000 laborers. When he opened his factory in 2000, Huang says, the average wage was RMB 600 to RMB 800 a month (about US$72-$97). Today it averages RMB 3,500 ($532) a month. “Over the last two years it’s gone up 20 percent each year,” he adds. “Two years from now, I expect it to be 5,000 [$760] per month.”
In eastern Jiangsu province, where Ye Chiu’s Chinese operations are based, that average wage is more than three times the minimum wage, which increased to RMB 980 ($149) a month in February 2010, according to the Financial Times. Indeed, at many scrap companies in China, the laborers now earn more than recent college graduates hired to work in the offices that overlook the yards. Stories in the foreign and Chinese media, and on the Chinese Internet, pointedly note that white-collar job opportunities for China’s so-called “mortgage slaves” aren’t nearly as plentiful, or growing as quickly, as the opportunities for unskilled laborers.
Few issues in China are more politically sensitive than inflation and the income gap, and it’s widely believed that government statistics intentionally play down the problem. Nonetheless, even the official figures are alarming for Chinese policymakers: In January 2011, China’s consumer price index rose to 4.9 percent above the January 2010 number, the highest reading since mid-2008, with many foreign and Chinese commentators suggesting that the actual rate was twice that. Food prices alone surged 10 percent in that period—a fact this author, who buys his food in Shanghai, can confirm. Meanwhile, factory wages grew at a breathtaking rate, with major manufacturers such as Foxconn (the world’s largest contract electronics manufacturer, whose clients include Apple) offering 20 percent to 30 percent increases in 2010.
Inflation (especially in food prices) and government pressure are both important factors in the wage hikes, but most important is one simple fact: China’s once-bottomless supply of cheap, migrant labor from the inland provinces appears to have hit bottom. For scrap companies, this means fierce competition. “The hard part isn’t salary,” Ye Chiu’s Huang tells me. “It’s finding the labor at all.” In 2000, he primarily hired people from the Taicang area, he says. But in the past 10 years, eastern Jiangsu province and the area around Shanghai both experienced notable growth, which has given the local population job opportunities that are, frankly, more attractive than scrap sorting.
On a snowy midwinter afternoon, Ye Chiu’s purchasing director, Yew-Mun Loke, leads me into the company’s sorting warehouse. On elevated platforms and tables, hundreds of women sort mixed metals with near-mechanized efficiency and precision. At first, the workers look the same as scores of others in similar rooms throughout the Chinese scrap industry in the last two decades. Looking more closely, I find one small but telling difference: In 2000, most of the workers would have been women in their mid-20s. At Ye Chiu, despite the workers’ face masks and hard hats, I see crow’s feet around eyes and wrinkles on faces that are one or two decades older. “Our workforce has aged,” Huang confirms. “That’s true for everyone in this business.”
The wage inflation and worker demographic concerns are just as serious at Ningbo Hualong Recycling Resources (Ningbo, China), a large-scale copper scrap importer and processor that’s in a major scrap processing hub three hours from Shanghai. Near the end of a day shift, Cai Jia Cao, the yard’s general manager, and I walk past three women in their late 30s who, with gloved hands, are pulling contaminants from metal fragments in the water washing across a vibrating water-separation table. At Hualong, monthly salaries have risen from RMB 1,500 ($181) in 2004 to RMB 3,500 ($532) in 2010, and the company’s usual method of getting new workers—hiring the young people of an entire village—is no longer feasible. “Young people don’t want to do this kind of work anymore,” Cai says. “They want better opportunities and lives. So now the only people who do this work are uneducated older people who don’t have better opportunities.” To overcome wage inflation and worker shortages, “we have only one choice,” says Ye Chiu’s Huang. “We need to mechanize.”
