Future Shock

The center of the recyclable commodities universe appears to have shifted to China.

Throughout 2003 and into 2004, scrap recyclers have shipped out materials at lofty per-ton prices, particularly for ferrous scrap and copper-bearing scrap.

While the secondary commodity markets have always been cyclical, observers and trackers of market forces historically have looked to North American market fundamentals (particularly on the demand side) to figure out why prices are rising or falling.

This natural inclination to look first at North America seems to be coming to an end, as the demand that drove supplies down and prices up in 2003 and thus far in 2004 has come from Asia in general and China in particular. The U.S. role in demand has been secondary at best, many market watchers believe.

The question to ask before making decisions based on future conditions is whether Asian market fundamentals have permanently or temporarily replaced North American market fundamentals as the key barometer of pricing.

THE WORLD’S METAL SHOP. During most of the 20th century, the U.S. could take pride in its leadership in the production of steel and other metals, often providing the basic materials needed not only for its own economic expansion, but also exporting to other global economies.

As the century reached its closing three decades, however, that leadership position began meeting stiff competition from East Asia, first in the form of Japan and South Korea, and ultimately from the rapidly industrializing People’s Republic of China.

With more than 1 billion people, China’s conversion from an agrarian to a more industrial and information-centered economy is a major global event. It compares in some ways to the industrialization of the former Soviet Union and the rebuilding of Europe and Japan following World War II, while differing in many other respects.

Looking strictly at metals consumption and production, comparisons can certainly be made. The harsh Stalin five-year plans of the pre- and post-World War II era raised Russia’s metals infrastructure from a second-tier one on the global scene to a global leader in mining, metals production and metals consumption.

Similarly, the Marshall Plan years in Western Europe after World War II and the decades following the war in Japan saw a from-the-ground-up rebuilding of major cities and national infrastructures, consuming huge amounts of metal while also seeing the creation of steelmaking complexes and smelters and foundries for other metals.

During various times in these rebuilding efforts, scrap and finished metals prices rose and fell to meet the needs of these growing economies. The metals industries in Japan and other nations ultimately reached a plateau fairly close to being in balance with the needs of their national economies.

In the case of China, with its 1 billion people, where that plateau might lie is a source of intense speculation. Questions that figure into the mix include determining how many of China’s people may ultimately live in middle-class households that will own washers, driers, refrigerators, automobiles and other metals-intensive durable goods.

The growth demonstrated so far by China has been rapid on the steelmaking side. In just the past year alone, China’s monthly steelmaking production has gone from 15 million tons (Feb. 2003) to 19.7 million tons (Feb. 2004). Its annual production of raw steel, according to figures from the U.S. Geological Survey, Reston, Va., has risen from 100 million metric tons in 1996 to 200 million metric tons in 2003.

The continued growth has been largely attributed as the force behind ferrous scrap prices, which have hit record-breaking highs in early 2004.

The alarming flow of scrap to China has caused some nations to impose restrictions on the outflow of scrap. (See "Tapping the Breaks," pg. 98 of this issue.)

South Korea and some former Soviet Republics have imposed such restrictions, while even in the U.S. some scrap consumers have banded together under the name the Emergency Steel Scrap Coalition.

Robert Stevens, the Coalition’s founder, is the CEO of a Columbus, Ind., scrap consumer who says his company is paying $10,000 per day more for scrap and that these charges cannot be passed on to customers. He testified before Congress that such circumstances are part of the wider problems besetting the U.S. manufacturing sector, which has lost 2.8 million jobs in the past three years.

RED METAL FEVER. Similar patterns can be seen in the copper market, a material for which demand has escalated as China wires its nation for electricity and telecommunications; builds more electronic appliances for the world market; and also constructs office and apartment towers and industrial plants with copper and brass pipes, tubing and fixtures.

Between January and August of 2003, buyers of number two-scrap copper in the U.S. were paying between 60 and 70 cents per pound in the U.S., according to American Metal Market pricing.

But later in the year, as brokers representing smelters and foundries in China placed larger and larger orders, the strain on the market showed. By the fall of 2003, dealers from throughout the U.S. were reporting tight copper scrap supplies as demand from overseas buyers continued unabated.

Pricing entered 2004 on a sharp upward course, with copper scrap consumers in the U.S. paying 90 cents per pound by December of 2003 and $1.12 per pound by the end of February.

But the buying by domestic consumers was not driving the market, according to most observers. And even a U.S. resurgence in buying might now be considered secondary to China’s powerhouse industrial sector. Says one East Coast scrap dealer, "Not that long ago, U.S. market conditions came first when calculating commodity prices—then the rest of the world. Now China is first, then the rest of the world."

He says Shanghai nonferrous scrap prices spent several months running above U.S. and European prices, while buyers in those countries waited for Shanghai to "get back in line" with New York and London pricing. Instead, North American and European pricing has escalated to catch up with the Shanghai pricing. "Shanghai was correct while the rest of the world lagged in its demand and pricing," he remarks. "Chinese buyers will do what needs to be done to procure metal—They need to have the copper units to keep running."