The Inevitable Shredder
Like many other Chinese shredder operators, and some Western ones, Armet runs its shredder at night to take advantage of much lower electricity rates. As a result, it’s just after 2 a.m. when my tour of the facility reaches the control room several stories above the new, hard-surfaced, 132,000-square-meter yard. Accompanying me are several officials from Armet; several representatives of Metso, including Frank Huang, a sales engineer for the company’s recycling business line in Beijing; and Song Yanzhao, deputy general manager of the Shandong Yuxi Group (Jinan, China), a major ferrous scrap recycler in the heavily industrialized Shandong province. Song, the son of Yuxi’s founder, is in the market for a shredder to replace the 1,000-hp, Chinese-built model the company has operated since 2005. At the time, it was a solid choice: In the space of a year, the company went from hand-processing between 2,000 mt and 3,000 mt of domestically generated ferrous a month to shredding 15,000 mt a month, collected from a 300-km radius of factories and recycling stations. But the company has greater ambitions, largely built upon Chinese steelmakers’ growing demand for quality shredded scrap. “We want a 4,000-hp machine,” he tells me, “so we can import baled car bodies. And then, when there’s enough in China, we can recycle Chinese ELVs.”
Song is taking a look at Armet’s Metso shredder because, he says, “Chinese manufacturers don’t make such big shredders.” The two major Chinese shredder manufacturers tend to produce machines smaller than 1,500 hp. Neither company responded to requests to comment for this article, and no statistics exist for shredder installations in China (or, for that matter, in the United States). But interviews with industry and trade association officials suggest that sales of large foreign shredders are robust in China, with an estimated 15 to 20 shredders in excess of 2,500 hp currently operating there. The largest might be a 10,000-hp shredder The Shredder Co. (Canutillo, Texas) has installed for a major ferrous processor near Armet’s plant in Lianyungang. But that shredder is an outlier, industry and trade association sources say; the strongest Chinese demand is for shredders around 3,500 hp. “The big American shredders that can handle hundreds of cars [an hour] are too expensive and less effective in China,” says Wang Jiwei, secretary general of the China Nonferrous Metal Industry Association’s Metal Recycling Branch, or CMRA (Beijing). “The Chinese buyers won’t spend the money on that kind of volume yet.” So manufacturers—Chinese and foreign—that offer smaller shredders are prevailing in the short term.
According to Metso’s Huang, four of his company’s shredders were operating in China as of 2010, with up to two more scheduled for this year. Overall growth in Metso’s Chinese sales of recycling equipment (including shears and balers) has been 57 percent over the last decade, and the company expects growth to more than double in this decade. Metso is not alone: Shredder sales in China for Hammel Recyclingtechnik (Bad Salzungen, Germany) have doubled every year since 2007, reports Siegfried Lohmeier, the company’s Asia Pacific sales director, and the company projects 40 percent annual growth for the foreseeable future. Hammel isn’t just targeting the biggest companies: “With our mobile car shredding plant,” Lohmeier writes in an e-mail, “we have created an opportunity for smaller companies, also, to invest in machinery which is affordable and efficient enough to compete in that market.”
As we descend the staircase from Armet’s shredder control room, Huang tells me this is the exact same shredder Metso might sell in Texas or Turkey. Nonetheless, to keep its premium price competitive, Metso assists customers in localizing the purchase of “simple parts” like belt conveyors, cables, and platforms. So, a Metso shredder in China might be outfitted with a Chinese conveyor. Another notable difference is the absence of an eddy-current system or other downstream sorting equipment. For now, with the shredder fed primarily with unprepared steel, there’s no need for it, and Armet contents itself with hand-pickers.
Like scrapyards in the developed world, Armet employs a trommel to size the shredded scrap, and some minimal hand-sorting removes visible contaminants. Armet procures the unskilled and semiskilled workers who do the hand-sorting from a temporary agency. They earn the same wage—about RMB 3,500 a month, based on performance—as unskilled workers all over China. The cost to dispose of shredder residue in this part of China runs as high as RMB 1,300 ($198) a mt, according to a knowledgeable source with another company. “Like scrap processors in the West, we are now looking for ways to be more efficient,” Ji tells me. Among those ways, he suggests, might be the installation of an eddy-current system to handle the nonferrous stream the car bales they’re soon to receive will produce. “This is the question we are asking ourselves: ECS or labor, which is cheaper?”
Equipment or Labor?