PAPER DRAGON. Paper recyclers are experiencing a similar trans-Pacific phenomenon, as China’s dominance in manufacturing creates a parallel growth track for corrugated boxes and other paper packaging. Add into the mix a growing middle class and an information boom in China, and the growth in demand for other grades of paper also far exceeds the comparatively stagnant demand in developed countries.

The result is an abundance of new papermaking capacity in China in the last seven years, with much of it derived from pulp made from recovered paper.

An analysis from paper industry consultant Bill Moore of Moore & Associates, Atlanta, which was presented at the 2003 Paper Recycling Conference, sums up the trans-Pacific capacity shift that has taken place since 1997.

Moore noted that in 1997, 12 paper mills shut their doors, starting a capacity cutback trend in North America that has continued. "The U.S. paper industry will lose 6.5 million tons of annual capacity in the 2000 to 2003 time period," said Moore, adding that some 56 mills went offline during that period. (Paper production in the U.S. has remained steady during those years, lending credence to the notion that this had become excess capacity.)

During this same time period, papermaking capacity in China grew steadily, with many new mills and paper making machines being fed with secondary fiber.

According to Moore, in 1998, slightly more than 9 million metric tons of recovered fiber was shipped from the U.S. to export destinations. In 2002, that number reached 11.5 million metric tons, and by 2006 the figure could climb to 16.2 million metric tons.

There are several emerging economies using recovered fiber from North America, but clearly China’s economy is the major force. Chinese destinations now absorb 34 percent of U.S. recovered fiber exports. Five years ago this figure was 15 percent. China’s demand now places it number one—above Canada and Mexico—as the largest importer of U.S. recovered paper.

In 2002, China imported 3.3 million metric tons of scrap paper from the U.S. Mills there have shown a preference for mixed paper, which is now imported from the U.S. at twice the rate of OCC, spurring mixed paper to become a higher-volume grade than it was a decade ago.

Unless there is a sudden jolt to the Chinese economy, papermaking capacity there is expected to grow rather than slow down any time soon.

AND THE REST. The shift in manufacturing to China has also made it a larger destination for plastic scrap and the mixed-commodity obsolete electronics stream.

As noted in a recent feature on plastic scrap ("Unbending Plastics," Recycling Today, March 2003, pg. S6), surging demand from China has affected pricing in the U.S. Some forms of plastic container scrap sold well above historic averages early this year as export brokers competed vigorously for post-consumer bales.

Chinese demand might be steady and strong enough to cause plastic prices to trend higher. The possibility may be attractive to North American recyclers, but consumers who count on low-cost feedstock have been dismayed by the sudden doubling of their material costs.

Electronic scrap may be considered a commodity driven largely by re-use, component harvesting, landfill bans and public relations gestures here in North America, but metals and plastics producers in China hungry for material have been much more willing to mine obsolete electronics for recoverable metals and plastics.

The unsafe and unsound practices of some Chinese electronics recyclers was exposed in 2002 by the Basel Action Network and followed up by closer customs inspections in China.

It appears, though, that the legitimate efforts of more scrupulous operators could keep Chinese demand for electronics in place for some time to come.

STUDENT DRIVER. If China is in the driver’s seat, are recyclers in for a different kind of ride? Or, more skeptical market watchers may wonder whether China’s driving privileges are temporary, with North America taking over at the steering wheel not too far down the road.

Determining the answers to these questions involves making judgments about China’s central government leadership and the firmness of China’s footing as a full-fledged, WTO-card-carrying member of the global economy.

China has become the world’s industrial park, churning out goods for export in staggering amounts, with economic growth (calculated, admittedly, by the central government) rising at annual rates of as much as 9 percent.

But skeptics still point to potential problems that could derail China’s race to bring a middle-class lifestyle to more of its citizens. Possible trouble spots include a banking system described by some as having marginal oversight and high loan default rates; higher world energy prices that could put the brakes on rapid industrial growth; and internal turmoil created by a society drawn toward economic freedom but not enjoying civil freedoms.

Other skeptical voices wonder if metals growth in particular will fall off after the construction boom surrounding the 2008 Olympics in Beijing.

Despite these question marks, multi-national corporations have largely cast their votes in favor of China, seeing the nation first as a source of abundant labor, and increasingly as a growing market for the purchase of finished goods.

Without question, in the past seven years in particular, China has added significant metals and paper making capacity, much of it on a par in terms of efficiency with mills and foundries found in North America and Europe.

If there is a stable political climate, the new reality of production capacity in China staying atop the world could keep it in the driver’s seat for a long time.

If a growing middle class among the 1 billion people in China is not enough to absorb its finished goods, the growing middle class among the 1 billion people in neighboring India can pitch in.

The author is editor of Recycling Today and can be contacted via e-mail at btaylor@RecyclingToday.com.