It’s clear how Ye Chiu’s plant in Taicang has answered that question. There, piles of aluminum scrap (Taint/Tabor) sit outside a three-story warehouse. On the warehouse is a sign, in English and Chinese, identifying it as the “Eddy Current Sorting Plant.” Inside, a conveyor feeds scrap into a 1,500-hp shredder and then into two ECS arrays. The semisorted scrap falls into concrete bays, and workers transport it to the neighboring warehouse for further separation by Ye Chiu’s experienced army of hand-sorters. Shredding and semiautomated sorting costs the company 60 percent less than what it spent for entirely manual sorting of Taint/Tabor aluminum scrap, Huang Chung Sheng says.
Across the main road that runs through Ye Chiu’s plant, workers are busy constructing a smelter with an additional 5,000 mt of annual melting capacity to handle the greater volume of scrap the company can process as a result of automation. When complete, Ye Chiu’s plant will be the largest single-site aluminum processor in China—and almost certainly the most technologically advanced. The facility’s new control room looks like the bridge of the USS Enterprise from Star Trek.
Discussing the changes he’s initiated at his plant, Huang points back to the dark days of 2008, when the global economic crisis and fall market crash shattered the Chinese scrap industry. “First of all, I knew we had to become more efficient,” he says. “But second, I knew that it would be very cheap for me to buy equipment to upgrade the plant [at that time] because there was no demand out there. The manufacturers would give us good deals.” Huang is not alone: Across the Chinese scrap industry, the market crash of 2008 served as a catalyst for rethinking how companies should and could process scrap.
At Ningbo Hualong, the post-market-crash period sent the company in search of a more efficient means of processing its core import: whole and shredded electric motors. Beyond the vibrating water table where workers sort shredded copper wire, I’m shown a new, freshly packed 450-hp shredder system the company’s manufacturing division, Hualong Machinery, just completed. It’s a new business line for the company—they’ve only sold one so far, to a brass bar manufacturer in Guangdong—but Cai is optimistic about its prospects and describes to me the company’s leads and opportunities. “Many Chinese companies are ready to switch how they handle meatballs,” Cai tells me, using the industry’s slang term for shredded electric motors.
To demonstrate the benefits of mechanization, he leads me across the warehouse where, at his direction, an employee has just fired up a 450-hp, Italian-manufactured shredder. Nearby, two other employees dig shovels into a pile of imported shredded motors and dump them onto the conveyor. A moment later, steam rises from the shredder box, which spits shredded mixed metals onto another conveyor. The material passes beneath a spinning drum magnet; the ferrous lands in one pile, the copper in another. The system can handle 6 mt to 7 mt of shredded and small electric motors an hour, Cai says. Since the shredder’s installation, the company’s annual production volume has grown from 24,000 mt to 35,000 mt. Even more important, production costs per metric ton have declined from RMB 600 ($91) to RMB 200 ($30). Not coincidentally, the Ningbo Hualong facility has reduced its labor force from a peak of 100 laborers to 30 laborers today.
The company isn’t done yet. Nearby, an ECS manufactured by SGM Gantry (Manerbio, Italy) rests on a temporary platform, where it’s undergoing preliminary testing before moving into production on the shredded motor lines. As soon as it’s fully operational, the company will permanently shut down its vibrating water table—the current, labor-intensive method of sorting the nonferrous stream—and the women who work on it will be looking for jobs at other scrapyards. Cai mentions that Ningbo Hualong has its own research and development facility, and though it doesn’t yet have the ability to manufacture its own eddy-current system, it won’t rule out the possibility. “With our machinery, we copy the foreign technology, find the problems, and then improve it to meet China’s needs. So maybe we can make an ECS, too, for sale. But that’s in the future.”
As we return to the office, we pass an enclosed area where middle-aged men and women use hand tools and basic machines to break apart fractional motors. I pause to take a few pictures, then I ask Cai what will happen to these workers if they’re no longer needed in the scrap business. He smiles and shakes his head. “China has many more opportunities these days than 10 years ago,” he reminds me. “They will find jobs elsewhere.”
The View From Above
For the last word on the industrialization of China’s scrap industry, I turn to an industry leader, CMRA’s Wang Jiwei. The life of a Chinese trade association leader is a busy one, but in Wang’s case, it has become doubly so: This year he also became secretary general of the newly formed China Technology Innovation Strategic Alliance for [the] Resource Recycling Industry, or CIAR. The name is a mouthful, but the mission is very simple: promote research, development, and implementation of technology in the Chinese scrap industry. At a meeting in CMRA’s Beijing offices, Wang hands me a complicated flow chart (in Chinese), based on surveys and discussions with Chinese scrap companies, on the kinds of technologies CIAR will facilitate. It covers dozens of innovations across a wide range of recycling and secondary production activities, from the recycling of rare earth metals to energy conservation in smelting. In part, the association seeks to match companies with research institutions (e.g., universities) and then facilitate funding of the partnership. (When I visited Wang in November 2010, the alliance was awaiting approval for RMB 55 million [$8.36 million] from China’s national technology support program.)
“The cost of labor is a very important driver” of CIAR’s work, Wang tells me. “The price just gets higher and higher, and the labor pool just gets smaller and smaller. The only way to get over this problem is technology.” Nonetheless, Wang makes it clear that, even if labor costs were still hovering at 2005 rates, technology and machinery upgrades would be a priority for Chinese policymakers. “Our production level is so high, it makes no sense that we would have such [a] low technology level. Our efficiency and quality require the upgrade.” This is very much in keeping with China’s avowed goal to become more than just the home of low-grade contract manufacturing and assembly. The country wants to produce higher-value (and higher-profit) products and home-grown innovations, and to do so in an environmentally conscious manner. China’s new, 12th five-year plan for economic development, released in early 2011, maps this course, and CMRA was responsible for researching and writing the substantial sections of the plan that concern the secondary nonferrous industry.
Is China ready to surrender its labor advantage to lower-cost countries such as India? Perhaps. For Wang and other leaders in the Chinese scrap industry, technology is the future, and the laws and regulations the country is rolling out over the next few years will ensure that labor plays less of a role in the industry. “We are raising the entry barriers for this business,” he tells me. “You will need pollution-control equipment, [greater] scale, [and] technology, or you will not have a license” to process scrap. As for India, Wang concedes that it will benefit somewhat from China’s shift. “But there are two factors to consider,” he points out. “First, every year, the total amount of scrap in the world is increasing, including in China. So I believe that Chinese domestic suppliers can make up for what’s lost to India. And second, Chinese scrap buyers have relatively good reputations in the global business. And I think people still prefer Chinese buyers.”
Wang is realistic about where Chinese scrap processors will get much of their equipment, at least in the short term. China’s scrap equipment manufacturing industry is still young, and its product mix and quality can’t yet compete with that from U.S. and European producers, even on the more basic products. For example, “the technology and quality gap between a foreign- and a Chinese-manufactured alligator shear is still wide,” Wang concedes. For now, China will make lower-volume processing machines; foreigners will make the higher-volume (and higher-cost and higher-quality) machines.
That will change, however. Wang is quite firm in his belief that the Chinese equipment industry will evolve quickly in a manner that will lead it to challenge foreign manufacturers for the Chinese market. “First, we are working on technologies—like presorting—that really are for our own industry. But in the long term, the [foreign] manufacturers must decide if their equipment is appropriate to China. If they want to compete here, and perhaps abroad, they need to think about being in China. It will be cheaper and more competitive to manufacture here, and they will have an easier time to localize.”
As we end our talk, Wang tells me that mechanization was inevitable for China’s scrap industry. “The only question was when and how quickly. Now we know—it’s happening now.” This is the start of a shift in the industry that will have broad and lasting effects on exporters—both processors and equipment manufacturers—for years to come.
Adam Minter is a journalist based in Shanghai, where he writes about business and culture for U.S. and international publications. He also maintains a blog at www.shanghaiscrap.com.
Trends in scrap supply and demand and high labor costs have China’s scrap companies moving from hand-processing to mechanized shredding and downstream separation, with long-term implications for scrap exporters and equipment manufacturers.